Recent Q3 disclosures concerning movie theater operator and real estate developer Reading International (NASDAQ:RDI) illustrate continuation of the company's operational growth, a conservative balance sheet, and progress towards redevelopment and monetization of the company's undervalued and underutilized real estate. Yet, RDI shares have appreciated only modestly, up around 10% this year. This disconnection between Reading's stock price and the company's lower net debt levels and increasing cash flows provides an inexpensive entry point for an investment in RDI shares.
Reading International lacks research coverage from sell-side entertainment, consumer non-durable, or real estate industry analysts. This is likely because Reading's business activities extend over three countries and two discrete (though synergistic) lines of business: cinema exhibition and real estate. This creates analytical complexity many analysts choose not to tackle. However, for a diligent and skilled analyst, Reading's extensive SEC disclosures combined with information available from resourceful Internet research provide a roadmap of value creation. Perhaps Reading's recent August 2013 Midwest IDEAS conference presentation and the roll-out of Reading's new website might attract some initial analyst work and consideration.
Reading's two businesses produce $259MM of LTM revenues generating consistent operating performance from large cinema market shares in Australia (#4), New Zealand (#3) and the United States (#11.) In addition, the company has 330.5-acres, or approximately 14MM sq ft, of undeveloped real estate that does not yet generate any meaningful revenue. During Q3 2013, steps toward converting some of this non-cash-flowing real estate into either recurring cash flow or sales proceeds were achieved.
Reading trades at a far lower multiple of stated book value/share than any of the three larger and analyst-recommended US publicly-traded theater exhibitors, Regal Cinemas (NYSE:RGC), Cinemark Holdings (NYSE:CNK), and Carmike Cinemas (NASDAQ:CKEC), even while this book value understates the underlying intrinsic value of Reading's long-held and up-zoned real estate. As Reading continues to grow its sustainable cash flows and unlocks (through sale and/or joint venture) the appreciated value in its geographically diversified real estate holdings, investors will close the substantial "value gap" that presently exists in RDI shares.
September, 2013 10-Q: Strong Results And Valuable Disclosures
Reading's recent September Q3 2013 10-Q can be found here and certain salient findings from this quarter's filing are discussed, below.
Despite foreign currency headwinds, Q3, 2013 Revenues were still up y/y. Total Q3 revenues were up 2.4% from prior year, led by a 3.3% y/y revenue increase in Reading's larger Cinema segment, offset by a 9.5% decrease in revenues in its smaller Real Estate segment. Real Estate segment revenue declines primarily resulted from temporary closure of Reading's large Courtenay Central parking structure as a result of a sizable earthquake in Wellington, New Zealand, combined with the above-mentioned currency impact.
Q3's Net Income of $2.4MM was substantially higher than prior year's $0.4MM as a result of both increased Operating Income and lower Interest Expense.
Reading IR Debut - August 2013 Midwest IDEAS Conference presentation
The first place to begin analyzing and seeing the enormous hard asset value embedded in Reading International's balance sheet is the company's elaborate slide presentation from the company's first appearance in front of an institutional investor conference audience, filed as an August 29, 2013 8-K/A exhibit here. The Midwest IDEAS Conference presentation and slides on Reading's new website illustrate some of Reading's hard assets, not just in the United States, but also in Australia and New Zealand and the company's plans and potential opportunities in each country. In addition, this past Just One Stock interview and my other Seeking Alpha articles on Reading provide readers historical background on the company and a roadmap for the progress that it has made on its many cinema and real estate development projects.
A Very Telling Picture Of 12-Years Of Growth
Slide 15, (below) from Reading's Midwest IDEAS presentation illustrates the progress the company has made at growing its Revenues, Adjusted EBITDA and Assets, while steadily paying down debt. As a result of Continuing strong cash flow generation and the sale of non-core real estate assets, Reading's 9/30/13 net debt was down to $135.7MM, $33.6MM (or 20%) lower than prior year.
Normally growing fundamental operating performance, combined with lower debt levels, translates enterprise value into a higher equity valuation. Recent RDI share price increases clearly ignore Reading's embedded real estate value. Reading's stock price in 2008 was $10/share before Reading's operating performance substantially accelerated and net debt started to be paid down. Today, RDI is over 50% away from that price, creating sizable appreciation opportunity.
Recent Progress Surfacing Value From Reading's Real Estate Assets
Reading can create substantial additional value by developing or redeveloping its raw land or fee-owned cinema and live theater sites. Slide 30 from the Midwest IDEAS presentation lists eight different real estate sites that Reading plans to convert into either higher recurring cash flow or sales proceeds. Over the past few months, certain events moved several of these parcels toward conversion into their highest or best use as follows:
Moonee Ponds - In October, Reading entered into a definitive agreement to sell its 3.3-acre Moonee Ponds (Melbourne, Aus) development site to Leighton Properties for AUD$23.0MM with a 10% deposit in escrow. Recently up-zoned to allow an increase in height limits from 10-stories to 16-stories, this property is listed on Reading's September 30, 2013 balance sheet at only $11.6MM (AUD $12.4MM.) Leighton's plans to transform the site include a master planned community of over 800 apartments and 2,000sqm of ancillary retail, with an end value of around AUD$450MM. Until the buyer's plans are given development approval and final proceeds are received in early 2015, Reading will continue to generate parking lot cash flows from these properties.
Courtenay Central ETRC Phase II - Earlier this year, enabling a major expansion of Reading's Courtenay Central Entertainment Center in downtown Wellington, Reading signed a 20-year (+ options) lease agreement with Progressive, a subsidiary of Woolworths Ltd. for its Countdown Supermarket to be the expansion's anchor at an initial rent currently projected at approximately NZ$1.7MM/yr. Reading will also reconfigure and upgrade about 10,000 sq ft. of existing space in the current center for higher-end tenants, taking advantage of the new entrances created by this 42,000 sq ft. supermarket.
An overhead depiction of this proposed expansion is illustrated here
(click to enlarge)
Reading is also exploring retail and other options to activate the potential rental space that will be created on top of the supermarket. Reading's recent September Q3 2013 10-Q operating results discussion disclosed that development expenditures on this valuable expansion have begun. It is expected that construction will begin in mid-2014 and the supermarket and overall project will open in June 2015.
Union Square - In my August 2013 Seeking Alpha article on Reading, I discussed at least $67MM (almost $3/share) of embedded unrealized gain in two of the company's New York City parcels, Cinema 1,2 & 3 (Third Avenue) and the Union Square Theatre (the former "Tammany Hall"). Certainly, a sale of these properties would be reflected more immediately in Reading's stock price. (See an August 13, 2012 Barron's article, entitled "Popcorn and Property" [found here if free access is still operable],) However, the company commissioned consulting and other professional studies that showed redevelopment of both parcels, prior to any sale, creates greater long-term value to Reading.
Management recently presented preliminary redevelopment plans for these two parcels, subject to Landmark Planning Commission ("LPC") and zoning approvals, that included renovating the interior of Reading's Union Square building to provide for a high end specialty retailer, like an Apple Store, a Microsoft Windows, or a Samsung store. (See Cinema 1, 2 & 3 Development Slide and Union Square Development Slide.)
On October 29, 2013, the New York Landmarks Preservation Commission voted to establish Reading's Union Square Theater building (formerly known as "Tammany Hall") as a New York Landmark. According to an LPC staffer's response upon inquiry, the particular landmark designation attached to Tammany Hall just limits modifications to the exterior of the building, and now opens the opportunity for Reading to renovate the structure's interior consistent with the company's redevelopment plans.
Reading's Balance Sheet - More Compelling Investment Than Peers
Reading's current Price/Book value of 1.2X remains the lowest amongst its public cinema peers while, at the same time, the company's leverage (Net Debt to Total Assets) ratio remains the most conservative of these companies.
Q3- September 2013
Balance Sheet Comparison
Net Debt ($mm)
Total Assets ($mm)
Net Debt/Total Assets %
* Closing prices as of 11/08/13, all balance sheet items from 09/30/13 10-Q.
Reading's Balance Sheet - Contains Substantial Embedded Unrealized Gains
What makes the table, above, so compelling is that Reading's true asset and book values are higher than presented in Reading's financial statements as they greatly understate the current fair market value of Reading's Australian, New Zealand, New York and Chicago real estate. Much of this real estate has appreciated in value (over the course of more than 15 years of inflation on some parcels) from population growth, up-zoning to expanded/more valuable allowed uses, and in some instances, completed development into rent-generating parcels.
In addition to stated book value and the substantial amount of unrealized gain embedded in Reading's long-held real estate, the footnotes of Reading's 2012 10-K, disclose that Reading had $83.9MM in tax NOLs at December 31, 2012 ($45.9MM and $16.3 MM of Australian and New Zealand tax NOLs, without any expiration date, respectively, and $21.7MM of US NOLs not expiring until at least 2025.) These tax carry-forwards should shield future real estate gains and pre-tax income from taxation for several years.
Reading International's favorable geographically diversified movie exhibition growth profile and its conservative balance sheet make for a compelling risk/reward investment. The company's cash flow generation continues to lower debt levels and inevitably will translate enterprise value into a higher equity valuation. Finally, Reading can create substantial additional value by developing or redeveloping its raw land or fee-owned cinema and live theater sites into higher recurring cash flows or increased sales proceeds.