Reading International: There's More Popping Than Just Corn

| About: Reading International, (RDI)
Theater exhibitor and real estate developer, Reading International (NASDAQ:RDI), which was highlighted in my September 30, 2010 Just One Stock interview, and several other Seeking Alpha articles, filed a very informative and must read 2010 10-K filing in conjunction with the company’s recent December Q4 and FY 2010 earnings press release (pdf). As usual, Reading’s Q4 press release discussed the company’s operating results for the quarter and full year 2010 and also summarized major events that occurred to Reading’s balance sheet. However, Reading’s 2010 10-K for the first time presented new language disclosing a whole lot more activity going on with Reading’s real estate to unlock and create value than just its on-going process to sell or joint venture all or part of its large 51-acre Burwood Square parcel (pdf) in Melbourne.
  • Despite reduced Q4 revenues from a greatly depressed box office (vs last year’s Avatar – the highest grossing movie of all time) and reduced Q4 margins from the resulting lower absorption of cinema segment fixed costs, overall revenues for the full 2010 year grew 6.1% from 2009, with growth from both cinema and real estate segments. Adjusted EBITDA of around $45MM for the full 2010 was flat to 2009 with compression in cinema segment margin offsetting an increase in real estate segment margin.
  • Q1 2011, will again face very difficult box office comps vs 2010’s Avatar and Alice in Wonderland. However, the upcoming 2011 box office release schedule shows a hot summer season, beginning in May, featuring films such as Thor (Paramount), Pirates of the Caribbean: On Stranger Tides [Disney (NYSE:DIS)], Kung Fu Panda 2 [DreamWorks Animation (NASDAQ:DWA)], Green Lantern [Warner Bros. (NYSE:TWX)], Cars 2 [Disney/PIXAR (DIS)], Transformers: Dark of the Moon (Paramount), Harry Potter and the Deathly Hallows: Part 2 (Warner Bros.), Captain America: The First Avenger (Paramount), Smurfs in 3D [Sony Pictures (NYSE:SNE)], and more.
  • Also highlighted in this press release and discussed in greater detail in Reading's 2010 10-K filing were three items in 2010 that further improved Reading’s balance sheet and financial condition:
  1. The favorable settlement of a long-running and sizable contingent tax liability at only 30% of the IRS’ original proposed assessment; and
  2. pursuant to the contingent purchase price reduction terms of Reading’s 2008 purchase of 181 movies screens in California and Hawaii, the forgiveness of $12.5MM of seller financed debt principal and reversal of accrued interest from the 2008 purchase debt. This debt forgiveness resulted in a similar reduction on Reading’s balance sheet of Goodwill originally booked with the cinema purchase.
  3. Most recently, and subsequent to year end, Reading received the Australian version of a commitment letter from a bank for a new 3-year credit facility on its Australian assets that, when completed, will soon replace Reading’s existing credit line in that country.

Reading’s Real Estate
as newly discussed in its 2010 10-K filing
Unlike other cinema exhibitors, in addition to its 56 cinemas comprising some 453 screens, Reading owns over 16 million square feet of real estate, of which only around 1.1 million square feet is already commercially developed, mostly as entertainment-themed retail shopping centers (“ETRC’s”). In these instances, Reading benefits by having its own multiplex as an anchor tenant and by having itself as landlord for its multiplex. Developed real estate includes the Courtenay Central shopping center in downtown Wellington, New Zealand, the Redyard Centre in the Auburn suburb of Sydney, Australia, and the Newmarket Centre near Brisbane, Australia.
Reading’s developed real estate generated EBITDA of approximately $15 million for the 12 months ended December 30. However, no cash flow is presently generated (and some development expense is incurred) from the sizable 14.9 million square feet of developable land that Reading additionally owns through about eight meaningful parcels, which have been slowly migrated and up-zoned toward eventual cash flow generation and higher value, via either outright sale, joint venture or lease out. Finally, combining both developed and undeveloped real estate categories above, Reading additionally owns four live theaters and their underlying real estate in Manhattan, and Chicago, that presently generate theater rental streams (a small part of the $15MM EBITDA, above), while awaiting redevelopment into higher value alternatives.
Something’s Popping and it isn’t just popcorn
Reading’s plan to monetize the most valuable of its undeveloped real estate, its “crown jewel,” the 51-acre Burwood Square parcel in Melbourne, Australia, is but one major catalyst for unlocking some of the enormous asset value that is not reflected in Reading’s current stock price. (For more details on this parcel and the plan to monetize it, see my May 27, 2010, and May 16, 2010, articles.) Up until the recent 2010 10-K filing, Burwood’s monetization appeared to be the only near-term catalyst and Reading’s stock price stagnation reflected the lack of disclosed progress in that sale process. Perhaps no longer.
While Reading’s 2010 10-K failed to disclose any progress in the Burwood sale process, it newly disclosed a variety of progress and actions being taken on several of Reading’s other developable parcels as follows:
For Sale
  • Reading is now considering the sale of its 75%-owned mid-town Manhattan, Cinema 123 property. This 7,907 sq ft parcel presently hosts a 21,000 sq. ft. tri-plex operated by Reading’s subsidiary, City Cinemas. Situated on 3rd Avenue between 59th and 60th Streets, directly opposite Bloomingdales. The property was appraised several years ago at a value far above Reading’s current book value.
  • In New Zealand, Reading has completed the up-zoning of its 1-acre Lake Taupo motel property to residential and is now marketing pieces for sale as condominiums.
Moving toward Development
  • During January 2011, Reading started communications with several potential joint venture partners with respect to its Union Square property in Manhattan. This 11,975 sq ft lot, once Tammany Hall before being renovated, hosts a 17,0000 sq ft, 499-seat theater for live performances and has 21,000 sq ft rented to retail tenants. This property was also appraised several years ago at a value far above Reading’s current book value.
  • Having had regulatory approval for expansion of its existing successful Courtenay Central ETRC in Wellington New Zealand, the 10-K disclosed Reading is now actively pursuing the development of Phase II on a contiguous 0.9-acre parcel. Prior approval was for an additional 162,000 sq. ft. retail development to be integrated into Courtenay’s existing Phase 1 common area, but Reading provided no details of present plans.
  • The 10-K newly disclosed that portions of Reading’s 3.3 acre Moonee Ponds (Melbourne) parcel have been re-zoned with increased density and height allowances to now build above 10 levels to the highest level (16) in the entire “Activity Centre”, enabling increased mixed-use density and value from this development site.
  • Reading has submitted a re-zoning development plan for its 64-acre holding in Manukau, (Auckland) New Zealand. Re-zoning completion is not expected until mid-2013.
Reading’s market value today fluctuates around its $4.86/share book value yet for many reasons, some discussed, above, I believe Reading’s book value still greatly understates the current fair market value of the company’s Australian, New Zealand, New York and Chicago real estate, much of which has appreciated in value from up-zoning or development into rent-generating parcels. With all the activity going on at Reading with many of these parcels, something is getting ready to pop.

Disclosure: At time of writing, funds the author manages hold a long position in RDI and RDIB. The funds or its affiliates may buy or sell securities of this issuer at any time.

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