|Share price ($)
|Fully diluted shares (M)
|+ Debt (@ Sep 30 2014)
|- Cash (@ Sep 30 2014)
|- Moonee Ponds sale proceeds (to be received April 2015)
|- Burwood sale proceeds (discounted, to be received by latest 2017)
We think RDI is as attractive today as it was when we wrote it up in 2011 even though the stock has more than doubled. The situation has changed: the risks are materially reduced, a few core assets are worth as much as the entire EV of the Company, the operating businesses (cinema and real estate) are steady cash generators, and the catalysts (including recent management changes) appear in place for the significant value to be realized. Currently trading at $10.67 per share, we arrive at a fair value of approx. $23 to $26 per share.
In summary, the valuation build is as follows:
- Cinema: $35M in annual EBITDA at 7x = $245M (comps at 9-11x)
- Real Estate $14M in annual EBITDA at 13x = $182M (comps at 14x-20x)
- Courtenay Central: $3M incremental EBITDA at 13x = $39M (comps at 14x-20x)
- JV Earnings (non-consolidated) $1.5M at 10x = $15M
- (Minus) Unallocated Corporate Costs: $11M (pre-tax) at 10x = $110M
Value of Operating Business = $371M (see above) – $56M (adj. net debt) = $315M (equity) or $13.30 per share
Near-Term Redevelopment/sale opportunities (not included in Operating Business above):
- Cinema 123 in New York City: $67M - $105M
- Union Square Building in New York City: $90M - $120M
- Australia Redevelopment/monetization (Auburn and New Market additions): $19M
Value of Near-Term Redevelopment Opportunities = $7.45 to $10.30 per share
Long-Term Asset Monetization Opportunities (Manukau, Coachella, etc.): ~$2 per share
Total value per share:
Operating Businesses: $13.30
Near-Term Redevelopment: $7.45 to $10.30
Long-Term Asset Monetization: $2.00
Total = ~$23 to ~$25 per share
The shares offer upside to reasonable value with a strong balance sheet that could easily handle incremental debt.
Key factors in this investment (addressing what has changed):
- Risk of permanent loss of capital is very low due to asset values and the recent sales of non-productive assets
- New York City trophy assets are on track to be monetized (via sale or redevelopment)
- The retirement of controlling shareholder and former CEO James Cotter will speed up the value realization
Risk of permanent loss of capital is very low due to asset values and the recent sales of non-productive assets
Before laying out RDI’s upside and catalysts, we wanted to highlight why RDI’s recent sales of its two large undeveloped parcels in Melbourne, Australia for ~$80M are so meaningful. In essence, these sales materially reduced the key risks that we highlighted in our 2011 write-up (and also reduced annual carrying costs by $1M). Management has shown a willingness to monetize large assets and also reduced its exposure to undeveloped Australian property. In addition, at its annual meeting, management announced a $10M (~5% of shares) buyback and indicated increasingly returning value to shareholders over time.
Since most of the cash from RDI’s sales of its two large undeveloped parcels in Melbourne has not yet been received, RDI’s true net debt is much lower than it appears on the balance sheet. The Company’s EV (adjusted for the guaranteed cash it will receive from the sales) is approximately $307 million, not $370 million as it appears on screens.
The solid operating businesses (cinema and real estate segments) are alone worth as much as the EV. More surprisingly, these operating profits do not incorporate assets in redevelopment, assets likely to be redeveloped in the near future, net income from JVs, and undeveloped parcels. For example, by the end of 2013 the Company will generate approx. $3M in additional annual cash flow from the redevelopment of Courtenay Central in Wellington, NZ. Moreover, two of these soon-to-be-redeveloped assets (Cinema 123 and Union Square properties in New York City) are together perhaps worth as much as RDI’s current market cap.
Cinema 123 in New York City
- Cinema 123: RDI owns a 75% interest in a 7,907 sq. ft. parcel located on 3rd Avenue between 59th and 60th The site currently hosts a 3-screen movie cinema. The property is located in one of the most valuable retail neighborhoods in Manhattan across from Bloomingdale’s. Based on our analysis of the property (including zoning and air rights), we believe that RDI can build a mix-use asset with roughly 22,000 sq. ft. of leasable retail space and roughly 44,000 sq. ft. of sellable luxury apartments with the potential to receive bonus FAR on top of this due to proximity to the subway. After discussing the asset with multiple real estate experts who confirm that this property will likely be luxury residential with retail below it, we believe that the property is worth $90M to $140M ($67M to $105M for RDI’s stake).
- We expect a Cinema 123 transaction announcement in the next 6 to 12 months. Management has been explicit in filings and at the annual meeting that they are working on monetizing this asset. On July 7, RDI refinanced its loan on Cinema 123 for one year, which also included an additional $6 million line of credit which “may only be used for the acquisition of air rights” to “add additional density to any redevelopment of the property (“air rights”). This additional financing further confirms that Management is working on a transaction. Any incremental value created from this additional density is not factored into our valuation.
Union Square Theater in New York City
- Located on the northeast corner of Union Square, RDI owns the underlying land and air rights to an 11,973 sq. ft. parcel that is currently the Union Square Theater. Based on our analysis of the property (including zoning and air rights), RDI will at a minimum build a large amount of leasable retail and commercial space. Our checks indicate that, although difficult to value, the property is worth $90M to $120M. Like Cinema 123, this is a unique, trophy asset which makes it difficult to value but the value is significant and our valuation could prove conservative. The Company is working with a leading architecture firm to redevelop the building while maintaining the building’s historic exterior which is under landmark status. Monetization of the valuable air rights of the building will be part of the development process if there is no tower built on the site.
- In terms of realizing this value, on May 14 2014 CBRE issued its monthly lease transaction update. Interestingly, the Union Square property’s main tenant, The New York Film Academy, has leased 43,108 sq. ft. of new commercial real estate at 26 Broadway. We believe that The New York Film Academy is seeking new space to transition its forced exit from RDI’s Union Square property where it has been located for over 20 years. RDI is not going to end the lease on their primary tenant unless they are far along with development plans.
- RDI has historically suffered from a control discount. The dual class structure created a situation where the Cotter family owned approx. 30% of outstanding shares, but 70% of class B voting stock. James Cotter Sr., the longtime CEO, made little effort to promote the company and was slow to monetize assets and unlock the value even though he did acquire assets smartly and did a good job of operating the business. Over the past two years, asset monetization has moved ahead and seems to be a sign of things to come.
- In early August, James Cotter, Sr., resigned from serving as the Company’s Chairman and CEO and recently passed away. Cotter’s son Jim has taken over the CEO position. We think that Jim has already been a positive influence in terms of value realization during the last year. We believe that Jim was instrumental in pushing not only the sales of important Australian assets, but also the share buyback. He is also seeking other ways to increase value (e.g. considering ways to further monetize the Angelika brand). We expect the stock will move much closer to fair value once definitive announcements are made around the New York City assets and other smaller asset monetization announcements in the next 12 months.
- The two New York assets discussed have appreciated significantly in recent years and are a part of the value here. It is also worth noting that RDI also owns other valuable, underutilized real estate (including Minetta Lane Theater, Orpheum Theater, Royal George in Chicago, etc.) that could ultimately be redeveloped and create incremental value for shareholders.
In summary, RDI is a cash generating business that is materially undervalued based on its underlying operating business and its collection of quality assets. It seems that we are on the precipice of realizing the significant value that the Cotter family has accumulated over the past 20 years.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
- Transaction announcements on Union Square and/or Cinemas 123
- Further monetization and unlocking the value of the Company's other assets
- Returning capital to shareholders (Company repurchases significant stock and over time also initiates a dividend)