Wednesday, March 14, 2018

Wyndham Worldwide: Hotel Spin from Timeshare Business

This idea is another addition to my unintentional ongoing series circling around the timeshare and hotel management industries.  Wyndham Worldwide (WYN) is the largest of the U.S. based timeshare companies and they will be spinning off their hotel franchise management division in the second quarter of 2018.  Timeshare multiples have run up significantly in the past several years, while this situation might not be as juicy as the past timeshare spinoffs, the pre-spin Wyndham trades at a discount to the parent's closest peer after the spinoff in ILG, while hotel management companies all trade significantly higher.  One also could argue that as the timeshare companies begin to generate increasingly more of their revenue from sticky resort management contracts, their multiples should continue to converge with the hotel management companies.

Wyndham is currently divided into three business lines:
  1. Wyndham Hotel Group:  Almost entirely a low capital requirement franchise business, Wyndham has over 8400 hotels in its stable which primarily skew to economy and midscale brands.  Their brands include the namesake Wyndham, along with brands well known to those that travel US interstates like Super 8, Days Inn, Ramada, Howard Johnson, Baymont and Travelodge.  Franchise fees are usually structured with an initial on-boarding fee, plus a percentage of revenues royalty irrespective of the underlying profitability of the hotel making the business less cyclical than the hotel operator REITs.  The essential components of the hotel management business are the number of rooms in your system and the revenue per available room (RevPar), both of which have been growing for Wyndham's hotel group.  To illustrate where Wyndham's brands are on the hotel segment landscape, the RevPAR for the entire in U.S. lodging industry was $83.57 in 2017, Wyndham's RevPAR was $37.63 for the same period.  Management guidance has this segment projected to do $445-$455MM of EBITDA in 2018.
  2. Wyndham Destination Network:  Wyndham operates the largest timeshare exchange network, RCI, which allows members (for an annual fee plus transaction fees) to trade their weeks or points in their own timeshare for another.  This is another low capital requirements business, but faces headwinds as consolidation across the timeshare industry has lessened the need for exchange networks.  Smaller or one off timeshare developers would typically give away an RCI membership in order to entice a sale, sell that the owner on having the option to be apart of a greater exchange network.  As larger brands entered the space, they've created their own exchange network ecosystems putting pricing pressure on RCI and their main competitor, Interval Internation (ILG's exchange network).  Management guidance has this segment projected to do $265-$275MM of EBITDA in 2018.
  3. Wyndham Vacation Ownership:  Wyndham is the largest timeshare business globally, they have 221 resorts under management representing 25,000 units and 878,000 owners.  Their model is almost entirely points based giving timeshare owners flexibility in how they book their vacation, plus more importantly to Wyndham it makes it easier for a current timeshare owner to upgrade/buy additional points than it would be to sell the same owner additional weeks under the old model.  Like everyone else in the industry, Wyndham has moved to a less capital intensive model where 80% of the units sold in 2017 were not developed by the company, instead buy a developer or via a just-in-time purchase of inventory.  Additionally, Wyndham provides financing to timeshare owners and then securitizes these loans in the ABS market.  Management guidance has this segement projected to do $735-$750MM of EBITDA in 2018.
Wyndham Hotel Group is going to be the spinoff, leaving the Destination Network and Vacation Ownership segments behind to become a purer play timeshare business.  In recent months, Wyndham has announced two large M&A transactions: (1) they sold their European vacation rentals business that was within their Destination Network segment for $1.3B in cash and (2) purchased La Quinta's hotel management business for $1.95B in cash ahead of its own spinoff.  Additionally, as part of these hotel/timeshare spinoffs, there has typically been a royalty fee going from the timeshare business to the hotel management company.  In all of the other timeshare spinoffs, the hotel management company has been the larger/parent in the transaction, where the opposite is true with Wyndham.  Even so, I'm going to assume management is smart and will put in place a 5% of VOI sales royalty agreement in place going from the timeshare parent to the hotel spin.

In order to come up with the post-spin picture, I took management's guidance and added the impacts of the European vacation rental business being sold (but it's already excluded from EBITDA guidance), the purchase of LQ's management business (and varying synergies levels), a potential 5% timeshare royalty to the spinoff, and then added some additional overhead to account for running two separate public companies.
Taking a look at peers of each, the parent will look most similarly to ILG with a combination of a large VOI sales business and an exchange.  ILG has had a epic run since the RMT with Starwood's Visitana (I sold unfortunately in the low-to-mid $20) and trades for a forward EBITDA multiple of just under 13x.  The hotel group spinoff will most resemble Choice Hotels (CHH), both compete primarily in the economy to midscale segments with brands like Comfort Inn, Quality and Econo Lodge.  The hotel management group all has significant growth baked into some of these EBITDA projections, the backwards numbers are several turns higher, but Choice Hotels trades for a 16x multiple on analyst 2018 estimates.
If we assume the timeshare business parent trades for 11.5x and the hotel group spinoff trades for 15x EBITDA, I come up with the below SOTP based on my mid-point forecasts:
The primary risks here is valuation, we're presumably late in the cycle, hospitality companies are historically very cyclical (timeshare and hotel operators more than hotel management) and we could be looking at both peak revenue/earnings and peak multiples.  This spinoff transaction would have looked a lot more attractive one or two years back, but I think it still will work and I've established a position with the hopes that there's something more to do after the spinoff if one or the other trade well outside my valuation targets.

If you're interested in WYN and in the Chicago area, we're covering WYN on 3/19 at the CFA Chicago meeting I co-host every month, details here:

Disclosure: I own shares of WYN

Tuesday, March 6, 2018

Spirit MTA REIT: Form 10 Notes

Some of this will be a rehash of my other post on Spirit Realty Capital (SRC) from January, but today SRC released the Form 10-12 for their spinoff, Spirit MTA REIT (SMTA), its a fun structure that deserves a little more fleshing out as it could result in an interesting investment opportunity once it starts trading in the second quarter.

As a refresh, SRC is a triple net lease REIT primarily focused on single tenant retailers that needs to rid itself of its largest and most troubled tenant, Shopko, in order to increase its valuation to the point where it can raise capital again (a must for any REIT).  SRC is hoping to accomplish this by spinning off its Shopko properties (and other workout assets) into SMTA but this would only work if SRC could receive proceeds in return -- here's where their securitization vehicle, Master Trust 2014, comes into play.  Master Trust 2014 is an SPV that houses many of SRC's small-to-middle market tenants that are unrated (but not Shopko or the other workout assets), and uses the SPV to obtained financing secured by the leases pledged to the SPV.  By putting the leases in the SPV, Spirit is able to obtain favorable financing terms such as being able to leverage the SPV up to 75% loan-to-value.  As the Master Trust has amortized over the last few years, the SPV had become overcollateralized, by putting the Master Trust with the spinoff, Spirit was able to put additional debt on SMTA and return it to SRC, in essence they're able to effectively "sell" the Shopko/workout assets by spinning it off with a cash out refinancing of the Master Trust SPV.  Of course they could have done the cash out refinancing of Master Trust 2014 anyway, but that would have increased SRC's leverage ratio and likely wouldn't have made their equity valuation any higher with Shopko stuck at the top of their rent roll.  But by positioning the spinoff as a highly levered REIT, they're able to rid themselves of Shopko and receive precious dry powder in return.

SMTA's mission statement per the Form 10:
The basic strategy will be to sell off or redevelop the Shopko assets and put the cash/collateral into Master Trust 2014, issue notes against it at 75% LTV and run a very leveraged REIT that looks more like a mREIT or CDO structure of yesteryear.  Coming out of the spinoff, SMTA will be leveraged 9.2x, but if all goes as planned, the leverage will climb significantly as Shopko makes up 20% of contractual rent and all of those properties are unencumbered.  As these assets are sold, the leverage will increase substantially to something like 12x EBITDA at the end state, or about double any traditional net lease REIT.
SRC mentioned on their recent earnings call that SMTA would have a very high payout ratio, I take this to mean it'll likely be at or above FFO, here's a little back of the envelope calculation of where cash available for distribution could be before any non-cash charges like impairments or loan loss reserves.
Please alert me if there are errors, likely I've made a few, but I think it's directionally right, and then below is the potential accretion if SMTA sells their Shopko/workout portfolio at various levels of their stated "Real Estate Investment Value" of $646MM per the Form 10.
*Revised from the original, I only had the debt proceeds and not the cash sale proceeds being reinvested originally.
A couple other points worth highlighting:

  • Some feedback I heard on my comparison of SRC to STOR was "well, STORE Capital's secret sauce is they get unit level financials and run their own internal ratings to monitor their tenants", the tenants in Master Trust 2014 are the same, 98% provide unit level financials and SRC utilizes Moody's to provide shadow ratings on all their borrowers.  I contend this is a commoditized industry and there is very little secret sauce or competitive advantage, other than the "shares are really your product" marketing to equity investors concept and lowering their cost of capital.
  • Fraudulent conveyance was also brought up, but in this structure the secured lenders in the Master Trust and one CMBS asset aren't being impacted by the spinoff directly, their notes are secured by the pools of leases in each SPV.  Even if Shopko went bust immediately after the spinoff, the debt holders of both SPVs wouldn't be impacted.  Which isn't to say the equity of SMTA being worth zero isn't a risk, clearly a recession or continued weakness in traditional retail (40% of SMTA's rent, 50% of that 40% is Shopko) will eat away at the equity strip of the SPVs and the value of the workout assets.
  • SRC will be the external manager, they're charging a flat $20MM plus a promote in the out years, $20MM works out to be about 2% of the equity NAV they laid out in their Path Forward III presentation slide below.  Not fantastic, but it is fixed, so as SMTA moves along in its recycling program the base management fee will remain the same providing some operational leverage (of course could go the other way too).
  • SRC and SMTA will have overlapping investment strategies, high level SRC wants to pursue the more investment grade rated tenants and SMTA will focus on the smaller non-rated tenants, but I'm sure there will be times when SRC has to decide which portfolio a prospective investment should go and it likely won't often be advantageous to SMTA.
  • SRC's recent $35MM term loan to Shopko will be "contributed" to the spinoff, it's included in their workout portfolio numbers, the coupon is 12% and is very likely to end up in some kind of restructuring before it matures in 2020.
Here's the old sum-of-the parts slide, I think the only changes are in the workout portfolio bucket, SRC must have contributed additional properties as the value moved to $646MM in the Form 10 versus $477MM below.
Using the new workout number, the NAV should be $3.05/share, it won't trade there but I think it's an important reference point.  If my CAD number is correct, and SMTA trades like one of the ugly Class B/C mall REITs with a 15+% dividend yield, then the shares could be worth $1.50 per share of SRC.  $1.50 is also about the value of the equity strip in the Master Trust SPV, as part of the refinancing, the collateral was reappraised and presumably the debt holders and rating agencies signed off on the new market value.  Certainly not something to be given too much faith, but another reference point.  I expect SMTA to be incredibly volatile those first few days of trading as many of SRC's traditional retail shareholders are likely to dump the stock, keep it on your watchlist!

Disclosure: I own shares and call options on SRC

Tuesday, January 23, 2018

Spirit Realty: Leveraged Shopko Spinoff Uncovering Value

Spirit Realty Capital (SRC) is a triple net lease REIT focused on single tenant commercial real estate, SRC effectively makes middle market loans secured by real estate collateral.  The REIT is very similar to STORE Capital (STOR) which did a private placement with Berkshire Hathaway last year, the difference being Spirit has a high concentration to one troubled retailer, Shopko, that is creating an unwarranted discount in the shares.  REITs generally need their shares to trade at a premium to NAV in order to play the private/public valuation arbitrage game and grow, when a REIT trades a significant discount like Spirit does, it gets stuck and is forced to come up with a strategy to continue on a growth path.  Spirit was a net seller of assets in 2017, but it has come up with an interesting solution to fix their discount, in the second quarter they will be spinning off their Shopko assets along with the assets and debt related to one of their asset backed securitization vehicles called Master Trust 2014.  The spinoff will be named Spirit MTA REIT (SMTA) and is generally viewed as a garbage barge spinoff that's worthless, while it's likely to trade ugly initially, there's call option like value in the spin while more importantly allowing the parent company to shed its riskiest asset.  After the spinoff, Spirit should trade more inline with its net lease peers.

Here's how the combined SRC compares to its net lease peers:
Most REITs are going to look cheap compared to Realty Income Corp, but after the spinoff new SRC should look a lot like STORE Capital and that large discount between the two should close over time.

The "bad bank" REIT will primarily contain two sets of assets (today they tossed in some more workout assets similar to Shopko that will be sold with the proceeds going into the Master Trust):
  • Shopko is a mostly rural (midwest and western US) discount store that's facing similar pressures to many retailers, its under-invested in its stores and sells ubiquitous products that you can buy almost anywhere.  It's target market is similar to Sears, its sort of an unfocused general store.  Spirit currently leases 101 properties to Shopko, representing 7.8% of its lease roll (prior to the spinoff), it recently became a secured lender of Shopko as well, advancing $35MM in the form of a term loan at a 12% interest rate.  The term loan will provide SRC/SMTA with quarterly financial statements and more direct insight into how the business is performing and also gives them optionality to separate the Shopko assets further if necessary.  SRC has been selling down Shopko assets in recent quarters/years, and will continue to do so at SMTA with the goal to completely dispose of the assets within 24 months of the spinoff.  With the proceeds from the dispositions, SMTA will contribute those proceeds to the Master Trust and lever it up.  The Shopko portfolio is debt free today, so in the event of a bankruptcy/liquidation at Shopko, the remaining assets at SMTA within the Master Trust shouldn't be impacted.
  • Master Trust 2014 (also seen it referred to as Master Trust A): Here's the interesting portfolio, the Master Trust portfolio is setup as an SPV, its bankruptcy remote from the rest of SMTA, and has a A+ rating by S&P with a 75% LTV.  The asset base is very similar to that of the rest of SRC, single tenant triple net leases, albeit a higher concentration of smaller tenants.  The effective leverage SMTA will be able to get inside the SPV is about 12x EBITDA.  I was able to locate the trustee report and the distributions to SRC have been pretty consistent over the past few years and they haven't stuffed the SPV with bad assets since announcing the spin.  Through the Master Trust and a new CMBS issue, SRC was able to raise an additional $698MM in debt at SMTA that will be used to reinvest in STOR/O/NNN like assets at SRC.
SMTA will be externally managed by SRC for an annual fixed fee of $20 million plus a $6 million property management fee.  There's additionally a one time incentive fee that triggers in the event of a change of control or the management agreement is terminated without cause after 3.5 years.  I think that shows you where management's head is at, if things work out, this entity will be merged away or some other transaction will take place within plus/minus 3.5 years.

I had a simple model put together late last week to break out new-SRC vs SMTA, but today the company released an updated presentation that does all the heavy lifting for us:
New-SRC is the critical piece to the overall SOTP, after the spinoff it will be under leveraged compared to peers with a largely similar tenant roster, if it can re-rate to STOR's multiple (not suggesting it happens over night) it's a $9.75 stock ($0.65 * 15) versus an $8.50 price today, and that's a conservative approach since we already know they're going to have a lot of dry powder ($698MM from SMTA that they'll lever 2-1) to start the acquisition engine again, growing AFFO.

SMTA won't have any close peers that I'm aware of (please correct me if there is one) and will probably trade terribly initially as the investor base for SMTA will be much different than SRC.  SRC provided an NAV build in the presentation today, the $1.61 value in the Master Trust is likely pretty solid (as of January 2018) as its just refinanced and had a third party assess the value of the collateral as part of that process.
The Shopko and workout assets are a little trickier, SRC has been able to dispose of some Shopko properties at similar cap rates to what they're showing here, but its unlikely the public REIT market will assign a 9% cap rate to the Shopko leases.  Quick and dirty, I'd probably assign a 50% discount to the $2.34 NAV presented here for today's purposes although I like the spinoff for its call option like return potential if their reinvestment plan works given the leverage at the Master Trust.

$9.75 for new SRC + $1.17 for SMTA = $10.92 versus a share price of $8.50 today, or ~30% upside without accounting for any new investments either side makes with their growth capital.

Why is this so undervalued?  I think it mostly relates to the typical net lease investor base, REIT investors like simple and safe stories, this spinoff transaction while creative is far from simple and the headline concentration risk to Shopko has scared away many investors.  This spinoff should remove the tenant concentration risk, simplifies the story, and then through the reinvestment of the capital raise from SMTA, allows SRC to return to the market and show a growing AFFO/dividend stream which should also help raise the valuation.

Biggest risks here: 1) interest rates moving higher than expected, the majority of their leases do have escalators built in but they're long dated and the investor base is also interest rate sensitive as net lease REITs are viewed as a bond alternative; 2) general recessionary risks, particularly with retail, although SRC is trying to move more towards services based tenants, these are risky borrowers that often can't get traditional financing elsewhere so they turn to a sale-leaseback transaction.

Disclosure: I own shares of SRC

La Quinta Holdings: WYN Buying OpCo, PropCo Undervalued

In a recent post I mentioned there are some interesting spins on the horizon, one of those is La Quinta Holdings (LQ) doing an OpCo/PropCo split sometime in Q2 2018.  Their plans changed a little last week with the announcement that Wyndham Worldwide (WYN) - also doing an interesting spin - is buying La Quinta's asset-lite management company business for $1.71B in cash (after backing out $240MM Wyndham is reserving for potential taxes La Quinta will owe in the spinoff) or roughly 15.1x EBITDA.

Since Wyndham is paying cash, it's fairly easy to back into what value the market is assigning to La Quinta's PropCo spinoff, to be named CorePoint Lodging (CPLG).  Today, La Quinta's enterprise value is roughly $3.83B and combined company has an estimated $331MM in EBITDA for 2017.  Wyndham is paying $1.71B for the management company that will do $113MM in EBITDA, leaving an EV of $2.12B and $218MM in EBITDA behind in the REIT spinoff, for a 9.7x EBITDA multiple.
CorePoint is a hotel REIT, I've discussed the disadvantages of those in previous posts, but in summary they're more an operating company/franchisees than true REIT models, they're taking the majority of the business risk rather than acting as a landlord charging rent.  La Quinta's model is a mid-market select service hotel, historically they've been concentrated in the south (particularly Texas) but have expanded and diversified in recent years after being hit hard in the oil downturn.  Their hotels typically tend to be situated in suburban, airport and interstate locations that might be less susceptible to AirBnB but more at risk for overbuilding/supply risk.

There are a lot of hotel REITs, here's a small sample of internally managed ones I pulled, they might not all be perfect comparable companies but as you can see, none of them trade below 10x EBITDA:
If CorePoint is worth 12x EBITDA, my math gets me to about a $14/share price for the spinoff (might move around a little depending on the eventual net debt on the spin) + $8.40/share from Wyndham for the management business for a total of $22.40 versus a $19.60 stock price today, or about 14% upside.  No one is going to get rich on this idea, if you could isolate the spinoff directly it'd be a better deal, but I like the risk/reward.  Two other points to consider: 1) the $240MM WYN is reserving for taxes approximates a $2.85B EV valuation or 13x EBITDA for CorePoint (21% on the difference between the first day of trading and the book value of the assets); 2) since CorePoint is a taxable spinoff (REIT spins are no longer allowed to be tax free) it will be immediately be available to get acquired, and I expect it won't be a standalone company for very long.

Disclosure: I own shares of LQ

Wednesday, January 10, 2018

MMA Capital: Externalizing Management, Transforming into BDC-Like Vehicle

Woke up to some fun news Tuesday, MMA Capital (MMAC) is selling its asset management business and some other assets to Hunt Investment Management for $57 million resulting in Hunt becoming the external manager of MMA Capital.  Once the dust settles, if you squint hard enough, MMA Capital will look like a BDC or yieldco but maybe without the high dividend to attract in retail investors.  Even though my thesis is almost played out (original idea: this was a pile of assets that was hidden by GAAP accounting choices, maybe one day becomes an operating company), the current price may offer a short term opportunity as the series of transactions with Hunt are completed.

Here's the deal deck (try not to cringe, MMAC clearly didn't pay high priced advisers):

Who is Hunt Investment Management?
Hunt is a privately held asset manager that focuses on real estate and infrastructure sectors, they specifically mention they manage $12B in real estate related assets and have some expertise in public-partnerships, military housing, and other sectors that might have some parallels with MMA Capital's affordable housing and solar energy verticals.  All of MMAC's employees will move over to Hunt and keep their same employment contracts which still do call for much of management's bonuses to be invested in MMAC's stock in open market purchases.

The new management fee agreement is the biggest concern I see in the deal, it's 2% annually (0.5% quarterly is how its presented, hate that optics game) of shareholder equity up to $500MM and tiered down to 1% annually after that.  We're a long way from $500MM, so its effectively 2% for the foreseeable future.  Plus Hunt will get a 20% carry on shareholder returns above 7%, so this is a fairly standard (bad) external management agreement like you'd typically see in the BDC industry. There is a carve out for this year that adjusts the equity value up to the proforma book value of ~$33.50 shown in the presentation when calculating 2018 fees and will be adjusted to exclude the effects of the companies NOLs in the event the valuation allowance is removed and a deferred tax asset is recognized.  There's also a termination payment of 3 years fees, so yes, while this is standard and I assume Hunt required this to protect their $57 investment, its far from a shareholder friendly deal.

What's Left?
This transaction removes the main remaining 'hidden asset' the company had, the asset management platform it had built in affordable housing, South Africa multifamily, and solar energy.  What's remaining is the bonds themselves, their investment in one of the South African funds, and two real estate projects.  Additionally they have ~$400MM in NOLs that are worth less under the new tax code.  If they ever are realized it'll be because MMAC was able to raise capital, scale up, and generate some taxable income (their plan), but that also means a higher share count and the value of those NOLs will be significantly diluted to current shareholders by the time their realized.

In their own words:
The new strategy sounds very much like a specialized BDC (maybe the altruistic mandate will appeal to some people) attempting to earn a ~10% ROE, general rule of thumb is a 10% ROE financial should trade for roughly book value.  Today it trades for $28.60, leaving 17% upside to the proforma book value, maybe that discount is deserved for reasons discussed below, but I'll continue to hold for now and wait for the dust to settle.

Other thoughts:
  • The company is doing a capital raise with Hunt, where Hunt will be purchasing $8.375MM worth of MMAC stock at $33.50, afterward Hunt will own a little more than 4% of the company.  This is in addition to the $57MM headline number, mostly for PR to show alignment of incentives with the public shareholders.  While not an arms length transaction, still shows someone is willing to pay book value.
  • MMAC is providing seller financing to Hunt for the full $57MM amount, 7 year term at a 5% coupon.  Hunt will be receiving about a $4MM annual base management fee off of the proforma equity base of ~$200MM.  When coming up with a new NAV, might be reasonable to discount it, not necessarily for credit reasons (the base management fee easily covers the annual interest payments) but because MMAC's capital is now tied up in an asset that wouldn't meet its targeted return requirements even if levered up.  They'll have a little drag in the portfolio until its redeemed.
  • CEO Michael Falcone owns over 182k shares (~3.15% of the company) and his lieutenant Gary Mentesana owns over 167k shares (~2.87%), they've been surprisingly transparent on conference calls, structured their compensation to align with shareholders, bought back as much stock as they legally could; they're mostly aligned with shareholders in this deal despite now being employees of Hunt.  I don't see this as a typical dirty BDC-like management stealing the company type move.
  • They didn't specifically touch on it, but the company will likely need to pay a dividend in order to raise capital in the future, that's at odds with most NOL companies mantra to retain all earnings in order to grow and pull the NOL forward as much as possible.  I think a dividend would be the right move once the transactions are finalized, as mentioned earlier, the NOL is going to get diluted anyway, might as well get the valuation uplift from yield based investors.
I started this post with the idea that shares were unfairly undervalued after the deal, but maybe the price is approximately right given the deal closing risks, interest rate risk in the current environment, and the discount applied to externally managed companies.  Most of all, the deal is probably management signaling the heavy lifting is all but complete in bringing MMAC back from the brink after the financial crisis.  So this is more of an update and an interesting twist in this deep value micro cap story, would love to hear from other MMAC shareholders too.

Disclosure: I own shares of MMAC

Friday, December 29, 2017

Year End 2017 Portfolio Review

Time to close the books on 2017; it was a great year in the markets and for my personal account which was up 31.25% compared to the S&P 500's total return of 21.83%.
My significant winners were Pinnacle Entertainment, MMA Capital, Tropicana Entertainment and NACCO Industries/Hamilton Beach Brands, my only significant loser was New York REIT.  Below is my performance attribution for 2017:
Soon to be Closed Positions:
  • Pinnacle Entertainment (PNK) recently announced they are being acquired by rival Penn National Gaming (PENN) for $20 in cash plus 0.42 shares of PENN, a great ~3x outcome 20 months after PNK did their OpCo/PropCo split transaction with Gaming & Leisure Property Trust (GLPI).  If I had to sum up the reasons why this idea worked: 1) leverage, PNK was levered 5-6x coming out of the GLPI deal; 2) strong economic tailwinds, people are spending money on experiences (including gaming) instead of things which drove EBITDAR up high single digits; 3) a well timed buyback, PNK bought back over 10% of its stock in the first few months after spinning off from GLPI when the price was $10-$13; 4) expanding multiples in the gaming industry. PENN is citing a 7.7x EBITDAR multiple post synergies on the deal where Boyd Gaming (BYD) might be the biggest winner, snapping up 3 PNK properties to appease regulators at 6.25x EBITDAR pre-synergies.  Proforma for the deal, I have new PENN trading for 7.2-7.7x EBITDAR (with and without synergies) and still believe in the regional gaming tailwind story (good reason to own CZR as well), but I'm going to sell my position shortly after the new year and set a Google alert for wherever the PNK management team lands next.
  • I bought pre-spin January 2018 calls in Hilton Worldwide (HLT) prior to the spinoff of Hilton Grand Vacations (HGV) and Park Hotels & Resorts (PK); HLT has done extremely well over the past year as it moves towards an asset-lite model plus a plan to grow its hotel count by 1/3 while shrinking its share count by 1/3.  I plan to sell in the new year, and potentially roll those proceeds over into other hotel stocks (Hyatt, Wyndham's split and LaQuinta's split come to mind).
Closed Positions:
  • The IEP tender offer for Tropicana Entertainment (TPCA) played out mostly during the first half of 2017, but the offer closed in mid-August at $45 per share.  As a long term shareholder of TPCA, I was too quick to sell into the tender, as shares now trade for $56 and interestingly many people I talked to thought the shares would fall after the tender as it would become more illiquid and Icahn threatened to put a 2 year freeze on additional tenders.  The tender offer was a tremendous short term event idea, the shares were trading at a discount almost all the way up to the expiration date with little chance of it being oversubscribed, but that was never my thesis for owning it, and I should have paid more attention to the post-tender entity's investment case.
  • My only significant loser this year was New York REIT (NYRT), like many others I relied too much on Michael Ashner's original activist presentation and the value it placed on One Worldwide Plaza.  The other issue with NYRT in hindsight was the tight cap rate environment in New York paired with leverage, tiny adjustments in the cap rate have a magnified impact on the valuation when you're talking 4-5% cap rates.  The conference calls after the Winthrop team took over have been comical (much funnier if I didn't own it) and I'm thankful I listened to people smarter than me and sold before things really got ugly.  This was a classic "do your own work" mistake.  The other lesson might be to throw up a caution flag the next time an attractive liquidation comes up, there's a reason why liquidations are rare, they're unlikely to be worth the time, effort, and expense compared to selling a company outright.
  • My post on the NACCO Industries (NC) split received quite a bit of attention, in retrospect the initial thesis had some flaws which thankfully ended up getting fleshed out in the comment section (thank you readers) by the time the spinoff actually occurred.  After the spinoff, shares of the parent company (NC) traded below $25 for a brief period and I was able to snatch up some additional shares that I eventually sold a couple months later around $47.  My original thesis was to sell the spinoff, Hamilton Beach Brands (HBB), and hold NC, but I ended up doing the opposite as the price of NC rose while HBB fell.  I have a poor track record when reversing my initial thoughts on which piece of a spinoff to hold, but hopefully HBB continued to gain traction in higher end higher margin kitchen appliances this holiday season and will make an attractive acquisition target for one of the big consumer appliance/brand rollups.
  • My thesis on Vistra Energy (VST) was rather simple (arguably too simple), it was a bankruptcy reorg that was traded over the counter at the time and had limited liquidity.  Since then, Vistra uplisted and then entered into a deal to merge with Dynegy (DYN) in a big all stock deal that will increase Vistra's diversification and also its leverage.  Not knowing the power industry well enough, I figured the idea had played out enough for me and sold shortly after the deal announcement at a similar price to where it trades today.
  • Inotek Pharmaceuticals (ITEK) was another simple thesis, it was a busted biotech that was trading below cash and pursuing strategic options.  ITEK ended up doing a reverse merger with Rocket Pharma that should close next year, the stock price shot up, but I sold relatively early and missed out on some of those gains.  Still happy, made money, and don't have many regrets as traditional biotech investing isn't my strong suit at this point.
  • I initially thought Merrimack Pharmaceuticals (MACK) was a combination of some the other busted biotech/CVR themes, but management's own thesis changed a couple times for the negative as the second half of 2017 played out.  First they settled a lawsuit with their convertible bondholders which reduced the net cash position, and then they raised capital which effectively diluted the CVR like nature of their future milestone payments in the Ipsen deal.  At this point, I wouldn't be surprised if management went back on their word to pass any milestone payments to shareholders in the form of special dividends.  I sold at a small loss.
  • All the small CVR (GNVC, MRLB, INNL) related deals I purchased this year closed as expected, now we just wait for if/when milestones to be met.  The Perfumania (PERF) offer also closed as expected.
Previously Unmentioned New Positions:
  • I try to post about every position, but sometimes I don't have anything intelligent to add or everything has been said about an idea by people smarter than me (see Andrew Walker's post on GNCMA/LVNTA:, but I bought General Communications (GNCMA) in late July as a way to get a discount on a discount on a discount in Charter Communications (CHTR).  The deal to merge GNCMA into LVNTA should close in the first quarter and hopefully eliminates some of the tracking stock discount at LVNTA while providing cash flow from GNCMA to continue Malone's typical levered equity strategy.
  • Another position I didn't get around to posting is Molson Coors Brewing Company (TAP).  I did lead the pitch of TAP at a recent meeting I moderate (notes here:  Elevator pitch: Molson Coors is trading within a whisper of 52 week lows, significantly cheaper the big beer peers/other consumer staples, just completed a transformational merger from a forced seller at a good price, levered, stable mature business (even if off-trend on craft/spirits).
Current Holdings:
*Additionally I have CVRs related to GNVC, MRLB and INNL
I hope to find some time to update thoughts on long held positions like MMA Capital Management (MMAC) Green Brick Partners (GRBK), iStar (STAR) and Resource Capital (RSO), all of which I continue to like going into the new year.  I don't have any insightful macro thoughts other than I'll probably continue to focus more on near term event like opportunities in 2018.  Thank you to everyone who has reached out, shared ideas, commented on my posts, its all appreciated and makes sharing ideas fun and entertaining.

Happy New Year.

Disclosure: Table above is my blog/hobby portfolio, I don't manage any outside money, its a taxable account, and only a portion of my overall asset allocation which follows a more diversified low-cost index approach.  The use of margin debt/options/concentration doesn't represent my true risk tolerance.

Wednesday, November 15, 2017

BBX Capital: Bluegreen Vacations IPO

BBX Capital (BBX) is familiar to many investors who fish in the same small cap value and special situation ponds.  Most of the company's (and predecessor BFC Financial) colorful management team and history has been hashed out other places, the company fell off my radar until they recently announced the listing of their timeshare company, Bluegreen Vacations (BXG).  At the mid-point of the indicated range, BBX's remaining 90% stake in Bluegreen would be worth considerably more than BBX's market cap resulting in the remaining assets being valued below zero.  There are a few moving parts here and I know some readers know this company far better than me, but hopefully I got the numbers directionally right.

Bluegreen Vacations Corp (BXG)
The timeshare business is hot again -- Wyndham (WYN) is spinning off their exchange and timeshare business, ILG and Marriott Vacations Worldwide (VAC) are reportedly in talks to merge and Hilton Grand Vacations (HGV) is up ~60% since it was spunoff in January.  Sensing an ideal market for a new issuance, BBX Capital is floating up to 10% of Bluegreen in an IPO scheduled for this week.

Bluegreen Vacations is a typical timeshare business, they have a mix of VOI ("vacation ownership interests") sales from their own developed properties but have moved toward a capital light model where they sell VOIs for third parties for a fee.  Once a timeshare is sold, Bluegreen then provides financing for up to 90% of the cost of the timeshare for a mid-teens interest rate that fully amortizes over 10 years.  Once the timeshares are sold and financed, Bluegreen then manages the timeshare resorts for a fee in a cost-plus model under a long term contract.

The difference between Bluegreen and their peers is in the end consumer they serve.  Bluegreen is primarily focused on "drive-to" destinations and a more value focused/lower end demographic, think more Myrtle Beach and Panama City, less Hawaii and Aspen (although they do have resorts in both locations).  Their average customers income is around $75,000 versus $90,000 for the timeshare market as a whole, certainly below average, but still solidly a middle class demographic and the average timeshare is ~$13k verus $20+k for the other publicly traded companies.  Prior to 2008, Bluegreen didn't utilize FICO scores in making credit decisions on their timeshare loans, basically anyone was given financing, now they have 41% of sales paid in cash within 30 days and those that do finance, have on average FICO scores of 700.  And remember, timeshare lending is a pretty great business, if someone defaults, Bluegreen will generally cancel their timeshare after 120 days delinquent and simply return the points to their inventory to be sold to someone new.   Nearly a friction-less foreclosure process. To reach their target consumer, Bluegreen has partnered with Choice Hotels and Bass Pro Shops (they have displays/reps in stores), as well as promoting their product through kiosks at outlet malls that are often located near drive-to resort towns.  In total, they now have 211k timeshare owners and manage 67 resorts.

The IPO has an offering price range of $16-18/share, there will be a total of 7,473,445 shares (including the underwriter's option) offered, half new shares from Bluegreen and half coming from BBX Capital as the selling shareholder.  After the IPO, public shareholders will own 10% of the company and BBX Capital will own the remaining 90% of shares.  To skip straight to the main thesis: BBX will own 67,261,010 shares of BXG, at the IPO mid-point of $17, that's an implied value of $1.14B for their remaining stake, plus the $63.5MM in cash received from selling their shares via the IPO, that's significantly more than BBX's current market cap of $871MM.

Back to Bluegreen itself, what's the valuation look like at the mid-point of $17/share?  Bluegreen has done $148.8MM in EBITDA over the 9/30 TTM (subtracting interest expense on VOI securitizations), will have cash of $181.6MM after the IPO and $237.7MM of recourse debt.  At the $17/share mid-point, I then have the enterprise value at $1,326MM for a 8.9x EV/EBITDA multiple.  There's probably a bit of apples and oranges going on with the consensus EBITDA multiples on Bloomberg, but timeshare peers (VAC, HGV, ILG) all trade for 10.5-12x EBITDA, so while almost 9x does seem expensive on its own, Bluegreen is relatively cheap compared to peers.  It really is an opportunistic time to IPO it again, getting a good historical multiple while still appearing cheap against comparables.

Rest of BBX Capital
BBX Capital outside of Bluegreen has $140.4MM of cash as of 9/30, following the IPO of Bluegreen,they'll have about $181.3MM in cash with $42.2MM of non-Bluegreen debt.  So again, just the value of net cash and Bluegreen shares is worth about $12.47 per BBX share and the stock trades at $8.50 today.

Additional Assets at BBX Capital:
  • BBX Capital Real Estate: Mostly as a result of the failed BankAtlantic predecessor, BBX has a grab bag of real estate that they foreclosed on and are still in the process of redeveloping for future sales.  The real estate is marked at $180MM on the balance sheet as of 12/31/16, but like other similar financial crisis real estate plays, they marked the assets down at rock bottom prices, much of which has recovered since.  Hard to place a value on these assets, but it's likely significantly higher than $180MM.
  • BBX Sweet Holdings: Collection of candy companies, the largest of which is IT'SUGAR, purchased for $58.4MM back in July, it has 96 retail stores in 26 states and DC.
  • Renin Holdings: Manufactures interior closet doors, wall decor, hardware and other products for the home improvement industry, its tiny, generating $900k in pre-tax income in 2016.
The well documented reason for much of the undervaluation is BBX's Chairman and CEO Alan Levan.  Levan has had an on-again, off-again battle with the SEC over rosy comments he made in 2007 while running BankAtlantic and then being slow to mark down clearly impaired assets as the financial crisis unfolded.  Levan and his Vice Chairman control 76% of the voting power, and as seen in their merchant banking activities, fancy themselves as savvy middle market investors.  The market tends to discount these controlled mini-conglomerates for good reason, but with the IPO of Bluegreen looming (possibly pricing tomorrow, 11/16), some of the discount should dissipate further.

Disclosure:  I own shares of BBX.  I also have exposure to a tiny piece of HGV through my pre-spin HLT call options that expire in January.