In A Year Of Major Events For Reading International, Wanda’s Purchase Of Hoyts Turns Our Head by Andrew Shapiro, Seeking Alpha
- Many events over the past year favorably impacted movie theater operator and real estate developer, Reading International.
- The passing of Reading’s long-time Chairman/CEO raises the importance of valuing the company’s parts in different ways.
- Reading continues its operational growth, de-leveraging a conservative balance sheet, while achieving milestones in the redevelopment and monetization of the company’s undervalued and underutilized real estate.
- The recent purchase multiple of large Australian/New Zealand exhibitor Hoyts by Wanda establishes a geographically on point comp for valuing Reading’s Aus/NZ Cinema Segment.
- As Reading converts developments into cash flow, appreciation in the real estate becomes easier to value and investors should close the substantial “value gap” presently existing in Reading shares.
Much has occurred at movie theater operator and real estate developer, Reading International since I last authored an article (see “Important Events In Front Of Reading International Q2 Report“) before the company’s 2014 Q2 earnings announcement.
Over the course of the past year, Reading continued its operational growth, further improved its conservative balance sheet, and progressed a large chunk of the company’s undervalued and underutilized real estate towards higher alternative use or outright sale. The illness and passing of Reading’s long-time Chairman/CEO, James Cotter, Sr., on September 13, 2014, was also significant in accelerating the pace of value-unlocking activity.
Reading’s Union Square Theatre (the former “Tammany Hall”) parcel, achieved a major redevelopment approval in March that greatly enhanced the project’s prospective value.
Finally, Reading is the 4th largest movie exhibitor in Australia and 3rd largest in New Zealand, right behind Hoyts Group in each country. The head-turning valuation that Wanda Cinema, an affiliate of the controlling shareholder of large US exhibitor, AMC Entertainment Holdings, was reported this past week as paying to acquire Hoyts is significant. It provides a comp for Reading’s valuable Australian/New Zealand cinema assets beyond the sizable appreciation embedded in Reading’s global real estate cited in my prior Seeking Alpha articles on Reading. Reading International’s share price does not adequately reflect the underlying value of the company’s geographically diverse real estate assets. The $1.95MM per-screen valuation Wanda is paying for Hoyts in a market where Reading is the next leading market share player implies a sizable undervaluation of Reading’s overall cinema assets in that market and the United States.
Reading Moves Forward Despite The Passing Of Former Chair/CEO Jim Cotter, Sr.
In September, Reading’s longtime Chairman, CEO and controlling shareholder, James J. Cotter, Sr., passed away. Prior to Mr. Cotter’s death, he began to shift Reading’s focus from solely asset acquisition towards value realization through monetizing and/or building out several undeveloped real estate parcels.
All three of Mr. Cotter’s children, long-time Reading executives and/or board members, have been pursuing the same value-unlocking roadmap that their father had been implementing. At the same time, they have brought in outside managerial expertise, hiring an in-house General Counsel (October 2014) and a new CFO (April 2015), both with substantial real estate experience. With conflicts emerging between the children regarding their father’s estate, Reading is currently conducting a CEO search process that may result in hiring an experienced outside professional to run the company day-to-day.
Over the course of the past year, Reading has refinanced its Australian debt and New York City Cinemas’ 1, 2, 3 mortgage debt, and its other US cinemas debt, all with increased capacities and longer terms. Refinancing details of the New Zealand debt facility and the New York City Union Square mortgage are due in the near future.
On the cinema screen growth front, Reading has replaced a Hoyts cinema in Dunedin, New Zealand with a new 6-plex, started the development of new 8-plex cinemas in New Lynn, (Auckland) NZ, West Oahu, Hawaii and Washington, DC’s Union Market to go along with acquired ownership rights to a previously managed Angelika Film Center cinema in Plano, Texas, and the repositioning of Reading’s Carmel Mountain theater in San Diego as a luxury Angelika.
A $10MM stock buyback program Reading announced after its 2014 annual meeting continues in place and several hundred thousand shares have been repurchased to date.
Reading Real Estate Monetization And Development To Surface Embedded Value
Reading has entered into separate agreements to sell both of Reading’s very large undeveloped Melbourne parcels, Burwood Square and Moonee Ponds, for a combined AUD$88MM. As of Reading’s March 31, 2015 balance sheet, over AUD$81.5MM of proceeds (over $2/share) from the very large Melbourne parcel sales was still to be collected, which will further pay down Reading’s declining debt levels. (Note on April 15, Reading received AUD$23MM for final payment on the Moonee Ponds sale.)
Reading has also sold its Los Angeles Condominium and its two parcels of land at Lake Taupo, New Zealand. Also, a 202-acre developable parcel in Coachella CA obtained a zoning milestone towards Reading’s likely sale to residential developers.
Union Square Redevelopment Plan Wins Landmarks Commission Approval
In my August 2013 Seeking Alpha article on Reading, I discussed at least a $100MM value for 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].) Since 2013, New York City real estate values have continued to skyrocket and Reading’s plan to further redevelop these parcels, prior to any sale, has created additional long-term value for Reading and its shareholders.
In March 2015, Reading’s Union Square redevelopment plans (pictured below) garnered Landmarks Preservation Commission (LPC) approval for the construction of an additional two floors, increasing potential rentable space of this development by another 23,000 square feet.
(click to enlarge)
Hoyts’ Purchase Multiple Implies $12.4-$14/Share Value For Reading’s Aus/NZ Cinema Segment Alone
This week, it was reported Wanda Cinema, a unit of Chinese conglomerate Dalian Wanda Group (which also controls large US exhibitor, AMC Entertainment Holdings, plans to buy 100% of Australian cinema operator Hoyts Group for $365.7MM in cash plus assumed debt. Hoyts has been private with different owners for many years. Based on information available on Bloomberg and in news reports, Hoyts placed $450MM in term and revolver debt in May 2013. We believe most of this debt remains outstanding, to be assumed by Wanda in the acquisition, bringing the effective purchase price of this deal to at least $800MM.
Several news sources have restated old screen count numbers for Hoyts of around 450 screens. However, taking into account Hoyts’ New Zealand and Australian screens closed over the last few years, due to earthquake damage and lost leases, plus new screens under development, we estimate that Hoyts’ screen count is down to 411. An $800MM transaction value works out to a range of valuation multiples of approximately $1.78MM (450 screens) to $1.95MM/screen (411 screens).
Given this valuation, there is no doubt that Reading International shares are a bargain. Reading’s 224 screens in Australia and New Zealand, combined, is this area’s next largest cinema operator, ranking 4th in Australia and 3rd in New Zealand. Using this range of per screen multiples Wanda is purportedly paying for Hoyts, Reading’s Australia and New Zealand cinema operations would have an approximate enterprise value (gross of any assumed debt) range of $399MM (1.78M/screen) to $436MM ($1.95MM/screen). As of March 31, Reading only had $110MM of total net debt (excluding reduction for the recently collected Moonee Ponds land sale proceeds.) Reducing these imputed enterprise valuations for Reading’s Australia/NZ cinema operations by Reading’s TOTAL net debt works out to a net equity market value of $289MM-$326MM. With 23.3MM total RDI and RDIB shares outstanding, Reading’s Australia/NZ cinema operations alone could have a $12.4-$14/share value.
At present prices for Reading International shares, Reading’s Aus/NZ real estate (including the proceeds being received for the sale of Moonee Ponds and Burwood), Reading’s US real estate (including the embedded appreciated value in both Union Square and Cinemas 1, 2 & 3) and Reading’s growing US cinema operations are not presently being properly valued in the price for RDI shares.
There have been two articles written on Reading by other authors over the past year, one on Value Investors Club in November 2014 and another, on Seeking Alpha in March entitled, “Reading International Prepares To Unlock Manhattan Real Estate Value.” They assigned values for Reading International at $23-$26/share, and $20-22/share, respectively, prior to this Hoyts transaction announcement. Perhaps these authors would now value RDI shares even higher?
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 growing cash flow generation continues to lower debt levels and inevitably will translate the company’s enterprise value into a higher equity valuation.
Much of Reading’s 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. 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.
Recent cinema chain transactions, including Wanda’s purchase of Hoyts, have placed a premium on large cinema chain market shares as noted by the high valuation multiples US publicly-traded theater exhibitors, Regal Cinemas, AMC Entertainment Holdings, Cinemark Holdings, and Carmike Cinemas trade at. Reading’s large shares in Australia (#4), New Zealand (#3) and the United States (#11) should be highly attractive on a break-up or sale of the company. Recent estate disputes between the Cotter heirs increase the possibility of such an action from prior unlikely expectations.
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 should close the substantial “value gap” that presently exists in Reading International shares.
Additional disclosure: Funds I manage are long RDI, RDIB and short AMC, CNK, CKEC. These funds or its affiliates may buy or sell securities of these issuers at any time.