BFC Financial/BBX Capital Part One – Value in Complexity

Today’s post is the second in a series I’m informally titling “stocks that caused me grief in 2014.” The first in the series was Awilco Drilling. This post concerns BFC Financial and BBX Capital, two related companies that possess valuable assets worth multiples of their current stock prices. Not that you’d know it by the market’s assessment. As I type, BFC Financial is down 5% in 2014, but more tellingly down 36% from its 52 week high. BBX Capital is a similar sad story, down 22% in 2014 and off 46% from its 52 week high. This post will serve as an introduction and analysis of BBX Capital. I’ll tackle BFC Financial next time.

The reasons for the decline are many, but at the center is litigation, a canceled merger, and the complete inability of management to communicate the company’s value to investors or to use the companies’ massive cash balances productively.

Before I begin, a brief overview of the BFC/BBX corporate structure is needed. The structure is complex, and obfuscates the underlying asset value. Basically, BFC Financial owns 51% of BBX Capital. Together, BFC and BBX own 100% of a timeshare business: Bluegreen. BFC owns 54% of Bluegreen and BBX owns 46%. (Actually, Bluegreen is 100% owned by Woodbridge Holdings, LLC and BFC/BBX own 54%/46% stakes in Woodbridge. The distinction is mainly technical, though I feel I should point it out.) Here’s how it all looks:

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It may already be clear why the market has a difficult time assessing these companies. I’ll spend plenty of time talking about the value of each, but for today I’ll spotlight BBX Capital. When dealing with parent/subsidiary structures and financial statement consolidation, it’s always easiest to start at the bottom and work one’s way up.

BBX Capital Corporation

BBX’s value comes from three sources.

1. Cash, loans, and real estate.

2. Ownership in Bluegreen

3. Net operating loss carryforwards

Once again, a little background information is required. BBX Capital was once BankAtlantic Bancorp, which owned BankAtlantic, a Florida bank. BankAtlantic got into serious trouble with bad loans, and was eventually sold to BB&T Bank. The remaining holding company then renamed itself BBX Capital. As part of the deal to sell BankAtlantic, BBX Capital and BB&T created an entity named FAR, LLC (Florida Asset Resolution Group, LLC) to hold and resolve many of the bad loans and real estate that BankAtlantic had once owned. This was the classic “bad bank” structure. As part of the deal, BB&T owned a 95% preferred claim to FAR’s assets with a face amount of $285 million. In simple terms, as FAR sold off foreclosed real estate and resolved bad loans, BB&T was entitled to 95% of the distributions until it had received $285 million. It was also entitled to interest on the unredeemed preferred interest. Once BB&T had received its $285 million with interest, BBX would receive all the remaining cash flows from asset resolutions.

FAR turned out to be immensely successful for BBX Capital. As of September 30, 2014, BB&T’s preferred claim had been reduced to just $14.17 million and FAR’s net worth was substantially positive. Now that BB&T’s preferred interest has nearly been eliminated, it’s very easy to ascertain BBX’s cash, real estate, and loan assets. The chart below shows these assets for the holding company and for FAR, as well as some other minor tangible assets that BBX Capital owns.

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Net of all liabilities, BBX Capital owns $222.1 million cash, real estate, loans, and other minor tangible assets. About one-third of the total resides within FAR and will become fully available to BBX once BB&T’s remaining $14.17 million interest is eliminated. Note that this $222.1 million value is conservative. Much of the real estate on BBX’s books is listed at historical values well below current values, which have recovered quite a bit since the financial crisis.

That brings us to Bluegreen, which represents the greatest portion of BBX Capital’s equity value. Bluegreen is in the business of timeshare sales. Timeshares don’t have the greatest reputation to say the least. The industry has earned a reputation for aggressive sales tactics and poor underwriting. But there is still a demand for timeshares, and lending standards have tightened up considerably since the crisis. Bluegreen is not the same “sub-prime” business it once was.

Assigning a value to Bluegreen is not as straightforward since Bluegreen is an operating business. If you’re wondering where Bluegreen shows up on BBX’s balance sheet, it’s as an equity investment in Woodbridge Holdings, LLC. The value is listed at $77.2 million as of September 30, 2014. That’s a ludicrous valuation, and it’s simply an artifact of GAAP accounting. Bluegreen produces nearly $100 million in pre-tax income, and throws off substantial cash. In the last twelve months, Bluegreen dividended $61.5 million to Woodbridge. BBX’s share is $28.3 million. Bluegreen also holds $159.6 million in cash, indicating quite a bit of excess capital. Even if it requires 10% of revenues in operating cash, Bluegreen has $108.6 million in excess cash. Clearly, Bluegreen is worth many times its balance sheet value to BBX.  Here’s a look at Bluegreen’s historical results, its excess cash, and a valuation range.

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At a reasonable multiple of 8x pre-tax income, Bluegreen’s value to BBX Capital is $411.3 million. There’s one additional wrinkle: Woodbridge, Bluegreen’s immediate owner, has issued $85 million in junior subordinated debentures. BBX’s 46% share of this liability, $39.1 million, brings my estimate of Bluegreen’s value contribution down to $372.2 million.

That brings me to BBX’s third source of value: its net operating losses. These are substantial. Between its own NOLs and those at Bluegreen, BBX possesses hundreds of millions in loss carryforwards, none of which expire any time soon. The graphic below summarizes these NOLs as of December 31, 2013.

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Evaluating the worth of NOLs is difficult, especially in a case like BBX Capital where there are multiple entities involved. To be conservative, I’ll simply take the cash value of the NOLS (tax rate * NOL) and discount that by two-thirds. With federal/other corporate tax rates at 35% and Florida’s corporate tax rate at 5.5%, I get a net value of $37.3 million. Again, that’s extremely conservative. It’s possible that BBX will realize a much greater portion of these NOLs and much earlier by selling off real estate or monetizing its interest in Bluegreen.

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So there we have it, the three components of BBX’s equity value. Combined, I estimate their value at $631.6 million, or $39.46 per share. This value could be quite a bit higher depending on the appreciation in BBX’s real estate portfolio, NOL usage and the ultimate valuation of Bluegreen. BBX also has some other minor assets that could contribute a small amount of equity value.

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I realize how it sounds when I casually posit a value per share more than 200% higher than the most recent trade. But if anything, I think BFC Financial is even more under-valued. More on that in my next post.

 

Alluvial Capital Management, LLC holds shares of BBX Capital Corporation and BFC Financial Corporation for client accounts.

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

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18 Responses to BFC Financial/BBX Capital Part One – Value in Complexity

  1. Rob says:

    What impact will the litigation have? It looks like the news of a potential fraud conviction scared the market.

    • otcadventures says:

      The litigation impact is something I’ll tackle in my next post because it falls more on BFC than BBX. In short: it’s not immaterial, but it’s also not nearly large enough to cause this sort of discount.

      • Gregg says:

        otc – How do you figure the litigation falls more on BFC? The lawsuit was against Bank Atlantic (now BBX) and Levan. Either way I’ve done a lot of research on this and from everything I’ve read the fine will be under $10 million.

        • Gregg says:

          BTW – If anyone wants to research the fines themselves, here is the complaint by the SEC: http://www.sec.gov/litigation/complaints/2012/comp22229.pdf.

          You can see the penalties they are seeking towards the end of the document. Here is the code they are referring to: http://www.law.cornell.edu/uscode/text/15/78u. The maximum possible fine (per count) would be $500k unless they have any ‘pecuniary gains’ which based on my research they do not have. Levan sold no shares in ’07 and BBX did not issue any shares (in fact they bought back shares in ’07). Also there was a shareholder suit several years ago. The jury verdict (against BBX) was tossed by the judge and the appeals court agreed with the judge so there will be no worry of any further shareholder suits in this matter.

          If anybody has any differing evidence I’d love to know.

        • otcadventures says:

          You’re correct, the litigation technically relates to statements Levan made to BankAtlantic investors. I say if affects BFC more because BFC is the “parent” company and I think its investors pay more attention to the legal proceedings.

          • Gregg says:

            Based on the reaction to BBX not so sure about that. Then again both stocks are so underfollowed that the trading volume that caused the stocks to plummet amounts to about 2-3 million dollars combined compared to a combined market cap of over 500 million. Most of these people probably do not understand that the monetary penalties are limited. The case is mostly about the SEC wanting Levan banned.

            I was kind of surprised they cancelled the merger considering the judge has not decided the penalties yet. If he doesn’t ban Levan or gives him a temporary ban I would have expected them to go through with the merger. Either way I believe eventually the two companies must merge unless they have some other plan like a sale. From my discussions with Investor Relations my impression is there are analysts who are ready to cover the stock after the lawsuit is complete and a merger is consummated. In the meantime there are only sites like yours which bring to attention how severely undervalued the stocks are, so thanks.

  2. Anonymous says:

    Hi,

    I’ve been long since before this was written up across the web.

    Opinion questions for you:

    What do you think of management’s incentives?
    How would you grade them on decision-making?
    What do you think they need to do to make this thing work?

    Thanks

    • otcadventures says:

      I know a lot of people smarter than me who’ve been in this stock before I was. You are far from alone.

      Incentives: Judging by their effectiveness, poor. Levan owns a good bit of stock, but also has extremely high compensation. He seems to care little for the stock’s value and doesn’t care to put excess assets to use.

      Decision-making: C-. I understand the litigation issues, but they’ve failed completely at highlighting the company’s asset value and achieving an uplisting, not to mention a merger. Operationally they’ve done a little better with Bluegreen and FAR, but they’ve let far too much cash sit on the balance sheet un-used.

      What will it take? My only answer is time. The litigation process has to play out and ideally, the companies merged together so Bluegreen’s ownership is no longer divided. That, plus an uplisting and a combination of dividends and buybacks would send the right signal and lift the stock.

      • Anonymous says:

        You are far more forgiving than I am.

        I’d give Levan & the board/cronies an F- for decision-making and optimizing for shareholders.

        What I think it will take: I think this thing would literally double overnight if Levan collapsed the dual-class shares, let us elect some truly independent directors, installs his kid (or god forbid, someone with credentials) as CEO to put an end to this litigation circle-jerk, and finally closes the merger.

        I know I’m asking too much; however, because he clearly doesnt give a shit about shareholders.

        • Anonymous says:

          With that said, I bought more over the 24hours.

        • Stephen says:

          Good write-up.

          I will preface my comment by saying that I generally have an optimistic view on life, more so than others. I also think that over the long-term, management will eventually make rational decisions that are in the best interests of their shareholders…

          With respect to this situation, there is substantial value even in light of the mismanagement and inability of management to highlight the difference between market valuation and true value. The nice thing about this situation is that the market seems to have priced in absolute failure by management to realize the underlying value of the company. More likely than not, something positive will happen (at this point, it won’t take much), and the shares will re-rate higher. And in the meantime, its not like this is a binary bet between a home run and a bankruptcy, so the downside is probably not zero.

  3. Thomas says:

    Fine write up.
    How much interest does Far owe BB&T?
    Thanks

    • otcadventures says:

      Not much. There’s no interest in arrears and future interest is accruing at 5% of the remaining preference balance, which is $14.17 million. Interest expense on that amount is just $0.71 million per year.

  4. Tj says:

    Interesting situation. Any insight into why they were able to purchase Woodbridge for a couple times pre-tax earnings a year and a half ago and now it’s worth 8 times?

    • Gregg says:

      TJ – Bluegreen went through a tough time during the housing bubble. They used to buy and develop their properties and when the market crashed so did they. They also had a homebuilding segment which obviously didn’t do too well either (that unit was sold off in 2012). They have since transitioned to a capital light model which transfers that risk to 3rd parties (although they still retain some legacy properties as well as any repossessed properties). Bluegreen makes their money from sales commissions, resorts management fees, mortgage and title servicing, and construction management.

      BFCF through their Woodbridge subsidiary was already a majority owner when the deal was announced. The original deal was a merger agreement which would give Bluegreen shareholders stock in BFCF. Diamond Resorts came in with a $6.25/share cash bid. BFCF in turn upped the bid to $10/share and used BBX to complete the acquisition resulting in their 46% ownership. There was a lawsuit against BFCF alleging the premium paid for Bluegreen was too low. That lawsuit was eventually dismissed. I don’t know a lot about that lawsuit, but Bluegreen had earnings of $1.26/share in 2012 (compared to -$1.40/share in 2010 and -$0.54/share in 2011) so they might have had a good point. However it’s hard to argue when BFCF was offering such a large premium.

  5. @lowriskvalue says:

    Great write-up,

    In order to give more visibility to this investment would be good idea upload the write up to SeekingAlpha,

    Congrats for your blog is an excellent source to get ideas,

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