A liquidity crunch forcing the monetization of Class A real estate to deleverage, coupled with an incoming inflection at the operating business, provides fuel for a potential multibagger
This is a great write-up and I appreciate the depth you go into - there is not much free content this good. However, I do have to disagree somewhat on the risk/reward picture here.
The controlling family have proven themselves not only to be purely self-interested, but to be terrible operators and capital allocators. Refusing to sell for $600m pre-covid was massively value-destructive for themselves as well as other shareholders. And I think their underperformance relative to other cinemas is probably as much to do with poor operational management as their indie offering. I think the $25m EBITDA and the 7x multiple are both pretty damn optimistic in all honesty.
Given that they sold what you describe as an incredible parcel, Courtney Central, for "well below" your estimate of fair value, I think it's also optimistic to assume the rest of the real estate could/would be sold at or near fair value - especially considering they're likely to sell (or have sold) the properties on which they can get the highest price relative to value.
I also don't see a compelling reason to believe they will continue selling assets off, other than as is necessary to keep the business out of bankruptcy. My impression is that they're using the real estate portfolio as their piggy bank.
44 Union Sq seems like a massively important piece of the puzzle here, making up almost half the value in the RE portfolio in your assessment. It seems a little strange to me that a loan of $47m against a property worth $97m would carry an interest rate as high as 12.5%, tenants or no tenants. I think it's again optimistic to assume (a) that they sell it off, seeing as they perfectly seem content not to at the moment, and (b) that it can fetch book value.
A final note - you say it's weird the market hasn't reacted positively to the property sale, but (a) the stock has rallied 24% and (b) you said it was sold for far below fair value - why should the market react positively to that? If anything, it was two negatives in one - it showed they aren't willing to go into liquidation, which would probably be a positive; and it suggests other parts of the portfolio are unlikely to get fair value either.
Sorry to be a downer. Would be interested to hear your thoughts on my thoughts.
Matt, thanks for the nice words and thoughtful pushback. Here are my replies to some of your thoughts.
Let's start with the family control. Yes, they are not to be trusted as fiduciaries. But the reason I like this set up right now is because the debt maturities completely arrest their ability to allocate capital. Simply, every free dollar needs to be put towards debt paydown, or the creditors are going to seize control. Let's think through what this means in the short term. Given we are buying highly leverered tangible assets, the repayment of debt I view as akin to a capital return. When you pay down the principal on your mortgage, each dollar of debt extinguished accretes on a dollar for dollar basis to your equity, unless the asset itself declines in value. Here, the only way ploughing the sale proceeds of Wellington and Cannon into paying off debt doesn't increase the value of the equity, is if the company's enterprise value pro forma the debt paydown declines below $200m. The enterprise value declining as the result of paying down your market cap in debt, improving liquidity, and realizing value for assets not being valued at all by the market...doesn't make any sense to me and would surely be an odd state of affairs. In any event, I am a buyer of these assets at a $200m EV, bad capital allocation aside. Now, longer-term, following the paydown of the near-term maturities, the sisters will have breathing room back to make their own decisions again -- at that point, I do think the thesis changes, but given the above, I think the equity should re-rate by then.
Second, on Courtenay Central sale price. Yes, it was a discount, but I don't think that provides a readthrough to the rest of the assets. Firstly, any buyer would know that RDI had that Westpac facility in New Zealand that they simply had no other way to pay off - so they were a distressed seller. Second, the property is in disrepair. Third, there's sale leaseback, which definitionally should reduce the value to the buyer.
Third, using the real estate as their piggybank. That's always been the case, but I think my first point addresses this. They cannot use the real estate for anything other than debt repayment (and in fact the debt is forcing them to monetize it), and that again, mathematically, should improve the value of the equity. To reiterate, this is intereting because the debt has completely deprived the sisters of any freedom. They will have to keep selling assets under the balance sheet is in a place where the company can survive. At that point, yes, the risk profile of this investment greatly changes.
Fourth, on Union Square. The reason the loan is that high is because its a construction loan and the property is vacant. That's not a particularly surprising cost of debt in those circumstances and don't think it says anything about the value of the property. I don't think this asset gets sold any time soon, but there is huge value in getting it leased, both for incremental NOI and to refinance to a lower cost. Unless you think this property is worth less than loan, which I think is crazy, the sisters are greatly incentivized to get the property leased in the next 18 months, because they aren't getting another extension (and will thus lose it, since they have no other to refi it) Yet again, another example of the debt maturities forcing their hand. They can have whatever silly dreams they want, but they are going to lose the keys if they don't find tenants, and their self-interest is strongly against that.
Fifth, I don't totally understand this concern admittedly. The stock ran a lot on my write up and was starting to move on the Cinema earnings update. If you look at the sale announcement, the stock didn't budge. And again, I don't think the sale price for Wellington is a read through for the other assets (non NOI generative and a well known desperate seller given RDI's terrible positioning to pay off the loan in NZ). They did not receive fair market value, but it is a material book value gain, and an even larger gain vis-a-vis what it has being value at in the stock market. What's better - holding a cash burning property valued at zero or getting something less than fair value for the asset and using proceeds to pay off half your market cap in debt? I consider this sale a great positive. I don't follow your piece on how the sale shows they aren't going into liquidation. No one is under view that this company is a total liquidation - but the forced liquidation of pieces of it is what makes this interesting.
Broadly, I think its important to consider that the price you pay for something is a huge determinant of outcomes. And so while I agree with some of your sentiments in the abstract, the question is whether this equity should trade for $45m or less after a few asset sales, more than $45m in debt paydown, and an operating business that is improving.
You should check notes with Andrew Shapiro. He’s been a long term investor in Reading for several years, might be on or two decades by now. He once was interviewed in Barrons’s and recommended the company. I believe he may still be on Seeking Alpha.
I've spoken with Andrew fairly extensively on the name. I am sure he will have some edits/feedback for me, which I'll likely incorporate given he certainly knows more about this company than me (or likely anyone for that matter).
I follow it closely … I’m based in NZ. Andrew sends regular updates and is the guru on all things Reading. I’ve been watching it for years - never bought it though
Perfect analysis of this company! I’m long at around $1.50 and while I have tried to explain this opportunity to others, it sounds too good to be true, making it hard for people to grasp. You, on the other hand, have articulated this opportunity perfectly, backing it with solid facts and hard numbers. What most people don’t realize is that this isn’t a typical stock play where the company’s earnings or movie business suddenly improve, driving the stock price up. Instead, this is more of an event-driven opportunity—whether through a sale, restructuring, or similar scenario. Investors in this stock need to be patient, ride it out, and wait for the event to unfold and then collect your winnings and get out. On a side note, I hadn’t heard of you before, and your articles don’t seem to rank highly on search engines but you're writing and analysis is awesome. You could benefit from some search engine optimization—just tweaking your article titles and adjusting a few key phrases at the top of your posts could significantly boost your visibility. Feel free to DM me if you’d like some advice on this.
Hit the post before by accident. Recently I have notice insider buying in $RDI by a director. He was consistent but has paused his buying for now. I have a small position in $RDI. I added some shares last year. I truly enjoyed reading your analysis here. You have really done a deep dive into the company. Far better than I have done. I am not as enamored in the outlook for the box office. I think the films that are released today are darn near awful. I personally have not been to a theater in over 5 years. To me the industry has lost creativity and rehashes old ideas and over sequelizes (probably not a word! đŸ˜‰) but I hope you and everyone understands what I mean.
Anyway, I think this is basically a real estate play. I have had mixed results in these situations.
Once again, great analysis. Thanks for posting. Great work.
Thanks for the nice words. I am not a fan of the quality of films today, but that doesn't change the underlying fact that people are going. Reduced competition, lower screen count, and an improved offering is just driving prices and there's a lot of runway there. Consolidation really matters. E.g. Cineplex guides to being able to return to 2019 ebitda with only 80% of the attendance. More broadly, you are also starting to see major streaming companies like Netflix, Apple, etc. show an inclination to release films to box office first.
Biggest thing to keep in mind here is simply the price we are paying. You don't really need to believe in the long term thesis to make a lot of money here as things go from distressed to merely ugly.
Mathematically, unless you believe monetizing assets being valued at zero to paydown the market cap worth of debt should cause the enterprise value to shrink by the equivalent amount of the debt paid down, than this set up is accretive to the equity and is akin to a capital return. Seems like the opposite of value trap in the near-term. Long-term, yea, you probably never get anything close to fair value.
precisely, the recent fire sale illustrates that last point + i highly doubt in the sustainability of the core movie business + all the hairs on the situation (main one being the dual class share with absolute control a la paramount). even if you end up making money on this, the return to brain damage ratio is not attractive
A risk point I'd like to contribute is that the Australian discretionary spending economy / commercial real estate market may not be sustained for much longer...
Fair point. But recessions are a risk to most theses and as I noted the movie going business tends to hold up quite well during consumer weakness - it’s more tied to the movie slate than the economy. Commercial real estate is another story but you can haircut the cap rates on the AUS properties and they are still worth a lot given no debt on them.
I’m not a lawyer and do not have a great understanding of trusts. What’s to say the sisters just run the company into the ground over the next decade by selling bits and pieces of real estate, pay themselves a nice salary as they do it, and distribute nothing to the grandchildren?
Or maybe to frame it another way, if they liquidate the company, the proceeds go to the grandchildren, and the sisters are presumably left with nothing, especially the sister that has no children.
It's an interesting question. It's worth looking at the incentives. Firstly, the sisters have material economic interest in this entity, which could be worth a hundred million in a sale vs. like $10m today. That's a lot more than they'll ever get in salary running this. Moreover not all of those shares are in the family trust, so it's not all about the grandchilren. I think the most important thing to note is that right now we are buying peak distress in hopes of making a return simply by this re-rating to something less than distress. We don't necessarily need to answer the ultimate question of where this ends up. Unless you think the enterprise value deserves to be valued at <$150m (that's less than the real estate net of debt), then mathetimically you make upside here just from deleveraging, as that debt paydown accretes to the equity.
i read this whole thing and what i come up with is this:
they should hire jake lamotta to run this business.
would be huge for the family too.
This is a great write-up and I appreciate the depth you go into - there is not much free content this good. However, I do have to disagree somewhat on the risk/reward picture here.
The controlling family have proven themselves not only to be purely self-interested, but to be terrible operators and capital allocators. Refusing to sell for $600m pre-covid was massively value-destructive for themselves as well as other shareholders. And I think their underperformance relative to other cinemas is probably as much to do with poor operational management as their indie offering. I think the $25m EBITDA and the 7x multiple are both pretty damn optimistic in all honesty.
Given that they sold what you describe as an incredible parcel, Courtney Central, for "well below" your estimate of fair value, I think it's also optimistic to assume the rest of the real estate could/would be sold at or near fair value - especially considering they're likely to sell (or have sold) the properties on which they can get the highest price relative to value.
I also don't see a compelling reason to believe they will continue selling assets off, other than as is necessary to keep the business out of bankruptcy. My impression is that they're using the real estate portfolio as their piggy bank.
44 Union Sq seems like a massively important piece of the puzzle here, making up almost half the value in the RE portfolio in your assessment. It seems a little strange to me that a loan of $47m against a property worth $97m would carry an interest rate as high as 12.5%, tenants or no tenants. I think it's again optimistic to assume (a) that they sell it off, seeing as they perfectly seem content not to at the moment, and (b) that it can fetch book value.
A final note - you say it's weird the market hasn't reacted positively to the property sale, but (a) the stock has rallied 24% and (b) you said it was sold for far below fair value - why should the market react positively to that? If anything, it was two negatives in one - it showed they aren't willing to go into liquidation, which would probably be a positive; and it suggests other parts of the portfolio are unlikely to get fair value either.
Sorry to be a downer. Would be interested to hear your thoughts on my thoughts.
Matt, thanks for the nice words and thoughtful pushback. Here are my replies to some of your thoughts.
Let's start with the family control. Yes, they are not to be trusted as fiduciaries. But the reason I like this set up right now is because the debt maturities completely arrest their ability to allocate capital. Simply, every free dollar needs to be put towards debt paydown, or the creditors are going to seize control. Let's think through what this means in the short term. Given we are buying highly leverered tangible assets, the repayment of debt I view as akin to a capital return. When you pay down the principal on your mortgage, each dollar of debt extinguished accretes on a dollar for dollar basis to your equity, unless the asset itself declines in value. Here, the only way ploughing the sale proceeds of Wellington and Cannon into paying off debt doesn't increase the value of the equity, is if the company's enterprise value pro forma the debt paydown declines below $200m. The enterprise value declining as the result of paying down your market cap in debt, improving liquidity, and realizing value for assets not being valued at all by the market...doesn't make any sense to me and would surely be an odd state of affairs. In any event, I am a buyer of these assets at a $200m EV, bad capital allocation aside. Now, longer-term, following the paydown of the near-term maturities, the sisters will have breathing room back to make their own decisions again -- at that point, I do think the thesis changes, but given the above, I think the equity should re-rate by then.
Second, on Courtenay Central sale price. Yes, it was a discount, but I don't think that provides a readthrough to the rest of the assets. Firstly, any buyer would know that RDI had that Westpac facility in New Zealand that they simply had no other way to pay off - so they were a distressed seller. Second, the property is in disrepair. Third, there's sale leaseback, which definitionally should reduce the value to the buyer.
Third, using the real estate as their piggybank. That's always been the case, but I think my first point addresses this. They cannot use the real estate for anything other than debt repayment (and in fact the debt is forcing them to monetize it), and that again, mathematically, should improve the value of the equity. To reiterate, this is intereting because the debt has completely deprived the sisters of any freedom. They will have to keep selling assets under the balance sheet is in a place where the company can survive. At that point, yes, the risk profile of this investment greatly changes.
Fourth, on Union Square. The reason the loan is that high is because its a construction loan and the property is vacant. That's not a particularly surprising cost of debt in those circumstances and don't think it says anything about the value of the property. I don't think this asset gets sold any time soon, but there is huge value in getting it leased, both for incremental NOI and to refinance to a lower cost. Unless you think this property is worth less than loan, which I think is crazy, the sisters are greatly incentivized to get the property leased in the next 18 months, because they aren't getting another extension (and will thus lose it, since they have no other to refi it) Yet again, another example of the debt maturities forcing their hand. They can have whatever silly dreams they want, but they are going to lose the keys if they don't find tenants, and their self-interest is strongly against that.
Fifth, I don't totally understand this concern admittedly. The stock ran a lot on my write up and was starting to move on the Cinema earnings update. If you look at the sale announcement, the stock didn't budge. And again, I don't think the sale price for Wellington is a read through for the other assets (non NOI generative and a well known desperate seller given RDI's terrible positioning to pay off the loan in NZ). They did not receive fair market value, but it is a material book value gain, and an even larger gain vis-a-vis what it has being value at in the stock market. What's better - holding a cash burning property valued at zero or getting something less than fair value for the asset and using proceeds to pay off half your market cap in debt? I consider this sale a great positive. I don't follow your piece on how the sale shows they aren't going into liquidation. No one is under view that this company is a total liquidation - but the forced liquidation of pieces of it is what makes this interesting.
Broadly, I think its important to consider that the price you pay for something is a huge determinant of outcomes. And so while I agree with some of your sentiments in the abstract, the question is whether this equity should trade for $45m or less after a few asset sales, more than $45m in debt paydown, and an operating business that is improving.
Welcome any pushback. Cheers.
You should check notes with Andrew Shapiro. He’s been a long term investor in Reading for several years, might be on or two decades by now. He once was interviewed in Barrons’s and recommended the company. I believe he may still be on Seeking Alpha.
I've spoken with Andrew fairly extensively on the name. I am sure he will have some edits/feedback for me, which I'll likely incorporate given he certainly knows more about this company than me (or likely anyone for that matter).
I follow it closely … I’m based in NZ. Andrew sends regular updates and is the guru on all things Reading. I’ve been watching it for years - never bought it though
Perfect analysis of this company! I’m long at around $1.50 and while I have tried to explain this opportunity to others, it sounds too good to be true, making it hard for people to grasp. You, on the other hand, have articulated this opportunity perfectly, backing it with solid facts and hard numbers. What most people don’t realize is that this isn’t a typical stock play where the company’s earnings or movie business suddenly improve, driving the stock price up. Instead, this is more of an event-driven opportunity—whether through a sale, restructuring, or similar scenario. Investors in this stock need to be patient, ride it out, and wait for the event to unfold and then collect your winnings and get out. On a side note, I hadn’t heard of you before, and your articles don’t seem to rank highly on search engines but you're writing and analysis is awesome. You could benefit from some search engine optimization—just tweaking your article titles and adjusting a few key phrases at the top of your posts could significantly boost your visibility. Feel free to DM me if you’d like some advice on this.
Hit the post before by accident. Recently I have notice insider buying in $RDI by a director. He was consistent but has paused his buying for now. I have a small position in $RDI. I added some shares last year. I truly enjoyed reading your analysis here. You have really done a deep dive into the company. Far better than I have done. I am not as enamored in the outlook for the box office. I think the films that are released today are darn near awful. I personally have not been to a theater in over 5 years. To me the industry has lost creativity and rehashes old ideas and over sequelizes (probably not a word! đŸ˜‰) but I hope you and everyone understands what I mean.
Anyway, I think this is basically a real estate play. I have had mixed results in these situations.
Once again, great analysis. Thanks for posting. Great work.
Thanks for the nice words. I am not a fan of the quality of films today, but that doesn't change the underlying fact that people are going. Reduced competition, lower screen count, and an improved offering is just driving prices and there's a lot of runway there. Consolidation really matters. E.g. Cineplex guides to being able to return to 2019 ebitda with only 80% of the attendance. More broadly, you are also starting to see major streaming companies like Netflix, Apple, etc. show an inclination to release films to box office first.
Biggest thing to keep in mind here is simply the price we are paying. You don't really need to believe in the long term thesis to make a lot of money here as things go from distressed to merely ugly.
reads like your average r2k value trap
Mathematically, unless you believe monetizing assets being valued at zero to paydown the market cap worth of debt should cause the enterprise value to shrink by the equivalent amount of the debt paid down, than this set up is accretive to the equity and is akin to a capital return. Seems like the opposite of value trap in the near-term. Long-term, yea, you probably never get anything close to fair value.
precisely, the recent fire sale illustrates that last point + i highly doubt in the sustainability of the core movie business + all the hairs on the situation (main one being the dual class share with absolute control a la paramount). even if you end up making money on this, the return to brain damage ratio is not attractive
So just to be clear you think this EV should decline as a result of monetizing assets and paying down debt?
A risk point I'd like to contribute is that the Australian discretionary spending economy / commercial real estate market may not be sustained for much longer...
Fair point. But recessions are a risk to most theses and as I noted the movie going business tends to hold up quite well during consumer weakness - it’s more tied to the movie slate than the economy. Commercial real estate is another story but you can haircut the cap rates on the AUS properties and they are still worth a lot given no debt on them.
Great write up.
I’m not a lawyer and do not have a great understanding of trusts. What’s to say the sisters just run the company into the ground over the next decade by selling bits and pieces of real estate, pay themselves a nice salary as they do it, and distribute nothing to the grandchildren?
Or maybe to frame it another way, if they liquidate the company, the proceeds go to the grandchildren, and the sisters are presumably left with nothing, especially the sister that has no children.
It's an interesting question. It's worth looking at the incentives. Firstly, the sisters have material economic interest in this entity, which could be worth a hundred million in a sale vs. like $10m today. That's a lot more than they'll ever get in salary running this. Moreover not all of those shares are in the family trust, so it's not all about the grandchilren. I think the most important thing to note is that right now we are buying peak distress in hopes of making a return simply by this re-rating to something less than distress. We don't necessarily need to answer the ultimate question of where this ends up. Unless you think the enterprise value deserves to be valued at <$150m (that's less than the real estate net of debt), then mathetimically you make upside here just from deleveraging, as that debt paydown accretes to the equity.
What’s the appropriate Kuppyism: we want to buy when things go from hopelessly fucked to just sorta shitty? Great write up, I’m in!