Description

Summary:

Boca Resorts, Inc. (RST – NYSE) owns and operates five distinctive resort assets and a few complementary club businesses. The stock is trading at a slight premium to tangible book value/share ($11.67, with current share price of $12.85) and I believe the company’s asset value is significantly higher than carrying value. Hotel stocks, and their underlying hotel assets, suffered from the recession and the effects of September 11th. However, most of these stocks have performed strongly this year in anticipation of improving operating fundamentals and the lack of new room supply. Despite this rally, RST is actually down year-to-date, despite several positives investment considerations: the company owns (i) irreplaceable assets with scarcity value and strategic locations, (ii) these assets are mostly unbranded, (iii) management has invested more than $60 million in capital improvements in the past year which will start to generate a return and (iv) the company is run by a owner-oriented management group that has taken steps that suggest that a sale of the company in the next couple years is likely. Given an asset value that is conservatively 60% higher than current stock price, the risk/reward seems compelling.

History:

RST was taken public as Florida Panthers, Inc. in November, 1996 by DLJ at $10 per share. Formed by Wayne Huizenga to own the Florida Panthers hockey franchise, the company’s stock appreciated strongly, reaching a high of $32.125 in January, 1997. Management used its highly rated stock, the proceeds from a secondary offering in August, 1997 and debt to acquire high quality hotel assets. In 1999, faced with a high debt level ($583 million) and a sub-$10 stock price, management recognized its roll-up strategy wasn’t working and began a process to recapitalize the company by initiating a rights offering, re-financing debt, and selling assets. The company has made substantial progress: (i) debt has decreased to $235 million, the company sold its Arizona Biltmore property in October 2000 to KSL Recreation for $343 million or just under 10x EBITDA, and (iii) RST sold its hockey team for $91 million in July 2001.

Business:

The company owns The Boca Raton Resort & Club (Boca Raton, FL), the Registry Resort (Naples, FL), the Edgewater Beach Hotel (Naples, FL), the Hyatt Regency Pier Sixty-Six (Ft. Lauderdale, FL) and the Radission Bahia Mar (Ft. Lauderdale, FL). In addition, the company owns and operates country club and spa facilities adjacent to certain of these hotels for which the company sells memberships to local residents. The Boca is the jewel of the portfolio and generates approximately half the cash flow. It is an irreplaceable asset with true scarcity value and trophy appeal. It is unencumbered by a management contract, which means it should trade for a higher multiple and be considered quite valuable for one of the major flags looking to build its presence in South Florida (i.e. Fairmont). The Registry & Edgewater are 4-star quality assets that are also un-encumbered by management contracts. The Hyatt and Radisson are solid cash flow producers with a significant and stable deep-water yacht marina business. They are relatively easy acquisitions for either a financial or strategic buyer and are relatively insignificant to the overall valuation.

Financials / Valuation:

RST operates on a June Fiscal Year. As of the second quarter ended-December 2001, the company had 39.701 million shares outstanding [39.446 million Class A and 255,000 Class B] for an equity market value of $510 million. The company reported net debt of $235.2 million, although $50.8 million of this debt represents capital enhancement projects spent during the last six months that is just beginning to generate revenue and profit. These funds were spent primarily at the Boca property to build (i) 112 water-view rooms at the Boca property (opened January 2002), (ii) a new 50,000 square foot spa complex and (iii) a new golf clubhouse with casual restaurant. Therefore, the adjusted enterprise value is $694 million. In fiscal year 2001, the company generated hotel EBITDA of $103.5 million. Given the effects of September 11th and the economic slowdown, the company has lowered guidance for this fiscal year to approximately $85 million, although I believe normalized cash flow is $110 million (excluding the contribution from the capital enhancements). It is worth noting that I am adjusting GAAP EBITDA in two ways: (i) I add-back corporate overhead, all of which will go away in a deal since the properties are being directly charged for property-level overhead and (ii) I add-back the deferral of membership fees from its membership club business because while GAAP requires the company to amortize these into income, they are in fact real cash inflows that are almost all non-refundable. Thus, the company is trading at 8.2x depressed EBITDA and 6.3x a more normalized number.

In terms of breakup value, if one assumes $110 million is a reasonable level for normalized cash flow, a 9x multiple provides $990 million. Subtracting $184.4 million in debt and dividing by 39.7 million shares, one comes to a fair value of $20.29 per share or 58% higher than the current share price. Looked at another way, the company should generate normalized free cash flow after maintenance capital expenditures (assume 5% of revenue) of $95 million, which is a cap rate of 13.6% on the current enterprise value. While the Hyatt and the Radisson are solid 10-11% cap rate properties, the Boca should trade for a sub-10% cap rate (higher multiple). I list some comparable trophy property transactions below.

Comparables:

The stock is down 1.9% in 2002, compared with Starwood (up 24.4%), Hilton (up 31%), Fairmont (up 16%), Four Seasons (up 15%), Host Marriott (up 30%) and Marriott Intl (up 8.6%).

Boca trades very cheaply relative to its peer group. The following lists the 2002 and 2003 EBITDA multiples for the comparables: Starwood (10.7x 2002, 9.3x 2003 EBITDA), Fairmont (13.7x, 12.1x), Four Seasons (31.0x, 28.9x), Hilton (8.7x, 7.6x), Marriot (17.3x, 14.7x), Host Marriot (10.9x, 9.3x). More importantly, the multiple is very cheap in relation to private market comparables (a list is provided below). Given its heavy ownership of hotels (as opposed to management), RST should perform more in line with Starwood and Host Marriott.

Shareholders:

Ownership is reasonably concentrated with the top five owners controlling almost half of the shares, according to Bloomberg. Management and insiders own approximately 30% of the stock outstanding and have been buyers recently. Bill Gates owns 5.2% of the shares outstanding.

Risks:

The primary risks/negatives include (i) a stalling of the economic recovery, (ii) another terrorist incident that negatively impacts travel patterns, (ii) the relative illiquidity of the stock and (ii) management controls the company thru super-voting stock.


List of comparable transactions:

Corporate Acquisitions [Buyer/Seller/LTM EBITDA Multiple/Forward EBITDA Multiple]
9/99 HLT Promus 10.5x 9.3x
12/98 HMT Blackstone ? 9.8x
7/98 Felcor Bristol 10.8x 9.9x
8/98 Capstar Amer Gen Hospitality 11.5x 11.1x
3/98 Bass Inter-Contintal 16.1x 14.0x
7/98 Meditrust La Quinta 12.1x 10.2x
5/98 Boykin Red Lion, LP 9.3x ?
6/98 Patriot/Wyn Interstate 13.1x 11.5x
3/98 Whitehall Chartwell Leisure 18.9x ?
2/98 Starwood ITT 12.3x 12.7x
12/97 Promus Doubletree 11.7x 11.1x

Single Asset Acquisitions [Buyer/Asset/LTM EBITDA Multiple/Forward EBITDA Multiple]
10/99 Millenium Ritz Boston 12.0x
7/99 Le Meridian Nikko Bev Hills 12.0x
7/99 Intercont. Westin Cent Pk South 11.0x
2/99 Pension Adv Century Plaza 16.0x
12/98 Lend Lease Westin Chicago 12.0x
12/98 Strat Hotel Essex House 11.0x
11/98 KSL Grand Wailea 12.0x
Hyatt Stanhope 14.0x

Catalyst

1. Recovery of travel to more normal levels (Interestingly, Florida as a destination has benefited as corporate groups and F.I.T. travelers have been staying closer to home).
2. The company has been repurchasing stock, attempting to repurchase its debt, and management has been buying on the open market.
3. The company should be a acquisition target for larger corporate buyers who desire a bigger presence in Florida. Fairmont seems to be the most logical as it desires to strengthen its Fairmont brand and to gain a presence in Florida.
4. The company has shown a willingness to attempt to enhance value thru assets sales, prudent re-investment, and intelligent balance sheet management.
5. Rick Rochon, the company’s President, recently resigned to launch a private equity fund. He retained his economics but likely concluded Boca would be a acquisition target rather than a consolidator of assets.