Wednesday, October 12, 2005

Silverleaf Resorts

Here's an interesting company that might deserve the attention of some financial theorists:

There's a company out there that owns lots and lots of vacation land and resorts mainly down south (in fact, 45% of their sales come from good ol' Texas, the Long Star State) and they sell "timeshare" resort ownerships to interested purchasers who are willing to pay a certain amount of money to own a vacation spot for certain time-slots in the year. They are pretty much exactly like a real-estate company in that 1.) they sell mortgage notes and ownership to purchasers of time-shares 2.) they lever up financially to support the notes and various maintenance operations.

Their main sources of revenue are:

10% downpayment on ownership of timeshare resort
15% annualized rates on the principal owned to them though mortgage notes

Their main sources of expense are:

Cost of debt of around 6.5% per annum
Certain principal payments due (but theoretically this company can just keep borrowing money to build resorts and pocket the interest income/expense spread year on year)


Not quite... but before I get to that, I'd like to mention the implications this would have on MC/FCFE and EV/FCFF. As you've probably already guessed, the EV/FCFF ratio is going to be much higher than the MC/FCFE. Why?

Frequent readers might remember me mentioning the effects of "Financial Leverage" on the value of an equity security. As debt load decreases, interest expense decreases as well. What happens in this company is a BUTTLOAD of debt exists in the enterprise value calculation that makes the EV/FCFF ratio very large. Interest expense is by no means enough to increase FCFF enough to offset the effects of a large EV. Anyway, that's my story and I'm sticking to it...

*Gosh, who the hell stays up until 5:39 AM and writes in an investment blog anyway!?*


Im so tired. Let me wrap this up some other time... but the main points i'd like to make about this stock is:

It could have a very attractive forecast going forward provided that they can collect the debt owed to them on a consistent basis. But accoring to thier annual report a whopping 20% of their debt is delinquent, as people just default on the mortgage payments--in which case the company sells the timeshare back to someone else and gets a 10% downpayment anew. Still, the effects of this bad-debt provision is not too clear, but suppose new people keep replacing the old who default on the loan... it shouldn't have too much of an effect on the company's sales--what will be most worrisome is if no sales are generated as ownership turns over. And... that MIGHT JUST happen because of a slumping economy and an overall cloudy forecast for consumer spending and confidence.

But who knows?

The company is also exposed to very real interest rate risk. Remember the debt that the company has to keep on borrowing in order to finance its receivables? Well, we all know what's happening to interest rates these days. The spread on which the company makes its money (appx. 17% of their revenue) is going to get knocked pretty hard in the foreseeable future. But still, 70-80% of their revenue comes from principal payments, so I'm not TOO worried.

One very good thing about the company:

Holds REAL land that could be sold for multiples of what they bought at.

Now... if we can figure out what management plans to do with all their free cash generated from property sales and interest spreads then this would be a really cool investment. Paying down debt would be the best scenario.

Im out.

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