|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||59||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
BFC Financial (ticker BFF) is a small sum-of-the-parts play that is suitable only for personal accounts, not institutions (trades around $100k per day). That said, the investment has an extremely attractive risk/reward profile and has greater than 100% upside within 12 months - for anyone willing to consider an insider-controlled microcap with Florida real estate and bank exposure. BFC Financial, which, strangely, stands for “Building Foremost Companies”, is a Florida-based investment holding company controlled by Alan Levan. BFF is a tiny company (with only a $59mm market cap) that is trading at only 39% of NAV. Importantly, all of its major holdings consist of stock in publicly-traded, larger companies. This makes valuation simple and also eliminates many typical risks associated with microcap investing. Should BFF return to a normal 15% holding company discount, there is 116% upside in the stock from current levels. Investors can either play this NAV discount through a stub trade, or can go straight long BFF and hope to get the additional benefit of positive stock price movements in its holdings.
What Does BFF Own?
I recommend that you pull up the 8-k filed on January 14th, which contains the latest investor presentation (including a helpful structural diagram). In declining order of the size of BFF’s assets, here is what it owns:
· 22% stake (13.2mm shares) in BankAtlantic Bancorp (ticker BBX) worth $68mm (note that this alone exceeds BFF’s market cap). BBX is a Florida-based bank with a $303mm market cap that is currently trading at 0.7x book value. As you might guess, BBX has struggled as a Florida-based bank with exposure to the Florida real estate market, and is down 75%+ from its all-time high price and 60%+ from its 52 week high price. I am not an experienced financial services analyst, but do note that BBX’s recent earnings announcement received a positive market reaction, BBX has limited subprime exposure, and BBX does not appear to be in serious financial jeopardy. BBX also owns a 16% stake in Stifel Financial (ticker SF) that is worth around $100mm currently, and adds additional financial flexibility. I would welcome detailed thoughts/analysis on BBX from other members, though. Note that BFF controls BBX via its super-voting shares.
· 21% interest (19.9mm shares) in Levitt Corp. (ticker LEV) worth $44mm at current prices. LEV is a Florida-based real estate holding company with a $215mm market cap and three primary assets: (1) $71mm net cash, (2) a wholly-owned (but not recourse guaranteed) sub engaged in master-planned communities named Core Communities, and (3) a 31% stake in the publicly-traded time-share company Bluegreen Corp. (ticker BXG) (this stake is currently worth $84mm to LEV). The $71mm net cash position consists of $99mm of debt and $170mm of cash, which was generated by a rights offering completed at $2.00 per LEV share in late 2007. LEV also owned the homebuilder Levitt & Sons, but that subsidiary filed for Chapter 11 in the fall and has exited that business (liabilities were non-recourse to LEV). Note that BFF controls LEV via its super-voting shares. So, to review, LEV has a $215mm market cap, with $71mm net cash and an $84mm stake in BXG, implying a value of only $60mm for its only operating asset, Core Communities. Here is some additional detail on LEV’s assets:
o Core Communities is engaged in master-planned communities in Florida and South Carolina. It is asset-rich, with $329mm of assets consisting primarily of 6,700 acres of undeveloped land held at cost of $32k per acre (well below any sales prices). Core has $19mm of cash and $132mm of debt, which is non-recourse to LEV. Some may compare this sub to The St. Joe Company (ticker JOE), but Core Communities seems better positioned in that it owns significant commercial property (which continues to sell, unlike the residential property). There is massive uncertainty associated with this asset, but the price appears right, the balance sheet is strong, and management has indicated that it is likely LEV will be cash-flow positive this year. Management continues to believe that Core is a strong asset deserving of further development/investment, which is part of the reason the rights offering was executed last fall.
o Bluegreen Corp. (ticker BXG), which has a $275mm market cap and a $537mm enterprise value. Again, LEV’s 31% stake is worth $84mm and is considered non-core to LEV and BFF (the stake will be sold at some point). BXG is primarily engaged in nation-wide time-share sales. Time-share sales probably don’t appeal to many investors on VIC, but has been a strong growth industry. BXG results continue to be decent, and it is considered a strong operator. I have some concerns with the business model, particularly the financing of the sales (which is a major profit center) and the levered balance sheet, and therefore would not be too excited about a standalone long position in BXG. But, given its track record, its modest valuation (10x EPS and less than 6x EBITDA), and the fact that it is down 30% + from its 52 week high, it is likely not overvalued. As one asset in a sum of the parts investment, I am okay with this asset.
· $20mm convertible preferred in Benihana (ticker BNHN), a Japanese restaurant chain with a $165mm market cap and a $184mm enterprise value. The convert pays 5% cash interest, and is convertible at $12.67 per share (versus current common price of $10.79). As the company has almost no debt senior to the preferred ($5mm), has a large equity cushion, and is performing reasonably well, this preferred looks money-good. The interest on the preferred also helps pay the bills at BFF (more on the cash needs of BFF later). BNHN is also considered a non-core investment by BFF.
· $18mm of net assets (primarily cash) at the holding company, excluding deferred tax liabilities of $15mm. These deferred tax liabilities are relevant only if the assets are sold- therefore I believe it would be double-counting to account for both the deferred tax liabilities and to assume a holding company discount. As a result, I ignore the deferred tax liabilities in the NAV analysis, but do assume a 15% holding company discount. BFF is debt-free at the holding company and has no material guarantees of its subsidiaries.
What is NAV?
Adding up the assets results in $150mm of total value, or $3.15 per BFF share. This compares to the current equity market cap of $59mm, or $1.24 per BFF share. Assuming BFF trades to a 15% holding company discount ($2.68 ) results in 116% upside. Further, if you would like to assume a holding company discount and ignore the net assets at the parent level (which effectively assumes that the deferred tax liabilities are relevant, which I believe is overly conservative), you still get to $2.36 per share or 91% upside.
What are the Issues/Negatives?
· Just as BFF controls its major subsidiaries (which is primarily a positive), BFF itself is controlled by the super-voting shares of its founder Alan Levan. While this is certainly a negative, I am comforted that Alan owns over 12mm shares. His stake, once worth well over $100mm, is now worth only $17mm or so. Ouch! Certainly he will do his best to extract value at some point, but on his own timeline. Other insiders also own significant stock.
· Nepotism. Alan’s son Jarett has been installed as CEO of BBX. He may or may not be talented, but this certainly smells bad and does not put Alan in a good light. Presumably this is already accounted for in the NAV analysis due to the BBX public valuation.
· No insider buying. IR explains this as due to the limited volume, frequent restricted periods, and the massive size of existing insider holdings that render additional purchases immaterial. I buy this explanation.
· Recent resignation of CFO. IR explains this as due to extreme stress and difficult lifestyle related to recent major financial transactions (signed and then terminated acquisition of LEV by BFF in early 2007, bankruptcy of Levitt and Sons in late 2007, rights offering of LEV in late 2007). I buy this as well. Also note that the value resides in the public holdings, not in the holdco.
· Some cash burn at BFF. Historically BFF was cash flow positive. However, that is no longer the case (primarily due to dividend cut at BBX). BFF still receives dividends from BNHN, and is paid for shared services from BBX and LEV. BFF is also in the process of cutting costs, so it is unclear exactly how much cash BFF will burn (and mgmt won’t provide an estimate), but I estimate it will be $5-8mm per year. While certainly a negative, one can assume 1-2 years of cash burn in the NAV analysis below and still get a huge margin of safety. I don’t expect cash burn to continue indefinitely as historically BFF has been cash flow positive and its goal is to be so again.
· Tiny size of company. Although a negative in that this investment can’t be made in size, I think it is important to note that the underlying assets are larger, somewhat more established companies, which eliminates some of the risks typically involved with micro-cap investing.
· So why are the shares so cheap (on an NAV discount basis)? Historically, BFF seems to have traded at a typical holding company discount of 15% or so. I think shares are cheap for several reasons:
o Virtually anyone who has been long any of the above securities has lost money recently (likely lots of it).
o Virtually anyone who has attempted to hedge out the underlying assets and bet on a narrowing NAV discount has lost money (the discount has widened significantly over the past 6 months). This stock is completely washed out.
o Not too many investors can get comfortable with Florida based banks and real estate right now.
o Major financial transactions in 2007 (signed then aborted acquisition of LEV, controversial LEV rights offering that BFF participated in) have complicated the situation.
o The share price recently touched $1.00 per share, which has a psychological edge to it and may leave some investors worrying about de-listing (the 52 week low says $0.50 but only a handful of shares traded there in an anomalous trade). BFF is listed on the NYSE Arca exchange, but based upon my review of the Arca listing rules and my discussion with management this does not seem to be a problem (Arca has generous listing requirements). Management also indicated they are also open to a reverse split if necessary.
To Hedge or not to Hedge?Investors could create pretty interesting stub trades here (in several different ways), and that would be the lowest risk way to play this. Helpfully, none of the holdings have oversized short positions, and given the tiny size of BFF this stub trade can’t get too crowded. However, I have a hard time getting comfortable shorting any of the holdings, as they each look oversold/undervalued to me (BBX at 0.7x book, LEV with great balance sheet and asset-rich position, BNHN convertible preferred looks money good). So despite the risks I prefer an outright long in BFF, and gain courage from the massive NAV discount. I think there is a strong chance that the underlying securities perform well and the NAV discount simultaneously closes, providing even more upside than discussed above. I note that at current prices, either of the two major holdings could go bankrupt and BFF value still should not be impaired. However, I do note that it is possible that LEV and BBX will be correlated over the long-term given their Florida real-estate exposures.
|Entry||02/11/2008 03:19 PM|
|Apologies for small font. Using the PDF view helps quite a bit.|
|Subject||Good write up|
|Entry||02/13/2008 07:14 AM|
|Thanks, I like ideas like this. Biggest SoTP discount I've seen in some time. Do you know if there is any tax impact of BFF spinning off the underlying shares owned to its own shareholders? I know this probably isn't Levan's plan, but if he decided he wanted to explore it, could it be done as a tax free spin off or would it be taxable to BFF?|
I think this type of spin used to be called a Morris Trust transaction years ago, but I'm very rusty on it. It would be one easy way to reduce the SoTP discount, though probably not Levan's preferred route since his control of BFF is though supervoting shares but he wouldn't have supervoting shares of the affiliates after a spin.
|Entry||02/13/2008 09:23 AM|
|Thanks for an interesting idea. I'm somewhat familiar with BankAtlantic and Stifel. BankAtlantic is cut in the mold of Commerce Bancorp, which has been written up here in the past, and which might shed some light on their business model. I think that BankAtlantic and Stifel are interesting in their own rights.|
A quick question as I dig deeper. BFC owns Cypress Creek Capital (CCC), which it is said guarantees certain obligations of BFC and is a potential source of advisory fees and other revenues. Have you been able to find any financials for this broken out anywhere, either a balance sheet or operations?
|Subject||RE: Good write up|
|Entry||02/13/2008 10:54 AM|
|I don't know the answer on the tax issues, but I'll ask the next time I have a chance. But, based on conversations with mgmt, I get the sense that the company's Benihana, Bluegreen and Stifel stakes (Bluegreen is of course held by Levitt, not by BFC, and Stifel is held by BankAtlantic) are likely to be sold at some point. I don't think they are going to get rid of the Bankatlantic or Levitt stakes anytime soon.|
|Entry||02/13/2008 10:58 AM|
|I know very little about this. The company has stated that the subsidiary was real-estate related (I believe commercial), and that it is not active right now (meaning not incurring expenses and not doing deals). All of CCC's assets and liabilities are consolidated, so there really is not much to it. I don't believe it was ever of material size (even relative to a small company like this).|
|Subject||RE: RE: CCC|
|Entry||02/13/2008 01:20 PM|
|Thanks. A few more questions. Sure are a lot of moving parts here.|
In the 2006 10-K, they talked about merging with LEV (i.e. bringing ownership from 17% to 100%) which was announced on 1/31/2007. At the time, LEV was at $14.16 and BFF was at $6.23. It looks like this deal fell apart during the year. It sounds like some shareholders were griping about the price, though they'd probably be happy with that price now. Do you know why this deal was contemplated, and why it fell apart? It seems like BFC may have dodged a bullet there considering the subsequent bankruptcy. But I thought the reasons for this might shed some light onto their goals as a holding company.
It looks like BFC raised about $36 million in July 2007 with a stock offering, most of which went into the LEV rights offering, which ultimately raised about $153M. Do you know why BFC participated in LEV's offering? Was it just to maintain their ownership percentage? As a separately traded public company, you would think they could raise their own capital. The upshot is that BFC had to dilute their shareholders in order to support LEV even though they have a minority interest there.
Does BankAtlantic's 16% ownership of Stifel include the warrants? It doesn't seem so.
While BFC hasn't been buying back their own stock, BankAtlantic bought back about 10% in 2006 and has a current authorization to buy back another 11% or so.
Regarding BankAtlantic, on quick review they appear to be well capitalized, with about 2/3 of their loan base supported by deposits and the remainder with FHLB advances and short-term financing. They should benefit from the rate cuts. However they also just reported non-performing assets of about 4%, mostly commercial loans, which is pretty high if they're dealing with A credits. The Stifel investment is pretty big for them, about 11% of total assets and 154% of book value. The loan book is primarily mortgages with significant home equity loans, so there is probably plenty to worry about here, given the impairments we've seen elsewhere. This is probably worthy of its own analysis.
|Entry||02/13/2008 03:02 PM|
|I just realized that BFC was written up here twice in the past, once in 2001 and again in 2005, and LEV was written up when it was first spun in 2004. The LEV write-up got a 6.0 rating with 36 votes at the insanely cheap price of $23.65 (compared to $2.00 today). A particularly prescient quote, "At today’s price, you get the Company’s Florida homebuilding operations ("Levitt & Sons" or the "Homebuilding Group") for free". Sounds like "free" was the right price after all :-).|
It is interesting to go back and look at those write-ups and long Q&A threads to get more background, and to find out where they went wrong.
|Subject||RE: RE: RE: CCC|
|Entry||02/13/2008 04:28 PM|
|1) Regarding announced then terminated Levitt merger: BFC clearly dodged a bullet with this, and clearly didn't fully understand the depth of the real estate downturn. BFC wanted to buy Levitt primarily due to the value they saw at Core Communities (the master planned community sub). BFC saw the assets at this sub as undervalued, and wanted to own them 100% in order to benefit from future growth. Since then, the homebuilder sub (Levitt & Sons) declared bankruptcy and is liquidating, and the outlook for Core is clearly weaker (although mgmt continues to believe it has huge value).|
2) As the market continued to decline over the course of 2007, BFC decided to raise equity capital (in July). I believe they did so in contemplation of participating in, and possibly oversubscribing to, the (not yet announced) rights offering, and/or to have the capability to support the homebuilding sub (which BFC untimately did not support). So while you could look at it as BFC having to dilute its shareholders to support LEV, I think that BFC really believes in the value at Core and wanted to, at a minimum, not dilute its ownership. Also note that BFC raised equity at $3.40 per share, so that turned out okay for investors buying today.
3)I don't believe the 16% includes the warrants.
4) Thanks for your thoughts on Bankatlantic.
|Subject||RE: Prior write-ups|
|Entry||02/13/2008 04:30 PM|
|And, I think that all of the money lost by prior investors betting on a narrowing NAV spread is contributing to the opportunity today.|