BLUEGREEN VACATIONS HOLDING A The following discussion and analysis should be read together with the Company's audited consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. The following discussion contains forward-looking statements, including those that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, without limitation, those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." The Management Discussion and Analysis of this Form 10-K discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Other than discussion related to theCompany's BBX Sweet Holdings reportable segment, discussions of 2017 items and year-to-year comparisons between 2018 and 2017 are not included in this Form 10-K and can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 . Such reports and other information filed by the Company with theSEC are available free of charge on our website at www.bbxcapital.com or with theSEC at www.sec.gov. OverviewBBX Capital Corporation (referred to together with its subsidiaries as the "Company," "we," "us," or "our," and without its subsidiaries as "BBX Capital ") is a Florida-based diversified holding company whose principal investments are Bluegreen Vacations Corporation ("Bluegreen Vacations " or "Bluegreen"),BBX Capital Real Estate LLC ("BBX Capital Real Estate " or "BBXRE"),Renin Holdings, LLC ("Renin"), andBBX Sweet Holdings, LLC ("BBX Sweet Holdings "). The Company's goal is to build long-term shareholder value. Since many of the Company's assets do not generate income on a regular or predictable basis, the Company's objective continues to be long-term growth as measured by increases in book value and intrinsic value over time. In addition, the Company's goal is to streamline its investment verticals so that the Company can be more easily analyzed and followed by the marketplace. The Company regularly reviews the performance of its investments and, based upon economic, market, and other relevant factors, considers transactions involving the sale or disposition of all or a portion of its assets, investments, or subsidiaries. These include, among other alternatives, a sale or spin-off of its assets, investments, or subsidiaries or transactions involving public or private issuances of debt or equity securities which decrease or dilute the Company's ownership interest in such investments.
As of
Summary of Consolidated Results of Operations
Consolidated Results
The following summarizes key financial highlights for the year ended
· Total consolidated revenues were
2018.
· Income before income taxes was
2018.
· Net income attributable to common shareholders was
decrease compared to 2018.
· Diluted earnings per share was
decrease compared to 2018.
The Company's consolidated results for the year ended
· The recognition of a charge of
Bluegreen's settlement agreement with
· An increase in Bluegreen's net carrying cost of VOI inventory primarily due to
Bluegreen's acquisition of the Éilan Hotel and Spa during
net costs associated with Bluegreen owning a larger amount of inventory and
increasing the allocation of available inventory to marketing guests.
· A net decrease in Bluegreen's system-wide sales of VOIs and increase in the
provision for loan losses.
· A net increase in sale activity in
including the Altis at Bonterra joint venture's sale of its multifamily
apartment community in
· An decrease in operating losses generated by
primarily reflects the impact of various strategic initiatives implemented by
the Company during 2018, including the closure of a manufacturing facility and
a reduction
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in corporate personnel and infrastructure, and various impairment losses and other costs recognized in 2018 in connection with such initiatives.
· The Company's exit from its restauration operations as a franchisee of MOD
Super Fast Pizza ("MOD Pizza") in September 2019 , which resulted in the
recognition of $6.7 million in impairment losses in 2019.
Segment Results
BBX Capital currently reports the results of its business activities through the
following reportable segments: Bluegreen, BBX Capital Real Estate , Renin, and
BBX Sweet Holdings .
Income before income taxes by reportable segment for the years ended
For the Years Ended December 31,
2019 2018 2017
Bluegreen $ 58,264 128,893 136,998
BBX Capital Real Estate 52,696 30,214 16,085
Renin 1,808 2,461 2,180
BBX Sweet Holdings (5,122) (14,986) (16,781)
Other (9,086) (4,178) (2,672)
Reconciling items and eliminations (49,799) (54,972) (43,209)
Income before income taxes 48,761 87,432 92,601
(Provision) benefit for income taxes (16,658) (31,639) 9,702 Net income 32,103 55,793
102,303
Less: Net income attributable to noncontrolling interests 14,412 20,691
18,378
Net income attributable to shareholders$ 17,691 35,102 83,925 Bluegreen Reportable Segment Executive Overview Bluegreen is a leading vacation ownership company that markets and sells VOIs and manages resorts in popular leisure and urban destinations. Bluegreen's resort network includes 45Club Resorts (resorts in which owners in itsVacation Club have the right to use most of the units in connection with their VOI ownership) and 23Club Associate Resorts (resorts in which owners in itsVacation Club have the right to use a limited number of units in connection with their VOI ownership). Bluegreen'sClub Resorts andClub Associate Resorts are primarily located in high-volume, "drive-to" vacation locations, includingOrlando ,Las Vegas ,Myrtle Beach andCharleston , among others. Through its points-based system, the approximately 220,000 owners in itsVacation Club have the flexibility to stay at units available at any of its resorts and have access to over 11,350 other hotels and resorts through partnerships and exchange networks. Bluegreen has a robust sales and marketing platform supported by exclusive marketing relationships with nationally-recognized consumer brands, such asBass Pro and Choice Hotels. These marketing relationships drive sales within its core demographic. VOI Sales and Financing Bluegreen's primary business is the marketing and selling of deeded VOIs, developed either by Bluegreen or third parties. Customers who purchase these VOIs receive an annual allotment of points, which can be redeemed for stays at one of its resorts or at 11,350 other hotels and resorts available through partnerships and exchange networks. Historically, VOI companies have funded the majority of the capital investment in connection with resort development with internal resources and acquisition and development financing. In 2009, Bluegreen began selling VOIs on behalf of third-party developers and has successfully diversified from a business focused on capital-intensive resort development to a flexible model with a balanced mix of developed and capital-light inventory. Bluegreen relationships with third-party developers enable it to generate fees from the sales and marketing of their VOIs without incurring the significant upfront capital investment generally associated with resort acquisition or development. While sales of acquired or developed inventory typically result in greater Adjusted EBITDA contribution, fee-based sales generally require no initial investment or development financing risk. Both acquired or developed VOI sales and fee-based VOI sales drive recurring, incremental and long-term fee streams by adding owners to itsVacation Club and new resort management contracts. In conjunction with its VOI sales, Bluegreen also generates interest income by providing financing to qualified purchasers. Collateralized by the underlying VOIs, Bluegreen's loans are generally structured as 10-year, fully-amortizing loans with a fixed interest rate ranging from approximately 13% to approximately 17% per annum. As ofDecember 31, 2019 , the weighted-average interest rate on Bluegreen's VOI notes receivable was 14.9%. In addition, Bluegreen earns fees for various other services, including title and escrow services in connection with the closing of VOI sales, and mortgage servicing. 56
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Resort Operations and Club Management
Bluegreen enters into management agreements with the Home Owner Associations
("HOAs") that maintain most of the resorts and earn fees for providing
management services to those HOAs and Bluegreen's approximately 220,000 Vacation
Club owners. These resort management services include oversight of housekeeping
services, maintenance, and certain accounting and administration functions.
Bluegreen's management contracts yield highly predictable, recurring cash flows
and do not have the traditional risks associated with hotel management contracts
that are linked to daily rate or occupancy. Bluegreen's management contracts are
typically structured as "cost-plus," with an initial term of three years and
automatic one year renewals. In connection with the management services provided
to the Vacation Club , Bluegreen manages the reservation system and provides
owner, billing and collection services. In addition to resort and club
management services, Bluegreen earns fees for various other services that
produce recurring, predictable and long term-revenue including construction
management services to third-party developers.
Principal Components Affecting Bluegreen's Results of Operations
Principal Components of Revenues
Fee-Based Sales. Represent sales of third-party VOIs where Bluegreen is paid a commission.
JIT Sales. Represent sales of VOIs acquired from third parties in close proximity to when Bluegreen intends to sell such VOIs.
Secondary Market Sales. Represent sales of VOIs acquired from HOAs or other owners, typically in connection with maintenance fee defaults. This inventory is generally purchased at a greater discount to retail price compared to developed VOI sales and VOIs purchased by Bluegreen for sale as part of Bluegreen's JIT sales activities.
Developed VOI Sales. Represent sales of VOIs in resorts that Bluegreen has developed or acquired (not including inventory acquired through JIT and secondary market arrangements).
Financing Revenue. Represents interest income from the financing of VOI sales, which includes interest income and loan servicing fees. Bluegreen also earns fees from providing mortgage servicing to certain third-party developers relating to VOIs sold by them. Other Fee-Based Services. Represents resort operation and club management recurring fees from managing theVacation Club and transaction fees for Traveler Plus and other member services. Bluegreen also earns recurring management fees under its management agreements with HOAs for day-to-day management services, including oversight of housekeeping services, maintenance, and certain accounting and administrative functions. Bluegreen also includes in other fee-based services revenue earned from various other services that produce recurring, predictable and long-term revenue, such as title services.
Principal Components of Expenses
Cost of VOIs Sold. Represents the cost at which Bluegreen's owned VOIs sold
during the period were relieved from inventory. In addition to inventory from
Bluegreen's VOI business, Bluegreen's owned VOIs also include those that were
acquired by Bluegreen under JIT and secondary market arrangements. Compared to
the cost of Bluegreen's developed VOI inventory, VOIs acquired in connection
with JIT arrangements typically have a relatively higher associated cost of
sales as a percentage of sales while those acquired in connection with secondary
market arrangements typically have a lower cost of sales as a percentage of
sales as secondary market inventory is generally obtained from HOAs at a
significant discount to retail price. Cost of VOIs sold as a percentage of sales
of VOIs varies between periods based on the relative costs of the specific VOIs
sold in each period and the size of the point packages of the VOIs sold
(primarily due to offered volume discounts, and taking into account
consideration of cumulative sales to existing owners). Additionally, the effect
of changes in estimates under the relative sales value method, including
estimates of projected sales, future defaults, upgrades and incremental revenue
from the resale of repossessed VOI inventory, are reflected on a retrospective
basis in the period the change occurs. Cost of sales will typically be favorably
impacted in periods where a significant amount of secondary market VOI inventory
is acquired and actual defaults and equity trades are higher and the resulting
change in estimate is recognized. While Bluegreen believes that there is
additional inventory that can be obtained through the secondary market at
favorable prices in the future, there can be no assurance that such inventory
will be available as expected.
Net Carrying Cost of VOI Inventory. Represents the maintenance fees and
developer subsidies for unsold VOI inventory paid or accrued to the HOAs that
maintain the resorts. Bluegreen attempts to offset this expense, to the extent
possible, by generating revenue from renting VOIs and through utilizing them in
sampler programs. Bluegreen nets such revenue from this expense item.
Selling and Marketing Expense. Represents costs incurred to sell and market
VOIs, including costs relating to marketing and incentive programs, tours, and
related wages and sales commissions. Revenues from vacation package sales are
netted against selling and marketing expenses.
57
--------------------------------------------------------------------------------Financing Expense. Represents financing interest expense related to Bluegreen's receivable-backed debt and amortization of the related debt issuance costs and other expenses incurred in providing financing and servicing loans, including administrative costs associated with mortgage servicing activities for loans owned by Bluegreen and the loans of certain third-party developers. Mortgage servicing activities include, among other things, payment processing, reporting and collection services. Cost of Other Fee-Based Services. Represents costs incurred to manage resorts and theVacation Club , including payroll and related costs and other administrative costs to the extent not reimbursed by theVacation Club or HOAs. Bluegreen also includes in costs of other fee-based services expense from various other services that produce recurring, predictable and long-term revenue, such as cost associated with title services. General and Administrative Expense. Primarily represents compensation expense for personnel supporting Bluegreen's business and operations, professional fees (including consulting, audit and legal fees), and administrative and related expenses.
Key Business and Financial Metrics and Terms Used by Management
Sales of VOIs. Represent sales of Bluegreen's owned VOIs, including developed VOIs, and those acquired through JIT and secondary market arrangements, reduced by equity trade allowances and an estimate of uncollectible VOI notes receivable. In addition to the factors impacting system-wide sales of VOIs (described below), sales of VOIs are impacted by the proportion of system-wide sales of VOIs sold on behalf of third-parties on a commission basis, which are not included in sales of VOIs. System-wide Sales of VOIs. Represents all sales of VOIs, whether owned by Bluegreen or a third party immediately prior to the sale. Sales of VOIs owned by third parties are transacted as sales of VOIs inBluegreen's Vacation Club through the same selling and marketing process used to sell Bluegreen's VOI inventory. Bluegreen considers system-wide sales of VOIs to be an important operating measure because it reflects all sales of VOIs by Bluegreen's sales and marketing operations without regard to whether Bluegreen or a third party owned such VOI inventory at the time of sale. System-wide sales of VOIs is not a recognized term under GAAP and should not be considered as an alternative to sales of VOIs or any other measure of financial performance derived in accordance with GAAP or to any other method of analyzing our results as reported under GAAP.
Guest Tours. Represents the number of sales presentations given at Bluegreen's sales centers during the period.
Sale to Tour Conversion Ratio. Represents the rate at which guest tours are
converted to sales of VOIs and is calculated by dividing guest tours by number
of VOI sales transactions.
Average Sales Volume Per Guest ("VPG"). Represents the sales attributable to
tours at Bluegreen's sales locations and is calculated by dividing VOI sales by
guest tours. Bluegreen considers VPG to be an important operating measure
because it measures the effectiveness of Bluegreen's sales process, combining
the average transaction price with the sale-to-tour conversion ratio.
EBITDA. Bluegreen defines EBITDA as earnings, or net income, before taking into
account interest income (excluding interest earned on VOI notes receivable),
interest expense (excluding interest expense incurred on debt secured by
Bluegreen's VOI notes receivable), income and franchise taxes, and depreciation
and amortization. For the purposes of the EBITDA calculation, no adjustments
were made for interest income earned on Bluegreen's VOI notes receivable or the
interest expense incurred on debt that is secured by such notes receivable
because they are both considered to be part of the operations of Bluegreen's
business.
Adjusted EBITDA. Bluegreen defines Adjusted EBITDA as EBITDA adjusted for
amounts attributable to the non-controlling interest in
Bluegreen considers EBITDA and Adjusted EBITDA to be an indicator of its operating performance, and it is used by Bluegreen to measure its ability to service debt, fund capital expenditures and expand its business. EBITDA is also used by companies, lenders, investors and others because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company's capital structure, debt levels and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. EBITDA also excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.
Bluegreen considers Adjusted EBITDA to be a useful supplemental measure of Bluegreen's operating performance that facilitates the comparability of historical financial periods.
58
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EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be
considered as an alternative to net income (loss) or any other measure of
financial performance or liquidity, including cash flow, derived in accordance
with GAAP, or to any other method or analyzing Bluegreen's results as reported
under GAAP. The limitations of using EBITDA or Adjusted EBITDA as an analytical
tool include, without limitation, that EBITDA or Adjusted EBITDA does not
reflect (i) changes in, or cash requirements for, working capital needs; (ii)
interest expense, or the cash requirements necessary to service interest or
principal payments on indebtedness (other than as noted above); (iii) tax
expense or the cash requirements to pay taxes; (iv) historical cash expenditures
or future requirements for capital expenditures or contractual commitments; or
(v) the effect on earnings or changes resulting from matters that Bluegreen
considers not to be indicative of its future operations or performance. Further,
although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
EBITDA or Adjusted EBITDA does not reflect any cash requirements for such
replacements. In addition, Bluegreen's definition of Adjusted EBITDA may not be
comparable to definitions of Adjusted EBITDA or other similarly titled measures
used by other companies.
59
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Results of Operations
For the years ended
Information regarding the results of operations for Bluegreen for the years endedDecember 31, 2019 , 2018 and 2017 are set forth below (dollars in thousands): For the Years Ended December 31, 2019 2018 2017 % of System-wide % of System-wide % of System-wide sales of VOIs, sales of VOIs, sales of VOIs, Amount net(5) Amount net(5) Amount net(5) Developed VOI Sales (1)$ 355,353 57%$ 287,292 46%$ 299,104 48% Secondary Market sales 248,780 40% 232,562 37% 182,108 29% Fee-Based sales 308,032 50% 318,540 51% 330,854 53% JIT sales 13,346 2% 56,450 9% 45,982 7% Less: Equity trade allowances (6) (306,403) -49% (270,774) -43% (238,780) -39% System-wide sales of VOIs 619,108 100% 624,070 100% 619,268 100% Less: Fee-Based sales (308,032) -50% (318,540) -51% (330,854) -53% Gross sales of VOIs 311,076 50% 305,530 49% 288,414 47% Provision for loan losses (2) (55,701) -18% (51,305) -17% (46,397) -16% Sales of VOIs 255,375 41% 254,225 41% 242,017 39% Cost of VOIs sold (3) (21,845) -9% (23,813) -9% (17,679) -7% Gross profit (3) 233,530 91% 230,412 91% 224,338 93% Fee-based sales commission revenue (4) 207,832 67% 216,422 68% 229,389 69% Financing revenue, net of financing expense 48,364 8% 51,205 8% 56,899 9% Other fee-based services revenue 189,133 31% 180,558 29% 164,458 27% Cost of other fee-based services (127,013) -21% (124,144) -20% (112,979) -18% Net carrying cost of VOI inventory (23,816) -4% (11,358) -2% (4,220) -1% Selling and marketing expenses (317,716) -51% (307,614) -49% (319,664) -52% General and administrative expenses (151,140) -24% (107,789) -17% (101,535) -16% Operating profit 59,174 10% 127,692 20% 136,686 22% Other (expense) income (910) 1,201 312 (Provision) benefit for income taxes (12,140) (28,541) 2,345 Net income$ 46,124 $ 100,352 $ 139,343 Adjustments for EBITDA: Provision (benefit) for income taxes 12,140 28,541 (2,345) Income before taxes 58,264 128,893 136,998 Depreciation 14,114 12,392 9,632 Franchise taxes 193 199 178 Interest expense (other than interest incurred on debt that is secured by VOI notes receivable) 19,035 15,195 12,168 Interest income (other than interest earned on VOI notes receivable) (7,191) (6,044) (6,874) EBITDA 84,415 150,635 152,102
Adjustments for Adjusted EBITDA: Severance 6,267 3,650 5,836 Bass Pro settlement 39,121 - 4,781 Loss on assets held for sale 3,656 3 46 EBITDA attributable to noncontrolling interest in Bluegreen/Big Cedar Vacations (11,670) (12,468) (12,485) Adjusted EBITDA$ 121,789 $ 141,820 $ 150,280 (1) Developed VOI sales represent sales of VOIs acquired or developed by Bluegreen under its developed VOI business. Developed VOI sales do not include Secondary Market sales, Fee-Based sales or JIT sales.
(2) Percentages for provision for loan losses are calculated as a percentage of
gross sales of VOIs, which excludes Fee-Based sales (and not of system-wide
sales of VOI).
(3) Percentages for costs of VOIs sold and gross profit are calculated as apercentage of sales of VOIs (and not based on system-wide sales of VOIs).
(4) Percentages for Fee-Based sales commission revenue are calculated as a
percentage of Fee-Based sales (and not based on system-wide sales of VOIs,
net).
(5) Represents the applicable line item, calculated as a percentage of
system-wide sales of VOIs, unless otherwise indicated in the above footnotes.
(6) Equity trade allowances are amounts granted to customers upon trading in
their existing VOIs in connection with the purchase of additional VOIs.
Bluegreen - For the year ended
Sales of VOIs. Sales of VOIs were$255.4 million and$254.2 million during the years endedDecember 31, 2019 and 2018, respectively. Sales of VOIs are impacted by the factors described below in system-wide sales of VOIs. Gross sales of VOIs were reduced by$55.7 million and$51.3 million during the years endedDecember 31, 2019 and 2018, respectively, for the provision for loan losses. The provision for loan losses varies based on the amount of financed, non-fee based sales during the period and changes in Bluegreen's 60 -------------------------------------------------------------------------------- estimates of future notes receivable performance for existing loans. Bluegreen's provision for loan losses as a percentage of gross sales of VOIs was 18% and 17% during the years endedDecember 31, 2019 and 2018, respectively. The percentage of Bluegreen's sales which were realized in cash within 30 days from sale was 42% during both years endedDecember 31, 2019 and 2018. The increase in the provision for loan losses was primarily due to an increase in the average annual default rates, which Bluegreen believes is due in large part to the receipt of letters from attorneys who purport to represent certain VOI owners and who have encouraged such owners to become delinquent and ultimately default on their obligations. Defaults associated with such letters in 2019 increased 26% compared to 2018, with a significant portion of such increase attributable to default activity for Bluegreen's resorts and owners located inMissouri , where Bluegreen believes certain attorneys are currently targeting its customers. See "Item 3. Legal Proceedings" for additional information regarding such letters and actions taken by Bluegreen in connection therewith. While Bluegreen believes its notes receivable are adequately reserved at this time, actual defaults may differ from the estimates and the reserve may not be adequate, whether due to actions by Bluegreen's attorneys or otherwise. In addition to the factors described below impacting system-wide sales of VOIs, sales of VOIs are impacted by the proportion of system-wide sales of VOIs sold on behalf of third parties on a commission basis, which are not included in sales of VOIs.
The average annual default rates and delinquency rates (more than 30 days past due) on Bluegreen's VOI notes receivable were as follows:
For the Years Ended December 31,
2019 2018
Average annual default rates 8.73% 8.41%
As of December 31,
2019 2018
Delinquency rates 3.62% 2.91%
System-wide sales of VOIs. System-wide sales of VOIs were $619.1 million and
$624.1 million during the years ended December 31, 2019 and 2018, respectively.
System-wide sales decreased during 2019 due to a decrease in the number of guest
tours. Bluegreen believes the decrease was due in part to disruptions in
staffing and operations at certain of its sales offices related to the issues
with Bass Pro which were resolved when the parties entered into a settlement
agreement in June 2019 (See Item 8 - Note 16: Commitments and Contingencies of
this Annual Report on Form 10-K for additional information regarding this
matter).
Included in system-wide sales are Fee-Based Sales, JIT Sales, Secondary Market
Sales and developed VOI sales. Sales by category are tracked based on which
deeded VOI is conveyed in each transaction. Bluegreen manages which VOIs are
sold based on several factors, including the needs of fee-based clients,
Bluegreen's debt service requirements and default resale requirements under term
securitization and similar transactions. These factors contribute to
fluctuations in the amount of sales by category from period to period. Fee-Based
Sales comprised 50% and 51% of system-wide sales of VOIs during the years ended
December 31, 2019 and 2018, respectively. Bluegreen expects this rate to
decrease in 2020 as it focuses on selling Bluegreen owned inventory; however,
actual results may different from this estimate in the future.
The following table sets forth certain information for system-wide sales of VOIs
for 2019 and 2018 (dollars in thousands, except average sales volume per guest):
For the Years Ended December 31,
2019 2018 % Change
Number of sales offices at period-end 26 26 -
Number of active sales arrangements with third-party clients at period-end 15 15
-
Total number of VOI sales transactions 40,703 40,087
2%
Average sales price per transaction
-2%
Number of total guest tours 235,842 238,141
-1%
Sale-to-tour conversion ratio - total marketing guests 17.3% 16.8%
3%
Number of new guest tours 142,130 146,623
-3%
Sale-to-tour conversion ratio - new marketing guests 14.1% 14.3%
-1%
Percentage of sales to existing owners 54.5% 51.6%
6%
Average sales volume per guest$ 2,642 $ 2,642 - Cost of VOIs Sold. During the years endedDecember 31, 2019 and 2018, cost of VOIs sold was$21.8 million and$23.8 million , respectively, and represented 9% of sales of VOIs during each year. Cost of VOIs sold as a percentage of sales of VOIs varies between periods based on the relative costs of the specific VOIs sold in each period and the size of the point packages of the VOIs sold (due to 61
-------------------------------------------------------------------------------- offered volume discounts, including consideration of cumulative sales to existing owners). Additionally, the effect of changes in estimates under the relative sales value method, including estimates of project sales, future defaults, upgrades and incremental revenue from the resale of repossessed VOI inventory, are reflected on a retrospective basis in the period the change occurs. Therefore, cost of sales will typically be favorably impacted in periods where a significant amount of Secondary Market VOI inventory is acquired or actual defaults and equity trades are higher than anticipated and the resulting change in estimate is recognized. During 2019, Bluegreen acquired more Secondary Market VOI inventory compared to 2018 due to a temporary suspension of Secondary Market VOI inventory purchases inSeptember 2018 in connection with a system conversion involving Bluegreen's sales and inventory process. In addition, during 2019, Bluegreen's cost of sales benefited from sales of relatively lower cost VOIs as compared to 2018. Further, in 2018, Bluegreen increased the average selling price of VOIs by approximately 3%. As a result of this pricing change in 2018, Bluegreen also increased its estimate of total gross margin on the sale of its VOI inventory under the relative sales value method. Under the relative sales value method prescribed for timeshare developers to relieve the cost of VOI inventory, changes to the estimate of gross margin expected to be generated on the sale of VOI inventory are recognized on a retrospective basis in earnings. Accordingly, during 2018, Bluegreen recognized a benefit to cost of VOIs sold of$3.6 million . Fee-Based Sales Commission Revenue. During the years endedDecember 31, 2019 and 2018, Bluegreen sold$308.0 million and$318.5 million , respectively, of third-party VOI inventory under commission arrangements and earned sales and marketing commissions of$207.8 million and$216.4 million , respectively, in connection with those sales. Bluegreen earned an average sales and marketing commission of 67% and 68% during the years endedDecember 31, 2019 and 2018, respectively, which is net of a reserve for commission refunds in connection with early defaults and cancellations pursuant to the terms of certain of its fee-based service arrangements. The decrease in sales and marketing commission as a percentage of fee-based sales for 2019 as compared to 2018 is primarily related to the mix of developer sales at higher commission rates in 2018 as well as higher reserves for early defaults in 2019, which Bluegreen refunds to the third-party developers in certain circumstances. Financing Revenue, Net of Financing Expense. During the years endedDecember 31, 2019 and 2018, financing revenue, net of financing expense were$48.4 million and$51.2 million , respectively. The decrease in finance revenue net of finance expense is a result of Bluegreen's higher weighted average cost of borrowing and higher outstanding debt balances during 2019 compared to 2018. Additionally, during 2019, Bluegreen paid off its 2013 Notes Payable and, in connection with this repayment, wrote off unamortized debt issuance costs of$0.4 million which contributed to the increase in interest expense in 2019.
Other Fee-Based Services Revenue. During the years ended
Other fee-based services revenue increased 5% during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Cost reimbursement revenue, which primarily consists of payroll and payroll related expenses for management of the HOAs and other services Bluegreen provides where Bluegreen is the employer, increased 2% during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Net of cost reimbursement revenue, resort operations and club management revenues increased 5% during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Resort operations and club management revenues, net of cost reimbursement revenues, increased during 2019 compared to 2018 primarily as a result of the receipt of management fees for the full year in 2019 related to two managed resorts added during 2018 and higher third-party rental commissions. Bluegreen managed 49 resort properties as of bothDecember 31, 2019 andDecember 31, 2018 . Cost of other fee-based services 2% during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This increase was primarily due to increased cost reimbursement expense and the timing of the new managed resorts described above. Net Carrying Cost of VOI Inventory. The carrying cost of Bluegreen's inventory was$35.7 million and$27.4 million during the years endedDecember 31, 2019 and 2018, respectively, which was partially offset by rental and sampler revenue of$11.8 million and$16.1 million , respectively. The increase in net carrying costs of VOI inventory was primarily related to our acquisition of the Éilan Hotel and Spa duringApril 2018 and higher net costs associated with Bluegreen owning a larger amount of inventory and increasing the allocation of available inventory to marketing guests. Selling and Marketing Expenses. Selling and marketing expenses were$317.7 million and$307.6 million during the years endedDecember 31, 2019 and 2018, respectively. As a percentage of system-wide sales of VOIs, selling and marketing expenses were 51% and 49% during the years endedDecember 31, 2019 and 2018, respectively. The increase in selling and marketing expenses as a percentage of system-wide sales of VOIs is primarily attributable to higher costs per guest tour, higher fees toBass Pro as well as a change in the timing of expense recognition under the settlement agreement withBass Pro discussed below, additional costs related to Bluegreen's marketing operations in 15 newCabela's stores in 2019, and additional costs associated with testing new traditional and digital marketing programs. In addition, 2019 includes severance of$0.6 million pursuant to an agreement entered into with an executive during 2019. 62
-------------------------------------------------------------------------------- Bluegreen's agreement withBass Pro previously provided for the payment of a variable commission upon the sale of a VOI to a marketing prospect obtained through the Bass Pro marketing channels. As discussed herein, pursuant to the settlement agreement and amended marketing arrangement withBass Pro , the settlement payment and a portion of the ongoing annual marketing fees are fixed costs and/or are subject to annual minimums regardless of the volume of VOI sales produced from the resulting marketing prospects generated from the amended agreement. If Bluegreen's amended agreement withBass Pro does not generate a sufficient number of prospects and leads or is terminated or limited, Bluegreen may not be able to successfully market and sell its products and services at current sales levels, at anticipated levels or at levels required in order to offset the costs associated with its marketing efforts. In addition, the amended arrangement withBass Pro is expected to result in an annual 9% increase in Bluegreen's marketing costs as a percentage of sales from the program based on increases in program fixed costs and anticipated VOI sales volumes from this marketing channel. Should Bluegreen's VOI sales volumes be below expectations, the increase in cost of this marketing program would be higher than expected and Bluegreen's results of operations and cash flows would be adversely impacted. General and Administrative Expenses. General and administrative expenses were$151.1 million and$107.8 million during the year endedDecember 31, 2019 and 2018, respectively. As a percentage of system-wide sales of VOIs, general and administrative expenses were 24% and 17% for the year endedDecember 31, 2019 and 2018, respectively. General and administrative expenses for the year endedDecember 31, 2019 include a charge of$39.1 million related to the settlement of the dispute withBass Pro inJune 2019 . (See Item 8 - Note 16: Commitments and Contingencies of this Annual Report for additional information regarding the Bass Pro settlement). In addition, during the year endedDecember 31, 2019 , Bluegreen accrued severance and transition expenses of$6.3 million pursuant to agreements entered into with certain executives and members of management during 2019 compared to$3.7 million during 2018. The above increases in general and administration expenses were partially offset by lower self-insured health care costs, lower legal expenses, and lower information technology costs. See "Bluegreen Liquidity and Capital Resources" below for additional information. Other (expense) income, net. Other income, net was an expense of$0.9 million during the year endedDecember 31, 2019 and income of$1.2 million during the year endedDecember 31, 2018 . InDecember 2019 , Bluegreen conveyed the ski and golf operations and related property at one of its resorts to the HOA, which resulted in a loss on disposal of approximately$5.6 million , partially offset by a land sale duringJune 2019 for a gain of$2.0 million . 63
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BBX Capital Real Estate Reportable Segment
Segment DescriptionBBX Capital Real Estate (or BBXRE) is engaged in the acquisition, development, construction, ownership, financing, and management of real estate and investments in real estate joint ventures, including investments in multifamily apartment and townhome communities, single-family master-planned communities, and commercial properties located primarily inFlorida . In addition, BBXRE owns a 50% equity interest in the Altman Companies, a developer and manager of multifamily apartment communities, and also manages the legacy assets acquired in connection with the Company's sale of BankAtlantic in 2012, including portfolios of loans receivable and real estate properties. Overview
The Altman Companies and Related Investments
In 2018, BBXRE acquired a 50% membership interest in the Altman Companies, a joint venture between the Company andJoel Altman ("JA") engaged in the development, construction, and management of multifamily apartment communities. As ofDecember 31, 2019 , BBXRE had investments in ten active developments sponsored by the Altman Companies, comprised of three developments that are stabilized or being leased and expected to be sold over the next two years, five developments that are under construction, and two projects that are currently in predevelopment stages.
During the year ended
· In
multifamily apartment community in
BBXRE recognized
31, 2019.
· In
multifamily apartment community located in
sale, BBXRE recognized $29.2 million of equity earnings and received
approximately $46.0 million of distributions from the joint venture. In
addition, prior to the sale, BBXRE received approximately $4.3 million of
distributions from the venture during the year ended
to prior operating profits of the venture.
BBXRE also continued to invest in new real estate joint ventures sponsored by the Altman Companies, which are summarized below:
· During the year ended
Companies closed on construction financing and commenced development of the
following projects:
· Altis at Preserve (
· Altis at Little Havana, a 224 unit multifamily apartment community in
Florida;
·
Florida; and
·
Florida.
The Altman Companies is providing development, construction, and management
services to the ventures in exchange for ongoing fee revenue, and BBXRE and JA
have invested in the respective managing member of these ventures. As of
· In
Willis (Vineland Pointe) joint venture, which was formed to acquire land,
obtain entitlements, and fund predevelopment costs for the development of a
potential multifamily apartment community in
venture expects to receive entitlements for the project, close on the capital
to construct the project, and commence construction in 2020.
During the year endedDecember 31, 2019 , BBXRE continued its development of theBeacon Lake Community inSt. Johns County, Florida and sold to homebuilders the remaining 51 developed lots in Phase I of the project, which is comprised of 302 lots. BBXRE has commenced land development on the lots comprising Phase II of the project, which is expected to include approximately 400 single-family homes and 196 townhomes, and an additional 79 lots for single-family homes as part of Phase III of the project. BBXRE has entered into purchase agreements with homebuilders to sell developed lots for 422 single-family homes and all of the 196 townhomes, and closings on the sale of developed lots in Phase II to homebuilders commenced inJanuary 2020 . 64
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Other Joint Venture Activity During the year endedDecember 31, 2019 , the PGA Design Center joint venture sold its remaining commercial buildings located inPalm Beach Gardens, Florida and provided seller financing to the buyer for a portion of the sales price. As a result of the sale, BBXRE recognized$2.8 million of equity earnings and received approximately$2.3 million of distributions from the venture. In addition, BBXRE invested in two new real estate joint ventures, including The Main Las Olas joint venture, which was formed to invest in the development of The Main Las Olas, a mixed-used project in downtownFort Lauderdale, Florida that is planned to be comprised of an office tower with approximately 365,000 square feet of leasable area, a residential tower with approximately 341 units, and approximately 45,000 square feet of ground floor retail, and the Sky Cove joint venture, which was formed to develop, construct, and sell 204 single-family homes inWestlake Florida . BBXRE has invested$2.0 million in The Main Las Olas joint venture and$4.2 million in the Sky Cove joint venture and expects to invest an additional$2.0 million in The Main Las Olas joint venture as the development progresses. Other Real Estate Activity During the year endedDecember 31, 2019 , BBXRE sold other various real estate assets within its portfolio, including RoboVault, a self-storage facility located inFort Lauderdale, Florida , its remaining land parcels located atPGA Station inPalm Beach Gardens, Florida , and various land parcels located inFlorida . As a result of these sales, BBXRE recognized total net gains on sales of real estate of$13.6 million and received aggregate net proceeds of$35.2 million . In connection with the sale of its remaining land parcels atPGA Station , which were sold to the buyer of the commercial buildings sold by the PGA Design Center joint venture, as described above, BBXRE reinvested$2.1 million of the proceeds in the PGA Lender joint venture, a joint venture formed with the PGA Design Center joint venture to invest in the seller financing provided to the buyer. Outlook As a result of BBXRE's monetization of a significant number of investments in its portfolio in 2019 and the overall decline in the balance of the legacy asset portfolio, BBXRE expects that its operating profits and income before income taxes will decline in the near term, including a significant decline in equity in net earnings of unconsolidated joint ventures in 2020. In addition, the Altman Companies has historically incurred operating costs in excess of the fees earned from the projects, and its earnings have generally arisen as a result of the promoted equity interests received as the managing member of the projects. As a result, BBXRE is currently focused on leveraging the Altman Companies, as well as BBXRE's relationships with third party developers, to source investments in new development opportunities with the goal of building a diversified portfolio of real estate investments that generate profits. In addition to the development and sale of multifamily apartment communities, these investment opportunities may also include the development of multifamily apartment communities that will be owned over a long-term hold period and the acquisition of existing multifamily apartment communities which can be renovated and re-leased pursuant to a "value add" strategy to generate sustainable cash flows. Furthermore, while BBXRE's investments in multifamily apartment communities sponsored by the Altman Companies primarily involve investing in the managing member in the joint ventures that are formed to invest in such projects, BBXRE may also consider opportunistically making increased debt or equity investments in one or more of such projects in lieu of seeking such funding from unaffiliated third parties. Due to the historically strong performance of multifamily apartment assets within the real estate market, BBXRE is experiencing increased competition from other real estate investors and developers, which is increasing the cost of land and resulting in increased inventories of multifamily apartment communities in the markets in which BBXRE invests and operates, which can decrease market rental rates and increase the time required to lease and stabilize its development projects. As a result of these factors, BBXRE is experiencing increased difficulties in identifying development opportunities that meet its investment criteria. In addition to enhancing its resources dedicating to identifying new opportunities, BBXRE is also evaluating the expansion of its investment pipeline through the acquisition of existing multifamily apartment communities pursuant to a "value add" strategy, as discussed above, and the entry into one or more new geographic markets. 65
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Results of Operations
Information regarding the results of operations for
For the Years Ended Change Change
December 31, 2019 vs 2018 vs
2019 2018 2017 2018 2017
Sales of real estate inventory $ 5,049 21,771 - (16,722) 21,771
Interest income 750 2,277 2,225 (1,527) 52
Net gains on sales of real estate
assets 13,616 4,563 1,451 9,053 3,112
Other 1,619 2,541 4,997 (922) (2,456)
Total revenues $ 21,034 31,152 8,673 (10,118) 22,479
Cost of real estate inventory sold 2,643 14,116 - (11,473) 14,116
Recoveries from loan losses, net (5,428) (8,653) (7,546) 3,225 (1,107)
Impairment losses 47 571 1,696 (524) (1,125)
Selling, general and administrative
expenses 9,144 9,210 11,127 (66) (1,917)
Total costs and expenses 6,406 15,244 5,277 (8,838) 9,967
Equity in net earnings of
unconsolidated joint ventures 37,898 14,194 12,541 23,704 1,653
Other income 170 112 148 58 (36)
Income before income taxes $ 52,696 30,214 16,085 22,482 14,129
· A net increase in equity in earnings of unconsolidated joint ventures and gains
on sales of real estate assets primarily associated with the sales in 2019
described above, as well as the sale of single-family homes by the
joint venture; partially offset by
· The recognition of a
complex in 2018;
· A decrease in interest income and recoveries from loan losses primarily due to
the continued decline in the balance of the legacy asset portfolio, as several
significant nonaccrual commercial loans were repaid in 2018; and
A decrease in net profits from the sale of developed lots to homebuilders at the
Beacon Lake Community development, as BBXRE sold 51 developed lots in 2019 and
251 in 2018.
BBX Sweet Holdings Reportable Segment
BBX Sweet Holdings is engaged in the ownership and management of operating businesses in the confectionery industry, including IT'SUGAR, Hoffman's Chocolates, and Las Olas Confections and Snacks. IT'SUGAR is a specialty candy retailer which operates approximately 100 retail locations, which include a mix of high-traffic resort and entertainment, lifestyle, mall/outlet, and urban locations in over 25 states andWashington D.C. , and its products include bulk candy, candy in giant packaging, and licensed and novelty items. Hoffman's Chocolates is a retailer of gourmet chocolates with retail locations inSouth Florida , and Las Olas Confections and Snacks is a manufacturer and wholesaler of chocolate and other confectionery products. Overview During the fourth quarter of 2019, the Company reorganized the operating businesses in the confectionery industry that are owned byBBX Sweet Holdings , including the centralization of various management and back office activities and the management of the operations of these businesses by the Company's executive management based on the consolidated activities and results ofBBX Sweet Holdings . In addition,BBX Sweet Holdings is continuing its efforts to streamline and integrate the operations of these businesses, including the manufacturing and sourcing of certain products by Las Olas Confections and Snacks forBBX Sweet Holdings' retail operations at IT'SUGAR and Hoffman's Chocolates. As a result of these organizational changes, the Company has updated its internal and external presentations of the operating results of these businesses to reflect the consolidated results ofBBX Sweet Holdings . AlthoughBBX Sweet Holdings incurred a loss before income taxes in 2019 and may incur a loss before income taxes in 2020, the Company expects continued improvements inBBX Sweet Holdings' operating results as compared to 2018 and prior periods as a result of the implementation of its strategies, including the opening of new retail locations by IT'SUGAR and continued efforts to create efficiencies and reduce costs related to these businesses. However, the Company will continue to periodically evaluate its manufacturing operations in the confectionery industry, including whether its efforts to reduce costs are continuing to result in improved operating results, and to the extent that it decides to divest of or otherwise exit certain of these operations, the Company may recognize additional impairment charges and incur additional losses in future periods. 66
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IT'SUGAR Consistent with its focus on selectively opening larger stores in resort and entertainment locations which experience high traffic, IT'SUGAR invested capital in several new retail locations in 2019, including Grand Bazaar, a 6,000 square foot location inLas Vegas, Nevada that was opened inJune 2019 , and a 22,000 square foot, three story candy department store at American Dream, a 3 million square foot shopping and entertainment complex inNew Jersey , that was opened inDecember 2019 . IT'SUGAR is also continuing to evaluate its current retail locations where sales volumes may give rise to early lease termination rights and the potential opportunity to renegotiate lease terms and occupancy costs. For certain underperforming locations where IT'SUGAR does not have early lease termination rights, IT'SUGAR is evaluating potential opportunities to close or sublease such locations. In certain circumstances, IT'SUGAR may determine that it is in its best interest to incur costs to exit a location if the Company believes that the closure of such locations will improve IT'SUGAR's overall operating efficiencies and profitability over the long term. Hoffman's Chocolates During the year endedDecember 31, 2019 ,BBX Sweet Holdings implemented various initiatives to reduce costs at Hoffman's Chocolates, including reductions in corporate personnel and the integration of certain of its management and back office activities withBBX Sweet Holdings .
Las Olas Confections and Snacks
During the year endedDecember 31, 2019 , Las Olas Confections and Snacks significantly reduced its operating losses as a result of various strategic initiatives implemented byBBX Sweet Holdings during 2018, including the closure of a manufacturing facility inUtah and a reduction in corporate personnel and infrastructure, and various impairment losses and other costs recognized in 2018 in connection with such initiatives that did not reoccur in 2019. Las Olas Confections and Snacks is currently focused on expanding its customer base and manufacturing and sourcing certain products for IT'SUGAR and Hoffman's Chocolates. Results of Operations
Information regarding the results of operations for
For the Years Ended Change Change
December 31, 2019 vs 2018 vs
2019 2018 2017 2018 2017
Trade sales $ 105,406 101,187 72,899 4,219 28,288
Cost of trade sales (67,703) (65,829) (51,975) (1,874) (13,854)
Gross margin 37,703 35,358 20,924 2,345 14,434
Selling, general and administrative (2,927) 14,427
expenses 43,203 46,130 31,703
Total operating losses (5,500) (10,772) (10,779) 5,272 7
Interest and other income 716 241 119 475 122
Interest expense (196) (308) (335) 112 27
Impairment losses (142) (4,147) (5,786) 4,005 1,639
Loss before income taxes $ (5,122) (14,986) (16,781) 9,864 1,795
Gross margin percentage % 35.77 34.94 28.70 0.83 6.24
SG&A as a percent of trade sales % 40.99 45.59 43.49 (4.60) 2.10
· The recognition of impairment losses in 2018 in connection with the
implementation of various strategic initiatives in 2018, as described above,
and ongoing losses from
· A net decrease in selling, general and administrative expenses primarily due to
the above mentioned strategic initiatives, which have resulted in lower ongoing
operating costs and the recognition of severance and other expenses in 2018
that did not reoccur
67
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in 2019, partially offset by costs associated with new IT'SUGAR locations opened
in 2019 and 2018, including the FAO Schweetz location in
· A net increase in gross margin primarily due to sales from the new IT'SUGAR
locations described above and improvements in Las Olas Confections and
Snacks' gross margin percentage as a result of improved efficiencies in its
manufacturing facility and the closure of its manufacturing facility in
· A net increase in the loss before income taxes generated by IT'SUGAR as a
result of costs and expenses associated with replacing various executives and
opening new locations, as well as the operating results for 2018 reflecting
seasonal operating losses that are typically incurred during the first half of
the annual period which are not reflected in IT'SUGAR's operating results for
2017 due to the timing of
2017;
· A net decrease in Las Olas Confections and Snacks selling, general and
administrative expenses and improvements in gross margin primarily due to the
above mentioned strategic initiatives; and
· A net decrease in impairment losses related to certain of
businesses.
Information regarding the results of operations for IT'SUGAR is set forth below
(dollars in thousands):
June 16, 2017
For the Years Ended to Change Change
December 31, December 31, 2019 vs 2018 vs
2019 2018 2017 2018 2017
Trade sales $ 85,275 79,618 46,765 5,657 32,853
Cost of trade sales (50,748) (46,718) (26,639) (4,030) (20,079)
Gross margin 34,527 32,900 20,126 1,627 12,774
Selling, general and administrative 36,521 35,404 17,594 1,117 17,810
expenses
Total operating profits (1,994) (2,504) 2,532 510 (5,036)
Interest and other income 286 160 66 126 94
Impairment losses (142) - - (142) -
Interest expense (114) (40) - (74) (40)
(Loss) income before income taxes $ (1,964) (2,384) 2,598 420 (4,982)
Gross margin percentage % 40.49 41.32 43.04 (0.83) (1.71)
SG&A as a percent of trade sales % 42.83 44.47 37.62 (1.64) 6.85
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Renin Reportable Segment Segment Description Renin is engaged in the design, manufacture, and distribution of sliding doors, door systems and hardware, and home décor products and operates through its headquarters inCanada and two manufacturing and distribution facilities inthe United States andCanada . In addition to its own manufacturing, Renin also sources various products and materials fromChina . Renin's products are sold through three channels inNorth America : retail, commercial, and direct installation in the greaterToronto area. Overview During the year endedDecember 31, 2019 , Renin's trade sales were down compared to its trade sales in 2018. Although Renin's gross trade sales marginally increased during 2019 as compared to 2018, this increase was offset by higher volume rebates and promotional spend on customers in its retail channel. Overall, sales to retail customers, including big box retailers, continue to comprise a significant portion of Renin's customer mix, as retail, commercial, and direct installation trade sales as a percentage of total gross trade sales were 63%, 26%, and 11%, respectively, during the year endedDecember 31, 2019 . With respect to Renin's product mix, although barn door products had been historically increasing as a percentage of its overall product mix, Renin's product mix based on gross sales within its major product categories remained relatively consistent in 2019 as compared to 2018. Although Renin has been able to maintain its sales volumes in 2019, it is experiencing increased competition, particularly in its retail channel and related to its barn door product, which has resulted in increased pricing concessions, including volume rebates and promotional spend. As a result, Renin is currently focused on developing new, innovative products and delivering superior customer service to grow sales across all of its channels. Renin is also renewing its focus on sales to customers in its commercial and direct installation channels, in which Renin has experienced decreased or flat sales in recent years. Although Renin's gross margins improved in 2019 as compared to 2018 partially due to the impact of certain promotions in which products were sold at low margins in 2018, Renin is experiencing increased costs on the products it sources fromChina as a result of tariffs levied on these products. As a result, Renin is focusing on identifying alternative sources for such products and reducing the costs of its manufactured products. Renin has also recently experienced increased interest in its manufactured products in its commercial channel, as its domestically produced products are becoming more competitive with Chinese imports as a result of tariffs. Results of Operations Information regarding the results of operations for Renin is set forth below (dollars in thousands): For the Years Ended Change Change December 31, 2019 vs 2018 vs 2019 2018 2017 2018 2017 Trade sales$ 67,537 68,417 68,935 (880) (518) Cost of trade sales (54,243) (55,483) (54,941) 1,240 (542) Gross margin 13,294 12,934 13,994 360 (1,060) Selling, general and administrative 11,066 9,903 11,112 1,163 (1,209) expenses Total operating profits 2,228 3,031 2,882 (803) 149 Other income 153 - - 153 - Interest expense (498) (638) (509) 140 (129) Foreign exchange (gain) loss (75) 68 (193) (143) 261 Income before income taxes 1,808 2,461 2,180 (653) 281 Gross margin percentage % 19.68 18.90 20.30 0.78 (1.40) SG&A as a percent of trade sales % 16.39 14.47 16.12 1.91 (1.65) Renin's income before income taxes for the year endedDecember 31, 2019 compared to the same 2018 period decreased by$0.7 million , or 26.5%, primarily due to the following:
· An increase in selling, general and administrative expenses primarily due to
consulting expenses related to the procurement of raw materials, severance
expenses, and higher employee compensation expenses associated with the accrual
of performance bonuses; and
· A decrease in trade sales primarily resulting from higher volume rebates and
promotional spend on customers in Renin's retail channel; partially offset by
69
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· An improvement in Renin's gross margin percentage which reflects improved
pricing for the procurement of raw materials in 2019 and a barn door promotion
to sell excess inventory in 2018 that was not repeated in 2019, partially
offset by the impact of tariffs on products imported from China .
Other
Other in the Company's segment information includes its investments in other
operating businesses, including a restaurant located in South Florida that was
acquired through a loan foreclosure and an insurance agency, as well as its
operations as a franchisee of MOD Pizza in Florida through September 2019 , as
described below.
MOD Pizza Restaurant Operations
In 2016, Food forThought Restaurant Group ("FFTRG"), a wholly-owned subsidiary ofBBX Capital , entered into area development and franchise agreements with MOD Pizza related to the development of up to approximately 60 MOD Pizza franchised restaurant locations throughout Florida. Through 2019, FFTRG had opened nine restaurant locations. As a result of FFTRG's overall operating performance and the Company's goal of streamlining its investment verticals, the Company entered into an agreement with MOD Pizza to terminate the area development and franchise agreements and transferred seven of its restaurant locations, including the related assets, operations, and lease obligations, to MOD Pizza during the third quarter of 2019. In addition, the Company closed the remaining two locations and terminated the related lease agreements. The net losses before taxes from the Company's MOD Pizza franchise operations for the years endedDecember 31, 2019 , 2018, and 2017 were$9.4 million ,$4.5 million , and$2.5 million , respectively. The net losses for the year endedDecember 31, 2019 included aggregate impairment losses of$6.7 million related to the transfer of the seven restaurant locations to MOD Pizza and the closure of the two restaurant locations.
Reconciling Items and Eliminations
Reconciling items and eliminations in the Company's segment information primarily includes the following:
·BBX Capital's corporate general and administrative expenses;
· Interest expense primarily associated with
debentures and
redeemable cumulative preferred stock;
· Interest income on interest-bearing cash accounts; and
· The elimination of Bluegreen's interest income on its
receivable from BBX Capital .
Corporate General and Administrative Expenses
BBX Capital's corporate general and administrative expenses consist primarily of expenses associated with administering the various support functions at its corporate headquarters, including executive compensation, legal, accounting, human resources, investor relations, and executive offices.BBX Capital's corporate general and administrative expenses for the years endedDecember 31, 2019 , 2018, and 2017, were$41.1 million ,$45.5 million , and$52.9 million , respectively.BBX Capital's corporate general and administrative expenses for the year endedDecember 31, 2019 compared to 2018 decreased by$4.4 million , which primarily reflects lower costs related to executive incentive bonuses and share-based compensation expense and lower professional fees, partially offset by higher severance costs. Interest ExpenseExcluding BBX Capital's note payable to Bluegreen, its interest expense for the years endedDecember 31, 2019 , 2018 and 2017 was$5.5 million ,$6.6 million , and$4.6 million , respectively. The decrease in interest expense during the year endedDecember 31, 2019 compared to the same 2018 period primarily resulted fromBBX Capital's repayment of the outstanding balance of$30.0 million on its$50.0 million revolving line of credit inJanuary 2019 .BBX Capital's interest expense on the$80.0 million note payable to Bluegreen for the years endedDecember 31, 2019 , 2018, and 2017 was$4.8 million ,$4.8 million and$6.4 million , respectively. The decrease for the 2019 and 2018 periods compared to the 2017 period reflects the reduction in the interest rate on the note onJuly 1, 2017 from 10% per annum to 6% per annum. The interest expense on this note and the related interest income recognized by Bluegreen are eliminated in the Company's consolidated statements of operations. 70
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Interest Income During the years endedDecember 31, 2019 , 2018 and 2017, the Company recognized$2.3 million ,$2.0 million and$0.9 million , respectively, of interest income primarily fromBBX Capital's interest-bearing cash accounts. Other Items In addition to the above items, Reconciling Items and Eliminations includes$0.6 million and$8.6 million of insurance carrier reimbursements of litigation costs for the years endedDecember 31, 2018 and 2017, respectively, and the reimbursement of a$4.6 million fine previously paid in connection with theSEC civil litigation against BCC for the year endedDecember 31, 2017 . Reconciling Items and Eliminations also includes$6.9 million of net gains on the cancellation ofWoodbridge's junior subordinated debentures for the year endedDecember 31, 2017 .
(Provision) Benefit for Income Taxes
The provision for income taxes for the year endedDecember 31, 2019 reflected the Company's effective tax rate of 34.2% on income before income taxes. The effective tax rate was higher than the expected federal income tax rate of 21.0% primarily due to nondeductible executive compensation and state income taxes. The provision for income taxes for the year endedDecember 31, 2018 reflected the Company's effective tax rate of 36.2% on income before income taxes. The effective tax rate was higher than the expected federal income tax rate of 21% primarily due to nondeductible executive compensation, which included a$2.8 million adjustment associated with the Company's completion of its analysis of its accounting for the enactment of the Tax Reform Act inDecember 2017 , and state income taxes. See Note 14 under Item 8 of this report for additional information with respect to the Company's accounting for the Tax Reform Act.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests during the years endedDecember 31, 2019 , 2018, and 2017 was$14.4 million ,$20.7 million , and$18.4 million , respectively. The decrease in net income attributable to noncontrolling interests for the year endedDecember 31, 2019 compared to the same 2018 period was primarily due to a decrease in the net income of Bluegreen andBluegreen/Big Cedar Vacations . Consolidated Cash Flows
A summary of our consolidated cash flows is set forth below (in thousands):
For the Years Ended December 31,
2019 2018 2017
Cash flows provided by operating activities $ 78,242 86,639 65,599
Cash flows provided by (used in) investing
activities 16,319 (31,063) (54,765)
Cash flows (used in) provided by financing
activities (108,788) (43,726) 52,096
Net (decrease) increase in cash, cash equivalents
and restricted cash $ (14,227) 11,850 62,930
Cash, cash equivalents and restricted cash at
beginning of period 421,097 409,247 346,317
Cash, cash equivalents and restricted cash at end
of period $ 406,870 421,097 409,247
Cash Flows provided by Operating Activities
The Company's operating cash flows decreased$8.4 million during the year endedDecember 31, 2019 compared to the same period in 2018. The decrease was primarily due to the$20.0 million payment made toBass Pro inJune 2019 pursuant to the settlement agreement described above, an increase in payments for federal income taxes, a decrease in proceeds from the sale of developed lots at theBeacon Lake Community development, and an increase in spending on the development of real estate inventory at Beacon Lake. The above decreases in operating cash flows were partially offset by an increase in operating distributions from real estate joint ventures and decreased spending on the acquisition and development of VOI inventory. 71
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Cash Flows provided by/used in Investing Activities
Cash provided by investing activities increased by$47.4 million during the year endedDecember 31, 2019 compared to the same period in 2018. The increase primarily reflects a$19.4 million increase in distributions from unconsolidated real estate joint ventures,$22.2 million of higher proceeds from the sale of real estate and property and equipment,$10.0 million of lower capital expenditures, and a$3.9 million net decrease in investments in unconsolidated real estate joint ventures, partially offset by a$13.2 million net decrease in cash from loan recoveries.
Cash Flows provided by/used in Financing Activities
Cash used in financing activities increased by$65.1 million during the year endedDecember 31, 2019 compared to the same period in 2018. The increase in cash used was primarily the result of a$114.6 million reduction in borrowings, net of repayments, primarily at Bluegreen, and the payment$10.0 million to redeemBBX Capital's redeemable cumulative preferred stock, partially offset by a$57.1 million decline in cash paid for the purchase and retirement of the Company's common stock. Commitments The Company's material commitments as ofDecember 31, 2019 included the required payments due on its receivable-backed debt, notes payable and other borrowings, junior subordinated debentures, commitments to complete certain projects based on its sales contracts with customers, subsidy advances to certain HOAs, and commitments under non-cancelable operating leases. The following table summarizes the contractual minimum principal and interest payments, net of unamortized discount, required on all of the Company's outstanding debt, outstanding payments required under the Bass Pro settlement agreement, and payments required on the Company's non-cancelable operating leases by period due date as ofDecember 31, 2019 (in thousands): Payments Due by Period Unamortized Debt Less than 1 - 3 4 - 5 After 5 Issuance Contractual Obligations 1 year Years Years Years Costs Total Receivable-backed notes payable $ - 13,124 102,381 312,435 (5,125) 422,815 Notes payable and other borrowings 17,127 33,512 112,904 27,422 (2,234) 188,731 Jr. subordinated debentures - - - 177,129 (39,875) 137,254 Noncancelable operating leases 26,384 48,981 32,507 44,508 - 152,380 Bass Pro settlement agreement 4,000 8,000 8,000 - - 20,000 Total contractual obligations 47,511 103,617 255,792 561,494 (47,234) 921,180 Interest Obligations (1) Receivable-backed notes payable 16,728 33,086 29,076 85,629 - 164,519 Notes payable and other borrowings 7,456 13,354 10,306 21,681 - 52,797 Jr. subordinated debentures 11,428 22,856 22,856 127,550 - 184,690 Total contractual interest 35,612 69,296 62,238 234,860 - 402,006 Total contractual obligations$ 83,123 172,913 318,030 796,354
(47,234) 1,323,186
(1) Assumes that the scheduled minimum principal payments are made in accordance
with the table above and the interest rate on variable rate debt remains the
same as the rate at December 31, 2019 .
In lieu of paying maintenance fees for unsold VOI inventory, Bluegreen may enter
into subsidy agreements with certain HOAs. During the years ended December 31,
2019 , 2018 and 2017, Bluegreen made subsidy payments in connection with these
arrangements of $24.9 million , $12.6 million and $12.6 million , respectively,
which are included within cost of other fee-based services. As of December 31,
2019 and 2018, Bluegreen had no accrued liabilities for such subsidies.
In December 2019 Bluegreen's President and Chief Executive Officer, resigned. In
connection with his resignation, Bluegreen agreed to make payments totaling $3.5
million over a period of 18 months, all of which remained payable as of December
31, 2019 . Additionally, during 2019, Bluegreen entered into certain agreements
with executives related to their separation from Bluegreen or change in
position. Pursuant to the terms of these agreements, Bluegreen agreed to make
payments totaling $2.5 million through November 2020 . As of December 31, 2019 ,
$2.3 million remained payable under these agreements.
The Company believes that its existing cash, anticipated cash generated from
operations, anticipated future borrowings under existing or future credit
facilities, and anticipated future sales of notes receivable under existing,
future, or replacement purchase facilities will be sufficient to meet its
anticipated working capital, capital expenditures, and debt service and other
contractual obligations, including the contractual payment of the obligations
set forth above, for the foreseeable future, subject to the success of the
Company's ongoing
72
-------------------------------------------------------------------------------- business strategy and the availability of credit. The Company will continue its efforts to renew, extend, or replace any credit and receivables purchase facilities that have expired or that will expire in the near term. The Company may, in the future, also obtain additional credit facilities and may issue corporate debt or equity securities. Any debt incurred or issued may be secured or unsecured, bear interest at fixed or variable rates, and be subject to such terms as the lender may require. In addition, the Company's efforts to renew or replace credit facilities or receivables purchase facilities which have expired or which are scheduled to expire in the near term may not be successful, and sufficient funds may not be available from operations or under existing, proposed, or future revolving credit or other borrowing arrangements or receivables purchase facilities to meet cash needs, including debt service and other contractual obligations. To the extent the Company is unable to sell notes receivable or borrow under such facilities, the Company's ability to satisfy its obligations would be materially adversely affected. Bluegreen's receivables purchase facilities, credit facilities, indentures and other outstanding debt instruments include what Bluegreen believes to be customary conditions to funding, eligibility requirements for collateral, cross-default and other acceleration provisions, and certain financial and other affirmative and negative covenants, including, among others, limits on the incurrence of indebtedness, payment of dividends, investments in joint ventures and other restricted payments, the incurrence of liens and transactions with affiliates, as well as covenants concerning net worth, fixed charge coverage requirements, debt-to-equity ratios, portfolio performance requirements and cash balances, and events of default or termination. In the future, Bluegreen may be required to seek waivers of such covenants, but may not be successful in obtaining waivers, and such covenants may limit its ability to raise funds, sell receivables or satisfy or refinance its obligations, or otherwise adversely affect its financial condition and results of operations, as well as its ability to pay dividends. In addition, Bluegreen's future operating performance and ability to meet its financial obligations will be subject to future economic conditions and to financial, business and other factors, many of which may be beyond Bluegreen's control. Pursuant to the settlement agreement Bluegreen entered into withBass Pro and its affiliates duringJune 2019 , Bluegreen paidBass Pro $20.0 million and agreed to make five annual payments toBass Pro of$4.0 million each commencing in 2020. Additionally, in lieu of the previous commission arrangement, Bluegreen agreed to payBass Pro a fixed annual fee of$70,000 for eachBass Pro andCabela's retail store that Bluegreen is accessing (excluding sales at retail stores which are designated to provide tours toBluegreen/Big Cedar Vacations , or "Bluegreen/Big Cedar feeder stores"), plus$32.00 per net vacation package sold (less cancellations or refunds within 45 days of sale). Bluegreen also agreed to contribute to theWonders of Wildlife Foundation $5.00 per net package sold (less certain cancellations and refunds within 45 days of sale), subject to an annual minimum of$700,000 . The fixed annual fee was prorated for 2019. Subject to the terms and conditions of the settlement agreement, Bluegreen will generally be required to pay the fixed annual fee with respect to at least 59Bass Pro retail stores and a minimum number ofCabela's retail stores that increases over time to a total of at least 60Cabela's retail stores by the end of 2021. Bluegreen had marketing operations at 15Cabela's stores atDecember 31, 2019 and are required to begin marketing operations in at least 25 more stores byDecember 31, 2020 . Notwithstanding the foregoing, the minimum number ofBass Pro andCabela's retail stores for purposes of the fixed annual fee may be reduced under certain circumstances set forth in the parties' agreement, including as a result of a reduction of traffic in the stores in excess of 25% year-over-year.
Off-balance-sheet Arrangements
BBX Capital guarantees certain obligations of its wholly-owned subsidiaries and unconsolidated real estate joint ventures, which are not included in the contractual obligations table above, and also guarantees certain of the obligations in the above table as described in further detail in Item 8 - Note 16 of this Annual Report. The Company has investments in joint ventures involved in the development of multifamily apartment and townhome communities, as well as single-family master planned communities. The Company's investments in these joint ventures are accounted for under the equity method of accounting, and as a result, the Company does not recognize the assets and liabilities of these joint ventures in its financial statements. As ofDecember 31, 2019 and 2018, the Company's investments in these joint ventures totaled$57.3 million and$64.7 million , respectively. These unconsolidated real estate joint ventures generally finance their activities with a combination of debt financing and equity. The Company generally does not directly guarantee the financing of these joint ventures, other than as described in further detail in Item 8 - Note 16 of this Annual Report, and the Company's maximum exposure to losses from these joint ventures is its equity investment. The Company is typically not obligated to fund additional capital to its joint ventures; however, the Company's interest in a joint venture may be diluted if the Company elects not to fund a joint venture capital call.
Liquidity and Capital Resources
As ofDecember 31, 2019 and 2018, the Company, excluding Bluegreen, had cash, cash equivalents and short-term investments of approximately$166.6 million and$146.9 million , respectively. Management believes thatBBX Capital has sufficient liquidity from the sources described below to fund operations, including its anticipated working capital, capital expenditure, and debt service requirements, for the foreseeable future, subject to the success of the Company's ongoing business strategy and the ongoing availability of credit. 73
--------------------------------------------------------------------------------BBX Capital's principal sources of liquidity are its available cash and short-term investments, dividends received from Bluegreen, borrowings from its$50.0 million IberiaBank revolving line of credit, distributions from unconsolidated real estate joint ventures, proceeds received from lot sales at theBeacon Lake Community development, and sales of real estate.BBX Capital believes that its current financial condition and credit relationships, together with anticipated cash flows from other sources of funds, including potential dividends from Bluegreen (which, as described below, are subject to certain limitations), and, to the extent determined to be advisable, proceeds from the disposition of properties or investments, will allow it to meet its anticipated near-term liquidity needs.BBX Capital may also seek additional liquidity from outside sources, including traditional bank financing, secured or unsecured indebtedness, or the issuance of equity and/or debt securities. However, these alternatives may not be available to us on attractive terms, or at all. The inability to raise funds through the sources discussed above would have a material adverse effect on the Company's business, results of operations, and financial condition.BBX Capital expects that it will receive dividends from time to time from Bluegreen. For the years endedDecember 31, 2019 , 2018, and 2017,BBX Capital received from Bluegreen dividends totaling$43.0 million ,$40.4 million and$40.0 million , respectively. In addition, onFebruary 20, 2020 ,BBX Capital received from Bluegreen dividends of$8.7 million . Bluegreen has indicated that it intends to pay regular quarterly dividends on its common stock subject to the discretion of its board of directors. The ultimate payment of such dividends will be based upon factors that the Bluegreen board deems to be appropriate, including Bluegreen's operating results, financial condition, cash position, and operating and capital needs. Dividends from Bluegreen are also dependent on restrictions contained in Bluegreen's debt facilities and may not continue at current or previous levels. Except as otherwise noted, the debts and obligations of Bluegreen are not direct obligations ofBBX Capital and generally are non-recourse toBBX Capital . Similarly, the assets of Bluegreen are not available toBBX Capital , absent a dividend or distribution. Furthermore, certain of Bluegreen's credit facilities contain terms which could limit the payment of cash dividends without the lender's consent or waiver, and Bluegreen may only pay dividends subject to such restrictions as well as the declaration of dividends by its board of directors. As a consequence,BBX Capital may not receive dividends from Bluegreen consistent with prior periods, in the time frames or amounts anticipated, or at all.BBX Capital may also receive funds from its subsidiaries, including Bluegreen, in connection with its tax sharing agreement to the extent that the subsidiary utilizesBBX Capital's tax benefits inBBX Capital's consolidated tax return. During the years endedDecember 31, 2019 , 2018, and 2017,BBX Capital received$13.0 million ,$23.1 million , and$39.3 million , respectively, of tax sharing payments from Bluegreen.
Anticipated and Potential Liquidity Requirements
BBX Capital expects to use its available funds for operations and general corporate purposes (including working capital, capital expenditures, and debt service requirements and the Company's other commitments described above) to make additional investments in real estate opportunities, operating businesses, or other opportunities, to declare and pay cash dividends on the Company's common stock, or to purchase shares of its common stock. InNovember 2018 , BBXRE acquired a 50% membership interest in the Altman Companies, a joint venture between the Company and JA engaged in the development, construction, and management of multifamily apartment communities. Although the Altman Companies generates revenues from the performance of development, general contractor, leasing, and property management services to the joint ventures that are formed to invest in the development projects that it originates, it is expected to generate profits for BBXRE and JA primarily through the equity distributions that BBXRE and JA receive through their investment in the managing member of such joint ventures. Therefore, as the timing of such distributions to BBXRE and JA is generally contingent upon the sale or refinancing of a completed development project, it is anticipated that BBXRE and JA will be required to contribute capital to the Altman Companies for its ongoing operating costs and predevelopment expenditures, as well as to the managing member of newly formed joint ventures. At the current time, BBXRE anticipates that it will invest approximately$4.0 million to$6.0 million in the Altman Companies and related joint ventures during the year endedDecember 31, 2020 related to planned predevelopment expenditures, investments in new joint ventures, and ongoing operating costs. In addition, BBXRE currently anticipates that it will contribute an additional$1.3 million toABBX Guaranty, LLC , a joint venture between BBXRE and JA that provides guarantees on the indebtedness and construction cost overruns of new real estate joint ventures formed by the Altman Companies. Pursuant to the operating agreement of the Altman Companies, BBXRE will also acquire an additional 40% equity interest in the Altman Companies from JA for a purchase price of$9.4 million inJanuary 2023 , and JA can also, at his option or in other predefined circumstances, require BBXRE to purchase his remaining 10% equity interest in the Altman Companies for$2.4 million . In addition, in certain circumstances, BBXRE may acquire the 40% membership interests inAltman-Glenewinkel Construction that are not owned by the Altman Companies for a purchase price based on prescribed formulas in the operating agreement ofAltman-Glenewinkel Construction . In addition to BBXRE's anticipated investments in the Altman Companies and related joint ventures, BBXRE has entered into two real estate joint ventures,CCB Miramar, LLC andL03/212 Partners, LLC , in which the Company expects to contribute additional capital of approximately$4.5 million during the next twelve to twenty-four months based on the current plans and estimates associated with the related development projects. 74 --------------------------------------------------------------------------------
IT'SUGAR expects to renovate certain existing stores during the year endedDecember 31, 2020 and is evaluating potential new locations to be opened in 2020 and 2021. Although IT'SUGAR is continuing to evaluate the size and location of these potential new stores, IT'SUGAR expects that it may incur between$5.0 million to$10.0 million of capital expenditures, net of tenant allowance reimbursements, during the year endedDecember 31, 2020 related to such locations.BBX Capital has previously indicated its intention to declare regular quarterly dividends on its Class A and Class B Common Stock and declared cash dividends of$0.05 per share on its common stock, or$4.8 million in the aggregate, during the year endedDecember 31, 2019 . However, future declaration and payment of cash dividends with respect to the Company's common stock, if any, will be determined in light of the then-current financial condition of the Company, its operating and capital needs, and other factors deemed relevant by the board of directors. OnJune 13, 2017 ,BBX Capital's board of directors approved a share repurchase program which authorizes the purchase of a total of up to 5,000,000 shares of the Company's Class A Common Stock and Class B Common Stock at an aggregate cost of no more than$35.0 million . This program authorizes management, at its discretion, to purchase shares from time to time subject to market conditions and other factors. During the year endedDecember 31, 2019 ,BBX Capital purchased 3,228,890 shares of its Class A Common Stock for approximately$15.4 million . As ofDecember 31, 2019 ,BBX Capital had purchased 4,750,483 shares of its Class A Common Stock for approximately$25.4 million pursuant to theJune 2017 share repurchase program. InOctober 2019 , a total of 222,848 shares of the Company's Class A Common Stock and 748,357 shares of the Company's Class B Common Stock previously owned by certain executive officers were surrendered to the Company to satisfy$4.5 million of withholding tax obligations associated with the vesting of their restricted stock awards. The Company has 2,817,776 unvested restricted stock awards outstanding as ofDecember 31, 2019 and anticipates that, to the extent that such awards vest, it will fund the cash payments associated with the related withholding tax obligations in return for the surrender of a portion of such awards. InApril 2015 ,BBX Capital borrowed$80.0 million from a wholly-owned subsidiary of Bluegreen. Payments of interest are required on a quarterly basis, with the entire$80.0 million principal balance and accrued interest currently being due and payable inApril 2020 . This debt currently accrues interest at a per annum rate of 6% with quarterly interest payments to Bluegreen of$1.2 million .BBX Capital may be required to repay all or a portion of the$80.0 million borrowed from Bluegreen if required by Bluegreen to maintain its compliance with the covenants of its outstanding debt and will be required to repay the loan if the maturity date is not extended. In addition to the note payable to Bluegreen, the Company has other indebtedness which is summarized in Commitments above. The Company's indebtedness, including any future debt incurred by the Company, may make us more vulnerable to downturns in the economy and may subject the Company to covenants or restrictions on its operations and activities.
Credit Facilities with Future Availability
As of
IberiaBank$50.0 million Revolving Line of Credit. InMarch 2018 ,BBX Capital and certain of its wholly-owned subsidiaries entered into a Loan and Security Agreement and related agreements with IberiaBank ("Iberia"), as administrative agent and lender, andCity National Bank of Florida , as lender, which provide for a$50.0 million revolving line of credit. Amounts borrowed under the facility accrue interest at a floating rate of 30-day LIBOR plus a margin of 3.0% to 3.75% or the Prime Rate plus a margin of 1.50% to 2.25%. The applicable margin is based onBBX Capital's debt to EBITDA ratio. Payments of interest only are payable monthly. The facility matures, and all outstanding principal and interest will be payable, onJune 30, 2021 , with twelve-month renewal options atBBX Capital's request, subject to satisfaction of certain conditions. The facility is secured by a pledge of a percentage ofBBX Capital's membership interests inWoodbridge having a value of not less than$100.0 million . Borrowings under the facility may be used for business acquisitions, real estate investments, stock repurchases, letters of credit, and general corporate purposes. Under the terms and conditions of the Loan and Security Agreement,BBX Capital is required to comply with certain financial covenants, including maintaining minimum unencumbered liquidity and complying with debt to EBITDA financial ratios. The Loan and Security Agreement also contains customary affirmative and negative covenants, including those that, among other things, limit the ability ofBBX Capital and the other borrowers to incur additional indebtedness and to make certain loans and investments. As ofDecember 31, 2019 , there were no borrowings outstanding under the credit facility.Toronto-Dominion Commercial Bank . InMay 2017 , Renin entered into a credit facility with TD Bank that was subsequently renewed inSeptember 2019 and 2018. Under the terms and conditions of the credit facility, TD Bank agreed to provide term loans for up to$1.7 million and loans under a revolving credit facility for up to approximately$16.3 million subject to certain terms and conditions. As ofDecember 31, 2019 , the outstanding amounts under the term loan and revolving credit facility were$0.7 million and$6.1 million , respectively, with effective interest rates of 5.89% and 5.62%, respectively. 75
-------------------------------------------------------------------------------- As ofDecember 31, 2019 , Renin was not in compliance with certain covenants under the credit facility as a result of a breach of its quarterly debt service coverage ratio. During the first quarter of 2020, Renin received a waiver of the default from TD Bank, and the credit facility was amended to replace the existing debt service coverage ratio with an interest coverage ratio. In connection with the amendment to the credit facility, Renin repaid the outstanding balance of the term loan with borrowings from the revolving credit facility.Bank of America Revolving Line of Credit . InAugust 2018 , IT'SUGAR entered into a revolving credit facility withBank of America . Under the terms and conditions of the credit facility,Bank of America has agreed to provide a revolving line of credit to IT'SUGAR for up to$4.0 million based on available collateral as defined by the credit facility and subject to IT'SUGAR's compliance with the terms and conditions of the credit facility, including certain specific financial covenants. The revolving credit facility matures inAugust 2021 , and amounts outstanding bear interest at a LIBOR daily floating rate plus 1.50% or a monthly LIBOR rate subject to the terms and conditions of the credit facility. Payments of interest only are payable monthly. As ofDecember 31, 2019 , the outstanding amount under the revolving credit facility was$2.0 million .Banc of America Leasing & Capital Equipment Note . InSeptember 2018 , IT'SUGAR entered into aMaster Loan and Security Agreement withBanc of America Leasing & Capital, LLC which sets forth the terms and conditions pursuant to which IT'SUGAR may borrow funds to purchase equipment under one or more equipment security notes. The Agreement contains customary representations and covenants. Each equipment note constitutes a separate, distinct and independent financing of equipment and is secured by a security interest in the purchased equipment and is an unconditional contractual obligation of IT'SUGAR. As ofDecember 31, 2019 , there was one equipment note outstanding with a balance of$0.4 million . As ofDecember 31, 2019 ,BBX Capital and its subsidiaries (other than Bluegreen) had availability of approximately$57.0 million under the above revolving lines of credit, subject to eligible collateral and the terms of the facilities, as applicable. Bluegreen Bluegreen believes that it has sufficient liquidity from the sources described below to fund operations, including its anticipated working capital, capital expenditure, and debt service requirements, for the foreseeable future, subject to the success of its ongoing business strategy and the ongoing availability of credit. Bluegreen's primary sources of funds from internal operations are: (i) cash sales, (ii) down payments on VOI sales which are financed; (iii) proceeds from the sale of, or borrowings collateralized by, notes receivable, (iv) cash from finance operations, including mortgage servicing fees and principal and interest payments received on the purchase money mortgage loans arising from sales of VOIs, and (v) net cash generated from sales and marketing fee-based services and other fee-based services, including resort management operations. While the vacation ownership business has historically been capital intensive, and Bluegreen has in the past and may in the future pursue transactions or activities which may require significant capital investment, Bluegreen has sought to focus on the generation of "free cash flow" (defined as cash flow from operating activities, less capital expenditures) by (i) incentivizing its sales associates and creating programs with third-party credit card companies to generate a higher percentage of sales in cash; (ii) maintaining sales volumes that focus on its more efficient marketing channels; (iii) limiting its capital and inventory expenditures; (iv) utilizing sales and marketing, mortgage servicing, resort management services, title and construction expertise to pursue fee-based-service business relationships that generally require minimal up-front capital investment and have the potential to produce incremental cash flows, and (v) more recently by selling VOIs obtained through secondary markets or JIT arrangements. Bluegreen considers free cash flow to be a measure of cash generated by operating activities that can be used for future investing and financing activities, however, it is not a guarantee that Bluegreen will use its excess cash flows for such purposes. VOI sales are generally dependent upon providing financing to buyers. The ability to sell and/or borrow against notes receivable from VOI buyers has been a critical factor in Bluegreen's continued liquidity. A financed VOI buyer is generally only required to provide a minimum of 10% to 20% of the purchase price in cash or equity at the time of sale; however, selling, marketing and administrative expenses attributable to the sale are primarily cash expenses that generally exceed a buyer's minimum required down payment. Accordingly, having financing facilities available for the hypothecation, sale or transfer of VOI notes receivable has been a critical factor in Bluegreen's ability to meet its short and long-term cash needs. Bluegreen has attempted to maintain a number of diverse financing facilities. Historically, Bluegreen has relied on its ability to sell receivables in the term securitization market in order to generate liquidity and create capacity in its receivable facilities. If there is a tightening of credit or instability or volatility in the financial markets, as a result of the coronavirus or otherwise, there is no assurance that financing or securitization of VOIs will be available to us in the future at acceptable terms, or at all. Further, the recent coronavirus outbreak inthe United States could impact leisure travel and the sale of vacation packages and VOIs. While it is too early to gauge the likely duration or ultimate impact, package sales have declined and trip cancelations have increased since the coronavirus outbreak inthe United States . In addition, maintaining adequate VOI inventory to sell and pursue growth into new markets has historically required Bluegreen to incur debt for the acquisition, construction, and development of new resorts. Development expenditures during 2020 are expected to be in a range of$50.0 million to$60.0 million , which primarily relate to developments at theBluegreen/Big Cedar Vacations resort and refurbishments at certain of Bluegreen's resorts, including Bluegreen'sBlue Ridge Village resort inBanner Elk, North Carolina . 76 --------------------------------------------------------------------------------
In connection with Bluegreen's capital-light business activities, Bluegreen has entered into agreements with third party developers that allow Bluegreen to buy VOI inventory typically on a non-committed basis prior to when Bluegreen intends to sell such VOIs. Bluegreen's capital-light business strategy also includes secondary market sales pursuant to which Bluegreen enters into secondary market arrangements with certain HOAs and others generally on a non-committed basis, which allows Bluegreen to acquire VOIs generally at a significant discount, as such VOIs are typically obtained by the HOAs through foreclosure in connection with maintenance fee defaults. Acquisition of JIT and secondary market inventory in 2020 is expected to range between$10.0 million to$15.0 million .
Capital expenditures in connection with Bluegreen's sales and marketing
facilities, as well as its information technology capital expenditures, are
expected to be in a range of
Available funds may also be used to acquire or develop VOIs at other existing or new locations, acquire other businesses or assets, invest in other real estate based opportunities, or to fund loans to affiliates or others. Bluegreen's level of debt and debt service requirements have several important effects on Bluegreen's operations, including that: (i) significant debt service cash requirements reduce the funds available for operations and future business opportunities and increases Bluegreen's vulnerability to adverse economic and industry conditions, as well as conditions in the credit markets, generally; (ii) Bluegreen's leverage position increases its vulnerability to economic and competitive pressures; (iii) the financial covenants and other restrictions contained in indentures, credit agreements and other agreements relating to Bluegreen's indebtedness require Bluegreen to meet certain financial tests and may restrict Bluegreen's ability to, among other things, pay dividends, borrow additional funds, dispose of assets or make investments; and (iv) Bluegreen's leverage position may limit funds available for acquisitions, working capital, capital expenditures, dividends, and other general corporate purposes. Certain of Bluegreen's competitors operate on a less leveraged basis and have greater operating and financial flexibility than Bluegreen does.
See Note 13 - Debt under Item 8 included in this report for additional information with respect to Bluegreen's receivable-backed notes payable facilities
Credit Facilities for Bluegreen Receivables with Future Availability
Bluegreen maintains various credit facilities with financial institutions which allow Bluegreen to borrow against or sell its VOI notes receivable. As ofDecember 31, 2019 , Bluegreen had the following credit facilities with future availability, all of which are subject to revolving availability terms during the advance period and therefore provide for additional availability as the facility is paid down, subject to compliance with relevant covenants, eligible collateral and applicable terms and conditions during the advance period (dollars in thousands): Advance Period Expiration; Borrowing Outstanding Borrowing Borrowing Rate; Limit as of Balance as of Availability as Maturity as Rate as of December 31, December 31, of December 31, of December December 31, 2019 2019 2019 31, 2019 2019 Prime Rate; Liberty Bank June 2020; floor of 4.00%; Facility$ 50,000 $ 25,860 $ 24,140 March 2023 4.75% 30 day September LIBOR+2.75%; NBA Receivables 2020; March floor of 3.50%; Facility 70,000 32,405 37,595 2025 4.55% September 2021; 30 day Pacific Western
September LIBOR+2.75% to
Facility 40,000 30,304 9,696 2024 3.00%; 4.68%
December 30 day LIBOR
2022; or CP
KeyBank/DZ December +2.25%; 3.99%
Purchase Facility 80,000 31,708 48,292 2024 (1)
June 2020;
Quorum Purchase December (2)
Facility 50,000 44,525 5,475 2032
$ 290,000 $ 164,802 $ 125,198
(1)Borrowings accrue interest at a rate equal to either LIBOR, a "Cost of Funds"
rate or commercial paper ("CP") rates plus 2.25%. The interest rate will
increase to the applicable rate plus 3.25% upon the expiration of the advance
period.
(2)Of the amounts outstanding under the Quorum Purchase Facility at December 31,
2019 , $3.1 million accrues interest at a rate per annum of 4.75%, $21.3 million
accrues interest at a fixed rate of 4.95%, $1.6 million accrues interest at a
fixed rate of 5.0%, $17.2 million accrues interest at a fixed rate of 5.10%, and
$1.3 million accrues at a fixed rate of 5.50%.
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Other Credit Facilities and Outstanding Notes Payable
Fifth Third Syndicated Line-of-Credit and Fifth Third Syndicated Term Loan.
In
December 2016 , Bluegreen entered into a$100.0 million syndicated credit facility withFifth Third Bank , as administrative agent and lead arranger, and certain other bank participants as lenders. InOctober 2019 , Bluegreen amended the facility and increased the facility to$225.0 million . The amended facility includes a$100.0 million term loan (the "Fifth Third Syndicated Term Loan") with quarterly amortization requirements and a$125.0 million revolving line of credit (the "Fifth Third Syndicated Line-of-Credit"). Borrowings under the amended facility generally bear interest at LIBOR plus 2.00% - 2.50%, depending on Bluegreen's leverage ratio, are collateralized by certain of Bluegreen's VOI inventories, sales center buildings, management fees, short-term receivables and cash flows from residual interests relating to certain term securitizations, and will mature inOctober 2024 . At closing, Bluegreen borrowed the entire$100.0 million term loan and$30.0 million under the revolving line of credit. Proceeds were used to repay the outstanding balance on the existing Fifth Third Syndicated Credit Facility, repay$3.6 million on the existingFifth Third Bank Note Payable and pay expenses and fees associated with the amendment with the remainder to be used for general corporate purposes. As ofDecember 31, 2019 , outstanding borrowings under the facility totaled$128.8 million , including$98.8 million under the Fifth Third Syndicated Term Loan with an interest rate of 3.71%, and$30.0 million under the Fifth Third Syndicated Line of Credit with an interest rate of 3.85%.
Bluegreen also has outstanding obligations under various credit facilities and securitizations that have no remaining future availability as the advance periods have expired.
See Note 13 - Debt under Item 8 included in this report for additional information with respect to Bluegreen's credit facilities terms and covenants.
Critical Accounting Policies Management views critical accounting policies as accounting policies that are important to the understanding of our financial statements and also involve estimates and judgments about inherently uncertain matters. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated statements of financial condition and assumptions that affect the recognition of income and expenses on the consolidated statements of operations and comprehensive income for the periods presented. On an ongoing basis, management evaluates its estimates, including, but not limited to, those that relate to the determination of:
· The allowance for loan losses on VOI notes receivable;
· The estimated future sales value of VOI inventory;
· The recognition of revenue;
· The recovery of the carrying value of real estate inventories;
· The fair value of assets measured at, or compared to, fair value on a
non-recurring basis, such as assets held for sale, intangible assets, other
long-lived assets and goodwill;
· The valuation of assets and liabilities assumed in the acquisition of a
business;
· The amount of deferred tax valuation allowance and accounting for uncertain tax
positions; and
· The estimate of contingent liabilities related to litigation and other claims
and assessments.
The accounting policies that we have identified as critical accounting policies are:
· The recognition of revenue;
· Allowance for loan losses on VOI notes receivable;
· The estimated future sales value of VOI inventory;
· Evaluating long-lived assets and definite lived intangible assets for
impairment; and
· Evaluating goodwill and indefinite lived intangible assets for impairment.
Management bases its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from these estimates under different
assumptions and conditions. If actual results significantly differ from
management's estimates, our results of operations and financial condition could
be materially and adversely impacted.
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Revenue Recognition Variable Consideration Bluegreen generally offers qualified purchasers financing for up to 90% of the purchase price of VOIs. The typical financing provides for a term of ten years and a fixed interest rate, is fully amortizing in equal installments, and may be prepaid without penalty. For sales of VOIs for which Bluegreen provides financing, Bluegreen reduces the transaction price for expected loan losses, which is considered to be variable consideration. To the extent Bluegreen determines that it is probable that a significant reversal of cumulative revenue recognized may occur, it records an estimate of variable consideration as a reduction to the transaction price of the sales of VOIs until the uncertainty associated with the variable consideration is resolved. Bluegreen's estimate of variable consideration is based on the results of its static pool analysis, which relies on historical payment data for similar VOI notes receivable and tracks uncollectibles for each period's sales over the entire life of the notes. Bluegreen also considers whether historical economic conditions are comparable to then current economic conditions, as well as variations in underwriting standards. Bluegreen reviews its estimate of variable consideration on at least a quarterly basis. See "Allowance for Loan Losses on VOI Notes Receivable" below for a further discussion on expected loan loss estimates.
Variable Consideration on
The Company's trade sales are generally sold with a right of return, and the Company may provide other sales credits or incentives, such as volume discounts or rebates. Additionally, the Company is entitled to contingent consideration on certain single-family lot sales to builders. These programs are accounted for as variable consideration when determining the amount of revenue to recognize upon transfer of control. Estimates of contingent consideration, returns, and incentives are calculated using the expected value method and updated at the end of each reporting period when additional information becomes available. Variable consideration estimates are based on historical experience adjusted for current economic conditions and sales trends. These estimates rely on assumptions and judgments regarding issues where the outcome is unknown, and actual results or values may differ significantly from these estimates. A significant change in the timing of revenue recognized could occur if actual variable consideration is significantly different than our estimates.
Identification of Distinct Performance Obligations
Bluegreen's resort and club management revenue and related cost reimbursements are recognized as services are rendered. These services provided to the resort HOAs are comprised of day-to-day services to operate the resort, including management services and certain accounting and administrative functions. Management services provided to theVacation Club include managing the reservation system and providing owner, billing and collection services. Bluegreen's management contracts are typically structured as cost-plus with an initial term of three years and automatic one year renewals. Bluegreen believes these services to be a series of distinct goods and services to be accounted for as a single performance obligation over time and recognizes revenue as the customer receives the benefits of its services.
Allowance for Loan Losses on VOI Notes Receivable
The allowance for loan losses is related to the notes receivable generated in connection with financing Bluegreen's VOI sales. Bluegreen holds large amounts of homogeneous VOI notes receivable and assesses uncollectibility based on pools of receivables, as Bluegreen believes that there are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. In estimating future loan losses, Bluegreen does not use a single primary indicator of credit quality but instead evaluates its VOI notes receivable based upon a static pool analysis that incorporates the age of the respective receivables, default trends and prepayment rates by origination year, as well as the FICO scores of the borrowers.
The Estimated Future Sales Value of VOI Inventory
Bluegreen carries its completed inventory at the lower of (i) cost, including
costs of improvements and amenities incurred subsequent to acquisition,
capitalized interest, real estate taxes and other costs incurred during
construction, or (ii) estimated fair market value, less costs to sell. Bluegreen
uses the relative sales value method for establishing the cost of its VOI sales
and relieving inventory, which requires Bluegreen to make estimates subject to
significant uncertainty. Under the relative sales value method required by
timeshare accounting rules, cost of sales is calculated as a percentage of net
sales using a cost-of-sales percentage based on the ratio of total estimated
development costs to total estimated VOI revenue, including the estimated
incremental revenue from the resale of VOI inventory repossessed, generally as a
result of the default of the related receivable. Also, pursuant to timeshare
accounting rules, Bluegreen does not relieve inventory for VOI cost of sales
related to anticipated loan losses. Accordingly, no adjustment is made when
inventory is reacquired upon default of the related receivable.
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Evaluating Long-lived Assets and Definite-lived Intangible Assets for Impairment
The Company evaluates its long-lived assets and definite-lived intangible assets, including property and equipment, real estate held-for-investment, and Bluegreen's undeveloped or under development resort properties, for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. With respect to property and equipment associated with new retail locations, the Company assesses whether there are indicators of impairment upon the earlier of the stabilization of the applicable retail location or twelve to eighteen months following the opening of the location (depending on the maturity of the retail brand). The carrying amounts of assets are not considered recoverable when the carrying amounts exceed the undiscounted cash flows estimated to be generated by those assets. As the carrying amounts of these assets are dependent upon estimates of future earnings that they are expected to generate, these assets may be impaired if cash flows decrease significantly or do not meet expectations, in which case they would be written down to their fair value. The estimates of useful lives and expected cash flows require us to make significant judgments regarding future periods that are subject to a number of factors, many of which may be beyond our control. As ofDecember 31, 2019 , the Company had capitalized in excess of$9.2 million of property and equipment associated with new IT'SUGAR retail locations which had not stabilized or had not been open for twelve to eighteen months. To the extent that these retail locations do not meet expectations or actual performance within twelve to eighteen months following the opening of such locations indicates that the carrying amounts of the property and equipment associated with such locations may not be recoverable, we may recognize impairment charges associated with these locations in future periods.
Evaluating Goodwill and Indefinite Lived Intangible Assets for Impairment
The process of evaluating goodwill for impairment involves the determination of the fair value of the Company's reporting units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including the Company's interpretation of current economic indicators and market valuations, and assumptions about the Company's strategic plans with regard to its operations. Due to the uncertainties associated with such evaluations, actual results could differ materially from such estimates. The Company tested its goodwill for impairment onDecember 31, 2019 (its annual testing date). The Company determined that the$35.2 million of goodwill assigned to the IT'SUGAR reporting unit atDecember 31, 2019 was not impaired. However, if the IT'SUGAR reporting unit does not meet expectations or if there is a downturn in the confectionery industry, we may recognize goodwill impairment charges in future periods. The Company's goodwill as ofDecember 31, 2019 and 2018 was$37.2 million . The Company's indefinite lived intangible assets as ofDecember 31, 2019 consisted of$61.3 million of management contracts, which were originated in connection with theNovember 16, 2009 acquisition of a controlling interest in Bluegreen. Such management contracts are not amortized but instead are reviewed for impairment at least annually, or if events or changes in circumstances indicate that it is more likely than not that the related carrying amounts may be impaired. Management contracts are impaired when the fair value of the contract is lower than the carrying value. The fair value of management contracts is based on an evaluation of estimated cash flows that can be generated from the contract which are uncertain and subject to change. Due to the uncertainties associated with such evaluations, actual results could differ materially from such estimates and the Company could recognize impairments on management contracts if future cash flows do not meet expectations. 80
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