Bluegreen (BXG) Purchase Explanation Part 2

Right around 2007 began a rough time for Bluegreen. The company was thrown into a drag from the housing crisis. Fascinatingly, if there was one industry that could possibly have been in a worse position in 2008 than constructing, selling, or financing housing, it was probably constructing & selling luxury condominiums, then slicing them up into complex financial instruments and selling those pieces to middle class citizens without bothering to check credit or salary data…THEN packaging those obligations into complex financial securitizations and selling THOSE off to wallstreet.

Say hello to the Timeshare industry, folks…

But right around 2007, a guy named John Maloney took the helm of Bluegreen as CEO and President. I’ve talked to some of Bluegreen’s employees, and they seem to have nothing but praise for the guy. Like Schlumberger’s Gould or Ford’s Mulally, there doesn’t seem to be a whole lot of doubt about who’s in charge, or that he’s done a terrific job.

Under Maloney, the company increased focus on not just selling these timeshares, but selling them to the right kinds of people – namely, people that could actually afford them. He also put emphasis on being honest about the pros and cons of the product, and simplifying the portfolio of off-balance sheet finances (which are still present but decreasing quickly).

By these moves, the company has seen an incredibly low default rate on these mortgages. And it’s a cash cow – the company earned $1.00 a share in 2012 on its own. It earned $0.75 in 2011, before restructuring the business. For the last two to three years, BXG has been using a cash generating machine to really restructure, cutting out business lines that were holding the main operation back.

Today, barely 5% of mortgages are distressed, and employees tell me that 40% of all prospective customers they invite to their presentations are making a purchase.

As of September 2012 the company has assets of just over a billion dollars, and because of a large credit line that was extended to them they’ve done a good job of rebalancing the debt terms and lowering interest rates. Actually, I think Levan (the board member trying to buy the company) was the one who extended the credit. With that money the company restructured over $250 million of liabilities (almost one third of their debt).

By all of this, the company is worth about $10 a share clean a clear. I impaired their books by 10-20% just in case something is wrong (lots of off-balance sheet fidgeting) and I’m still getting about $7-8. This company has no premium baked into the pie.

And with earnings of $0.75-1.00, the company has a price to earnings of 10-13X. Really not very expensive, especially considering that revenues last year jumped by ~15%. Or that all the heavy lifting needed to get this company into a shareholder money press seems to have already been done.

Now, the company is complicated. They like to pull the housing bust especial – their mortgages are packaged into CMBS products then securitized and sold off to investors; sound familiar?

So I checked the state of affairs of their SPE’s. It looks like they’re baking in allowances on their loans of 10-20%, depending on where you’re digging. And what’s the actual rate of defaults their packaged securities have been experiencing?

For loans that were originated after Maloney took charge, the loans have been defaulting at 6.5%…

The guy did solid work. Delinquency rates are even lower. And the company has a good focus on keeping this financial garbage under tight control. It’s paying off.

So here’s a company that is really fairly priced, is growing quickly, and just doesn’t have much in the way of a premium baked into the share prices (even after the run up from the buyout announcement). Also, the more shady sides of the business seem pretty clean, after I pry them open, if not also improving.

It’s a company I would own for a good while, provided they keep up the performance. The American public is shifting away from the McMansion frame of mind and starting to ask themselves “what am I doing?” Everywhere, an emphasis on living simply but to the fullest and happiest is taking over. That means less square footage, more vacations and marble and fine dining, provided within one’s salary and with financial security. That’s what people want now. So it’s a solid buy.

Just one problem – the chairman Levan is taking the company private, right?

Well, maybe. You see, Levan is also being investigated by the SEC for shady securities dealings around the time of the housing crisis. His entire reputation – including his ability to chair a company – is at stake. And the deal has already failed once.

I want to see this deal fail. I want the company to stay public. I would warn you that if it does, the stock may initially fall back to the $5 range it was trading at before the buyout offer. But, I think this whole affair has put attention to the company, and that it was mispriced at that level.

If it falls like that, I would take my lumps and double down.

If Levan perseveres and manages to take BXG private, I’ll collect 2% and go on my way.

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