Adam Prior – Vice President of The Equity Group Inc.
John M. Maloney, Jr. – President and Chief Executive Officer
Anthony M. Puleo – Senior Vice President and Chief Financial Officer
Bluegreen Corp. (BXG) Q3 2008 Earnings Call November 10, 2008 10:00 AM ET
Good day ladies and gentlemen and welcome to the Third Quarter 2008 Bluegreen Earnings Conference Call. (Operator Instructions) I would now like to turn the presentation over to Mr. Adam Prior of The Equity Group.
Our speakers on this pre-recorded call will be John Maloney, President and Chief Executive Officer of Bluegreen and Tony Puleo, Bluegreen’s Senior Vice President and Chief Financial Officer.
Before we get started I would like to remind everyone that statements made during today’s call may constitute forward-looking statements and are made pursuant to the Safe Harbor Provision of the Private Securities and Litigation Reform Act of 1995.
Forward-looking statements are based largely on expectations and are subject to a number of risks and uncertainties including but not limited to the risks and uncertainties associated with economic, competitive and other factors affecting the company and its operations, markets; products and services as well as the risk that the company’s strategic initiatives do not accomplish the company’s goals; do not have the expected impact on the company’s financial position, results of operations, liquidity and affects the performance of the company’s vacation ownership notes receivables may deteriorate in the future; the company may not be in a position to draw down on its existing credit lines or may be unable to renew or replace such lines of credit; real estate inventories, notes receivable, retained interest in notes receivables sold and other assets will be determined to be impaired; risks relating to pending our future litigation, claims and assessments; sales and marketing strategies related to resorts and communities properties may not be successful; retail prices and home site yields for community properties will below the company’s estimates; marketing costs will increase and not result in increased sales; sales to existing owners will not continue at current levels; deferred sales will not be recognized to the extent or at the time anticipated; risks relating to pursuing alternatives for the sale of all or part of the company; and the risks and other factors detailed in the company's SEC filings, including its most recent Annual Report on Form 10-K filed on March 3, 2008 and Form 10-Q to be filed on November 10, 2008.
I would now like to turn the call over to John Maloney, President and Chief Executive Officer of Bluegreen.
Good morning and thank you for joining us today. I’d like to begin my stating that we are pleased with the results of our reward business during the third quarter, especially when you consider that we are operating in one of the most challenging periods in history.
For the three to nine months ended September 30, 2008 our contract sales have increased compared to the comparable periods last year. Our segment selling, marketing, general and administrative expenses are consistent with the prior year and our time share and notes receivable portfolio has performed within historical norms. However, this really doesn’t tell the story.
Significant stresses in the commercial credit market have made the availability of credit uncertain and has increased borrowing costs. In a normalized environment our intention would be to continue to grow. We believe there continue to be strong industry trends, our brand remains strong, we offer a flexible point system and we enjoy what we believe is an unparalleled reputation for customer service.
However, given the challenges of this credit market we decided that it was only prudent to be proactive and to implement the strategic initiatives we announced early this morning. As I will describe in more detail, we believe these initiatives will refocus our business on the generation of operating cash flow and to lesson our dependency on the credit markets in the near term.
As many of you may know, Bluegreen Resorts Operations consists of sales operations, resort management services and finance operations. While each of these areas of focus has been profitable, each is very different when it comes to cash generation and dependency on the credit market.
Sales operations require the upfront acquisition, development and carry costs required to have adequate timeshare info for it to sell. In addition, as we have provided financing on 95% of our timeshare sales historically, few of our sales generate significant cash when consummated. When combined with the direct marketing nature of our industry, our commissions and other selling and marketing costs that are paid up front, it well exceeds the cash received from the customer at the time of sale. Timeshare sales result in net cash outflows by the company. Like most others in our industry we have historically relied on the credit market to sell or pledge our timeshare notes receivables in order to make up for this cash deficit.
On the other hands, our resort management operations and our finance operations generate both profits and cash for the company, while not requiring much if any support from the credit markets. Resort management earns cash on a fee for service basis from the property and club owners associations that service our over 194,000 timeshare owners.
Our finance operations include the ongoing excess interest spread earned on over $359 million of on balance sheet notes receivables, as well as continued earnings on over $572 million of off balance sheet notes receivables through our retained interest in those notes. In addition, finance operations include providing mortgage servicing on the off balance sheet notes receivables and title services all on a cash fee for service basis.
For the end of nine months ended September 30, 2008 our resort management services and finance operations earned $6.8 million of $38.6 million of pre-tax profits, respectively. While our robust sales operations created the basis for these businesses, the ongoing profitability and cash contribution based on these areas is not dependent on continued sales at our recent historical levels.
With these factors in mind, we believe the strategic initiatives we announced this morning will better position Bluegreen in light of the current credit environment. Our plan includes closing certain sales offices, a significant reduction we’ve identified to be lower efficiency marketing programs, a reduction in overhead, including eliminating a significant number of staff positions across a variety of areas and various locations.
Within our sales activities the purchasers newly introduced underwriting standards, increasing interest rates on new sales transactions and reducing inventory spending from approximately $215 million during the 12 months ended September 30, 2008 to our estimate of approximately $45 million during 2009.
We also intend to review our resource management and finance operations for opportunities to increase our profitability and generate cash flow through fee optimization and new services, as well as refocusing our sales operations from creating new programs to generate cash flow. We estimate that the impact of these initiatives will be declining in 2009 as far as sales, approximately 60% as compared to 2008 levels.
We believe that the impact on our variable expenses and reductions in fixed overhead that we’re contemplating will help mitigate the impact of the reduction of sales on our field operating profits. We do not currently believe that the reduction in our sales operation will grossly impact our results of operations from our resort management business or our finance operations which we expect to drive our overall profitability for Bluegreen Resorts in 2009.
We also believe that the successful implementation of these initiatives will allow us to preserve the majority of our unrestricted past position at least in 2009. We’re satisfying our obligations and with no need for additional receivable financing facilities or term securitization transactions during the same period.
Our hope is that the credit markets will stabilize by this time, but we will continue to assess the situation and adjust our strategy as necessary. I want to be clear that we do not plan to close any existing resort properties although the pace of new property acquisitions and openings will slow. Most importantly, our commitment to our customers remains a top priority during this process and we do not expect that our initiatives will in any way affect customer service.
We estimate that the implementation of our strategic initiatives will result in pre-tax charges ranging from $10 million or $0.20 per share to as high as $15 million or $0.30 per share during the fourth quarter of 2008. While the difficult credit markets have played an important role in our recent strategic thinking, we also view our new initiatives as an opportunity to improve the efficiency of and cash flow strong our resort businesses.
While actions for a plan involves difficult decisions regarding certain of our associates, which we are by no means taking lightly, we believe that these proactive steps are in the best interest of the company as a whole, our shareholders and other stakeholders as well.
Once the credit markets improve we anticipate that we will be in a position to evaluate sales and marketing strategies and consider thoughtful growth with a view towards cash flow maximization. We have the roadmap for growth for the markets we’re currently in and the benefit of experience, which allows us to further think in our business model.
Now let’s briefly discuss our results for the third quarter of 2008. As I mentioned previously, Bluegreen Resorts’ contract sales increased approximately 10% and continued to operate profitably. Our owner based increased and dealized sales transactions tour flow and total prospect conversion rates improved quarter over quarter.
At September 30, 2008 our owner based had increased to over 194,000 members from approximately 190,000 at June 30, 2008. We welcomed our first guest at Bluegreen Club 36 Resort in Las Vegas and at Patrick Kennedy Square in Williamsburg, Virginia.
We continue to closely monitor our timeshare receivables portfolio. At September 30, 2008 both delinquencies and defaults within this portfolio continued to perform within historical norms. The difficult residential real estate market continued to impact results at Bluegreen communities. While sales were appreciably well quarter over quarter, the community posted a modest loss of only approximately $550,000.
I want to speak briefly about Bluegreen communities. Forward sales and the loss in the quarter reflect the ongoing difficult residential real estate environment. The community still is an important part of our business and we are continuing our efforts to identify and implement additional strategies which might enhance sales and generate profitable returns. We’ve taken steps to reduce our overhead in this condition, with a view towards improving the efficiencies of our advertising program and consolidating infrastructure.
We are at $0.21 per share in the third quarter of 2008. While down from the $0.45 reported year earlier period, bear in mind that the third quarter of 2007 included a gain on sales of note receivables of $0.40 per share.
We had no such gain in the 2008 third quarter and we do not expect to realize any future gains in sales of notes receivable as we will be accounting for these types of transactions as on balance sheet borrowing. We ended the third quarter with a book value of $12.65 per share far in excess of the price of our common stock.
Before turning over to Tony, we disclosed this morning in our 10-Q that the Pennsylvania Attorney General had filed a lawsuit against Bluegreen last month. Because this is a legal matter, we are somewhat limited in what we can say but I want you to know that in this company we work very hard to address any customer concerns and to comply with all consumer regulations.
It is in this spirit that we intend to work closely with the Attorney General to determine who this situation can be resolved. We’ve initiated these discussions and intent to work hard to resolve this matter quickly in a way satisfactory to all parties.
I will now turn the call over to Tony who will provide a more detailed look at our third quarter’s results.
On a consolidated GAAP basis, total operating revenues for the third quarter of 2008 declined to $179.8 million from $206.3 million in the same period last year. Lower GAAP resort sales solely as a result of the $20.1 million gain on the sale of notes receivable in Q3 2007 and lower community sale were the primary drivers of this decline, which was offset somewhat by higher resort and communities’ operations revenue and increased interest income.
Debt income for the third quarter of 2008 was $6.8 million or $0.21 per share compared to net income of $13.9 million or $0.45 per share for the third quarter of 2007. As John mentioned, the third quarter of 2008 did not include any benefit from gains on the sales of notes receivable, while net income for last year’s third quarter was compromised almost entirely of such gains.
Sales to existing owners rose 20% in Q3 2008 and comprised approximately 49% of resort sales in the third quarter as compared to 42% in the third quarter of 2007. As we have previously disclosed, we also benefited from a system-wide price increase that went into effect in January of 2008 and that based on current indications is being well tolerated by consumers.
Sales of other services, a recurring revenue stream for Bluegreen, rose by 10% to $15.8 million reflecting higher resort management fees, higher service fees and higher fees earned by our title company. Our blended conversion rates for owners and non-owners during the third quarter of 2008 rose to 13.9% from 12.5%, which conversion rates for new prospects dipped slightly to 8.8% from 9%.
Resorts Field Operating Profits which is defined as operating profit prior to the allocation of corporate overhead, interest income, other income and expense, interest expense, income taxes and minority interest was 20.8 million, down about $3.2 million from the third quarter of 2007. This decline was primarily the result of the $21.1 million gain on sales and notes receivable in last year’s third quarter as compared to no such gain in the third quarter of 2008.
As previously announced, we will structure any future notes receivable financing activities as on balance sheet borrowing. As a point of reference, for the fourth quarter of 2007, gains on sales and notes receivable totaled $11.3 million.
Selling and marketing expenses as a percentage of growth sales declined to 50.2% from 53.7% during the third quarter of 2007. You may recall that our selling and marketing expenses had increased as a percentage of sales in the second quarter of 2008 as compared to the comparable prior year period. We were successful in correcting certain inefficient programs to achieve this more favorable result in the third quarter.
Delinquencies over 30 days in the total service timeshare notes receivable portfolio at September 30, 2008 were 4.4% compared to 4.5% at December 31, 2007. The average annual default rate increased to 8.7% for the 12 months ended September 30, 2008 as compared to 7% for the 12 months ended September 30, 2007. However, it should be noted that the default rates in 2007 represented recent historical lows. The 2008 default rate approximates the default rates realized in years prior to 2007.
Bluegreen Community sales declined to $10.7 million in the third quarter of 2007 from $31.7 million in the third quarter of 2007. Communities had a field operating loss of $550,000 as compared to a field operating profit of $4.5 million in the third quarter of 2007. As of September 30, 2008, approximately $2.5 million and $716,000 of community sales and profits respectively were deferred under the percentage of completion method of accounting.
This compares to $6.9 million and $2.6 million of community sales and profits, respectively that were deferred as of June 30, 2008. Therefore, net recognition in the third quarter of 2008 of revenues and profits previously deferred under the percentage of completion method of accounting totaled $4.4 million and $1.9 million, respectively.
We believe our balance sheet of September 30, 2008 remains strong. At that date and across all of our credit facilities we had available liquidity of $176.7 million subject to collateral requirements and other customary conditions. Also at September 30, our balance sheet included unrestricted cash of $65.6 million up from $59.6 million at June 30, 2008. Unrestricted cash at September 30, 2008 is down from $125.5 million at December 31, 2007 due to the repayment in full of $55 million of senior secured notes on March 31, 2008.
Our book value per share at quarter end was $12.65 per share, up from $12.46 per share at June 30, 2008 and $12.34 per share at December 31, 2007. Our debt to equity ratio for both recourse and non-recourse debt was 1.39 to 1, while debt to equity for recourse debt only was 1.04 to 1. Our debt balances of September 30, 2008 included $135.2 million related to on balance sheet accounting treatment for non-recourse transfers of notes receivable compared to $17 million at December 31, 2007.
Thank you and now I’ll turn it back over to John.
Thank you again for your participation. This is a challenging time for Bluegreen, but we believe that the strategic initiatives we’re implementing will help us address the challenges of the present and yet position us to take advantage of the opportunities in the future. We very much appreciate the support of all of our shareholders and associates, as well, as we move forward. Thanks.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.
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