|Shares Out. (in M):||33||P/E||38.6x||N/A|
|Market Cap (in M):||143||P/FCF||N/A||N/A|
|Net Debt (in M):||338||EBIT||47||10|
Bluegreen is a developer and marketer of timeshares and residential lots that over-extended itself during the real estate bubble and fell into disfavor in 2008/2009 as the real estate market soured and securitization fell apart. Like other timeshare developers, BXG has significantly downsized the timeshare business and appears to be managing it for cash flow. The Company currently trades at ~41% of stated book value (adjusting for FASB 166 and backing out non-controlling interest) of $10.50/share, pricing in little going concern value. Assuming 1) timeshare receivables capacity does not run away and 2) legacy receivables are healthy enough to pay down receivables-backed debt, we think net cash flow is adequate to meet non-receivables backed cash obligations, even after aggressive inventory additions (which is in management's control). Other measures to generate cash include: 1) ramping up fee based business 2) requesting more cash up front on timeshare sales and 3) selling timeshares to existing owners, which requires less marketing spend. This idea is not riskless and stands to lose significant value if the economy double-dips, the credit market flees and management aggressively adds to inventory. Despite this downside scenario, we believe that investors could see multiples of upside if Bluegreen can successfully negotiate near-term liquidity issues and de-lever its balance sheet over time. Timeshare operators Wyndham and Starwood completed timeshare securitizations in late 2009, and given the improving quality of BXG's recently originated receivables since December 2008, it would not surprise us to see this funding avenue open up for the Company. With TALF for non-CMBS collateral having recently come to an end, we believe timeshare receivables may once again be on folks' radar screens, particularly given the much improved credit quality of Bluegreen's receivables. Finally, in September 2008, Diamond Resorts International signed a non-binding Letter of Intent to acquire Bluegreen for $15.00 per share, valuing the Company at around $500mn, excluding outstanding debt. If Bluegreen is able to secure funding and resolve its liquidity issues, we don't see why $15 would be out of the question in a few years.
A reasonably conservative stress test that: knocks 26% and 20% off on-BS, recourse receivables and inventories, respectively (vs. 13% and 3% now), wipes out retained interest in off balance sheet receivables, and assigns a low multiple (5.0x) on BXG's fee generating businesses yields around ~low/mid $7s in book value. We will not belabor this point - given Bluegreen's highly leveraged balance sheet and the numerous covenants attached to various credit facilities, we think a "stress test" of the Company's net asset value is largely academic, since its going concern value would at that point be largely based on the beneficence of its lenders. In a distressed liquidation, equity value could be "0".
Vacation Ownership Interest (VOI) Industry
The timeshare industry originated during the 1960s in Europe before migrating to the States. At the start, the US timeshare industry was fragmented, regionalized and scummy. Over time, the industry has consolidated into large, corporate hands. Think of a timeshare as a prepaid vacation: for a reasonably small price (as little as $13k but probably closer to $20/$25k) and just 10% down, a middle class 50-year old professional with a median salary of $80k, can buy himself and his family a lifetime of vacation during certain times of the year.....and that's not all! The value proposition is that if you plan on consistently vacationing for, say, 1 week out of every year with your family, it is far more economical on a per square foot basis, to purchase a timeshare than to book a hotel room. A standard Bluegreen timeshare will run $13k, $12k of which is financed with a 10 year term at a 17% fixed interest rate. US timeshare sales grew in every year from 1990 through 2007, even through the two recessions ('90-'91 and '00-'02). The industry contracted only recently due to the securitization debacle. Over the years, the timeshare model has evolved; below are some of the most common forms:
Fixed Floating week: Fixed week is the oldest timeshare form. A customer purchases one or more weeks during the year to be used at the same time at the same resort each year. In a floating timeshare, week-long timeshare is purchased for a particular seasonal period, offering customers more scheduling flexibility than the fixed week option. Marriott and Starwood operate under this system. You are not actually required to stay put in the same location every year, but booking another resort location can be difficult and must generally be done on an "apples-to-apples" basis. If Adam owns a timeshare week in, say, Pleasant, FL, while Beth owns one in Nowhere, AR, and both want to exchange on this particular year for a week in Hawaii, Adam will almost certainly get it, since his week in Pleasant is in higher demand and can be filled more readily by the timeshare operator who makes an exchange fee ($100-$150) on both sides of the transaction.
Points: This is the most recent timeshare form and the one Bluegreen has sold since 2004. A customer purchases a specific number of points that can be allocated to various resorts with more popular destinations and seasonal periods commanding more points. For example, sifting through the Wyndham timeshare, I see that 1 week per year during the prime season in San Francisco, CA will run me 300k points during the prime season while a week per year during the prime season in Branson, MO will cost me 94.5k points. The rule of thumb is that 1 point costs $0.20, though there are certainly promotions and deals. Sometimes, if a receivable is well-aged and defaults, the reclaimed inventory will be resold by the timeshare operator for a substantial discount.
For further background on the timeshare market, we recommend reading madler934's excellent write-up on Wyndham Worldwide from December 2008.
Bluegreen's relationship with BFC
Bluegreen first came to our attention upon hearing (belatedly) that BFC Financial increased its minority 30% ownership to a majority 52% in November 2009. BFC Financial is a diversified holding company whose interests include Woodbridge Holdings (wholly owned, which implies BFC's >50% ownership in Bluegreen), BankAtlantic Bancorp (BBX - 35.9% owned), and Benihana (BNHN - convertible preferred stock that would amount to 9% economic interest and 19% voting interest if converted). BankAtlantic Bancorp, in turn, owns BankAtlantic (commercial bank) and Ryan Beck & Co. (investment bank / brokerage).
In 2000, BankAtlantic, a partially owned, publicly traded subsidiary of BFC, acquired real-estate developer Levitt Corp. Three years later, after growing under the BFC umbrella, Levitt was spun-off by BankAtlantic - this is how BFC first came to its direct ~15% ownership of Levitt. BFC then participated in Levitt's October 2007 rights offering, purchasing 16.6mn A and B shares and increasing its ownership in Levitt from 16.6% to 20.6% (and its voting interest from 52.9% to 59%). BFC then acquired the remaining stock of Levitt in September 2009. It is through this 100% ownership interest in Levitt that BFC came upon its 30% ownership of BXG. Then, on November 16, 2009, via Levitt, BFC increased its 9.5mn shares (30% ownership) in BXG to 16.9mn (52% ownership) by acquiring 7.4mn shares from Central Florida Investments for a purchase price of ~$3.12/share. BXG was trading at ~$2.70 before the transaction.
Alan Levan, Chairman and CEO of BankAtlantic and Levitt, as well as a director at BXG, has clearly been the puppet-master behind these various corporate tie-ups. We think Levan could be doing with BXG what he did with Levitt through BankAtlantic, bringing BXG into the BFC family, fixing it up and then spinning it off at some point in the future. (We will quickly note that the value of BFC's 54% ownership of BXG (~$74mn) is greater than the market cap of BFC (~$40mn), though the stock seems less liquid and uncorrelated with that of BXG. We are unfamiliar with BFC Financial and why this negative stub exists, but would be interested in getting people's thoughts).
Receivables-backed debt facilities
There are at least four different types of debt facilities: 1) on balance sheet, collateralized by time share receivables, 2) off balance sheet, collateralized by receivables (sold to securitization vehicles) 3) on balance sheet debt collateralized by inventory (real estate) and 4) corporate debt. In late 2009, BXG extended the maturities of several B/S receivable-backed debt, which provided liquidity relief for 2010 but also increased the payment burden for 2011 and 2012.
Selling timeshares is an inherently negative cash flow business before receivables are financed, since down payments are typically just 10% of the purchase price while cash marketing / sales expenses can be greater than 50%. Therefore, it is important to have external financing facilities to monetize fresh receivables if timeshare sales are to generate cash in the near term (timeshare loans typically pay off over 10 years or so). The financial system's violent collapse in 2008 severely impacted timeshare securitization capacity and forced Bluegreen (along with others in the industry) to dramatically downsize the business. This led BXG to slow down timeshare volume by 53% from 2008 to 2009 and rely more on on-balance sheet receivables facilities, in line with the US timeshare industry. Most of these facilities are currently maxed out and the ones that aren't are nearing their advance expiration dates, requiring the Company to negotiate replacement facilities if it is to continue selling its timeshare inventory for cash generation. Management is actively under discussions with new and existing lenders and we believe the conversations are progressing well.
After a year and a half of no activity (timeshares were not included on Fed's list of eligible collateral for the TALF program), the securitization market for timeshares has also timidly returned, with Wyndham and Marriot each undertaking securitizations in 4Q09. In March 2009, Marriott was able to complete a securitization transaction that required keeping a 28% residual (vs. 18% in the past) and a "turbo option" that diverted the first year's cash flow to pay noteholders before equity started cash-flowing. Bluegreen's pre-December 2008 vintage notes receivable has a default rate of 15% and just 38.5% of FICO scores are over 700, reflecting its poor underwriting standards during the real estate boom. For receivables underwritten since December 2008, credit quality composition has significantly improved to a weighted average FICO score of 701 (with no financing to buyers with scores under 575 and 53.5% over 700), and may put the Company in a better position to obtain collateral-backed financing in the near future. We will also mention that recovery on defaulted timeshare receivables runs anywhere between 40%-100% depending on the note's age.
If one can get comfortable that (1) timeshare receivable funding capacity won't run away and (2) Bluegreen's legacy receivables quality is "good enough" to roll-in and payoff receivables-backed debt, then we believe the Company's net cash flow is adequate to meet upcoming maturities on non-receivables backed cash obligations even assuming aggressive inventory additions. Here is how we view Bluegreen's cash flow on a 4Q run-rate basis:
|4Q run-rate ($ millions)|
|Gross sales of real estate||$ 213.9|
|Receivables in excess of notes||(34.0)||<----assumes the advance rate on receivables is 80% and downpayment is 15%|
|Other resort / comm. Revenue||38.4||on timeshare sales of ~$200mn|
|Fee-based timeshare brokerage||52.1|
|Interest income from on B/S rec.||53.4||<----assumes 15% interest rate on $356mn in gross receivables|
|Retained interest in notes rec.||45.5|
|Less cash costs|
|- Cost of other resort / comm.||18.7|
|+ Non-cash stock comp||2.4|
|Est. cash operating earnings||$ 167.6|
|- Interest expense||18.3||<--- interest on notes payable + Jr. suboridinated debt|
|- Taxes||0.2||<----assumes 38% tax rate|
|Est. net cash flow for non-rec. debt||$ 146.4|
So, we get to ~$146mn of net cash flow that can be used to service/paydown debt and add to timeshare inventory. Bluegreen's non-receivables cash obligations looks like this per BXG's 8-K filing (I added the Company's operating leases to this):
Assuming Wachovia debt extension:
2010: $48mn + $11.7mn = $59.7mn
2011: $60.4mn + 9.5mn = $69.9mn
2012: $74.4mn + 7.7mn = $82.1mn
In 4Q09, we estimate that Bluegreen added ~$27mn in inventory (EoP inventory of $515.9mn less BoP inventory of $515mn plus cost of real estate of $25.8mn). This annualizes to ~$107mn, leaving under $40mn for debt payments, or less than the amount required to meet 2010 maturities with the Wachovia extension. Inventory spend in 2009 was just over a third of what it was in 2006 and we would expect it to continue trending down over the next several quarters. With $70.5mn of unrestricted cash on the balance sheet, as long as management properly paces its timeshare inventory spend, we think Bluegreen will be in a position to meet its debt obligations and still be in compliance with minimum unrestricted cash balance covenants.
Other liquidity sources: Bluegreen is also pulling several other liquidity levers, 1) asking for more cash up front from customers - 46% of resort sales were received in cash (at closing or within 30 days) in 4Q09 vs. 31% in 4Q08; 2) Selling timeshares to existing customers who require less marketing spend - 55% of timeshare sales in 2009 were to existing customers vs. 46% in 2008; and 3) ramping up cash-fee generating business, namely a property management business and more recently, a timeshare brokering business, in which BXG will help design and sell the timeshares of other operators.
In the near-term (as in the next 3 months) we will be vigilantly monitoring Bluegreen's discussions with Wachovia regarding an extension of $10.5mn of notes payable and $15.7mn of unsecured letters-of-credit. There is currently a non-binding term sheet in place to refinance these under a single 2-year term facility, though this conversation has been ongoing for several quarters. If you peruse prior quarter 10-Qs, you will notice that Bluegreen was formerly in discussions with Wells Fargo Foothill. While Wachovia and Wells Fargo obviously operate under the same corporate umbrella, they often act as separate entities according to management. We think the delay surrounding a final, binding term sheet could be related to administrative hold-ups around who will be responsible for the facilities. Given the Company's ample cash flow and an improving securitization environment, we think it is in Wachovia's best interest to facilitate a loan extension for Bluegreen versus seizing collateral. This has already been demonstrated once: sometime in 2009, the Company breached its interest coverage ratio covenant but recently received a waiver of non-compliance for this covenant from Wachovia. There are currently $44.7mn of timeshare resorts collateralizing $40.1mn of notes payable and LOCs, not a lot of coverage and most likely not worth the headache of bringing this on the bank balance sheet.
Inventory impairments (or lack thereof)
It may seem odd that over the last several years, Bluegreen has not taken any impairment on its timeshare inventory, especially considering the rapid development that took place from 2005-2007 as well as impairments that peers (Marriot and Starwood) have taken. However, consider the following: First, a timeshare (<$20k generally) is a small, "digestible" ownership form with a large buyer base. The average monthly payment for Bluegreen timeshare borrower is just $200, far lower than a typical mortgage payment. Even within the common timeshare classification, Bluegreen is at the "value" end. Contrast this to a luxury fractional ownership (>$200k), which may have only a few potential buyers and require much steeper price concessions to move. The large impairments that Marriott took in their timeshare inventory were almost entirely in the high-end fractional ownership business. (Whereas one might pay ~$20k for a timeshare week, fractional ownership - comprising a month or so in an ultra-luxury unit like the Ritz-Carlton - involves a substantial financial commitment).
Bluegreen's Communities business (which develops and sells homesites), which has incurred $18.4mn in impairments over the last few years, is more similar in form to the big-ticket fractional ownership business where Marriott has taken its lumps. Second, timeshare inventory is marked at the lower of cost or fair market value; the gross margin on timeshare is large (65%-75%) and provides significant cushion to absorb moderate pricing concessions. If you bought a property at $1 with the intention of flipping it at $3 at current retail prices, market values - in this case, prices for a bite-sized fraction of a resort unit - have to fall rather precipitously to eat through the gross margin. To be fair, we also note that Starwood has also taken impairments on its timeshare inventory due to a continuance of previously initiated timeshare development projects, though it is unclear how much of this was common timeshare vs. fractional ownership. The impairment appears idiosyncratic in nature.
As is often the case with binary-payoff ideas, risks can often morph into catalysts if properly resolved.
Liquidity: Bluegreen needs to find new receivables-backed funding facilities or renew expiring ones. There is no certainty that recourse financing for this low junk-rated timeshare developer will be available. Furthermore, Bluegreen's poor underwriting history may make it difficult to secure non-recourse funding.
BFC Relationship: BFC did not pay much (if any) of a premium for Levitt in a stock deal that closed September 2009. While there is certainly risk of a takeunder, we note that in September 2008, Diamond Resorts International signed a non-binding Letter of Intent to acquire Bluegreen for $15.00 per share, a hefty premium to its then price of ~$7 pre-July announcement, valuing the Company at around $500, excluding outstanding debt. We also reiterate that BFC paid a premium for CFI's shares in November 2009.
Fee-based business: The profitability of Bluegreen's new timeshare brokering business is less impressive than we originally hoped. In 3Q09, this business generated $7.1mn in revenue and $2.3mn in pretax income (32% margin) while the next quarter, it did $1.3mn on $13mn (10% margin). The Company guided us to somewhere around 20%-30% as a normalized margin for this business. We also don't see why timeshare operators with large exchange networks (Wyndham w/ RCI) or Interval, aren't better suited for this business. For now, we see the $10mn-$15mn or so in annual cash income as icing on the cake rather than as critical to the Company's overall de-levering efforts.
Resale market: Google "timeshares." You will see countless ads for timeshares being offered in the murky, unregulated resale market for significant discounts. Timeshare operators know which customers have purchased timeshares directly from them vs. in the resale market and as one experienced salesman informed us, as a resale customer "you will be treated like a 3rd class citizen" during booking or your stay.
New bank lending / securitization facilities
Negotiations surrounding Wachovia facility extension are finalized