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.

30 comments:

  1. What would make Bluegreen attractive to investors when 90% will still be controlled by a shall-we-say contentious owner? Am I right in believing that generally stub stocks like this trade at a control discount?

    You've definitely found another interesting one. I'd push back and say maybe investors are only willing to pay 7-8x for a situation like this?

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    1. Right, we'll see how BXG trades, but it seems like they've found people willing to pay 9x and the business has tailwinds, so it very well may trade higher. I'm not really saying that BXG is cheap, I wouldn't buy it outright, more interested in the IPO in that it highlights the extreme SOTP discount at BBX.

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  2. Great write up and thank you for sharing. Excellent summary.

    Any idea of the potential tax implications to BBX from the Bluegreen IPO? I suspect BBX will be required to pay capital gains taxes on the shares they are selling in the IPO as well as in the future as they presumably sell down their 90% stake? I think this could be a material part of the thesis depending on BBX's cost basis.

    It's also interesting that BBX is choosing to retain 90% ownership of Bluegreen when they undoubtedly would receive a higher valuation if there wasn't such a large ownership/control overhang. Curious as to what the rationale is for this.

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    1. Sorry -- forgot to mention, BBX has $436MM in federal NOLs which would likely shield any gains from selling their stake. Good question on the small sale, my guess is its just a tool to highlight the SOTP discount on BBX and give them flexibility down the road to continue to sell.

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  3. I agree with almost everything you state above. My friends and I have been shareholders in BBX for several years now (full disclosure). And we have been waiting for this type of event with Bluegreen to finally highlight the true value of BBX. I think your comp multiples might be too low, but that also depends on whether or not to include the non-recourse debt when cal.'ing total enterprise value. And yes, the NOL's have real value to the BBX shareholders. And yes again, that the real estate portfolio is worth a lot more than the balance sheet amount

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  4. Pricing came in below the range at $14/share, making BBX's stake worth $941MM + the cash received in the IPO. Initially disappointing, but we'll see how it trades tomorrow and the general thesis still holds.

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    1. IPOs are usually made to pop so hopefully that's the case here.

      The SEC issue has been settled in Alan Levan's favor and the SEC could be described as trying to shakedown Levan and many other bankers in the aftermath of the great financial crisis.

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  5. weird move, i don't quite understand the violence

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    1. Ouch! I knew it was bad short term news, but didn't expect this move either. I think the IPO is still a positive? BXG will eventually highlight the discount here, but might just take longer now.

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  6. aren't you missing the $80m that BBX owes BXG and $663m of jr subordinate at holdco? Still interesting but including that and it gets less interesting or did I miss something?

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  7. IPO pricing came in about 20% below midpoint. Market values BBX ex BXG less than zero. So, BBX is down about 20%. Seems consistent.

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    1. Heart skipped a beat there at the $663MM, yeah the rest of BBX I kind of lopped off, a grab bag of other assets that would take a lot longer to go through individually, but that's fair to mention the junior subordinate notes and the related party $80MM. Thanks.

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    2. Sorry to scare you. Been a rough day already here (though I bought it rotten under $7).
      Wouldn't the combination add up to $1.40/shr--not immaterial? Also, how do you calculate the property at $180m. $166m +43m Equity investments -$20m debt = $189m or am I thinking of this correctly? Sorry, trying to get up to speed in a hurry as the shares came in and it got real attractive.
      Thanks

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    3. No, I think you have that right. I was using $180MM from the 10-K.

      And sure, it's all material at a certain level, but even at $13 for BXG, that's $8.56 per share to BBX, leaves a lot room on the cash at BBX and other assets/liabilities.

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    4. One last question (for now). Where is all this real estate on the balance sheet or is it just sprinkled around in a few places? I actually think it's $166m -$21m fwiw so $145m net.

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    5. Disclosure is a little light, but pages 13-18 of the 10-K go through the real estate and legacy loan holdings.

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  9. Thanks again. I posted to VIC to help get some exposure for it. If you aren't on VIC, email me and I'll send you a PDF. Thanks again for the idea and doing the heavy lifting here.

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  10. A bummer about how they traded today, but in the grand scheme not so dreadful. Momentive pulled their IPO (from pinks) due to famed "market conditions," so it's good--maybe?--that at least BXG got it done.

    I think the dividend to come represents the first potential hard catalyst for BXG. Based on performance the past few years (famous last words), it looks like BBX gave them a little room to raise the dividend down the line and potentially juice returns, if needed.

    Off-topic, 3 liquidation/merger ideas:

    GLBL: BAM acquiring for $5.10 "by year end." Currently $4.80. Don't love it because a lawsuit has to be settled first, though BAM has experience enough that I'd take them somewhat at their word. ~6% return in ~6 weeks.

    ASHG: To be acquired by CRH "late 2017 or early 2018" $531-548. Currently ~$510. Seems like low chance of deal break. Probably spread exists due to illiquidity and uncertainty about what final payoff will be, and because consideration is two-part: payment from CRH and, pre-merger, a dividending of excess cash. Range of outcomes: 4% over 10 weeks to 7.5% over 5 weeks. Seems good at low end, great at high end.

    ENZN: liquidating, and their receivable from Nektar is payable in January, adding $3.5 million cash to their stash and, I suspect, triggering a 5-10 cent special dividend. Currently at ~32 cents, which may be a little high to buy. Additional catalysts: Shire potentially filing for SC Oncaspar and receiving approval (as outlined in most recent quarterly), triggering $7 million payable to ENZN (~15.5 cents/share), and resumption of royalties now that overpayment arrears are mostly cleared up. Not a screaming buy at 32 cents, but may be in line to have current share price in cash by mid-2018, ~2/3 to be dividended out (based on past behavior) by YE, with a drip of cash flow for several years thereafter and some chance of something happening with the NOL/shell listing. You will get your cash back one way or another, but IRRs look meh if one or another catalyst doesn't happen.

    That's more than enough!

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    1. Some weekend research, thank you!

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    2. ADL - what a fantastic post - thank you!
      On ENZN, do you know where CFIUS has got to? Quite a few things have fallen over at the CFIUS stage this year... and that could be a risk. That and the cash swing since last balance sheet are the main risk factors IMHO

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    3. @anonymous: CFIUS isn't an issue for ENZN, as it's not being acquired (ENZN cash reduction on BS is a result of special dividend, as they're in slo-mo liquidation). Could be on ASHG and GLBL, but the industries, and the countries of the acquirers, don't make it seem like much of an issue--we're not dealing with much proprietary high-tech or national security in either case. On ASHG, it's basically a family company, and while they could siphon off a bit of cash to themselves first, they've been quite fair to minority shareholders so far.

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    4. @adl Apologies - I misstyped. I meant ASHG, not ENZN. I agree on GLBL - have held it since before merger announcement and continue to hold. On CFIUS - I agree the chance of it getting failed is low. However, the CFIUS process has been very slow this year b/c of Trump - there is a chance the deal gets delayed which would impact IRR. I also have had bad experience (Black Earth Farming in Sweden) with projected shareholder returns based on actual cash situation at transaction time, so will pass. Thanks again and Good luck!

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  11. @anonymous:

    Uch, Black Earth Farming--I was tempted by that but got scared, and am glad I did! The farmland aspect made it seem like it was ripe for trouble.

    Good point on CFIUS speed; I didn't think about a delay as much as I should have. Obviously return profile changes quite a bit if it takes extra time. I bought ASHG shortly before the merger announcement and just got lucky; have been trying to decide whether to add.

    Entirely different notes: I think BPT (and particularly its January calls) is a very interesting situation with a January catalyst, but since this depends on the price of oil (an easy input to track, though impossible to predict) and investor psychology (impossible all around) I can't recommend it, though I've invested.

    Basically, with WTI where it is now, the trust will likely distribute ~$1.20 in January, which annualized at its trailing 12 month or trailing 5 year yield would get you a price of $26.40-33.60. Of course, the trust is an awful product from which many retail holders have been scared, belatedly, by short-sellers pointing out how the trust structure is stacked against them and the trust--as it discloses in its 10-K annually, though many holders don't bother to read--will likely terminate over the next few years.

    My thinking is that the weaker retail holders have sold and the remainder--trust/oil bulls--will see this higher distribution as vindication and drive up the price, albeit more mutedly than in the past. But this whole thing is predicated on the oil price now through 12/31 (which determines the distribution, and can at least be checked daily), the oil price in January (as a background to general potential investor psychology), the forward strip, and psychology, so it's an unquantifiable mess which maybe--only maybe!--creates an interesting opportunity.

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    1. Well, I am just a value peon... so not smart enough to understand/buy options. And with my simple value outlook, royalty trusts are impossible to value - to do so you'd have to have a reasonable view on oil price for the duration of the royalty cashflows, which is just not possible. Same thing for valuing equity in shipping stocks. But my view point is limited - and not to say right. Just what makes sense for me. Good luck on BPT.

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    2. Yeah, this idea is strictly a result of "mission drift"! BBX, RDNT and LICT are my largest positions and have been for some time; I wander away from core positions/discipline and get into trouble...

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    3. FYI, worked out exactly as planned, which is a case, almost certainly, of more lucky than good...

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