Getting Caught in the Trap? Evaluating Silverleaf Resorts (Part II)

Jun.15.08 | About: Silverleaf Resorts, (SVLF)

In part one of our piece on Silverleaf Resorts (NASDAQ:SVLF), we discussed some of the risks associated with this tiny timeshare company. These risks centered on the high interest rate loans the company makes to its customers, some of which have less than stellar credit, as well as the method by which Silverleaf finances these loans, primarily through receivables based revolvers.

The company captures the spread between the loans it makes to timeshare buyers, and it’s borrowings from creditors. Typically this spread is very wide; at year end, 2007, the company’s portfolio of customer notes receivable had an average yield of 16.3%, and company borrowings had a weighted average cost of 7.6%. While this leaves room for some defaults, given the difficulty some consumers may be having these days, that’s a slippery slope. If defaults rose precipitously, this could lead to insolvency. We are not suggesting that’s where SVLF is heading, just laying out the potential risks.

If customers default on loans, the company will take back the timeshare, the prospect of which involves a foreclosure process of sorts, re-advertising and then finding another buyer: not the preferred method of business for the company, and not as lucrative as the normal course of business.

That being said, Silverleaf does have an interesting array of assets, including the following: (From 2007 10K)

Pinnacle Lodge. In 2006, we purchased Pinnacle Lodge, a 64-room hotel property located near the Winter Park recreational area in Colorado which provides our owners with another destination vacation alternative and gives Silverleaf an entry point into this increasingly popular destination area. We generated $1.1 million and $522,000 of revenues at the Pinnacle Lodge during the years 2007 and 2006, respectively.

Other Properties. We own a 500-acre tract of land in the Berkshire Mountains of Western Massachusetts that we are in the initial stages of developing. During September 2007, we purchased an additional 394.3 acre tract which adjoins the 500 acres. We have not yet finalized our future development plans for this site.

In November 2007, we purchased 15.3 acres of undeveloped land in Grand County, Colorado with plans to develop up to 136 Vacation Interval units on the property. The acquired land is located only two miles from the Pinnacle Lodge hotel.

At December 31, 2007, we owned a total of 13 timeshare resorts. Each of these resorts was encumbered by various liens and security agreements at December 31, 2007 due to inventory from each resort being pledged as collateral under our inventory credit facilities with our senior lenders. See “Note 8 – Debt” in the Notes to our Consolidated Financial Statements for a further description of these credit facilities. Principal developmental activity which occurred at our Existing Resorts during 2007 and future plans are summarized below.

Continued Development of The Villages Resort. The Villages Resort, located approximately 100 miles east of Dallas, Texas, has 362 existing units. We intend to develop approximately 236 additional units (12,272 Vacation Intervals) at this resort in the future. During 2007, we added 16 new units and a $10 million indoor water park at this resort.

Continued Development of Piney Shores Resort. Piney Shores Resort, located near Conroe, Texas, north of Houston, has 202 existing units. We intend to develop approximately 168 additional units (8,736 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.

Continued Development of Timber Creek Resort. Timber Creek Resort, located in Desoto, Missouri, has 72 existing units. We intend to develop approximately 24 additional units (1,248 Vacation Intervals) at this resort. During 2007, we did not add any new units at this resort.

Continued Development of Fox River Resort. Fox River Resort, located 70 miles southwest of Chicago, in Sheridan, Illinois, has 240 existing units. We intend to develop approximately 276 additional units (14,352 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.

Continued Development of Apple Mountain Resort. Apple Mountain Resort, located approximately 125 miles north of Atlanta, Georgia, has 84 existing units. We intend to develop approximately 180 additional units (9,360 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.

Continued Development of Ozark Mountain Resort. Ozark Mountain Resort, located approximately 15 miles from Branson, Missouri, has 148 existing units. We intend to develop approximately 12 additional units (624 Vacation Intervals) at this resort. During 2007, we did not add any new units at this resort.

Continued Development of Holiday Hills Resort. Holiday Hills Resort, located two miles east of Branson, Missouri, in Taney County, has 458 existing units. We intend to develop approximately 444 additional units (23,088 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort. During 2005, we purchased approximately 81 acres, and in 2007, we purchased approximately 37 additional acres of land, both adjacent to the existing resort.

Continued Development of Hill Country Resort. Hill Country Resort, located near Canyon Lake in the hill country of central Texas between Austin and San Antonio, has 342 existing units. We intend to develop approximately 156 additional units (8,112 Vacation Intervals) at this resort. During 2007, we added 40 new units at this resort.
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Continued Development of Oak N' Spruce Resort. Oak N’ Spruce Resort, located 134 miles west of Boston, Massachusetts, has 320 existing units. We intend to develop approximately 30 additional units (1,560 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.

Continued Development of Silverleaf’s Seaside Resort. Silverleaf’s Seaside Resort, located in Galveston, Texas, has 132 existing units. We intend to develop approximately 276 additional units (14,352 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.

Continued Development of Orlando Breeze Resort. Orlando Breeze Resort, located in Davenport, Florida, just outside Orlando, Florida, has 48 existing units. We intend to develop approximately 24 additional units (1,248 Vacation Intervals) at this resort. During 2007, we did not add any new units at this resort. On January 4, 2006, we purchased an additional 31 acres contiguous to the Orlando Breeze Resort. We have not yet finalized plans for development of this property.

Of course, the entire business is dependent on attracting customers and selling timeshare intervals, and marketing costs are huge; 50.9% of vacation interval sales in 2007.

So far, the company has appeared to weather the recent real estate storm fairly well. There’s a huge dependence on attracting customers, collecting from those customers, and having adequate liquidity to keep the whole process from falling apart. Given the state of our economy, and perception that consumers are in trouble, its pretty clear why this stock has come under pressure, and trades at 3 times trailing 12 month earnings. The risks here for Silverleaf are twofold: The prospect of current customers defaulting on their loans, and the difficulty finding new timeshare buyers if consumers cut their discretionary spending.

Value trap or screaming buy? Perhaps too early too tell.

Disclosure: The author does not have a position in Silverleaf Resorts (SVLF).