Levitt (LEV)

This is a stock I have poured tons of sweat in over the last 12 months on numerous occasions and have passed on each occasion after being extremely close to buying. The latest analysis had to do on the rights offering. I passed again about a month ago which I detail below in an email exchange with a friend detailing my analysis. Was I wrong? Well I don't think so at least in deciding not to participate in the right offering. I was definitely wrong in estimating the success of the rights offering. I thought if the rights offering was successful that their was huge upside in the stock (I estimated about 60%) almost instantaneously because it took bankruptcy out of the cards in the near term. Why I ultimately ended up passing was because I thought it was management's way to get suckered shareholder money through the rights offering while saving a bigger investment (read below if you want the complete explanation) . So it worked as long as everyone else was on board but if only a few people jumped on board those few who did participate would probably lose close to 100%. Well indeed almost everyone was on board. The company announced on Tuesday that it raised $153 million (the absolute maximum its management through BFC would have contributed would have been $32 million and this number has not been released yet. Based on my research my guess is they did not do that much). Well I would have been in perfect position to benefit from the rights offering if I would have noticed on Tuesday that it was such a huge success because I knew what fair value should be. Well because of my incident last weekend with the stitches and following sickness combined with preparing for my presentation for Texas A&M on Wednesday I completely missed it!!! Did not notice until today when I was reviewing all my ideas and the various moves in stocks last week what happened. Ohh the horror. I definitely would have captured about 50% of that upside as I would have been in around $2.25 (bounced around there on Tuesday and Wednesday!!). GRRRR. Well now the stock is within about $.20 of what I estimated fair value to be assuming the offering rights occurred. Missed opportunities like that eat me up especially since I knew the outcomes in various scenarios.

This is a link that describes the success of the rights offering.
http://www.forbes.com/2007/10/05/levitt-bfc-prescott-markets-equity-cx_ra_1005markets35.html?partner=yahootix

Email 1 detailing analysis Aug 23
Leviit entered into a merger agreement with BFC Financial Corporation (BFF) last January where LEV shareholders would get 2.27 shares of BFF for every 1 share of LEV. Well LEV bounced along following BFF price for months until last week BFF called off the merger. Well LEV stock goes from 10ish to about $2.30 now over the last several weeks. Well BFF still owns 100% of LEV B shares (obviously don't trade) and I think 11% of the A shares that do trade. So they still have a big stake.
Well LEV balance sheet is horrible. They have do something soon or they will have to declare bankruptcy. So they are offering a $200 million right offering. Here is EV as it stands.-

Market Cap 46.4
B Shares 2.8
Cash 61.6
Mortgages 569.0
Debentures 85.1
EV 641.7

BXG Investment 83.9
Adjusted EV 557.8

They own 31% of BXG which is publicly traded and that 31% would be worth $83.9 million at today's prices. They probably would have to sell such a huge stake a discount but that ball parks it.

Well below is the land portion of the balance sheet.

Land and land development costs 527.0
Construction Costs 149.1
Capitalized Interest 63.4
Other Costs 36.7
Inventory of Real Estate 776.2

Assets held for sale 71.4
Liabilities related to Assets for Sales -48.8
798.8

All this is mostly in Florida, South Carolina, and Tennessee. Obviously a large portion of this has risk of impairment but the Florida land is good high quality land. Not swampish land like JOE has. When things someday turn around this land has alot of value to it. I am sure they overpaid as they bought it in the peak of the bubble and they had an impairment charge of like $60 million last quarter.

Anyway I wonder if the rights offering would greatly alter the capital structure in such a way that would greatly increase the intrinsic value of the company. Obviously the dilution would be mind boggling but you are essentially transferring a whopping $200 million from debt holders to equity holders. This makes the chance of bankruptcy essentially disappear in the next year or two. So let's say the chance of bankruptcy is currently 50% (have no idea just throwing a number out there) making the equity a zero. X bankruptcy intrinsic value would be call it $4.60 getting to the $2.30 price today. (50% * 0 + $4.60 * 50% = $2.30) (Illustrative purposes only) So you transfer debt to the equity holders eliminating any chance of bankruptcy in the short term and all of a sudden the 50% chance of bankruptcy disappears and the shares should go to $4.60. I don't know but just something to think about.

Email 2 - Aug 26

Hey. Well I have spent quite a bit of time on LEV and I think I am a pass for now. I did a liquidation analysis using various assumptions and came to the end of it and looked at what I came up with and it was within 2.1% of where the equity value would be post right offerings. I could not believe it came out that close. .

I also looked at what it would be trading at post rights offering and compared it to comps excluding the high and low outlier. After the rights offering it would be trading at .5X book at today's price. The average is .87X trailing book which means it has like 60% upside to get to mean. In my mind assuming this rights offering gets done (I am not so sure it really does) it solves their short term liquidity issues and the stock should trade more along the lines with their peers.

I then started some kind of dcf but stopped realizing all this does not really matter. Yes valuation is important and it has got to be cheap but what matters is what management is trying to do in all of this and being on the right side of that equation. I started digging through the proxies of all the related entities and these guys are more inbred than a pack of dogs on an abandoned island. I worked on a flow chart showing all their various investments (directors, officers etc.) and how it all related and overlapped. Good grief, complicated. My original thought was that management might be trying to steal this company through the rights offering. BFC (BFF) bought them out, the housing market continued down worse than expected, they realized they were paying to much for it (though it was all in shares) and announce that they cancel the merger agreement and the stock collapses, come in with a rights offering with oversubscription rights and steal the company much cheaper. I would want to be apart of that and be long it benefiting from managements intentions but I don't think that is the case anymore. If you look at the economic interest the CEO Alan Levan and the Vice Chairman John Abdo have most of their economic interest in BFF. Combine they own stock worth $73k of LEV but $28 million of BFF. So they want to BFF to survive and do well. (They also receive bigger salaries and bonuses from BFF than LEV) So what do they get sticking with the merger agreement? A company on the verge of bankruptcy in need of a major capital infusion of which BFF does not have (BFF is just a holding company). Well BFF investment in BankAtlantic Bancorp is much bigger than its investment in Levitt (and worth alot more). Well thinking about it my guess is considering all the inbreeding that BankAtlantic has lent quite a bit of money to Levitt. If Levitt goes bankrupt they may be writing off some major loans. What better way for Levan and Abdo to protect their bigger investment than getting suckers to give fresh equity money in a rights offering that goes straight to pay off loans owed to Bank Atlantic? The other thing is this rights offering is only for the Class A shares which means that BFF essentially keeps their controlling interest whether they put up more capital or not. The B shares represent 47% of the vote and will not be diluted at all with the rights offering. Anyway what I am thinking now is that they will talk a good game with this rights offering collect some money with the few suckers who do it which my guess is will be well below the $200 million. Use that money and pay off BankAtlantic and then declare bankruptcy. If for some reason they are able to get 200 million they just used tons of other peoples money to shore up their balance sheet, keep voting control, and increase the value of their holdings all in one swoop. There is alot of speculation in all that but it seems reasonable after spending most of my time on all this trying to understand what is in the minds of management.