I just finished going through Reading’s (RDI, Financial) 10-K. Given I recently updated my thesis on RDI, and the press release does a great job of summarizing the full year results, I thought I’d just post some of the major highlights I found buried in the 10-K. However, I do want to point out that, since I last updated my thesis, all of RDI’s cinema comps have enjoyed massive stock price run ups and are now at or approaching 52 week highs. In addition, the comps all look to be enjoying analyst upgrades as the box office to date in 2012 has come in stronger than expected.
Key thoughts
- p. 2 of 10-K
- p. 83 of 10-K
Overall, I think Reading remains significantly undervalued. Given the multiples there cinema competitors trade for, it’s not hard to reach the conclusion that, at today’s prices, you are basically purchasing Reading’s cinema assets for a fair price and picking up all of their (incredibly valuable) real estate for free. I think this quote sums it up quite nicely (from p. 101)
Disclosure- Long RDI
Key thoughts
- p. 2 of 10-K
“In recent years, the market value of most commercial and undeveloped real estate has seen a material decline in the markets in which we operate. While this decline has been, in our view, less pronounced in Australia and New Zealand than in the United States (and while the impact of the declines in Australia and New Zealand have been somewhat mitigated by renewed strength of the Australian and New Zealand dollar as compared to the US dollar), real estate values today are in many cases less than they were at the end of 2007. This has affected some of our development projects resulting in impairment losses. However, the practical impact on our real estate holdings has been minimal, as we have continued to enjoy increases in rentals from the tenants in our retail holdings, and as our strategy generally calls for development of our raw land holdings over time for long-term development. On an overall or portfolio basis, our estimated value of our real estate and cinema assets has not in fact declined since the end of 2008. Furthermore, in our view, it appears that values have stabilized in the markets in which we operate. In some markets (such as Manhattan), our real estate portfolio values have increased and have, in our estimation, a value substantially in excess of their book value.”- p. 3 of 10-K
“Given the resurgence of Manhattan commercial real estate values, in 2012, we intend to focus on the sale of our Cinemas 1, 2 & 3 property and the redevelopment of our Union Square property. Also, we are actively pursuing the development of the next phase of our Courtenay Central property in Wellington, New Zealand. We continue to evaluate our options concerning our 50.6 acre Burwood property in Melbourne, Australia.” The Cinema 1, 2, 3 property has $15m in debt against it, while the Union Square prop has $7.5m. The sale of both of these would result in some serious debt paydown and cash flow.- p. 76 of 10-K
“In May 2010, we announced our intent to sell and began actively marketing our 50.6-acre Burwood development site in suburban Melbourne. At June 30, 2011, we had not yet achieved that aim. Pursuant to ASC 360-10-45, as twelve months had passed since this announcement and we did not meet the criteria to classify this property as held for sale, we reclassified the current carrying value of this property of $53.4 million (AUS$52.1 million) from assets held for sale to property held for development on our December 31, 2011 consolidated balance sheet. Nevertheless, discussions with qualified buyers continue, and it remains our plan to monetize at least the residential portions of this property. Based on recent valuations, we continue to believe that the fair market value of the property less costs to sell is greater than the current carrying value; therefore, no asset impairment loss was recorded at the time of the reclassification.”Remember, RDI has a market cap of ~$100m. A sale of this property alone could result in RDI receiving cash equal to over 60% of their market cap, a gain on sale of more than 10% of their market cap, and an increase in BV of 15-20%+ of their market cap.
- p. 83 of 10-K
“On February 5, 2007, we issued $51.5 million in 20-year fully subordinated notes to a trust that we control, which in turn issued $51.5 million in securities. Of the $51.5 million, $50.0 million in TPS were issued to unrelated investors in a private placement and $1.5 million of common trust securities were issued by the trust to Reading called “Investment in Reading International Trust I” on our balance sheet. The interest on the notes and preferred dividends on the trust securities carry a fixed rate for five years of 9.22% after which the interest will be based on an adjustable rate of LIBOR plus 4.00% unless we exercise our right to refix the rate at the current market rate at that time. There are no principal payments due until maturity in 2027 when the notes and the trust securities are scheduled to be paid in full. We may pay off the debt after the first five years at 100.0% of the principal amount without any penalty. “The reset date came in February. Given RDI still has ~$27m of TPS outstanding (see p. 84, they bought back $23m of them at 50% of face at the height of the crisis) and all LIBOR rates are somewhere between 0.5% – 1.0%, this reset will result in over $1m in interest expense savings per year.
Overall, I think Reading remains significantly undervalued. Given the multiples there cinema competitors trade for, it’s not hard to reach the conclusion that, at today’s prices, you are basically purchasing Reading’s cinema assets for a fair price and picking up all of their (incredibly valuable) real estate for free. I think this quote sums it up quite nicely (from p. 101)
Due to a perceived low price to our common shares, during the first quarter of 2010, we purchased 62,375 shares for a total cost of $251,000.That works out to a per share price of $4.02. Given the huge growth in book value since then, RDI actually trades at a lower P/B now then they did when the company repurchased those share, and given the dramatic increase in asset prices, it could easily be argued they trade for a much more extreme discount to the market value of their assets now.
Disclosure- Long RDI
