NEW YORK, May 29, 2012 /PRNewswire/ -- The following is a letter from Capstone Equities to the Reading International (RDI) Board of Directors demanding a sale of Cinema 1, 2 & 3 and a JV of Union Square Theatre as well as highlighting corporate governance concerns.
May 15, 2012
To Reading International Board of Directors:
Another year of the company has passed and Reading International (The "Company") has failed to deliver on promises to the shareholders, while the Company's share price remains deeply undervalued. Shareholders have been told that the Cinema 1, 2 & 3 Property and New Union Square Theatre in NY would be sold and the Burwood Property in Australia would be sold or redeveloped with a joint venture partner.
The shareholder meeting is this week and this shareholder is tired of all the failed promises related to strategic dispositions and joint ventures. Clearly, this demonstrates a lack of accountability to shareholders and brings forth the issue of highly nepotistic arrangements with both insiders and their family members.
By way of background, our firm Capstone Equities has invested in New York City Real Estate for nearly ten years and has acquired and presently own interests in $1 Billion USD of property, including over 3 million square feet of property in the United States including 156 William Street, 14 Wall Street, 30 Flatbush Avenue and 4 New York Plaza.
We have also been shareholders of RDI for over twelve months. We made our original investment because we were intrigued by the Company's prized real estate assets and what we considered a deeply undervalued stock price.
However, it has become clear to us that shareholders are not benefiting from the current conglomerate of Theatre, Cinema and Real Estate. Currently trading for $5.54, Capstone believes the sum of parts valuation is between $12 - $14.
Lack of Accountability
The Company's 2010 Annual Report states that the Company has considered a sale of Cinema 1, 2 & 3 as well as a redevelopment of Union Square Property including discussions with several joint venture partners. The 2011 Annual Report states "Given the resurgence of Manhattan commercial real estate values, in 2012, we intend to focus on the sale of Cinemas 1, 2 & 3 property and the redevelopment of our Union Square property."
It is now May 2012, and there has been no material public news related to either of the above sites. It is hoped that there will be a material announcement at this year's shareholder meeting regarding these matters, but thus far we have seen no status updates.
Union Square Theatre is currently marked on the balance sheet at a gross book value of approximately $9 Million. We estimate that the market value for this site could exceed $50 million, which would translate to potential proceeds of over $40 million, or 31% of the Company's current market capitalization, after netting out (what we understand to be) $7.5 million of debt.
Similar to the discount present in Union Square Theatre, Cinema 1, 2 & 3 has a stated gross book value of $23 million USD. We believe the market value of this asset could be as much as $50 million, which would translate to proceeds of $35 million, after netting out the $15 million of debt on the property. We believe the delay in decision making and execution leaves enormous unrealized value on the table for shareholders.
Rather than wait for a deal that may or may not come to fruition, my firm Capstone made our own effort to acquire Cinema 1, 2 & 3 and Union Square Theatre solely using publicly available information. As evidenced from the attached timeline in Exhibit A, we believe the Company has made it unnecessarily difficult if not impossible for any reputable investor such as ourselves to attempt to buy the assets, by refusing to even engage in substantive discussions that might lead to a sale for the benefit of the shareholders.
Initially, Capstone attempted to engage in productive discussions with the Company but several board members as well as the corporate secretary were completely unresponsive. After a meeting with a senior company employee to discuss our interest in these assets, we followed up with a revised offer that gave Reading the option to buy back into the development projects at our cost.
Finally, on April 30th we were told that the Company is not prepared to pursue a transaction on Union Square Theatre. This change of direction would appear to be in direct conflict with all of the Company's public statements that the Company would consider or would focus on a joint venture development on Union Square.
Why would the Company repeatedly publicly state it is marketing or has an intent to redevelop certain assets, yet not pursue those alternatives when they are presented to them?
Conflicts of Interest / Company Management:
Why do the shares of RDI trade at such an enormous discount to the sum of its parts?
We believe the answer lies partly in the market's lack of confidence in present management.
First, clear conflicts of interest exist. As disclosed in the most recent proxy statement, Mr. Cotter is the 50% owner of Sutton Hill Associates and a partner in Sutton Hill Capital (SHC), both of which benefit from favorable relationships with Reading. For instance, the following section also taken from the 2012 proxy:
"In 2005, we acquired from a third party the fee interest and from SHC its interest in the ground lease estate underlying the Cinemas 1, 2 & 3 in Manhattan. In connection with that transaction, we agreed to grant to SHC an option to acquire a 25% interest in the special purpose entity formed to acquire these interests at cost. On June 28, 2007, SHC exercised this option, paying the option exercise price through the application of their $3.0 million deposit plus the assumption of its proportionate share of SHP's liabilities giving it a 25% non-managing membership interest in SHP."- While this transaction occurred in the past and is effectively priced into today's share price, we believe these terms were not arm's-length and are indicative of the favorable treatment by which a Cotter affiliated entity benefitted, while all of the risks are borne by Reading.
In addition Cotter, and not Reading, is an investor in Theatre Productions that lease the Company's live theatres. We question whether Cotter is properly incentivized to maximize rents which benefit shareholders, without being influenced by the effect on the profitability of his personal investments in these productions. One wonders how a "highly independent" conflict committee waived such a clear conflict.
Second, another family member Ms. Margaret Cotter, earns 21% of net cash flow from the live theatres in New York. By moving forward on a deal for Union Square Theatre, Cotter would likely put his daughter out of a job. We question whether that consideration has influenced the delays in selling or redeveloping Union Square Theatre in a way that otherwise would benefit Reading shareholders. We believe this is another conflict that should be addressed.
We believe RDI should hire a qualified investment bank to perform a strategic review in order to determine ways to maximize shareholder value, including through a sale or co-development project involving Cinema 1, 2 & 3 and Union Square Theatre. Some obvious considerations which we believe would improve the Company's standing among shareholders and the broader investment community include:
- Modernizing corporate governance by implementing a plan to eliminate the dual class share structure over reasonable period of time. Thereby mitigating the disproportionate control of Cotter, the resulting apparent lack of effective board oversight and mitigating what we believe are significant conflicts of interest.
- Divesting the theatre and Cinema business unit to avoid allocating the Company's capital to unwise capital expenditures while allowing the return of capital to shareholders.
- Disposing of the theatre and land interests and putting all income producing assets into a real estate investment trust
- Marketing and selling of Cinema 1, 2 & 3 and the Union Square Theatre to the highest bidder.
As a minority shareholder we urge Reading's Board to strictly adhere to their fiduciary duties of care and loyalty to the Company's stock holders. We further urge the conflict committee to more carefully scrutinize the conflicted transactions they are called to pass upon and to ensure that the minority stockholders' interests are properly protected. Finally, we demand that an overall strategic review be engaged for the benefit of patient shareholders.
Capstone Equities Capital Management, LP
James Cotter Sr.
6100 Center Drive, Suite 900
Los Angeles, CA 90045
Mr. Robert Eckardt
Raymond James & Associates
880 Carillon Parkway PO Box 14508
St. Petersburg, Florida 33716
Eidelman Virant Capital
800 Maryland Avenuje Suite 380
Sait Louis, MO 63105
Catalyst Capital Advisors LLC
22 High Street
Huntington, NY 11743
Robert A Laatz
Perritt Capital Management
300 South Wacker Drive, Suite 2880
Chicago, IL 60606
Lawndale Capital Management
591 Redwood Highway, Suite 2345
Mill Valley, CA 94941
Timeline of Capstone's Attempted Offer and Correspondence with RDI
December 30, 2011: Sent a written offer to Board of Directors. We received no written or verbal response and so we followed up with a certified mail to Eric Barr on January 2, 2011.
January 4, 2012: We then called Elley Dai on January 4, 2012 to make sure receipt of above and received no response to our voicemail.
January 5, 2012: Jonathan Scheinberg a principal at our office spoke to Board member William Gould on January 5, 2012 – he stated that he did not get a copy of the offer and Mr. Gould was then sent email of offer.
January 9, 2012 : Called Elley Dai to make sure receipt of above- no response to voicemail
January 11, 2012 : Called Elley Dai to make sure receipt of above- no response to voicemail
February 8, 2012 : Sent letter via certified mail on February 8, 2012 to James cotter and other directors - no response.
March 20th, 2012: Josh Zamir Meets Andrzei Matyczynski and is informed the Company would like an offer for both properties with Reading having an option after closing on the sale to purchase back up to 25% interest in the properties at the development cost basis.
March 26, 2012: Sent Revised offer to Andrzei Matyczynski on March 26, 2012 for revised offer- no response.
April 2, 2012: Andrzei directs us to Craig Tompkins.
April 30 2012: Receive response from Craig Tompkins that the Company is not certain they are interested in selling Union Square Theatre.
RUBENSTEIN PUBLIC RELATIONS
Contact: Alan Segan, Tele: 212-843-8064
SOURCE Capstone Equities, LLC