Description

Bluegreen Vacations Corporation (BXG)

Recommendation

Buy BXG equity.  Even as I risk being ridiculed for being in bed with an Alan Levan company, I am recommending buying BXG equity.  This stub equity trades at a modest 4.8x next year’s EBITDA and a mid-teens FCF yield (ex-cash) largely because its has become orphaned following a failed go-private transaction.  Recent earnings related weakness in the trading of its publicly traded comps and the growing concerns about a potential recession around the corner likely has also weighed on the share price.  While the valuation and the potential catalysts are very compelling, given the cyclical nature of this industry, I’ve paired the position with some puts on IWM in the event we are heading into a slowdown.  

BXG is a vacation timeshare company that is 90% owned by BBX Capital, a publicly traded holding company controlled by Levan and his cronies, err sorry, friends/family.  I believe Levan showed his cards in March when he tried to take BXG private (again) by merging it (back) with BBX Capital. He was subsequently forced to pull the offer in May when a major BXG partner relationship issue with Bass Pro came up which resulted in over a 50% decline in the stock price.  The stock initially recovered some from the June lows on news of the resolution of the issues but has since retraced back near the 52-week lows. I believe that there’s a high likelihood that BBX will come back with a new go-private offer within the next 12 months and the risk/reward is favorable here.

What kind of upside are we talking about?  Obviously, I don’t know what BBX will do but we can take a shot at some possible outcomes.  BXG came public in November 2017 at $14.00/sh and subsequently traded as high as $25.00/sh by mid 2018.  I suspect some of this exuberance had to do with the small float and perhaps even some short covering by folks who had a BBX/BXG long/short pair trade.  However, weaker than expected operating performance derated the stock price back to the low teens by the end of 2018. BBX’s opportunistic March offer of $16.00/sh represented a ~20% premium to the share price at the time.  With the stock now trading at $9.12, I think it’s safe to assume that any potential new offer will be below $16.00. At a minimum, I think another ~20% premium offer is achievable for no other reason than Levan is predictable.   This works out to a purchase price of ~$11.00/sh based on current trading levels. But would he actually make an offer that far below the IPO price or even the March offer price? While Levan’s penchant for screwing shareholders is legendary, I think it would be quite silly (for even him) to make an offer much below the $14.00/sh IPO price.  The optics would be bad and it would be penny wise and pound foolish – every $1.00/sh improvement in the offer would cost BBX less than $7.5mm, a rather insignificant amount if the intent is to avoid a long, and potentially litigious, valuation fight with disgruntled investors. For that reason, my base case is that he initially offers $12.50/sh, which represents ~37% upside from today’s levels, but then bumps it up to $14.00/sh  (~54% upside) after some investors object. While a low probability event, upside case would be an offer of $15.00/sh, representing ~65% upside from here. With a dividend yield of ~7.5%, you’d also get paid to wait around for this offer, should it ever come.  

Takeover game theory dynamics aside, the risk/reward is attractive because at 4.8x EBITDA, I don’t believe BXG has a buyout premium already factored into the stock price.  For the time being, let’s put aside the fact that while BXG will be under earning for the next four to six quarters, it will be poised for higher profitability beyond then.  While the whole timeshare industry currently trades at below market multiples, it would be difficult to make the argument that BXG’s current valuation is excessive. Based on where the comps are trading, I believe BXG is undervalued and conservatively worth $11.00 – 12.00/sh today, which suggests that you’re getting the buyout catalyst for free.  With M&A comps north of 7.0x EBITDA, BXG would be worth at least $13.00 – 14.00/sh to a potential buyer but likely even more to parent BBX because they absolutely need this asset and it wouldn’t cost them a whole lot to pay up for the stub. 

Company Overview

BXG is a non-branded timeshare resort company, with a portfolio of 69 resort properties across the US and the Caribbean, concentrated in the Southeastern US.  BXG’s publicly traded peers, Wyndham Destinations, Marriott Vacations and Hilton Grand Vacations, are affiliated with major hotel brands and offer a branded timeshare product. BXG has a partnership with Choice Hotels, but the timeshare offering is not branded, and the emphasis is on an experiential vacation product. The non-branded timeshare segment is fragmented and BXG is a leader in this category.  

BXG first went public in 1985 as a land bank and entered the timeshare business in 1994.  A few years later, the Company shifted from a weeks-based system to a points-based system. In the past, BXG was a capital-intensive business that developed its inventory or acquired and held the inventory prior to sale.  In 2009, forced by the financial crisis when timeshare sales crashed, BXG began a shift to an asset-light model, with greater use of third-party developers, secondary market, and just-in-time inventory.

Through its Bluegreen Vacation Club, a points-based system, the ~217,000 owners in the Vacation Club have the flexibility to stay at units available at any of the 69 resorts and have access to approximately 11,300 other hotels and resorts through partnerships and exchange networks.  Most of BXG’s resorts are located in popular, high-volume, “drive-to” vacation destinations, including Orlando, Las Vegas, Myrtle Beach, Charleston and New Orleans where 85% of owners live within a four-hour drive of at least one property in the system. 

The key differentiator between BXG and publicly traded peers is household income level.  The Company targets a less affluent demographic in comparison to the rest of the industry.  Its typical timeshare owner has an average annual household income of ~$77k as compared to an industry average of ~$86k.  Accordingly, the average VOI transaction size for BXG is $16k, significantly lower than the industry average.  This price point appeals to millennial customers who now account for more than 15% of the owner base and around 30% of VOI sales to new owners. 

Like its competitors, BXG has multiple revenue sources: 

1) Sale of vacation ownership interests (VOI)

2) Financing purchases of VOI 

3) Management fees from the resort HOAs

4) Ancillary fees related to VOI sales (mortgage & title service) 

The Company provides a nice slide summarizing the main revenue drivers:

BXG gets leads for timeshare sales from various channels but the two most significant marketing partnerships are with Bass Pro shops (~15% of VOI sales) and Choice Hotels (~7% of VOI sales).  These agreements are exclusive for BXG’s partners, but not for BXG.  

At Bass Pro, BXG has a marketing agreement that allows it to market in the stores as well as access to the Bass Pro customer database, which includes 120mm annual visitors who tend to spend 2-3 hours in the stores.  BXG’s middle class, suburban target demographic is aligned with the Bass Pro customer base. BXG operates kiosks in 67 Bass Pro stores and this channel generates roughly 100,000 tours each year. With Bass Pro’s $4.5bn acquisition of Cabela’s, there’s real opportunity for BXG to benefit by adding timeshare sales kiosks in Cabela’s stores in the coming years. When rolled out, BXG expects to have a presence in no less than 60 Cabela's stores. The Cabela's store rollout is anticipated to proceed with at least 10 stores by the end of 2019, an additional 30 stores phased in throughout 2020 and 20 additional stores phased in throughout 2021.  Additionally, the Company has a 51% owned JV with Bass Pro with three wilderness themed timeshare resorts, which helps cement this important relationship. 

While problems started brewing in 2017, in April, Bass Pro finally brought legal action alleging that BXG underpaid commissions due it under their marketing agreement. A month later, Bass Pro gave notice that it was terminating the marketing agreement based on the failure to cure the alleged breaches.  However, in June 2019, BXG caved and settled the matter with an amended marketing agreement that included payment of $41.5mm in cash damages to Bass Pro as well as a revised commission schedule. BXG paid Bass Pro $20mm upfront and agreed to pay an additional $4.0mm annually for the next five years. BXG also agreed that Bass Pro would keep the remaining $1.5mm prepaid to them earlier in 2019 under the marketing agreement.  The commission schedule is changing from a variable/success based fee to a flat fee based on the number of stores and vacation packages sold. Specifically, BXG will pay a fixed annual fee of $70k for each Bass Pro and Cabela’s retail store that it accesses (excluding JV stores) plus $32 per net vacation package sold (less cancellations and refunds within 45 days of sale). Finally, BXG also agreed to contribute to the Wonders of Wildlife Foundation $5.00 per net package sold (less cancellations and refunds within 45 days of sale), subject to an annual minimum of $700k.  Net net, while expensive, this is clearly a positive development given the importance of this channel. However, it would be fair to say that by moving from a variable structure to a more fixed structure, there’s pressure on BXG to drive higher VOI sales through this channel in order to protect historical margins.  

At Choice Hotels, one of the world’s largest hotel companies, BXG is allowed to market tours to Choice guests. Choice has ~33mm members in its loyalty program, which is a close demographic match with BXG’s target customer. The companies signed a new marketing alliance agreement in August 2017, which effectively expands BXG’s access to Choice members from just call center referrals to multiple channels now (website, emails, digital, etc.). Given the Company’s focus on millennial customers, shifting to online and digital away from the telephone is a driver of future growth.  It’s important to keep in mind that BXG does not have exclusivity to Choice and is therefore free to pursue other such agreements with other hotel brands.

BXG generates 69% of VOI sales through capital-light inventory, meaning only 31% of inventory sold is on-balance sheet development, with the remainder being fee-based for third-party developers, inventory purchased at a discount on the secondary market, and just-in-time inventory.  BXG sells VOIs owned by third-party developers and is paid a commission equal to 65 –75% of the sales price. BXG also purchases under just-in-time arrangements with third-party developers or from secondary market sources. This capital light business model is attractive because it generates higher returns on invested capital and more importantly, lowers development and inventory risk.  Of course there are limitations that come with this business model. The main one is that BXG sales are driven by the inventory availability of third-party developers. Additionally, BXG doesn’t get to finance the VOI sales made on behalf of third-party developers thus missing out on a high margin recurring revenue stream. 

Financing timeshares is a lucrative business for BXG and its peers. BXG earns the spread between the high interest rates it charges to VOI buyers and the low rates it pays on the securitizations of the loans. BXG can finance up to 90% of the purchase price of the VOI to buyers with FICO scores that meet the Company’s credit requirements. Interest rates can vary from the low teens to the high teens with the current weighted-average being 15.0%.  The loan interest rate is fixed and amortizes over a 10-year period. BXG generally does not originate financing to customers with FICO scores below 575 but may provide financing to customers with no FICO score if the customer makes a minimum down payment of 20%. For loans made during 2018, the borrowers’ weighted-average FICO score was 726. It’s important to note that BXG removes the credit risk from its own balance sheet via securitizations. BXG’s underwriting has been solid as evidenced by its long history of successful securitizations at low interest rates.  Below is a summary of its securitization history:  

BXG’s resort operations provide management services to a majority of the homeowners associations of the resorts within its Vacation Club.  This is another lucrative business with recurring revenues and very high EBITDA margins. These management services include oversight of housekeeping services, maintenance and certain accounting and administrative functions.  It also provides club reservation services, services to owners and billing and collections services. The management contracts are cost-plus in that BXG receives 10 – 12% of operating costs, and the initial term is three years with automatic one-year renewals and a 100% renewal rate for the club resorts. Additionally, the Vacation Club pays BXG a flat fee of $10 per member plus reimbursement of all costs incurred. 

Capitalization

BXG is extremely well capitalized with $227mm in cash and another $80mm that is owed to it by parent BBX.  This exceeds total non-securitized debt amount of $210mm. The balance sheet is far too underlevered and if the Company was not controlled by BBX, it would likely be financed with net debt of at least 2.0x EBITDA given the FCF generation of the business.  BBX needs dividends from BXG to support its infrastructure and therefore, it’s unlikely that we’ll see any change to the capital structure that will result in lower cash flow available for dividends.  

Summary Financials

BXG growth story has either faltered or is taking longer to play out since becoming a publicly traded company.  At the time of the IPO, BXG was positioned as a growth company within the fragmented non-branded timeshare industry.  Analysts were projecting rapid EBITDA growth from $145mm in FY17 to above $180mm within a few years. Unfortunately, EBITDA has only trended lower since then and I’m modeling $120mm in FY20.  At this level, FCF should approximate a healthy $65mm.  

There are a few reasons behind this underperformance, some within the Company’s control but others outside.  Given its southern footprint, contract sales have been affected by lingering hurricane impacts in recent years.  While not much damage was done to the properties, tours and new owner sales were impacted by the weather. More importantly however, sales were negatively impacted by the Bass Pro dispute that lasted nearly two years before recently getting resolved.  The negotiation, resolution and documentation of the agreement were time-consuming for key executives. The public nature of the dispute resulted in canceled guest tours and attrition in staffing at sales offices. Not only were sales impacted within the Bass Pro locations but also the timing of the rollout at the Cabela’s locations was delayed.  Finally, while they don’t disclose details, it is my understanding that the expansion of the Choice Hotels marketing program is taking longer than expected. Lower VOI sales mean lower financing income as well as other ancillary high margin fee based revenues.  

On the expense side, loan loss provisions have increased and may remain elevated while BXG and the industry continue its fight against timeshare exit firms.  The Company’s default rates in recent years have been adversely impacted by the actions of timeshare exit firms, which had been encouraging VOI owners to become delinquent and ultimately default on their obligations. The Company, along with its competitors, has adopted a zero-tolerance strategy and ongoing steps to address this issue, which has resulted in a reduction of cease and desist letters received and an improvement in the default rates and correspondingly the provision for loan losses. The Company’s provision for loan losses has recently ranged between 15% and 21%, and expectations for the remainder of 2019 are below the midpoint of that range.

On the positive side, the Resort Management business continues to grow and generate EBITDA margins in excess of 30%.  The following shows EBITDA for this segment in recent years:

FY16:    $41.8mm

FY17:    $43.4mm

FY18:    $50.6mm

FY19E:  $58.0 – 60.0mm

This business will continue to grow nicely with the addition of the three new properties that were recently acquired.

Speaking of acquisitions, BXG’s strong balance sheet allows for the expansion of resort offerings for its owners.  Recently, the Company has acquired three resorts: the Eilan Hotel & Spa in San Antonio, the Marquee in New Orleans, and The Manhattan Club in New York City.  In addition, BXG has made significant new investments in sales centers around the country with the addition of space at nine resorts to be open this year. Some of these sales centers are in major markets such as Chicago, New York and San Antonio.  While they will take time to develop, these investments will increase the Company’s capacity to sell VOIs and will drive revenue and profit growth in the coming years. 

Valuation Thoughts

BXG trades at 4.8x forward EBITDA but I believe that is at least a turn too low, even after taking into account all of the issues the Company has been dealing with.  While it shouldn’t trade in line with its comps, I think a 6.0 – 6.5x range would be more appropriate. Based on recent M&A transactions, I believe that a 7.0x multiple would be reasonable in a takeout scenario.  Based on these assumptions, I value BXG at $11.00 – 12.00/sh as a standalone and $13.00 – 14.00/sh in an M&A scenario.

I believe my valuation estimates are conservative because BXG is under earning right now and the current run rate profitability is not indicative of its potential.  With Bass Pro resolved, the addition of Cabela’s to the platform, the new sales centers that will drive tours and sales, and the stabilization of the loan loss provisions, there is no reason why BXG can’t eventually get back to – and even exceed – the $145mm EBITDA level from a couple of years ago.  I suspect Levan believes this and why he was willing to take the Company private at $16.00/sh.  

I’d also argue that the market is not giving the Company much credit for its capital-light business model and its significant high margin, recurring revenue base.  While VOI sales can be volatile on a quarter to quarter basis, the rest of the BXG’s businesses with recurring revenues and high margins are much more stable and in theory should warrant a much higher multiple.  What should a growing Resorts Management business with long-term contracts generating $60mm in EBITDA be valued at? A 10x multiple doesn’t seem crazy to me but if the entire company is being valued at $581mm, its clear that the market doesn’t agree with me.  Perhaps it’s just wishful thinking to expect a higher multiple for BXG, or its competitors for that matter.

For sanity check purposes, below is the section from the Diamond Resorts (taken private by Apollo in 2016) proxy relating to transaction comps:

Catalyst

Just one - BBX comes back with a new bid for BXG