Intrawest IDR W
September 28, 2004 - 1:56pm EST by
pirate681
2004 2005
Price: 18.12 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 880 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

Trading at a 25% discount to NAV, 1.1X book value with an equity cap of $800MM, this is an overlooked value play poised for significant share appreciation. Intrawest Corporation is a “land play” much like St. Joe (ticker: JOE) and Kmart (ticker: KMRT) which has largely been ignored by value investors. While the stock has come off its $15 low to around $18 per share, the stock’s NAV is easily $24-27 or higher. Trading at just 1.1X book, the land holdings on IDR’s balance sheet are substantially undervalued. This isn’t a wait and see what they do with the assets story, IDR is actively turning its land bank into cash.


Company Description: (from company filings)

Intrawest Corporation engages in the development and operation of village-centered resorts across North America. The company’s operations can be classified in to three sources of revenue: Mountain Resort Operations, Warm-Weather Resort Operations, and Real Estate Operations. Intrawest conducts its ski and resort operations through the Mountain Resort Operations and Warm-Weather Resort Operations segments.

The Mountain Resort Operations comprise all of the operating activities at its 10 mountain resorts, as well as the operations of Resort Reservations, Alpine Helicopters, and Breeze/Max Retail. The Warm-Weather Resort Operations comprise all the operating activities at Sandestin, as well as operations at its five stand-alone golf courses.

The company conducts its Real Estate Operations through the Resort Development Group and the Resort Club Group. The Resort Development Group develops and sells condo-hotel units, town-house units, and single-family lots. The Resort Club Group’s business is a timeshare business where owners purchase points that entitle them to use accommodations at different resorts.

As of June 30, 2003, the company had 10 mountain resorts; one warm-weather resort in Sandestin, Florida; 29 golf courses under management; a vacation ownership business – Club Intrawest; and six resort villages at other locations, including one in France. Its resorts include Whistler Blackcomb and Panorama in British Columbia; Blue Mountain in Ontario; Tremblant in Quebec; Stratton in Vermont; Snowshoe in west Virginia; Copper and Winter Park in Colorado; Mammoth in California; and Mountain Creek in New Jersey.


EBITDA:

EBITDA totaled $268M for FY2004, up 17% year-over-year. Resort operations EBITDA was $105M (39%), real estate operations were $136M (51%) and management services $28M (10%).

Resort operations LTM EBITDA was negatively impacted by a relatively warm winter last year in the Northeast. A normal snowfall/temperature year would produce another $5-15MM in EBITDA vs. last year.

Real estate operations EBITDA continues to benefit from low interest rates and very strong demand for high-end second-homes, timeshares and resort properties. IDR is one of those companies you hear about that once they release inventory (land or units) there is a bidding frenzy and multiple offers come in for each available property. EBITDA should continue to grow in this segment.


IDR Trading at Book, Value in Land Holdings Not Reflected in Share Price:

Book value per share is $16.33 (excluding $25M cash gain from the CNL transaction). The majority of the land was purchased in the 1980’s and 1990’s. IDR has over a 10-year supply of land, 19k units (equivalent to approximately 47.5k hotel rooms), which includes phase 2 and phase 3 of Tremblant that was recently approved. The land profit per unit ranges from $44k-84k/unit. At 2.0x BV, the land is valued at $39k/unit (11% discount to the low-end of estimated profit per unit).


Trading at Significant Discounts to Net Asset Value:

Vail Resorts (ticker: MTN) is trading at 7.8x EV/EBITDA. Its ski and resort business is comparable to IDR, but not as geographically diverse. There are rumors that MTN rejected a bid of $19.50 from KKR (8.3x EBITDA) in August of this year. Using the same multiple for IDR’s resort business (7.8x EBITDA), land holdings at 2.0x book, and $309M value for real estate under-construction, I calculate an NAV of over $25 per share (assuming average ski & resort EBITDA of $110M). Using Bear Stearn’s estimate of EBITDA for FY2005, NAV is $26.43.

NAV Calculation Trough Yr Avg Yr Good Yr FY05E Bear
Ski & Resort Op. EBITDA 105,000 110,000 115,000 117,179
Less: Minority Interest -15,750 -16,500 -17,250 -17,577
Multiple 7.8x 7.8x 7.8x 7.8x
Value of Ski & Resort Op.699,838 733,163 766,489 781,012

Land(2x BV=$368MM) 736,618 736,618 736,618 736,618

RE U/C (BV + 11.5%) 309,327 309,327 309,327 309,327

Mgt Inc (5x EBITDA) 169,000 169,000 169,000 169,000

Leisura Int.(15% ROIC) 58,534 58,534 58,534 58,534

Add: Cash (+CNL&Refi) 173,816 173,816 173,816 173,816
Add: Accounts Rec. 142,427 142,427 142,427 142,427
Less: Accounts Payable -209,037 -209,037 -209,037 -209,037
Less: Company Debt -887,856 -887,856 -887,856 -887,856

Total Equity Value 1,192,577 1,225,902 1,259,228 1,273,751
Shares Outstanding 48,200 48,200 48,200 48,200

NAV per Share $24.74 $25.43 $26.13 $26.43

Implied Resort EV/EBITDA 5.3x 5.0x 4.8x 4.7x


NAV Sensitivity Analysis
Ski & Resort Book Value of Land ($368MM) Multiple
EBITDA Multiple 1.00x 1.25x 1.50x 1.75x 2.00x 2.25x
4.0x $10.34 $12.25 $14.16 $16.07 $17.98 $19.89
5.3x $12.77 $14.68 $16.59 $18.50 $20.41 $22.32
6.5x $15.19 $17.10 $19.01 $20.92 $22.83 $24.74
7.8x $17.62 $19.53 $21.44 $23.35 $25.26 $27.17
9.0x $20.04 $21.95 $23.86 $25.77 $27.68 $29.59
10.3x $22.46 $24.38 $26.29 $28.20 $30.11 $32.02
11.5x $24.89 $26.80 $28.71 $30.62 $32.53 $34.44


Partnerships:

IDR has two significant partnership arrangements which reduce debt and increase return on equity for Intrawest. Leisura in an entity that purchases real estate developments from IDR once they are at least 50% pre-sold. IDR receives payment for the development work to date and maintains a significant equity partner in the development without having the debt on their balance sheet. In addition, Leisura pays a development fee (6-7% of total project cost), sales commission (2% of sales), and incentive fee to IDR. This boosts the ROIC to mid-twenty percent for IDR.

The other more recent partnership is with CNL where IDR sold an 80% interest in certain commercial properties located at nine of their resorts for $160MM. IDR keeps a 20% equity interest in the properties and collects ongoing management fees.


Interest Savings from Refinancing:

IDR tendered for their 10.5% Bonds due February 2010 for $394MM. The company sold $225MM of 7.5% Senior Notes maturing in 2013 and C$125MM ($98MM) of 6.875% Senior Notes due 2009 to pay for the tender. The company has estimated $16MM of interest savings per year. Overtime, interest savings will work its way to COGS (as interests are capitalized in the development phase of each project).


Ambercrombie & Kent Investment Acquisition:

For less than $10MM, IDR bought 67% of Ambercrombie and Kent (ANK) with annual revenues of $200MM. IDR will benefit from cross marketing and the revenues will help offset the seasonality of its ski business as the peak season for ANK is in the summer.


Management:

Management here is excellent and willing to talk/meet with investors.


Catalysts:

Increased EBITDA from real estate sales and Leisura partnerships
Increased EBITDA from a more normalized ski season in the Northeast and West
Increased EBITDA from marketing efforts with Ambercrombie & Kent
Increased EPS and Real Estate Margins from interest cost savings and lower debt
Possible take-over (rumors abound)
Multiple expansion

Catalyst

Increased EBITDA from real estate sales and Leisura partnerships
Increased EBITDA from a more normalized ski season in the Northeast and West
Increased EBITDA from marketing efforts with Ambercrombie & Kent
Increased EPS and Real Estate Margins from interest cost savings and lower debt
Possible take-over (rumors abound)
Multiple expansion
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    Description

    Trading at a 25% discount to NAV, 1.1X book value with an equity cap of $800MM, this is an overlooked value play poised for significant share appreciation. Intrawest Corporation is a “land play” much like St. Joe (ticker: JOE) and Kmart (ticker: KMRT) which has largely been ignored by value investors. While the stock has come off its $15 low to around $18 per share, the stock’s NAV is easily $24-27 or higher. Trading at just 1.1X book, the land holdings on IDR’s balance sheet are substantially undervalued. This isn’t a wait and see what they do with the assets story, IDR is actively turning its land bank into cash.


    Company Description: (from company filings)

    Intrawest Corporation engages in the development and operation of village-centered resorts across North America. The company’s operations can be classified in to three sources of revenue: Mountain Resort Operations, Warm-Weather Resort Operations, and Real Estate Operations. Intrawest conducts its ski and resort operations through the Mountain Resort Operations and Warm-Weather Resort Operations segments.

    The Mountain Resort Operations comprise all of the operating activities at its 10 mountain resorts, as well as the operations of Resort Reservations, Alpine Helicopters, and Breeze/Max Retail. The Warm-Weather Resort Operations comprise all the operating activities at Sandestin, as well as operations at its five stand-alone golf courses.

    The company conducts its Real Estate Operations through the Resort Development Group and the Resort Club Group. The Resort Development Group develops and sells condo-hotel units, town-house units, and single-family lots. The Resort Club Group’s business is a timeshare business where owners purchase points that entitle them to use accommodations at different resorts.

    As of June 30, 2003, the company had 10 mountain resorts; one warm-weather resort in Sandestin, Florida; 29 golf courses under management; a vacation ownership business – Club Intrawest; and six resort villages at other locations, including one in France. Its resorts include Whistler Blackcomb and Panorama in British Columbia; Blue Mountain in Ontario; Tremblant in Quebec; Stratton in Vermont; Snowshoe in west Virginia; Copper and Winter Park in Colorado; Mammoth in California; and Mountain Creek in New Jersey.


    EBITDA:

    EBITDA totaled $268M for FY2004, up 17% year-over-year. Resort operations EBITDA was $105M (39%), real estate operations were $136M (51%) and management services $28M (10%).

    Resort operations LTM EBITDA was negatively impacted by a relatively warm winter last year in the Northeast. A normal snowfall/temperature year would produce another $5-15MM in EBITDA vs. last year.

    Real estate operations EBITDA continues to benefit from low interest rates and very strong demand for high-end second-homes, timeshares and resort properties. IDR is one of those companies you hear about that once they release inventory (land or units) there is a bidding frenzy and multiple offers come in for each available property. EBITDA should continue to grow in this segment.


    IDR Trading at Book, Value in Land Holdings Not Reflected in Share Price:

    Book value per share is $16.33 (excluding $25M cash gain from the CNL transaction). The majority of the land was purchased in the 1980’s and 1990’s. IDR has over a 10-year supply of land, 19k units (equivalent to approximately 47.5k hotel rooms), which includes phase 2 and phase 3 of Tremblant that was recently approved. The land profit per unit ranges from $44k-84k/unit. At 2.0x BV, the land is valued at $39k/unit (11% discount to the low-end of estimated profit per unit).


    Trading at Significant Discounts to Net Asset Value:

    Vail Resorts (ticker: MTN) is trading at 7.8x EV/EBITDA. Its ski and resort business is comparable to IDR, but not as geographically diverse. There are rumors that MTN rejected a bid of $19.50 from KKR (8.3x EBITDA) in August of this year. Using the same multiple for IDR’s resort business (7.8x EBITDA), land holdings at 2.0x book, and $309M value for real estate under-construction, I calculate an NAV of over $25 per share (assuming average ski & resort EBITDA of $110M). Using Bear Stearn’s estimate of EBITDA for FY2005, NAV is $26.43.

    NAV Calculation Trough Yr Avg Yr Good Yr FY05E Bear
    Ski & Resort Op. EBITDA 105,000 110,000 115,000 117,179
    Less: Minority Interest -15,750 -16,500 -17,250 -17,577
    Multiple 7.8x 7.8x 7.8x 7.8x
    Value of Ski & Resort Op.699,838 733,163 766,489 781,012

    Land(2x BV=$368MM) 736,618 736,618 736,618 736,618

    RE U/C (BV + 11.5%) 309,327 309,327 309,327 309,327

    Mgt Inc (5x EBITDA) 169,000 169,000 169,000 169,000

    Leisura Int.(15% ROIC) 58,534 58,534 58,534 58,534

    Add: Cash (+CNL&Refi) 173,816 173,816 173,816 173,816
    Add: Accounts Rec. 142,427 142,427 142,427 142,427
    Less: Accounts Payable -209,037 -209,037 -209,037 -209,037
    Less: Company Debt -887,856 -887,856 -887,856 -887,856

    Total Equity Value 1,192,577 1,225,902 1,259,228 1,273,751
    Shares Outstanding 48,200 48,200 48,200 48,200

    NAV per Share $24.74 $25.43 $26.13 $26.43

    Implied Resort EV/EBITDA 5.3x 5.0x 4.8x 4.7x


    NAV Sensitivity Analysis
    Ski & Resort Book Value of Land ($368MM) Multiple
    EBITDA Multiple 1.00x 1.25x 1.50x 1.75x 2.00x 2.25x
    4.0x $10.34 $12.25 $14.16 $16.07 $17.98 $19.89
    5.3x $12.77 $14.68 $16.59 $18.50 $20.41 $22.32
    6.5x $15.19 $17.10 $19.01 $20.92 $22.83 $24.74
    7.8x $17.62 $19.53 $21.44 $23.35 $25.26 $27.17
    9.0x $20.04 $21.95 $23.86 $25.77 $27.68 $29.59
    10.3x $22.46 $24.38 $26.29 $28.20 $30.11 $32.02
    11.5x $24.89 $26.80 $28.71 $30.62 $32.53 $34.44


    Partnerships:

    IDR has two significant partnership arrangements which reduce debt and increase return on equity for Intrawest. Leisura in an entity that purchases real estate developments from IDR once they are at least 50% pre-sold. IDR receives payment for the development work to date and maintains a significant equity partner in the development without having the debt on their balance sheet. In addition, Leisura pays a development fee (6-7% of total project cost), sales commission (2% of sales), and incentive fee to IDR. This boosts the ROIC to mid-twenty percent for IDR.

    The other more recent partnership is with CNL where IDR sold an 80% interest in certain commercial properties located at nine of their resorts for $160MM. IDR keeps a 20% equity interest in the properties and collects ongoing management fees.


    Interest Savings from Refinancing:

    IDR tendered for their 10.5% Bonds due February 2010 for $394MM. The company sold $225MM of 7.5% Senior Notes maturing in 2013 and C$125MM ($98MM) of 6.875% Senior Notes due 2009 to pay for the tender. The company has estimated $16MM of interest savings per year. Overtime, interest savings will work its way to COGS (as interests are capitalized in the development phase of each project).


    Ambercrombie & Kent Investment Acquisition:

    For less than $10MM, IDR bought 67% of Ambercrombie and Kent (ANK) with annual revenues of $200MM. IDR will benefit from cross marketing and the revenues will help offset the seasonality of its ski business as the peak season for ANK is in the summer.


    Management:

    Management here is excellent and willing to talk/meet with investors.


    Catalysts:

    Increased EBITDA from real estate sales and Leisura partnerships
    Increased EBITDA from a more normalized ski season in the Northeast and West
    Increased EBITDA from marketing efforts with Ambercrombie & Kent
    Increased EPS and Real Estate Margins from interest cost savings and lower debt
    Possible take-over (rumors abound)
    Multiple expansion

    Catalyst

    Increased EBITDA from real estate sales and Leisura partnerships
    Increased EBITDA from a more normalized ski season in the Northeast and West
    Increased EBITDA from marketing efforts with Ambercrombie & Kent
    Increased EPS and Real Estate Margins from interest cost savings and lower debt
    Possible take-over (rumors abound)
    Multiple expansion

    Messages


    SubjectLand NAV
    Entry09/30/2004 01:23 PM
    Memberscrooge833
    How did you get 2xBook Value for the land NAV?
    Any impending event that might make unlock this land value?

    SubjectEBITDA Multiple
    Entry09/30/2004 07:30 PM
    Memberscrooge833
    Your EBITDA Multiple of 7.8X compares favorable to the multiple you cited. What is your multiple on
    EBITDA Less Maintenance Capex? I like to get a sense of the true cost of D&A.

    What is the FCF yield?


    SubjectRE: IDR EBITDA Multiple & FCF
    Entry10/01/2004 10:55 AM
    Memberpirate681
    EBITDA Multiple (after adjusting for maintenance cap-ex) is 6.8x FYE2004. This is almost half the multiple of the average lodging owner/operator.

    The company is shifting its business model away from a real estate owner/operator into a high-end leisure service company. As such, they will continue to monetize their land and real estate holdings through joint ventures (e.g. sale of 80% of commercial property to CNL, while maintaining equity interest and earning a management fee), use the cash to reduce debt, and capture increasingly more management fees and incentive fees from their partners (which boosts their ROIC to +25%).

    As IDR completes this transformation, look for multiple expansion and strong earnings growth. When this happens, IDR should trade at a premium to NAV of $24-27. Intrawest can be worth over $30/share further down the road.

    FCF for FYE2004 was $293M, $6/share. At $21.99, the FCF yield is 28%.


    SubjectRE: Unlocking Land NAV
    Entry10/01/2004 11:14 AM
    Memberpirate681
    It's been taking place for a few quarters now! With the Leisura structure. The Leisura Partnerships Decreases IDR’s Capital requirements and helps offset seasonalities of IDR’s.

    The increasing success of its real estate business has led to increasing level of construction debt (as the scale of the developments increase and capital gets tied up for longer periods) and negative free cash flow (as working capital is increased to support real estate projects). In order to offset these challenges, Intrawest developed two joint venture partnerships:
    JV with ManuLife (Canada, IDR keeps 30% interest)
    JV with JP Morgan and Ledcor Properties (U.S., IDR keeps 35% interest)

    The partnerships will own and finance the largest, most capital intensive real estate projects through construction and sale. IDR will sell land parcels to Leisura at fair market value once the particular project is 50% pre-sold and construction financing is in-placed.

    This structure removes IDR’s working capital financing requirements while allowing the company (and its shareholders) to retain a significant proportion of a project’s economics in the following ways:

    • The sale of land to the Leisura partnership captures the initial value created through land appreciation, the design approval, and pre-sale stages up to the time of sale.

    • IDR removes construction risks off its books.

    • Development fees (6-7% of total development costs) and commissions (2% of sales revenue) are paid to IDR from Leisura for development management and overseeing sales activities.

    • IDR retains an interest in the profit earned by the partnerships as well as additional incentive participation (i.e. promotes) for each project, based on a sliding scale.

    This arrangement reduces the capital requirements for IDR as it builds out its land holdings (approximately 10-year supply) and removes the debt from its balance sheet. The initial land sales to Leisura helped IDR to significantly reduce its debt by $200M. IDR went from -$101M cash drain in FYE2003 to +$293M FCF in FYE2004.

    The joint venture debt will reside in Leisura as non-recourse to the Intrawest. Each project is levered 70% and IDR will contribute equity, 10% of the development costs.

    As a result, IDR minimizes its equity contribution, while increases its total return on the development as development fees, sales commissions and incentive fees are factored into its ROE (of low to mid-twenty percent). The return on the land is (4-8x) multiples of book. So just valuing the land NAV at just 2x book will prove to be too conservative overtime. At 4x book for land, IDR NAV is over $40/share, compared to my stated NAV of $24-27.

    IDR has a strong backlog of land sales.

    Subjectcapex & land val
    Entry10/04/2004 12:15 PM
    Memberpoirot921
    On the resort side of the biz, what is real capex requirement? 10K says $30 million is maintenance but they have been spending more than double that without growing that part of the biz much

    In terms of land val, I see the $368 on the balance sheet for resort properties, but where is the RE U/C? Also, what about the resort properties under current assets? Finally, is there a way to estimate the value of real estate in terms of future management fees that they will generate?

    Thanks!

    SubjectRE: Land Value and Cap-Ex
    Entry10/04/2004 07:08 PM
    Memberpirate681
    Land value & Balance Sheet:
    The balance sheet has two line items for resort properties. Under current assets, this reflects the book value of real estate under-construction ($277.3M) and the commercial properties ($135M) of which 80% interest were sold to CNL.

    Under long-term resort properties, $368M, represents the book value of IDR's land holdings. To date, IDR has approximately 19k units entitled. My analysis of land value (and NAV) only includes the value of the entitled land and do not account for land that is not entitled.

    To that end, 600 units at Copper are currently entitled. The company is trying to get an incremental 800-900 units entitled, and recently lost the first round. This does not impact my current NAV value of $24-27/share. However, please note that this entitlement process is still work-in-progress. Developers typically go through rounds of rejection before they are given final approval to build on the land. The initial rejection was a result of local politics and timing of one local council member retiring. Therefore, when the Copper entitlement comes through, this will increase land value (NAV) by approximately $1/share.

    Cap-ex:
    Total cap-ex for IDR’s operating business is about $70-80M (of which $30M is maintenance cap-ex) for FY05. Please remember that, while it doesn’t not appear that IDR is growing its resort business, management typically expects to earn a return on expansion cap-ex (i.e. additional lifts, etc.), investment not earmarked as “maintenance cap-ex”. Return on investment cap-ex should help increase the top line (higher revenues) and improve overall performance of the portfolio (operating income).

    Management Fee:
    Industry standard for management fee is typically two percent of revenue. In my NAV calculation, I do not account for future management fee revenue growth. To be conservative I valued the current management fee as 5x EBITDA. However, we expect management fees to grow as IDR divests its real estate holdings and maintains a minority interest and a long term management contract for the assets (e.g. CNL transaction).

    The easiest way to estimate the value of the real estate to account for future management fees is to use a higher multiple in valuing the land. My NAV ($24-27/share) is valuing the land at 2x book (approximately $39k/unit). This proves to be conservative since IDR sold land into Leisura at $167k per unit in FY04.

    SubjectRE: Land Value & Leisura Struc
    Entry10/11/2004 01:32 PM
    Memberpirate681
    Intrawest's latest audited financial statement (FYE2004) is filed on www.sedar.com. http://www.sedar.com/csfsprod/data49/filings/00691581/00000001/w%3A%5C3w_out%5C29306%5Cafs.pdf

    or Form 40-F on Edgar.com.

    Intrawest financial position has changed dramatically since June 2003. IDR went from carrying $1.13B of net debt and negative free cash flow (-$21M) to net debt levels of $849MM and FCF of $293MM.

    1) Please remember that land value on the balance sheet, $368M, represent the BOOK value. This number decreased from $405MM in 2003, reflecting some land sales into Leisura.

    Also, in FYE2003, IDR had 16k (approximate book value of $25.3k/unit) units entitled. At FYE2004, the number of units entitled increased by 3k, totaling 19k units (approximate book value of $19.4k/unit). This VALUE creation process is NOT reflected in Book, and is grossly understated. IDR sold entitled land at Fair Marktet Value into Leisura. That means in 2003, average price of land sold into Leisura was $160k, far above two times book value.

    2) I am not concern about any potential agency problems between Intrawest and their Leisura partners. Shareholders benefit from this structure. This allows the company to operate with lower debt levels, generate significant free cash flow, and earn higher margins (lower COGS) from land sales.

    Profit margins in Leisura is 10% because the profit on the sales to Leisura is initially deferred and is realized based on percentage of completion basis in accordance to Canadian GAAP. Therefore, this does not reflect the cash profits and does not capture the profits made by IDR when they sell their pre-sold lots into Leisura at FMV. In addition, IDR earns a development fee (6-7% of total development costs), management fee (2% sales commission) and promotes that determined by a specific formula for related to each project.

    The Leisura partnerships allow IDR to support the growth of its land development business. Intrawest’s capital requirements to support this growth are limited to its 11% share of new capital, and of this investment only about 55%, i.e. 6% of total capital, is cash equity. This model allows IDR to internally generate sustainable 15-18% return of equity. For that reason, this model is sufficient to support a long-term growth rate in earnings of 15% without a need to access equity or increase debt ratios.

    SubjectVail Resorts annouces 26% incr
    Entry10/13/2004 12:49 PM
    Memberpirate681
    The Wall Street Journal reported today that Vail Resorts' season-pass sales are running 26% ahead of last year. While I focused my write-up on the overlooked value in IDR's vast land holdings, it now looks like IDR will also get a big boost to EBITDA this year from resort operations. Versus last year (which wasn't very good), IDR should be able to do another $10-15MM in EBITDA from their ski operations. The added EBITDA was not factored into my valuation. Bottom-line, IDR is even cheaper.

    SubjectRE: Land Value & Leisura
    Entry10/14/2004 06:03 PM
    Memberpirate681
    RE: Land Value & Leisura

    Let’s look at the latest financials (full-year).

    These are the economics behind IDR’s land business under the Leisura structure:
    FY04 IDR sells land at FMV to Leisura $171.5MM (1,025 units)
    Book Value = $126.2MM
    Land profit = $45.3MM
    Development Fees = $55.7MM (assuming land = 20% of total dev. cost & 6.5% fee)
    Sales Commission = $19.1MM (assuming 11.5% return on dev. costs & 2% comm.)
    Deferred Land Int. = $4.0MM ($1.006MM booked through June 2004)
    Incentive Fees = >$2.1MM (project specific, sliding scale)
    Total Fees & Profits = >$126.2MM >= 2x Book

    This is how can value the land at 2x Book to get to the NAV $24-27/share. If you just accounting for the land at 2x historical cost, you will not be capturing:
    • The value creation executed by IDR by taking raw land and getting it through the entitlement process.
    • Land available in a resort village with all its amenities is worth more than
    • Accounting for the appreciation of land since the 80’s and 90’s (when IDR bought the bulk of their land holdings). The average house appreciated 210% since 1980 and 42% in the last 5 years in the U.S.

    Conclusion: Book value of land is significantly understated. Management’s talent and value creation is not reflected in the stock price. IDR is trading at 21-30% discount to NAV ($24-27).

    SubjectA question on valn
    Entry10/19/2004 06:20 PM
    Memberzzz007
    Pirate,

    I am trying to tie out some of the numbers between your analysis and the company's filed finls. It appears that all of the corporate overhead ($20mm last year) is rolled into the $136mm of 2004 Real Estate Development EBITDA. Since your NAV analysis uses EBITDA multiples for both Resort Operations and Mgmt Svcs, but a P:BV valn metric for Real Estate Development, aren't you effectively giving the company a free ride on that corporate overhead nut? Seems to me that the overhead is an ongoing operating expense and, as a result, should really have a multiple applied to it and subtracted from the enterprise value. I may be thinking about this wrong, please let me know if you disagree. Thanks in advance.

    SubjectRE: Valuation
    Entry10/19/2004 08:08 PM
    Memberpirate681
    Valuing the land holdings at 2x Book (please see Reply 13 for Leisura and Land Value economics) is more conservative than using an EBITDA multiple of greater than 6x to get to TEV on IDR. (JOE is trading at TEV/EBITDA 21x)

    At 2x Book, Land Holdings is valued at $737M. This is compared to $816M at 6x EBITDA. As a result, I don't believe in penalizing the company twice (i.e. using lower valuation as 2x Book vs. 6x EBITDA for Real Estate and then taking out its pro-rata share of G&A).

    Please note, the $20M of G&A is allocated to three components of Total Company EBITDA (Real Estate, Resort, and Management Services) on a pro-rata basis.

    NAV for IDR is $24-27/share. It's trading at a significant discount to NAV at $19. My NAV method of valuing the company is also very conservative. By valuing the land at 2x Book, I'm effectively using 5.4x EBITDA on Real Estate to get to my TEV, compared to JOE who is trading at 21x EBITDA.

    SubjectI am not arguing that an EV:EB
    Entry10/20/2004 08:54 AM
    Memberzzz007
    I am not arguing that an EV:EBITDA multiple is the appropriate methodology for the Real Estate Development segment, I think that the only area in which we are disagreeing is in relation to corporate G&A.

    I don't think that corporate G&A is being allocated pro-rata to the three segments - 100% of it is dropping by default into Real Estate Development. Hence my concern about it not being properly accounted for in the valuation. Based on my reading of the filings, the company reports EBITDA numbers in the MD&A for the total company ($268.3mm), Resort Operations ($105.1mm), and Management Services ($27.5mm), but not for Real Estate Development. The disclosed numbers for Resort Operations and Management Services match the segment contribution line items on the consolidate financials, which clearly do not include any allocation for corporate G&A (which is listed separately further down the income statement). From my read, there are two ways to get to an EBITDA number for Real Estate Operations: 1) Total company EBITDA less Resort Operations and Management Svcs EBITDA ($268.3 - 105.1 - 27.5 = $135.7mm, which ties to your $136mm number), or 2) Real Estate Development segment contribution from the consolidated income statement ($91.4mm) + interest in real estate costs ($64.7mm) - corporate G&A ($20.4mm) = $135.7mm.

    I agree with your valn methodology on Real Estate Development - an EBITDA multiple isn't appropriate. However, I do think that the $20mm of corporate needs to be capitalized and backed out of your enterprise value as this is a real, ongoing cash drain. This knocks a couple of bucks off the NAV.

    SubjectRE: G&A and Valuation
    Entry10/20/2004 01:40 PM
    Memberpirate681
    RE: G&A & Valuation
    I don't believe in applying a multiply to G&A, and then removing it from my NAV. This is not common practice in calculating NAV for a real estate company. You can bring up any sellside NAV model on a real estate company and see this. Valuation is based NOI / Cap Rate, (G&A can vary, depending on the owner and NAV serves as a liquidation value).

    We both agree that an EBITDA multiple method of valuing the land holdings is not appropriate. By using 2x Book, which is more conservative than using 6x EBITDA (which includes $20.3M G&A), I get to NAV of $24-27/share. Taking G&A out becomes a moot issue, depending on what multiple you use. So I think taking $2/share hit to my NAV is overly conservative. I don’t want to penalize the company twice in my NAV calculation by using a conservative 2x Book for its land, and then further knock its value down even more per your suggestion.

    Furthermore, this is clearly a talented management team with franchise value that is not accounted for in my NAV calculation. By using a conservative 2x Book estimate to get to the land value (and you can see how value is easily created in Reply 13), I am not adding a line item to account for the franchise value and talent of this irreplaceable management team. Therefore, you can infer that I am implicitly accounting for the G&A in my NAV $24-27/share.

    I will also argue that applying 5x EBITDA multiple (20% capitalization rate on NOI) on Management Services is also conservative. I have seen other analyst apply 8.25%-12.5% cap rate (8-11x Multiple) to this line item in their NAV calculation for real estate companies. I stand by my NAV of $24-27. You are free create your own model.

    SubjectYou may be right on sell-side
    Entry10/20/2004 02:52 PM
    Memberzzz007
    You may be right on sell-side valn methods, although in my experience with lodging stocks (which I consider to generally be R/E plays) EBITDA and/or operating cash flow are generally presented after corporate expense is taken out. I guess we can agree to disagree.

    SubjectNow that they've reacted...
    Entry03/13/2006 04:12 PM
    Memberhao777
    ...who do you think the most likely buyers are?

    Also, if you don't mind, what have been the major drivers of increased intrinsic value since the $24-27 mentioned in this original posting?

    Thanks.
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