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:

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.

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.

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.

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.

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.

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.

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