Author: Cheng Yuan
Covestor model: Value with Catalyst
Disclosures: Long RDI
While the model portfolio dropped 2.84% in the month of May based on Covestor’s measured performance, I believe the underlying fundamentals of the businesses in the portfolio actually improved.
I attended the Reading International (NASDAQ: RDI) 2011 shareholders meeting in May and was not disappointed. At the meeting, Andrezj Matyczynski, CFO, gave a presentation on how Reading performed in 2010. The cinema exhibition business, which generated 92% of revenues in 2010, was weak in Q3 and Q4. However, management expects this segment to perform on par to 2010 for the rest of 2011. Even so, Reading’s cinema business performed better than some of its bigger competitors. This is evidenced by the $64k TTM EBITDA per Screen (EBITDA/Screen) compared to Regal’s $60k EBITDA/Screen. Carmike is the best performer, generating $99k EBITDA/Screen. It appears that Reading’s cinema business is performing in line with the rest of the cinema exhibitors.
However, as James Cotter, CEO, pointed out before, the cinema business is not a growth business for Reading. The cash flow generated from the cinema business is opportunistically invested in Reading’s real estate portfolio. Reading’s real estate business continues to trade at around 1x book value while its peers trade on an average of 1.7x book value. Should Reading’s real estate business trade in line with its peers at 1.7x book value, Reading’s market capitalization would come closer to US$190mm.
But the appreciated value of Reading’s real estate over the years is not reflected in the book value. Its crown jewel of undeveloped real estate, the 50.6-acre Burwood property, which it announced in May of last year it would put up for sale, is carried on the books at AUS$52.2mm. At the meeting, management revealed that the property will be divided into three parcels (residential, retail and residential/commercial) and sold separately. A recent appraisal obtained from CBRE valued the 31 - 34 acres of residential parcel at AUS$1.7mm/acre or AUS$53mm - AUS$58mm. The residential/commercial parcel of about 6+ acres is valued at AUS$11.5mm or approximately AUS$1.9mm/acre. Although with the build out of the adjacent parcels, the remaining retail parcels should appreciate in value, I’ll use the more conservative valuation of AUS$1.7mm/acre to value the remaining 10.6 - 13.6 acres of retail parcel at AUS$18mm - AUS$23mm. The sum of all the parcels is approximately AUS$82.5mm - AUS$92.5mm or approximately US$88mm - US$99mm based on the June 5 mid-market exchange rate (US$1.065 = AUS$1). Management is actively in discussions with interested parties with regard to the sale of the residential parcel.
In addition to the Burwood property, management announced plans to sell or co-develop its Cinemas 1, 2 & 3 and Union Square Theatre properties in New York. Cinemas 1, 2 & 3 is carried on the books at US$23.6mm while Union Square Theatre is carried at US$9.2mm. A 2005 appraisal of these two properties valued Cinemas 1, 2 & 3 at 27.5mm and Union Square Theatre at 23.5mm7.That was back in 2005. Even though I think it is reasonable to expect the properties have further appreciated in value since then, using the conservative valuation in 2005, excluding the outstanding debt on these properties of US$15mm and US$7.3mm respectively, I arrive at a total appraised value net of debt of US$28.7mm.
It’s worth noting that there are other properties held for sale that have similar appreciation. In addition, major expansions to the Courtenay Central shopping center in Wellington, NZ and the Newmarket shopping center in Brisbane, AU were announced in the press release. Following the sale of Burwood, management will focus on the sale or development of the Moonee Ponds property in Melbourne, AU which is listed on the books at US$14mm.
Reading 2011 Annual Shareholders Meeting Presentation, http://www.readingrdi.com/pdf/Annual%20Shareholders%20Meeting%20presentation_May%2019%202011.pdf, Slide 9, May 19, 2011.
Reading 2011 Annual Shareholders Meeting Presentation, http://www.readingrdi.com/pdf/Annual%20Shareholders%20Meeting%20presentation_May%2019%202011.pdf, Slide 7, May 19, 2011.
Reading 2011 First Quarter 10-Q, http://www.readingrdi.com/pdf/2011%2010-Q%201st%20Quarter.pdf, March 31, 2011.
Burwood Plan, http://www.readingrdi.com/pdf/Burwood%20Plan.pdf, May 24, 2011.
Reading 2011 Annual Meeting Press Release, http://www.readingrdi.com/pdf/2011-05-24%20Annual%20Meeting%20Press%20Release.pdf, May 24, 2011.
Reading 2010 10-K, http://www.readingrdi.com/pdf/2010%2010-K(1).pdf, p20 - 21, December 31, 2010.
Reading International Closes Sale of Glendale Office Building for $21.0 Million, http://www.sec.gov/Archives/edgar/data/716634/000095012905005523/a09396exv99w1.htm, May 19, 2005.