Except as otherwise noted or where the context otherwise requires, the terms "the Company," "we," "us," or "our" refers toBBX Capital, Inc. and its consolidated subsidiaries, and the term "BBX Capital " refers toBBX Capital, Inc. as a standalone entity.BBX Capital's principal holdings areBBX Capital Real Estate, LLC ("BBX Capital Real Estate " or "BBXRE"),BBX Sweet Holdings, LLC ("BBX Sweet Holdings "), andRenin Holdings, LLC ("Renin").
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements based largely on current expectations of the Company that involve a number of risks and uncertainties. All opinions, forecasts, projections, future plans, or other statements, other than statements of historical fact, are forward-looking statements and can be identified by the use of words or phrases such as "plans," "believes," "will," "expects," "anticipates," "intends," "estimates," "our view," "we see," "would," and words and phrases of similar import. The forward-looking statements in this document are also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and involve substantial risks and uncertainties. We can give no assurance that such expectations will prove to be correct. Actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements contained herein. Forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. When considering forward-looking statements, the reader should keep in mind the risks, uncertainties, and other cautionary statements made in this report and in the Company's other reports filed with theSecurities and Exchange Commission ("SEC"). The reader should not place undue reliance on any forward-looking statement, which speaks only as of the date made. This document also contains information regarding the past performance of the Company and its respective investments and operations. The reader should note that prior or current performance and pro forma financial information is not a guarantee or indication of future performance. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, and all such information should only be viewed as historical data. Future results and the accuracy of forward-looking statements may be affected by various risks and uncertainties, including the risk factors applicable to the Company which are described herein and in "Item 1. Business - Cautionary Note Regarding Forward-Looking Statements" and "Item 1A. Risk Factors" of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Annual Report"). These risks and uncertainties also include risks relating to general competitive, economic, industry, market, geopolitical, and public health issues, including impacts of inflation on our costs and the ability to pass on price increases to our customers, a decline in customer spending or deterioration in consumers' financial position or confidence, the COVID-19 pandemic, labor shortages, increases in interest rates, current inflationary trends and possible deflationary pressures. The current inflationary environment has had a negative impact on our margins, including as a result of increased energy and raw material costs and increasing wages in the labor markets in which we compete. We expect that inflation will continue to pressure our margins in future periods. In addition, in response to the concerns over inflation risk in the broaderU.S. economy, theU.S. Federal Reserve raised interest rates in March, June, July andSeptember 2022 and signaled that additional rate increases may continue throughout the year. Increases in interest rates may ultimately result in an economic recession, which could have a material adverse impact on us. Adverse economic conditions resulting from inflationary pressures,U.S. Federal Reserve actions, and geopolitical issues are difficult to predict, and it is not possible to accurately assess the expected duration and effects of the uncertain economic and geopolitical environment which create a number of risks that could adversely impact our businesses. These include (i) changes in consumer demand, (ii) disruptions in global supply chains, (iii) employee absenteeism and a general labor shortage, as well as increases in the cost of hiring and maintaining employees, (iv) disruptions in credit and capital markets, (v) our customer retention, including our ability to maintain our relationships with large customers, (vi) changes inU.S. federal income or other tax laws and interpretation of tax laws and (vii) heightened cybersecurity risks. The duration and severity of these factors are uncertain, and the Company may continue to be adversely impacted by these factors in future periods. It is also difficult to predict whether the COVID-19 pandemic or current economic conditions will result in prolonged changes in customers' behavior, which may include continued or permanent decreases in discretionary spending and reductions in demand for retail store and confectionery products, home improvement products or real estate, each of which would have a material adverse impact on our business, operating results and financial condition. 33 -------------------------------------------------------------------------------- Further, current inflationary trends may adversely impact our results of operations. BBXRE has experienced a significant increase in commodity and labor prices, which has resulted in higher development and construction costs. These cost increases may be exacerbated due to the significant destruction caused by hurricane Ian inFlorida . IT'SUGAR has experienced an increase in the cost of inventory and freight, and Renin has experienced significant supply chain challenges and increases in costs related to shipping and raw materials which had an adverse effect on its margin. These increases in Renin's costs have adversely impacted and will continue to adversely impact Renin's compliance with the terms of its credit facility, which may require additional loan paydowns or the full repayment of its loan facility. These inflationary trends could have a material effect on the Company's results of operations and financial condition if the Company is unable to increase prices to its customers to offset the increase in its costs. The continuing effect of the COVID-19 pandemic, increasing interest rates and other actions theFederal Reserve may take in response to inflationary pressure as well as other factors, may cause a downturn in the economic environment, which could further adversely impact the gross margins of the Company's operating businesses, particularly if an economic downturn is prolonged in nature and impacts consumer demand, materially disrupts the supply chain for the Company's operating businesses' products and raw materials, delays the production and shipment of products and raw materials from foreign suppliers or increases shipping costs. Labor is one of the primary components of our expenses. A number of factors may adversely affect the labor force available to us or increase our labor costs, including labor shortages, demand for labor to assistant in the clean-up and rebuilding of communities inSouthwest Florida in the aftermath of Hurricane Ian, increased competition for qualified employees, federal unemployment subsidies, and other government regulations. A sustained labor shortage or increased turnover rates, whether caused by COVID-19, wage inflation or as a result of general economic conditions, natural disasters or other factors, could lead to increased costs, increased overtime pay to meet demand and increased costs to attract and retain employees, which could in turn negatively affect our operations or adversely impact our business and results. Further, any mitigation measures we take in response to a decrease in labor availability or an increase in labor costs may be unsuccessful and could have negative effects.
Rising interest rates could also have an adverse impact on homebuyers and home sales, the availability of financing, the affordability of residential mortgages, the profitability of development projects as a majority of development costs are financed with third party debt, and the value of multifamily apartment communities as rising interest rates increase capitalization rates applied to sales transactions.
While the Company believes that the bankruptcy process improved IT'SUGAR's financial condition as a result of the relief it obtained in relation to its pre-petition liabilities and amendments to its lease agreements, the Company continues to be subject to risks and uncertainties related to IT'SUGAR that have had and could continue to have a material adverse effect on the Company and IT'SUGAR's business, results of operations, and financial condition. These risks and uncertainties include, without limitation, the potential for additional disruptions to its operations if there is another outbreak of COVID-19 or a similar pandemic; risks associated with the current inflationary economic environment with respect to demand, sales levels, and consumer behavior, as well as increased inventory, freight, and labor costs and general supply chain disruptions which have had and may continue to have a material adverse effect in future periods; the risk that IT'SUGAR may not be able to continue to increase prices without significantly impacting consumer demand; risks relating to IT'SUGAR's business plans, including that IT'SUGAR may not be able to fund or otherwise open new retail locations as or when expected, or at all; the risk that IT'SUGAR may not be able to extend or enter into new lease agreements for any existing "pop-up" locations which it desires to extend, whether on favorable terms or at all; risks related to the lease amendments entered into by IT'SUGAR, including that, while many of the lease amendments provided for the payment of rent based on a percentage of sales volumes for a specified period of time as opposed to fixed rental payments, IT'SUGAR continues to bear the costs of staffing and procuring inventory and the terms of many of such amendments require IT'SUGAR to resume the payment of previously scheduled fixed lease payments going forward and, as a result, IT'SUGAR's ongoing occupancy costs have increased and will continue to increase as fixed rental payments under these leases revert to pre-bankruptcy levels. Further, landlords may exercise their right to terminate certain leases where rent was reduced or where IT'SUGAR has opened "pop-up" retail locations. The risk factors described in the 2021 Annual Report, as well as the other risks and factors detailed in this report and the other reports filed by the Company with theSEC , are not necessarily all of the important factors that could cause the Company's actual results to differ materially from those expressed in any of the forward-looking statements. Other unknown or unpredictable factors could cause the Company's actual results to differ materially from those expressed in any of the forward-looking statements. As a result, the Company cautions that the foregoing factors are not exclusive. 34 -------------------------------------------------------------------------------- Given these uncertainties, you are cautioned not to place undue reliance on forward-looking statements, and you should read this Quarterly Report on Form 10-Q with the understanding that actual future results, levels of activity, performance, and events and circumstances may be materially different from prior results or what the Company expects. The Company qualifies all forward-looking statements by these cautionary statements. Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and the Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report.
Critical Accounting Policies
See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section "Critical Accounting Policies" in the Company's 2021 Annual Report for a discussion of the Company's critical accounting policies.
New Accounting Pronouncements
See Note 1 to the Company's condensed consolidated financial statements included in Item 1 of this report for a discussion of new accounting pronouncements applicable to the Company.
Overview
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 is long-term growth as measured by increases in book value and intrinsic value over time. 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. Further, subject to market conditions and other factors, the Company has and may from time to time in the future repurchase its outstanding common stock.
Impact of Current Economic Conditions
Headline inflation has accelerated to 8.2%, and there has been broad based price increases for goods and services. TheFederal Reserve has attempted to address inflation through monetary policy, including the wind-down of quantitative easing and by increasing the Federal Funds rate. The Russian invasion ofUkraine and the related embargoes againstRussia , as well as the impact of the efforts byChina to mitigate COVID-19 cases in that country, have worsened supply chain issues with the potential of further exacerbating inflationary trends. It is possible thatthe United States and/or the global economy generally will experience a recession of an uncertain magnitude and duration. These conditions can negatively affect our operating results by resulting in, among other things: (i) higher interest expense on variable rate debt and any new debt, (ii) lower gross margins due to increased costs of manufactured or purchased inventory and shipping, (iii) a decline in the availability of debt and equity capital for new real estate investments and the number of real estate development projects meeting the Company's investment criteria, (iv) higher overall operating expenses due to increases in labor and service costs, (v) a reduction in customer demand for our products, (vi) a shift in customer behavior as higher prices affect customer retention and higher consumer borrowing costs, including mortgage borrowings, affect customer demand, and (vii) increased risk of impairments as a result of declining valuations. In light of inflationary conditions, we have taken steps to increase prices; however, such increases may not be accepted by our customers, may not adequately offset the increases in our costs, and/or could negatively impact customer retention and our gross margin. BBXRE has experienced a significant increase in commodity and labor prices, which has resulted in higher development and construction costs, and disruptions in the supply chain for certain commodities and equipment have resulted in ongoing supply shortages of building materials, equipment, and appliances. These factors have impacted the timing of certain projects currently under construction and the commencement of construction of new projects. Furthermore, homebuilders have seen a general softening of demand, and the increase in mortgage rates have had an adverse impact on residential home sales. In addition, rising interest rates have increased the cost of the Company's 35 -------------------------------------------------------------------------------- outstanding indebtedness and any financing for new development projects. Increased rates have also had an adverse impact on the availability of financing, and the anticipated profitability of development projects, as a majority of development costs are financed with third party debt and capitalization rates related to multifamily apartment communities are generally impacted by interest rates. BBXRE has also recently observed a decline in the number of potential investors interested in pursuing equity or debt financing for new multifamily apartment developments and the acquisition of stabilized multifamily apartment communities. Although such factors have not yet materially impacted BBXRE's results of operations, we expect that they may have an adverse impact on BBXRE's operating results in future periods. Similarly, as a result of inflationary pressures and ongoing disruptions in global supply chains, IT'SUGAR has experienced an increase in the cost of inventory and freight, as well as delays in its supply chain. While IT'SUGAR has generally been able to mitigate the impact of increased costs through increases in the prices of its products, supply chain disruptions have impacted its ability to maintain historical inventory levels at its retail locations. To the extent that costs continue to increase, there is no assurance that IT'SUGAR will be able to continue to increase the prices of its products without significantly impacting consumer demand and its sales volume. Further, following difficulties in maintaining appropriate inventory levels during fiscal 2021, IT'SUGAR has increased the inventory levels at its retail locations in 2022 in an effort to ensure that it can meet consumer demand; however, in light of current economic conditions, including a possible slowdown in consumer demand, such increased inventory levels have increased the risk that IT'SUGAR will be unable to sell the products and the risk for inventory writedowns. IT'SUGAR has also experienced an increase in payroll costs as a result of shortages in available labor at its retail locations. Global supply chain disruptions and increases in commodity prices have also contributed to a significant increase in Renin's costs related to shipping and raw materials, as well as delays in its supply chains, which have: (i) negatively impacted Renin's product costs and gross margin, (ii) increased the risk that Renin will be unable to fulfill customer orders, and (iii) negatively impacted Renin's working capital and cash flows due to increased inventory in transit, a prolonged period between when it is required to pay its suppliers and it is paid by its customers, and an overall decline in its gross margin. While Renin has obtained price increases for many of its products, Renin's gross margin has nonetheless been negatively impacted by these cost pressures. Additionally, the negotiation of increased prices with customers increases the risk that customers will pursue alternative sources for Renin's products, which may result in Renin losing customers or require it to lower prices in an effort to retain customers. Increases in interest rates will also adversely impact Renin's results. Further, Renin has recently observed a decline in consumer demand, which Renin believes may be attributable to (i) the impact of price increases and overall inflationary pressures on consumer behavior and (ii) a shift in consumer spending away from home improvements as the economy has reopened. In addition, following difficulties in maintaining appropriate inventory levels during 2021, Renin has increased its inventory levels in an effort to ensure that it can meet consumer demand; however, in light of current economic conditions, including a slowdown in consumer demand, such increased inventory levels have increased the risk of Renin being unable to sell such products and the risk of inventory writedowns. In addition, as part of Renin's efforts to mitigate the impact of the current economic environment on its business, Renin executed a lease agreement for a new manufacturing and distribution facility near one of its existing locations inCanada , with the goal of substantially winding down its operations in one of its other facilities and eliminating other logistics and warehousing facilities. In connection with these efforts, Renin expects to incur in excess of$2.0 million related to, among other things, severance expenses, relocation and freight costs to transfer inventory, and capital expenditures for new racking for storage and equipment. However, there is no assurance that these efforts and the related upfront costs, which Renin believes will reduce its operating costs over time, will result in the expected cost savings and will not have unanticipated impacts on Renin's operations, including its ability to meet customer demand. There is no assurance that the Company's operating subsidiaries will be able to increase prices in response to increasing costs, which could have a material adverse effect on the Company's results of operations and financial condition. Any downturn in the economic environment may also have a significant adverse impact on the gross margins of the Company's operating businesses, particularly if an economic downturn is prolonged in nature and impacts consumer demand, materially disrupts the supply chain for the Company's operating businesses' products and raw materials, delays the production and shipment of products and raw materials from foreign suppliers or increases shipping costs.
The Company incurred minimum damage from hurricane Ian that made landfall in
36 -------------------------------------------------------------------------------- InAugust 2022 , the Inflation Reduction Act was enacted which changes the tax laws to provide a minimum corporate tax equal to fifteen percent of the adjusted financial statement income of certain corporations as well as a one percent excise tax on share buybacks, effective for tax years beginning in 2023. The Inflation Reduction Act also provides for enhanced tax enforcement and tax incentives for clean energy investments. The minimum corporate tax and the excise tax on share buybacks is currently not expected to have a material impact on the Company's tax liability; however, it is difficult to predict whether these tax law changes or future regulations or interpretations will have a material adverse effect on our business, results of operations, financial condition and liquidity.
Summary of Consolidated Results of Operations
Consolidated Results
The following summarizes key financial highlights for the three months ended
?Total consolidated revenues of
?Income before income taxes of
?Net income attributable to shareholders of
?Diluted earnings per share of
The following summarizes key financial highlights for the nine months ended
?Total consolidated revenues of
?Income before income taxes of
?Net income attributable to shareholders of
?Diluted earnings per share of
The Company's consolidated results of operations for the three months ended
?A decrease in net profits from BBXRE's sale of lots to homebuilders at theBeacon Lake Community development, as BBXRE sold 8 developed lots during the 2022 period compared to 55 developed lots and 299 undeveloped lots during the 2021 period;
?Lower recoveries from loan losses primarily related to the collection of previously charged off loans receivable in the legacy asset portfolio during the 2021 period;
?The recognition by Renin of a loss before income taxes of$3.3 million during the 2022 period compared to a loss before income taxes of$0.7 million during the 2021 period primarily due to a decline in its gross margin percentage relating primarily to the significant increases in costs related to freight, raw materials, and labor in 2022 compared to 2021; and ?An increase in corporate general and administrative expenses primarily related to higher compensation expense during the 2022 period, including the impact of restricted stock awards granted inJanuary 2022 ; partially offset by ?A net increase in equity in net earnings of unconsolidated joint ventures during the 2022 period as compared to the same 2021 period primarily due to the Miramar East/West joint venture's sale ofAltis Miramar , a 320-unit multifamily apartment community located inMiramar, Florida , andAltra Miramar , a 330-unit multifamily apartment community adjacent toAltis Miramar in 2022, partially offset by the Altis Grand at the Preserve joint venture's sale of its multifamily apartment community and the Altis Grand Central joint venture's recapitalization of its ownership of its multifamily apartment community in 2021. In addition to the items discussed above for the three months endedSeptember 30, 2022 compared to the same 2021 period, the Company's consolidated results of operations for the nine months endedSeptember 30, 2022 compared to the same 2021 period were also significantly impacted by the following: 37 -------------------------------------------------------------------------------- ?An additional net increase in equity in net earnings of unconsolidated joint ventures during the first half of 2022 primarily due to (i) the Altis LittleHavana joint venture's sale of its multifamily apartment community in 2022, (ii) BBXRE's sale of its equity interest in theBayview joint venture in 2022, and (iii) the Marbella joint venture's sale of single-family homes in 2022, partially offset by the Altis Promenade joint venture's sale of its multifamily apartment community in 2021; and
?The recognition of a
Segment Results
Information regarding income (loss) before income taxes by reportable segment is set forth in the table below (in thousands):
For the Three Months Ended For the
Nine Months Ended September
September 30, 30, 2022 2021 Change 2022 2021 Change BBX Capital Real Estate$ 14,259 27,924 (13,665) 45,733 44,711 1,022 BBX Sweet Holdings 80 413 (333) (1,268) 15,953 (17,221) Renin (3,327) (723) (2,604) (10,932) 877 (11,809) Other (31) 112 (143) 871 1,270 (399) Reconciling items and eliminations (4,462) (2,027) (2,435) (14,089) (6,831) (7,258) Income before income taxes 6,519 25,699 (19,180) 20,315 55,980 (35,665) Provision for income taxes (2,519) (6,382) 3,863 (7,852) (13,971) 6,119 Net income 4,000 19,317 (15,317) 12,463 42,009 (29,546) Net loss (income) attributable to noncontrolling interests 24 (125) 149 200 (352) 552 Net income attributable to shareholders$ 4,024 19,192 (15,168) 12,663 41,657 (28,994)
BBX Capital Real Estate Reportable Segment
Segment Description
BBX 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 rental apartment communities, single-family master-planned for sale housing communities, and commercial properties located primarily inFlorida . In addition, BBXRE currently owns a 50% equity interest in the Altman Companies, a developer and manager of multifamily apartment communities, and anticipates acquiring an additional 40% of the Altman Companies in 2023. BBXRE also manages the legacy assets acquired in connection with the Company's sale of BankAtlantic in 2012, including portfolios of loans receivable, real estate properties, and judgments against past borrowers. BBXRE is also currently pursuing investment opportunities in the development of warehouse and logistics facilities and has expanded its operating platform to include a logistics real estate division. Further, the Altman Companies has been evaluating potential opportunities to develop multifamily apartment communities in new geographical areas, including the greaterAtlanta, Georgia area.
Business Update
As previously disclosed, during 2021 and into the first half of 2022, BBXRE's operations benefited from an increase in demand for single-family and multifamily apartment housing in many of the markets inFlorida in which BBXRE operates, as sales at BBXRE's single-family home developments and leasing at its multifamily apartment developments sponsored by the Altman Companies were exceeding prior expectations. Further, BBXRE had benefited from (i) investor demand for the acquisition of stabilized multifamily apartment communities, as evidenced by the sale of three communities sponsored by the Altman Companies in 2021 and three additional communities sponsored 38 -------------------------------------------------------------------------------- by the Altman Companies in 2022, and (ii) available debt and equity capital for financing new multifamily apartment developments, as evidenced by the Altman Companies commencing the development of three multifamily apartment communities during 2021 and another multifamily community during the first nine months of 2022. However, more recently, rising interest rates have increased the cost of the Company's outstanding indebtedness and any new financing and have also had an adverse impact on applications for mortgage financing and home sales, the availability of financing, and the anticipated profitability of development projects, as a majority of development costs are financed with third party debt and capitalization rates related to multifamily apartment communities are generally impacted by interest rates. BBXRE has also recently observed a decline in the number of potential investors interested in pursuing equity or debt financing for new multifamily apartment developments and the acquisition of stabilized multifamily apartment communities, which BBXRE believes is also a result of rising interest rates and an overall decline in economic and market conditions. In addition, there has also been a significant increase in land, commodity, and labor prices, which has resulted in higher development and construction costs, and disruptions in supply chains for certain commodities and equipment, which has resulted in ongoing supply shortages of building materials, equipment, and appliances. These factors have impacted the timing of projects currently under construction and are also impacting the commencement of new development opportunities and the anticipated profitability of such developments. Although the above mentioned factors have not yet materially impacted BBXRE's results of operations, these factors have impacted the Altman Companies' pipeline of new developments, as further described below, and may have a material adverse impact on BBXRE's results of operations, cash flows, and financial condition in future periods, particularly if (i) debt and equity financing is not available for new projects or are only available on less attractive terms and (ii) the values of multifamily apartment communities are adversely impacted by an increase in capitalization rates or a decline in the number of potential purchasers. As previously discussed in the Company's 2021 Annual Report, BBXRE's operating results in 2021 significantly benefited from demand for single-family and multifamily housing, and certain of BBXRE's existing investments continued to benefit from these factors in 2022, as evidenced by the sales ofAltis Little Havana ,Altis Miramar , andAltra Miramar and BBXRE's sale of its investment in theBayview joint venture. However, BBXRE continues to expect a relative decline in revenues and net income over the next several years as compared to 2021 and 2022 based on its current pipeline of investments, which reflects, among other things, (i) the accelerated monetization of certain investments from future years into 2021 and 2022 and (ii) the temporary delay of the commencement of new projects in 2020 due to the COVID-19 pandemic. In light of these factors, BBXRE has been focused on the sourcing and deployment of capital in investments in new development opportunities where supported by market conditions, including (i) the expansion of its investments in multifamily rental apartment communities through the Altman Companies and (ii) investing in the development of warehouse and logistics facilities through its recently formed logistics real estate division. However, due to the expected life cycle of these developments, which generally results in the monetization of an investment approximately three years following the commencement of the development, BBXRE does not expect that its operating results will significantly benefit from these efforts in the near term. Further, rising interest rates, increases in development costs, and a decline in economic and market conditions have more recently adversely impacted the costs and availability of debt and equity capital and reduced the number of development projects meeting its investment criteria, and such conditions may adversely impact BBXRE's plans to deploy capital in investments in new development opportunities and its goals to build long-term shareholder value and a diversified portfolio of profitable real estate investments that generate recurring earnings and cash flows in future periods.
The Altman Companies and Related Investments
In 2018, BBXRE acquired a 50% membership interest in the Altman Companies, a joint venture between BBXRE andJoel Altman engaged in the development, construction, and management of multifamily apartment communities. Pursuant to the operating agreement of the Altman Companies, BBXRE will acquire an additional 40% equity interest in the Altman Companies fromJoel Altman inJanuary 2023 for a purchase price of$9.4 million , subject to certain adjustments (including reimbursements for predevelopment expenditures incurred at the time of purchase), and will also acquire control and decision making authority for all significant operating and financing decisions related to the Altman Companies as of and subsequent to the acquisition. Further,Joel Altman can also, at his option or in other predefined circumstances, requireBBX Capital to purchase his remaining 10% equity interest in the Altman Companies for$2.4 million . However,Joel Altman will retain his membership interests, including his decision making rights, in the managing member of any development joint ventures that are originated prior to BBXRE's acquisition fromJoel Altman of additional equity interests in the Altman Companies. 39 -------------------------------------------------------------------------------- The Company currently accounts for its investment in the Altman Companies under the equity method of accounting. Upon the acquisition of the additional 40% equity interest in the Altman Companies in 2023, the Company will consolidate the Altman Companies in its financial statement using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed associated with an acquiree be recognized at their fair values at the acquisition date. As part of the application of the acquisition method of accounting, the Company will remeasure the carrying value of its current equity interests in the Altman Companies at fair value as of theJanuary 2023 acquisition date, with the remeasurement adjustment recognized in the Company's statement of operations, and expects to recognize goodwill based on the difference between (i) the fair values of the identifiable assets and liabilities of the Altman Companies at the acquisition date and (ii) the cash consideration paid at closing and the fair values of the Company's interests and any noncontrolling interests in the Altman Companies at the acquisition date. Further, the Company expects that it will consolidate the managing member of any new development joint ventures that are sponsored and formed by the Altman Companies commencing as of and subsequent to theJanuary 2023 acquisition date. However, becauseJoel Altman will generally retain his decision making rights in the managing member of development joint ventures that are originated prior to the acquisition date inJanuary 2023 , the Company expects that it will continue to apply the equity method of accounting to those joint ventures. As ofSeptember 30, 2022 , BBXRE had investments in seven active developments sponsored by the Altman Companies, which are summarized as follows (dollars in thousands): Carrying Value of BBXRE Investment Expected at Apartment Project Status at Exit/Sales September Project Location Units September 30, 2022 Date 30, 2022 Altis Grand Tampa, 314 Stabilized - 94%$ 687 Central Florida Occupied 2031 Altis Ludlam Miami, Under Construction - Trail (1) Florida 312 Expected Completion in 2022 2023 11,803 Altis Grand at Orlando, Under Construction - Lake Willis Florida 329 Expected Completion in Phase 1 2024 2025 728 Altra Lake Orlando, 230 Under Construction 1,066 Willis Phase 2 Florida 2026 Altis Grand at Lutz, Under Construction - Suncoast Florida 449 Expected Completion in 2024 2025 4,483 West Palm Under Construction - Altis Blue Lake Beach, 318 Expected Completion in Florida 2024 2025 634 Altis Santa Naples, Under Construction - Barbara Florida 242 Expected Completion in 2024 2025 424 (1)The carrying value of BBXRE's investment atSeptember 30, 2022 includes$11.2 million related to BBXRE's investment in the preferred equity associated with theAltis Ludlam Trail project, including the investment balance and accrued preferred return. Developments Sold in 2022 InJune 2022 , the Altis Little Havana joint venture sold Altis Little Havana, its 224-unit multifamily apartment community located inMiami, Florida . As a result of the transaction, BBXRE received a net cash distribution of approximately$9.4 million from the joint venture and recognized$8.4 million of equity earnings from its investment in the joint venture during the nine months endedSeptember 30, 2022 . InJuly 2022 , the Miramar East/West joint venture soldAltis Miramar , its 320-unit multifamily apartment community located inMiramar, Florida , andAltra Miramar , its 330-unit multifamily apartment community adjacent toAltis Miramar . As a result of the transaction, BBXRE received a net cash distribution of approximately$16.4 million from the joint venture and recognized$14.0 million of equity earnings from its investment in the joint venture during the three and nine months endedSeptember 30, 2022 . New Developments InFebruary 2022 , a joint venture sponsored by the Altman Companies closed on development financing and commenced the development of Altis Santa Barbara, a planned 242-unit multifamily apartment community inNaples, Florida . BBXRE invested$0.4 million in the managing member of the joint venture. 40 -------------------------------------------------------------------------------- In 2019, BBXRE andJoel Altman had previously invested in the Altis Lake WillisVineland joint venture, which was sponsored by the Altman Companies to acquire land, obtain entitlements, and fund predevelopment costs for the development of a multifamily apartment community inOrlando, Florida . In 2021, the joint venture decided to develop the project in two phases. Accordingly, inSeptember 2021 , the Altis Lake Willis Phase 1 joint venture was formed to develop the first phase of the project, which is expected to be comprised of a 329-unit multifamily apartment community, and closed on its development financing. In connection with the closing, BBXRE andJoel Altman acquired membership interests in the managing member of the Altis Lake Willis Phase 1 joint venture and retained their respective ownership interests in the land and predevelopment costs related to the anticipated second phase of the project through the existing joint venture, Altis Lake Willis Vineland. InSeptember 2022 , the Altis Lake Willis Phase 2 joint venture was formed with an institutional investor to develop the second phase of the project, which is expected to be comprised of a 230-unit multifamily apartment community, and the remaining land held by the Altis Lake Willis Vineland joint venture was transferred to theAltis Lake Willis Phase 2 joint venture in exchange for cash. In connection with the transfer of the land, BBXRE andJoel Altman also acquired membership interests in the managing member of the Altis Lake Willis Phase 2 joint venture. As a result of the transaction, BBXRE received a cash distribution of approximately$2.3 million from the Altis Lake Willis Vineland joint venture and recognized approximately$0.4 million of equity earnings from its investment in the venture during the three and nine months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , predevelopment activities related to the development ofAltis Lake Willis Phase 2 remained ongoing, and the joint venture was continuing to seek debt financing for the project. Other During 2021 and into the first half of 2022, developments sponsored by the Altman Companies benefited from an increase in demand for multifamily apartment housing in many of the markets inFlorida in which the Altman Companies operates, as the volume of new leases and rental rates at its completed developments were generally exceeding prior expectations. Further, as evidenced by the recent sales of Altis Little Havana inJune 2022 andAltis Miramar andAltra Miramar inJuly 2022 , the Altman Companies continued to benefit from investor demand for the acquisition of stabilized multifamily apartment communities. However, the Altman Companies has recently observed (i) a deceleration in the growth of rental rates at its developments, as well a decline in rates in certain markets, (ii) a relative slowdown in investor demand for multifamily apartment communities and indications of an increase in capitalization rates, which would have a negative impact on the value of multifamily apartment communities, (iii) a relative decline in the availability of debt and equity capital for new multifamily apartment developments, and (iv) a decrease in the number of potential development projects which meet its investment criteria. The Altman Companies believes that these conditions are a result of increases in interest rates and a decline in economic and market conditions. With respect to its communities where construction commenced in 2021 and in the first half of 2022, while the Altman Companies' development budgets for these projects contemplated increases in commodity and labor prices, the Altman Companies has continued to experience significant volatility in development costs, including higher than anticipated interest costs related to debt financing and unanticipated increases in commodities costs, and potential delays in the timing of the completion of projects. While the Altman Companies previously anticipated that the impact of higher development costs on the profits expected to be earned on these developments would be offset to some extent by various factors, including higher rental rates currently resulting from inflationary factors and demand for multifamily housing, the Altman Companies now believes that, in light of rising interest rates and the potential for decreases in investor demand and increases in capitalization rates, which would negatively impact the values at which these communities could be sold upon stabilization and the timing of such sales, there is significant risk that these projects will be less profitable than previously expected or may not be profitable at all. While the Altman Companies has identified new opportunities primarily located inSouth Florida ,Orlando, Florida , and the greaterTampa, Florida area, all of which have experienced increased demand for multifamily housing, the significant increases in land, commodity, and labor prices, as well as supply chain disruptions and material shortages, have resulted in a compression in the profits expected to be earned from such developments, which has been further exacerbated by the impact of higher interest rates on development costs and the estimated values at which multifamily apartment communities can be sold. Further, there is increased uncertainty related to whether growth in rental rates will be able to offset more recent increases in development costs for new communities. In addition, the Altman Companies has observed a relative decline in the availability, as well as increases in the cost, of debt and equity capital for new development opportunities, and uncertainty in the overall economy and compression in the profits expected to be earned from new developments has increased the risk of the Altman Companies being unable to identify equity and/or debt financing on acceptable terms, or at all. As a result of these factors, the Altman Companies may make a determination to not pursue prospective opportunities and/or may be unable to pursue such developments, which could result in, among other things, (i) increased operating losses at the Altman Companies due to a decline in development, general contractor, and management fees, (ii) the recognition of impairment losses by BBXRE and/or the Altman 41
-------------------------------------------------------------------------------- Companies related to their current investments, including predevelopment expenditures related to prospective development opportunities that are abandoned, and (iii) the recognition of impairment losses related to BBXRE's overall investment in the Altman Companies, as the profitability and value of the Altman Companies depends on its ability to source new development opportunities. In addition to the above, economic and market conditions are highly uncertain as a result of various factors, including inflationary pressures and expected further increases in interest rates. An economic recession resulting from these factors could ultimately have a significant impact on rental rates, occupancy levels, and rental receipts, including an increase in tenant delinquencies and/or requests for rent abatements. These effects would impact the amount of rental revenues generated from the multifamily apartment communities sponsored and managed by the Altman Companies, the extent of management fees earned by the Altman Companies, and the ability of the related joint ventures to stabilize and successfully sell such communities. Furthermore, a decline in rental revenues at developments sponsored by the Altman Companies could require it, as the sponsor and managing member, to fund operating shortfalls in certain circumstances. In addition, as discussed above, the increases in costs of developing and operating multifamily apartment communities, including, but not limited to, increases in commodity prices, labor prices, and property insurance costs, could also have an adverse impact on market values and the Altman Companies' operating results. If there is a significant adverse impact on real estate values as a result of increased interest rates, lower rental revenues, higher capitalization rates, or otherwise, the joint ventures sponsored by the Altman Companies may be unable to sell their respective multifamily apartment developments within the time frames previously anticipated and/or for the previously forecasted sales prices, if at all, which may impact the profits expected to be earned by BBXRE from its investment in the managing member of such projects and the ability of the joint ventures to repay or refinance construction loans on such projects and could result in the recognition of impairment losses related to BBXRE's investment in such projects. Furthermore, as further described above, the Altman Companies may be unable to close on the equity and/or debt financing necessary to commence the construction of new projects, or may determine to not pursue certain development opportunities which no longer meet its investment criteria, which could result in increased operating losses at the Altman Companies, the recognition of impairment losses by BBXRE and/or the Altman Companies related to their current investments, including predevelopment expenditures, and the recognition of impairment losses related to BBXRE's overall investment in the Altman Companies.Beacon Lake Master Planned Development BBXRE is the master developer of theBeacon Lake Community , a master planned community located inSt. Johns County, Florida that is being developed in four phases and is expected to be comprised of 1,476 single-family homes and townhomes. BBXRE is primarily developing the land and common areas and selling finished lots to third-party homebuilders who are constructing single-family homes and townhomes. Other than in the case of the lots comprising Phase 4, which were sold to a homebuilder as undeveloped lots, the agreements pursuant to which BBXRE is selling finished lots to homebuilders generally provide for a base purchase price that is paid to BBXRE upon the sale of the developed lots to the homebuilders and a contingent purchase price that is calculated as a percentage of the proceeds that the homebuilders receive from the sale of the completed homes. While an estimated amount of the contingent purchase price is recognized in BBXRE's revenues upon the sale of the lots to the homebuilders, the contingent purchase price is paid to BBXRE upon the closing of home sales by the homebuilders. BBXRE has substantially completed the development of the lots comprising Phases 1 through 3 of theBeacon Lake Community and previously sold the 299 undeveloped lots comprising Phase 4 in a bulk lot sale to a single homebuilder in 2021.
The following table summarizes the status of the sale of lots to homebuilders in
each phase in the development as of
Phase 1 Phase 2 Phase 3 Phase 4 Total Single-family Townhomes Total planned lots 302 479 196 200 299 1,476 Lots sold to homebuilders (1) (302) (479) (196) (48) (299) (1,324) Remaining lots to sell - - - 152 - 152 Lots under contract with homebuilders - - - (152) - (152) Available lots - - - - - - 42
-------------------------------------------------------------------------------- (1)As further described in Note 2 to the Company's consolidated financial statements included in the 2021 Annual Report, BBXRE generally recognizes revenue related to sales of lots to homebuilders, including an estimate of any contingent purchase price expected to be collected in relation to such lots, upon the closing of the sale of the lots to the homebuilders. Although BBXRE recognizes the expected contingent purchase price associated with such lots upon the closing of the sale to the homebuilders, BBXRE ultimately does not receive any contingent purchase price related to a lot until the homebuilder closes on the sale of a home on such lot and collects the proceeds from the home sale. With respect to the sale of the undeveloped lots comprising Phase 4, BBXRE received the payment of the purchase price for the lots from the homebuilder at the time of closing, subject to certain adjustments contemplated in the agreement, but the agreement related to the transaction does not provide for a contingent purchase price structure similar to the agreements related to the sale of developed lots in Phases 1 through 3. As noted in the table above, BBXRE has sold all but 152 lots in theBeacon Lake Community as ofSeptember 30, 2022 and is under contract to sell the remaining 152 lots to homebuilders. Accordingly, other than closing on the sale of the remaining lots in Phase 3, BBXRE has substantially completed its primary activities as the master developer of theBeacon Lake Community . However, as discussed above, BBXRE expects to continue to collect contingent purchase price from homebuilders upon the sale of homes by the homebuilders, and as ofSeptember 30, 2022 , BBXRE had recognized contingent purchase price receivables totaling$14.6 million related to the sale of lots in theBeacon Lake Community . The following table summarizes the status of the sale of homes by homebuilders on lots in phases 1 through 3 previously sold by BBXRE to such homebuilders: Phase 1 Phase 2 Phase 3 Total Single-family Townhomes Lots sold to homebuilders 302 479 196 48 1,025 Homes closed 301 372 175 - 848 Homes remaining to close 1 107 21 48 177 BBXRE has substantially completed the development of lots at theBeacon Lake Community , and its development costs were not materially impacted by recent increases in commodity and labor prices. However, BBXRE expects that homebuilders are experiencing increases in costs to construct homes on the developed lots throughout theBeacon Lake Community . Further, while homebuilders have continued to sell homes in theBeacon Lake Community , BBXRE has recently observed a deceleration in the number of prospective homebuyers and home sales as compared to 2021 and the first quarter of 2022, which BBXRE believes is attributable to the impact of an increase in interest rates on mortgage loans and uncertainty related to a potential recessionary economic environment on demand for single-family homes. In spite of these factors, BBXRE currently believes that homebuilders are likely to continue to meet their obligations to acquire the remaining lots in the community from BBXRE pursuant to the existing agreements between BBXRE and the homebuilders, as the impact of the increase in construction costs on the profitability of home sales has been offset to some extent by an increase in prices for single-family homes; however, there is no assurance that homebuilders will not default on their obligations to acquire the remaining lots in the community. Further, in many cases, BBXRE's estimate of contingent purchase price on lots sold to homebuilders are based on executed contracts between the homebuilders and homebuyers, and BBXRE currently believes that it is probable that it will collect its estimated contingent purchase price receivables. However, if market factors result in a significant decline in demand and selling prices for single-family homes and/or a significant number of prospective home buyers forfeiting deposits on executed contracts to purchase homes in the community, BBXRE's expected contingent purchase price due from homebuilders upon the sale of homes in the community may be negatively impacted and could result in the reversal of previously recognized revenues related to contingent purchase price receivables.
As ofSeptember 30, 2022 , BBRE had invested$8.1 million in a joint venture withCC Homes to develop Marbella, a residential community expected to be comprised of 158 single-family homes inMiramar, Florida . As ofSeptember 30, 2022 , the joint venture had executed contracts to sell all of the 158 single-family homes comprising Marbella and had closed on the sale of 126 homes. During the nine months endedSeptember 30, 2022 , the joint venture closed on the sale of 94 single-family homes, and BBXRE recognized$8.6 million of equity earnings and received$8.1 million of distributions from the joint venture. ? 43
-------------------------------------------------------------------------------- InJune 2019 , BBXRE invested$4.2 million in the Sky Cove joint venture, which was formed to developSky Cove at Westlake, a residential community comprised of 204 single-family homes inLoxahatchee, Florida . As ofSeptember 30, 2022 , the joint venture had substantially completed the development of the community, as it had executed contracts to sell all of the homes comprising the community and closed on the sale of all but 3 homes in the community. During the nine months endedSeptember 30, 2022 , the joint venture closed on the sale of 36 single-family homes, and BBXRE recognized$0.5 million of equity earnings and received$2.0 million of distributions from the joint venture. InFebruary 2021 , BBXRE invested$4.9 million in the Sky Cove South joint venture, which was formed to develop Sky Cove South at Westlake, a residential community that is adjacent toSky Cove at Westlake and is expected to be comprised of 197 single-family homes. As ofSeptember 30, 2022 , the joint venture had executed contracts to sell 157 homes in the community and had closed on the sale of 53 homes. During the nine months endedSeptember 30, 2022 , BBXRE recognized$0.1 million of equity earnings from the joint venture. Although the above joint ventures have experienced increases in costs to construct homes in their respective communities and disruptions in supply chains and supply shortages, BBXRE does not currently believe that such increases will have a material adverse impact on the expected profitability of these investments, as higher than expected sales prices for single-family homes in these communities have to some extent offset the increase in construction costs. Further, in spite of a recent deceleration in the number of prospective homebuyers and home sales within the overall market for single-family homes, the joint ventures have to date not experienced a significant decline in selling prices for single-family homes and/or a significant number of prospective home buyers forfeiting deposits on executed contracts to purchase homes in the communities. While there is no assurance that this will continue to be the case, BBXRE does not currently expect these joint ventures to be materially impacted by current market factors given the current status of the projects, including the significant number of executed contracts for homes within the communities.
Bayview Joint Venture
In 2014, BBXRE invested in a joint venture (the "Bayview joint venture") with an affiliate ofProcacci Development Corporation ("Procacci"). At the inception of the venture, BBXRE and Procacci each contributed$1.8 million to the venture in exchange for a 50% equity interest, and the joint venture acquired approximately three acres of real estate inFort Lauderdale, Florida for$8.0 million . The property was subject to a mortgage loan which had an outstanding balance of$5.0 million , and in connection with BBXRE's investment in the joint venture, the Company also guaranteed 50% of the outstanding balance of the mortgage loan. InJune 2022 , BBXRE sold its equity interest in theBayview joint venture to Procacci. As a result of the transaction, BBXRE received net cash proceeds of approximately$8.8 million and recognized a net gain from the sale of its investment in the venture of approximately$7.3 million , which is included in equity in net earnings of unconsolidated real estate joint ventures in the Company's condensed consolidated statements of operations for the nine months endedSeptember 30, 2022 . In connection with the sale, the Company and BBXRE obtained a release from the lender for any liability to the lender under the loan documents, including any obligation related to the Company's guaranty on the outstanding loan balance.
Other Pending Real Estate Sales
During the first quarter of 2022, BBXRE entered into an agreement to sell approximately 119 acres of vacant land located inSt. Lucie County, Florida for a sales price of approximately$23.0 million , subject to certain adjustments. The vacant land is a legacy asset acquired by a predecessor of BBXRE and has a carrying value of approximately$0.4 million . Pursuant to the terms of the agreement, the transaction is currently scheduled to close inDecember 2022 or an earlier date as designated by the buyer. However, the closing of the transaction is subject to various closing conditions, and there is no assurance that the property will be sold pursuant to the terms of the contract, or at all. 44
--------------------------------------------------------------------------------
Results of Operations
Information regarding the results of operations for BBXRE is set forth below (in thousands):
For the Three Months Ended September For the Nine Months Ended 30, September 30, 2022 2021 Change 2022 2021 Change Sales of real estate inventory$ 1,606 21,849 (20,243) 16,813 47,774 (30,961) Interest income 970 490 480 2,165 1,465 700 Net gains on sales of real estate assets - 129 (129) 1,329 438 891 Other revenues 442 316 126 1,443 1,152 291 Total revenues 3,018 22,784 (19,766) 21,750 50,829 (29,079) Cost of real estate inventory sold 556 9,999 (9,443) 6,669 23,425 (16,756) Recoveries from loan losses, net (278) (5,393) 5,115 (4,215) (7,038) 2,823 Impairment losses 311 - 311 311 - 311 Selling, general and administrative expenses 3,196 2,088 1,108 8,956 5,709 3,247 Total costs and expenses 3,785 6,694 (2,909) 11,721 22,096 (10,375) Operating (losses) income (767) 16,090 (16,857) 10,029 28,733 (18,704) Equity in net earnings of unconsolidated real estate joint ventures 15,026 11,820 3,206 35,712 15,992 19,720 Other income (expense) - 14 (14) (8) (14) 6 Income before income taxes$ 14,259 27,924 (13,665) 45,733 44,711 1,022 BBXRE's income before income taxes for the three months endedSeptember 30, 2022 compared to the same 2021 period decreased by$13.7 million primarily due to the following: ?A decrease in net profits from the sale of lots to homebuilders at theBeacon Lake Community development, as BBXRE sold 8 developed lots during the 2022 period compared to 55 developed lots and 299 undeveloped lots during the 2021 period; ?A net decrease in recoveries from loan losses primarily related to a$4.1 million recovery of a loan receivable in the legacy asset portfolio in the 2021 period; and ?An increase in selling, general and administrative expenses primarily associated with new hires, which reflects the establishment of BBXRE's logistics real estate division, and increased incentive compensation; partially offset by ?A net increase in equity in net earnings of unconsolidated joint ventures primarily due to the Miramar East/West joint venture's sale of its multifamily apartment communities in 2022, partially offset by the Altis Grand at the Preserve joint venture's sale of its multifamily apartment community and the Altis Grand Central joint venture's recapitalization of its ownership of its multifamily apartment community in 2021. BBXRE's income before income taxes for the nine months endedSeptember 30, 2022 compared to the same 2021 period increased by$1.0 million primarily due to the factors described above related to the three months endedSeptember 30, 2022 compared to the same 2021 period as well as the following: ?An additional net increase in equity in net earnings of unconsolidated joint ventures during the first half of 2022 primarily due to (i) the Altis LittleHavana joint venture's sale of its multifamily apartment community in 2022, (ii) BBXRE's sale of its equity interest in theBayview joint venture in 2022, and (iii) the Marbella joint venture's sale of single-family homes in 2022, partially offset by the Altis Promenade joint venture's sale of its multifamily apartment community in 2021; and ?An increase in gains on sales of real estate assets from BBXRE's legacy portfolio of foreclosed assets. ? 45
--------------------------------------------------------------------------------
BBX Sweet Holdings Reportable Segment
Segment Description
BBX Sweet Holdings is engaged in the ownership and management of operating businesses in the confectionery industry, including (i) IT'SUGAR, a specialty candy retailer whose products include bulk candy, candy in giant packaging, and licensed and novelty items and which operates in retail locations which include a mix of high-traffic resort and entertainment, lifestyle, mall/outlet, and urban locations throughoutthe United States , and (ii) Las Olas Confections and Snacks, a manufacturer and wholesaler of chocolate and other confectionery products which also operates severalHoffman's Chocolates retail locations inSouth Florida .BBX Sweet Holdings owns over 90% of the equity interests in IT'SUGAR. Prior toSeptember 22, 2020 , the Company consolidated the financial statements of IT'SUGAR and its subsidiaries as a result of its over 90% ownership of IT'SUGAR. As a result of the impact of the COVID-19 pandemic on its operations, onSeptember 22, 2020 , IT'SUGAR and its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of Title 11 of theU.S. Code in theU.S. Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court "), and as a result of the filings and the uncertainties surrounding the nature, timing, and specifics of the bankruptcy proceedings, the Company deconsolidated IT'SUGAR onSeptember 22, 2022 . OnJune 16, 2021 , theBankruptcy Court confirmed IT'SUGAR's plan of reorganization, and the plan became effective onJune 17, 2021 (the "Effective Date"). Pursuant to the terms of the plan,BBX Sweet Holdings' equity interests in IT'SUGAR were revested on the Effective Date, and all organizational documents of IT'SUGAR were assumed, ratified, and reinstated. As a result of the confirmation and effectiveness of the plan and the revesting of its equity interests in IT'SUGAR, the Company was deemed to have reacquired a controlling financial interest in IT'SUGAR and consolidated the results of IT'SUGAR into its consolidated financial statements as of the Effective Date, the date that the Company reacquired control of IT'SUGAR. As a result of the above, IT'SUGAR's results of operations are included in the Company's statement of operations and comprehensive income for the three and nine months endedSeptember 30, 2022 and for the three months endedSeptember 30, 2021 but are not included in the Company's statement of operations and comprehensive income fromJanuary 1, 2021 toJune 16, 2021 .
Business Update
IT>
As of
Since its emergence from bankruptcy inJune 2021 , IT'SUGAR has been focused on (i) expanding its "candy department store" concept in select high-traffic resort and entertainment locations acrossthe United States (as implemented in retail locations at American Dream inNew Jersey and the Ala Moana Center inHonolulu, Hawaii ), (ii) evaluating additional retail locations in targeted markets in which it believes it can opportunistically capitalize on the availability of retail space and a decline in rental rates of retail space, (iii) improving the remaining maturity of its store portfolio by extending the lease terms of its existing successful retail locations and expanding the size of certain retail locations, and (iv) closing retail locations where appropriate (or where required if the applicable landlord has a right to terminate the lease and exercises such right).
The following summarizes activities in IT'SUGAR's store portfolio in 2022:
?IT'SUGAR opened (i) large format "pop-up" retail locations inChicago, Illinois ,San Francisco, California , andManhattan, New York , (ii) new retail locations inSomerville, Massachusetts , Foxborough,Massachusetts , andNational Harbor ,Maryland , (iii) its first international location inWest Edmonton, Canada , (iv) an Oreo Café in its "candy department store" at Ala Moana Center inHonolulu, Hawaii , (v) an expansion of an existing retail location inConey Island ,New York , (vi) an expanded relocation of a store at an existing location inBranson, Missouri , and (vii) a relocation of a store at an existing location inOrlando, Florida ; ?IT'SUGAR executed lease agreements for various locations, including (i) two "candy department stores" in high-traffic metropolitan areas, (ii) three new retail locations, (iii) two new "pop-up" retail locations, (iv) the relocation and expansion of an existing retail location, and (v) the extension of the lease term of two existing "pop-up" retail locations; and
?IT'SUGAR closed seven retail locations, including certain "pop-up" retail locations.
46 -------------------------------------------------------------------------------- During the course of its bankruptcy, IT'SUGAR opened various "pop-up" retail locations in select locations acrossthe United States . These locations required initial capital investments that were generally significantly lower than the investments required for IT'SUGAR's traditional retail locations and were subject to lease agreements with terms ranging from 13-36 months and which generally provided for the payment of rent based on a percentage of sales generated at the applicable location. Although IT'SUGAR has been seeking to extend the term of the leases for certain of these locations, certain of the landlords have indicated that they do not intend to extend the term of the leases, and in some cases, IT'SUGAR has closed the locations. However, IT'SUGAR is continuing to seek to open additional "pop-up" retail locations and has also expanded its "pop-up" retail location concept to include large format locations that are similar in size to its "candy department stores." Although these large format "pop up" locations generally require initial capital investments that are higher than its previous "pop-up" locations and are also subject to leases that include fixed rental obligations as opposed to lease payments based on a percentage of sales, IT'SUGAR believes that these locations will generate higher sales that justify such investments. Further, as these large format "pop-up" retail locations are generally in high-traffic metropolitan locations of interest to IT'SUGAR, these locations will allow IT'SUGAR to test the market and evaluate whether it should incur the capital expenditures and lease obligations associated with longer-term retail locations in these locations. As previously disclosed, IT'SUGAR executed lease amendments with respect to 78 retail locations during the course of its bankruptcy. Although the specific terms of the executed lease amendments vary, the amended leases generally provided for the forgiveness of IT'SUGAR's pre-petition rent obligations, and many (but not all) of the amended leases also provided for the payment of rent based on a percentage of sales volumes (in lieu of previously scheduled fixed lease payments), generally for a period of one to two years from the commencement of the bankruptcy proceedings. Following such periods of time, the amended leases generally required IT'SUGAR to resume the payment of previously scheduled fixed lease payments going forward. As the temporary rent relief provided by many of these amended leases expired inDecember 2021 , IT'SUGAR experienced an increase in its occupancy costs during the three and nine months endedSeptember 30, 2022 as compared to the same 2021 periods, as it recommenced the payment of previously scheduled fixed lease payments. In addition, for certain retail locations, including four locations that historically generated operating losses largely based on the applicable fixed rental obligations prior to the amendments, the lease amendments provide for the payment of rent based on a percentage of sales volumes through the remainder of the lease term; however, in such cases, the landlords generally have the right to terminate the lease agreements at any time following notice periods ranging from 30 to 60 days. As previously disclosed, IT'SUGAR has generally experienced an improvement in its sales since the commencement of its bankruptcy proceedings, and its revenues in 2022 have significantly increased as compared to 2021 and 2019 reflecting an increase in comparable store sales and its investments in new and expanded store locations. The following summarizes the increase in IT'SUGAR's comparable store sales and total revenues during each of the first three quarters of 2022 as compared to the comparable periods in 2021 and 2019: First First Second Second Third Third Quarter Quarter Quarter Quarter Quarter Quarter 2022 2022 2022 2022 2022 2022 Compared Compared Compared Compared Compared Compared to First to First to Second to Second to Third to Third Quarter Quarter Quarter Quarter Quarter Quarter 2019 (2) 2021 2019 (2) 2021 2019(2) 2021 Comparable Store 16% 30% 19% 11% 4% -1% Sales (1) Total Revenues 41% 27% 44% 17% 32% 16% (1)Comparable store sales represent IT'SUGAR's sales at its retail locations excluding both the impact of e-commerce sales and changes in its store portfolio. (2)Because IT'SUGAR's results for the first and second quarters of 2021 and fiscal 2020 were significantly impacted by the COVID-19 pandemic, the Company has included a comparison of its results for the quarters endedMarch 31, 2022 ,June 30, 2022 andSeptember 2022 to the comparable periods in 2019 in order to include a meaningful comparison to periods that were not impacted by the COVID-19 pandemic. 47 -------------------------------------------------------------------------------- As a result of inflationary trends and disruptions in global supply chains, IT'SUGAR has experienced an increase in the cost of inventory and freight. Although it has experienced some compression in its selling margins, IT'SUGAR has to date been able to mitigate the impact of increased costs to some extent through increases in the prices of its products. However, to the extent that costs continue to increase, there is no assurance that IT'SUGAR will be able to continue to increase the prices of its products without significantly impacting consumer demand and its sales volume, particularly in light of current economic conditions and an expected decline in consumer discretionary spending that would result from a recessionary economic environment. In addition to an increase in its product costs, IT'SUGAR has also experienced delays in its supply chains, which have also impacted the inventory levels at its retail locations. Following difficulties in maintaining appropriate inventory levels during fiscal 2021, IT'SUGAR has increased the inventory levels at its retail locations in 2022 in an effort to ensure that it can meet consumer demand. However, in light of current economic conditions, IT'SUGAR intends to closely manage its inventory levels in anticipation of a possible slowdown in consumer demand.
In addition to the above issues, IT'SUGAR has been impacted by staffing issues and has experienced an increase in payroll costs associated with hiring and maintaining staffing at its retail locations.
Las Olas Confections and Snacks
During the three months endedSeptember 30, 2022 , Las Olas Confections and Snacks' revenues decreased by 4.1% as compared to its revenue during the same 2021 period and increased by 4.2% during the nine months endedSeptember 30, 2022 compared to revenue during the 2021 nine month period. The decline in revenue for the three months endedSeptember 30, 2022 primarily reflects the temporary closure of aHoffman's Chocolates retail location for rebranding and renovations, while the increase in revenue for the nine months endedSeptember 30, 2022 reflects increases in sales prices on certain products. Although Las Olas Confections and Snacks is also currently experiencing the impact of increased costs for raw materials and supply chain delays, as well as higher wages, it has generally mitigated the impact of these factors through increases in the prices of certain of its products and improvements in labor efficiencies in its manufacturing facility based on decreased use of temporary labor resources. During the nine months endedSeptember 30, 2022 , the Company soldHoffman's Chocolates' manufacturing facility in Greenacres,Florida . Substantially all of the products previously manufactured at theHoffman's Chocolates facility are now manufactured at the existing Las Olas Confections and Snacks facility.
Results of Operations
Information regarding the results of operations for
For the Three Months Ended September For the Nine Months Ended September 30, 30, 2022 2021 Change 2022 2021 Change Trade sales$ 37,053 32,810 4,243 102,012 47,990 54,022 Cost of trade sales (21,939) (19,682) (2,257) (60,934) (30,066) (30,868) Gross margin 15,114 13,128 1,986 41,078 17,924 23,154 Interest income - - - - 36 (36) Interest expense (228) (185) (43) (697) (251) (446) Impairment losses - - - (64) - (64) Selling, general and administrative expenses (14,444) (12,563) (1,881) (42,101) (17,724) (24,377) Total operating income (losses) 442 380 62 (1,784) (15) (1,769) Other (losses) income (360) 33 (393) 518 78 440 Foreign exchange loss (2) - (2) (2) - (2) Gain on the consolidation of IT'SUGAR, LLC - - - - 15,890 (15,890) Income (loss) before income taxes$ 80 413 (333) (1,268) 15,953 (17,221) Gross margin percentage % 40.79 40.01 0.78 40.27 37.35 2.92 SG&A as a percent of trade sales % 38.98 38.29 0.69 41.27 36.93 4.34 Expenditures for property and equipment$ 3,788 2,825 963 7,733 2,844 4,889 Depreciation and amortization$ 1,627 1,456 171 4,732 1,852 2,880 Debt accretion and amortization $ 6 9 (3) 55 11 44 48
--------------------------------------------------------------------------------
?An increase in selling, general, and administrative expenses due to an accrual related to a long term incentive compensation plan during the 2022 period, higher pre-opening expenses as a result of new IT'SUGAR store locations, and increased staffing to support IT'SUGAR's growth of its store portfolio and new store pipeline; partially offset by
?An increase in IT'SUGAR's sales and gross margin as a result of increased prices on certain products and the opening of new and expanded retail locations; and
?A decrease in Las Olas Confections and Snacks' operating losses due to improved margins during the 2022 period as compared to the 2021 period primarily associated with price increases of its products and improved efficiencies in its manufacturing facility.BBX Sweet Holdings' loss before income taxes for the nine months endedSeptember 30, 2022 was$1.3 million compared to$16.0 million of income during the same 2021 period. The decrease was impacted by the factors described above related to the three months endedSeptember 30, 2022 compared to the same 2021 period, as well as the following: ?The recognition of a$15.9 million gain on the reconsolidation of IT'SUGAR in the Company's financial statements in the 2021 period as a result of IT'SUGAR emerging from bankruptcy inJune 2021 and the revesting ofBBX Sweet Holdings' control of IT'SUGAR;
?An increase in an accrual related to a long term incentive compensation plan during the 2022 period; and
?Operating losses associated with IT'SUGAR during the first quarter of 2022, as IT'SUGAR has historically generated operating losses during the first quarter due to a seasonal decline in its sales but its results of operations were excluded from the Company's operating results in the first quarter of 2021; partially offset by ?The recognition of a$0.9 million gain on the sale of property and equipment in the 2022 period associated with the Company's sale of theHoffman's Chocolates manufacturing facility in Greenacres,Florida .
Information regarding the results of operations for IT'SUGAR for the three and
nine months ended
For the Three Months Ended September For the Nine Months Ended September 30, 30, 2022 2021 Change 2022 2021 Change Trade sales$ 32,583 28,274 4,309 87,774 34,296 53,478 Cost of trade sales (17,965) (15,422) (2,543) (49,030) (18,536) (30,494) Gross margin 14,618 12,852 1,766 38,744 15,760 22,984 Interest expense (189) (146) (43) (565) (173) (392) Impairment losses - - - (64) - (64) Selling, general and administrative expenses (13,005) (10,936) (2,069) (36,416) (13,003) (23,413) Total operating losses 1,424 1,770 (346) 1,699 2,584 (885) Other (expense) income (359) 14 (373) (405) 17 (422) Foreign exchange loss (2) - (2) (2) - (2) Income before income taxes$ 1,063 1,784 (721) 1,292 2,601 (1,309) Gross margin percentage % 44.86 45.46 (0.59) 44.14 45.95 (1.81) SG&A as a percent of trade sales % 39.91 38.68 1.23 41.49 37.91 3.57 The table above reflecting IT'SUGAR's standalone results of operations excludes an accrual related to a long term incentive compensation plan implemented byBBX Sweet Holdings for certain of IT'SUGAR's executives. The expense related to the long term incentive plan, which is reflected inBBX Sweet Holdings' consolidated results, was$0.2 million and$0.3 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$1.5 million and$0.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. 49
--------------------------------------------------------------------------------
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 manufacturing and distribution facilities inthe United States andCanada . In addition to its own manufacturing activities, Renin also sources various products and materials fromChina ,Brazil , and certain other countries.
Renin's products are sold through three channels in
Business Update
During the nine months endedSeptember 30, 2022 , Renin's sales decreased as compared to the same period in 2021, and its retail channel comprised approximately 70% of its gross sales for the 2022 period as compared to approximately 77% for the same period in 2021. Although Renin's sales in 2022 benefited from price increases to customers implemented in response to increased costs, as well as sales of slow-moving inventory as described below, the impact of these factors were offset primarily by a decline in sales volume. The decrease reflected (i) lower customer demand during the second and third quarter of 2022, (ii) backordered inventory resulting from supply chain disruptions, and (iii) one of Renin's major customers discontinuing its purchase of certain products from Renin in late 2021. Further, inJanuary 2022 , Renin experienced disruptions associated with inclement weather and restrictions on business operations as a result of increased COVID-19 infections, which also impacted its sales. With respect to the decline in customer demand, Renin believes that the decline may be attributable to (i) the impact of price increases, rising interest rates, and overall inflationary pressures on consumer behavior, (ii) a shift in consumer spending away from home improvements as many portions of the economy reopened, particularly inthe United States , and (iii) efforts by retailers to rationalize their inventory levels during the summer months. Renin's sales may be further impacted in future periods if rising interest rates and a recessionary environment further impacts consumer demand. In addition to a decline in sales, Renin's gross margin percentage decreased from 8.9% and 12.2%, respectively, during the three and nine months endedSeptember 30, 2021 to 3.1% and 3.5%, respectively, during the same periods in 2022. Renin has continued to be negatively impacted by significant increases in costs related to shipping and raw materials and delays in its supply chains during the past 15-18 months, which have adversely impacted (i) its product costs and gross margin, (ii) its ability to fulfill customer orders, and (iii) its working capital and cash flows due to increased inventory in transit, a prolonged period between when it is required to pay its suppliers and it is paid by its customers. While Renin has recently observed a decrease in spot rates for shipping products from overseas, Renin's operating results have thus far not meaningfully benefited from these decreases due to the timing of shipping products from overseas and ultimately selling such products to its customers. Further, costs to ship products from its domestic facilities to customers and costs of raw materials remain highly volatile, which has continued to negatively impact its gross margin. In addition, the overall decline in sales resulting from lower customer demand has increased the impact of the manufacturing overhead costs associated with its facilities on its operating results. In an effort to mitigate the impact of certain of these factors, Renin has sought to (i) negotiate increases in prices with its customers, (ii) maintain higher inventory levels in an effort to ensure that it can fulfill customer orders, (iii) diversify its global supply chains, and (iv) transfer the assembly of certain products from foreign suppliers to its own manufacturing facilities. Further, as a result of declines in customer demand and a potential recessionary economic environment, Renin is evaluating steps it can take to reduce the costs associated with its manufacturing and distribution facilities, including (i) the possible consolidation of its manufacturing facilities and (ii) rationalizing and lowering its inventory levels. As part of these efforts, Renin has executed a lease agreement for a new manufacturing and distribution facility near one of its existing locations inCanada , with a goal of substantially winding down its operations in one of its other facilities and eliminating other logistics and warehousing facilities. In connection with these efforts, Renin expects to incur costs in excess of$2.0 million related to, among other things, severance expenses, relocation and freight costs to transfer inventory, and capital expenditures for new racking for storage and equipment. Although Renin has taken steps intended to mitigate the risks it faces and is evaluating additional courses of action to further mitigate such factors, Renin's product costs and gross margin have been and are expected to continue to be adversely impacted for the remainder of 2022 and into 2023. While Renin has been able to increase the prices of many of its products, the timing of the implementation of price increases with its major customers has generally lagged behind the increases in its costs, resulting in significantly lower gross margins during the periods in which Renin has continued to fulfill orders at lower prices. In addition, in certain cases, the negotiated price increases do not fully offset 50 -------------------------------------------------------------------------------- the increase in Renin's costs, and as a result, Renin's gross margins will continue to be negatively impacted unless it can negotiate additional price increases in the future, global supply chains stabilize, and/or Renin is able to identify and implement alternative methods to source and manufacture its products in a more cost effective manner. Further, Renin's efforts to mitigate its increase in costs have had and may continue to have other negative impacts on Renin's operations. In particular, the combination of higher inventory levels and the increased time between its purchase of inventory and receipt of payments from customers has negatively impacted its liquidity. In addition, the negotiation of increased prices with customers increases the risk that customers will pursue alternative sources for Renin's products, which may result in Renin losing customers or require it to maintain or lower prices in an effort to retain customers. Further, while Renin is generally seeking to diversify its supply chain and limit its exposure to specific geographic locations and suppliers, supply chain delays and the scarcity of products and raw materials have made this difficult. Further, although Renin's manufacturing and distribution facilities remained open throughout the COVID-19 pandemic, worker shortages and/or shutdowns related to COVID-19 may also result in the closure of facilities or cause such facilities to operate below capacity, particularly in Renin's Canadian operations.
Renin is also negatively impacted by increases in interest rates, as its borrowings bear interest at variable rates, and the cost of its borrowings has substantially increased as a result of rising interest rates.
Amendment and Restatement of TD Bank Credit Facility In connection with the acquisition of Colonial Elegance in 2020, Renin amended and restated its credit facility with TD Bank to include a$30.0 million term loan, increase the availability under its existing revolving line of credit with TD Bank to$20.0 million , and extend the maturity of the facility toOctober 2025 . In 2021, Renin's credit facility with TD Bank was amended to temporarily increase the availability under the revolving line of credit from$20.0 million to$24.0 million throughDecember 31, 2022 , at which time the availability under the line of credit was to revert to$20.0 million and any amounts outstanding in excess of$20.0 million was to be repaid by Renin. The amendments to the credit facility also (i) waived the requirement for Renin to comply with certain ratios included in the financial covenants of the facility, (ii) temporarily increased the maximum total leverage ratio included in the financial covenants of the facility throughDecember 31, 2022 , (iii) modified the calculation of the maximum total leverage ratio, and (iv) included an additional financial covenant related to Renin meeting certain minimum levels of specified operating results fromNovember 2021 throughDecember 2022 . Further, the amendments prohibited Renin from making distributions toBBX Capital throughDecember 31, 2022 . OnJanuary 1, 2023 , the financial covenants under the facility and Renin's ability to make distributions to the Company were to revert to the requirements under the facility prior to the amendments in 2021. However, as Renin was not in compliance with certain financial covenants under the facility from January throughMarch 2022 , Renin's credit facility with TD Bank was further amended onMay 9, 2022 to (i) require$13.5 million of funding fromBBX Capital to provide Renin funds to prepay$10.0 million of the term loan and to provide additional working capital to Renin of$3.5 million , (ii) waive compliance with the maximum total leverage ratio and fixed charge coverage ratio included in the financial covenants of the facility untilDecember 31, 2022 , (iii) waive compliance with the financial covenant requiring Renin to meet certain minimum levels of specified operating results for January throughMarch 2022 , (iv) adjust the required minimum levels of specified operating results throughDecember 31, 2022 beginning inApril 2022 , and (v) amend the modification period to the later ofDecember 31, 2022 or upon Renin's compliance with specified financial covenant ratios. The amendment also increased the interest rates on amounts outstanding under the term loan and revolving line of credit during the modification period to (i) the Canadian Prime Rate plus a spread of 3.375% per annum, (ii) the United States Base Rate plus a spread of 3.00% per annum, or (iii) Term SOFR or Canadian Bankers' Acceptance Rate plus a spread of 4.875% per annum. Under the terms of the amendment, the Term SOFR Rate for loans with one to six-months terms are also subject to an additional credit spread adjustment of 10 to 25 basis points per annum. Renin issued a$13.5 million promissory note toBBX Capital upon execution of the amendment onMay 9, 2022 , and pursuant to the terms of the amendment,BBX Capital funded$13.5 million of the note to Renin inMay 2022 .BBX Capital and Renin entered into a subordination, assignment, and postponement agreement with TD Bank that requires all present and future loans or advances fromBBX Capital to Renin (including the$13.5 million promissory note) be subordinated and repayments postponed until the TD Bank credit facility has been paid or satisfied in full. 51 -------------------------------------------------------------------------------- As ofJune 30, 2022 and continuing as ofSeptember 30, 2022 , Renin was not in compliance with the financial covenants under the credit facility which required Renin to meet certain minimum levels of specified operating results, and Renin does not expect to be in compliance with certain of the financial covenants in future periods as a result of its actual and expected operating results for 2022. Renin has notified TD Bank about the non-compliance and is currently in discussions with TD Bank to further amend the credit facility. Further, Renin is exploring potential alternatives related to the refinancing of the credit facility. While TD Bank has continued to allow Renin to utilize its revolving line of credit and has not to date accelerated any payments required under the loan agreements, TD Bank has sent several formal notices of default to Renin and confirmed that the parties' continued discussions do not constitute a waiver by TD Bank of any existing or future defaults or breaches or prevent TD Bank from exercising any rights or remedies it may have. If Renin is unable to obtain a waiver in relation to its covenants or amend the covenants under the facility to reflect its expected operating results, Renin may lose availability under its line of credit, may be required to provide additional collateral, or may be required to repay all or a portion of its borrowings prior to the scheduled maturities, any of which would have a material adverse effect on the Company's liquidity, financial position, and results of operations. The risks and uncertainties associated with the matters described above, as well as those described in the Company's 2021 Annual Report, could have a material adverse impact on Renin's results of operations, cash flows, and financial condition in future periods.
Impairment Testing
As described in the consolidated financial statements included in the Company's 2021 Annual Report, the Company tests goodwill for potential impairment on an annual basis as ofDecember 31 or during interim periods if impairment indicators exist. During the three months endedJune 30, 2022 , the Company concluded that the factors discussed in this report, including inflationary pressures, the recent decline in market valuations, increases in interest rates, a decline in consumer demand, the current economic and geopolitical environment, and the increased likelihood of a recessionary environment in the foreseeable future, when combined with the ongoing nature of Renin's margin compression and recent decline in customer demand, indicated that it was necessary to quantitively test whether the fair value of the Renin reporting unit had declined below its carrying amount as ofJune 30, 2022 . As a result, the Company tested Renin's goodwill for impairment by estimating the fair value of the Renin reporting unit as ofJune 30, 2022 and, as discussed below, concluded that its goodwill was not impaired, as the estimated fair value of the Renin reporting unit was in excess of the carrying amount of the reporting unit. The Company applied an income approach utilizing a discounted cash flow methodology and a market approach utilizing a guideline public company and transaction methodology to estimate the fair value of the Renin reporting unit, and the estimated fair values obtained from the income and market approaches were compared and reviewed for reasonableness to determine a best estimate of fair value. The Company's assessment of the Renin reporting unit for impairment required the Company to make estimates based on facts and circumstances as ofJune 30, 2022 and assumptions about current and future economic and market conditions. These assumptions included, among other things, (i) the stabilization of Renin's gross margins over time, including a progressive improvement during the second half of 2022 and into 2023 and a return to historical gross margins thereafter, (ii) a long-term increase in sales resulting from Renin increasing its market share in various products by leveraging its 2020 acquisition of Colonial Elegance, and (iii) the attribution of value to Renin's current working capital levels as compared to expected normalized working capital levels. However, as there is significant uncertainty in the current economic environment and how it may evolve and the potential for a prolonged economic recession, the estimates and assumptions in the Company's estimated value of Renin may change over time, which may result in the recognition of impairment losses related to the Renin reporting unit in a future period that would be material to the Company's financial statements. Changes in assumptions that could materially impact the Company's estimates related to Renin that could result in the recognition of impairment losses in future periods include, but are not limited to, (i) a further decline in market valuations resulting in a further increase to the discount rate applied in the income approach and/or a decrease in the multiple of earnings applied in the market approach, (ii) a material longer term or permanent decline in demand for Renin's products and/or its product margins, and/or (iii) Renin being unable to increase its market share in various products. During the three months endedSeptember 30, 2022 , the Company qualitatively concluded that Renin's goodwill was not impaired, as there had not been any material changes in the Company's assumptions related to economic conditions and the forecasted cash flows associated with Renin that were incorporated into the Company's valuation of Renin as ofJune 30, 2022 . 52
--------------------------------------------------------------------------------
Results of Operations
Information regarding the results of operations for Renin is set forth below (dollars in thousands):
For the Three Months Ended September For the Nine Months Ended September 30, 30, 2022 2021 Change 2022 2021 Change Trade sales$ 32,535 33,410 (875) 101,116 106,479 (5,363) Cost of trade sales (31,539) (30,432) (1,107) (97,618) (93,450) (4,168) Gross margin 996 2,978 (1,982) 3,498 13,029 (9,531) Interest expense (1,063) (448) (615) (2,405) (1,287) (1,118) Selling, general and administrative expenses (4,166) (3,545) (621) (13,099) (11,653) (1,446) Total operating (loss) income (4,233) (1,015) (3,218) (12,006) 89 (12,095) Other income 1 - 1 1 - 1 Foreign exchange gain 905 292 613 1,073 788 285 (Loss) income before income taxes$ (3,327) (723) (2,604) (10,932) 877 (11,809) Gross margin percentage % 3.06 8.91 (5.85) 3.46 12.24 (8.78) SG&A as a percent of trade sales % 12.80 10.61 2.19 12.95 10.94 2.01 Expenditures for property and equipment$ 233 196 37
757 1,797 (1,040) Depreciation and amortization$ 846 959 (113) 2,497 2,222 275 Debt accretion and amortization$ 32 31 1 85 92 (7)
Renin's loss before income taxes for the three months ended
?A decline in Renin's sales as compared to the same period in 2021 due to, among other things, (i) a decline in customer demand, (ii) backordered inventory resulting from supply chain disruptions, and (iii) one of Renin's major customers discontinuing its purchase of certain products from Renin in late 2021;
?A decrease in Renin's gross margin percentage primarily as a result of (i) increased costs of shipping, raw materials and labor, (ii) delays in the implementation of price increases to certain customers, and (iii) sales of slow-moving inventory at cost;
?An increase in interest expense associated with (i) an increase in interest rates from the modification of the TD Bank credit facility inMay 2022 , (ii) rising rates on Renin's variable rate debt, and (iii) interest expense associated withBBX Capital's loan to Renin; and
?An increase in selling, general, and administrative expenses primarily due to higher labor costs and professional fees and additional accrued severance associated with a former executive; partially offset by
?An increase in foreign currency exchange gains due to the impact of changes in
foreign exchange rates between the
Renin's loss before income taxes for the nine months endedSeptember 30, 2022 was$10.9 million compared to$877,000 of income during the same 2021 period. The decrease was primarily due to the items discussed above.
Other
Other in the Company's segment information includes its investments in other operating businesses, including a restaurant located inSouth Florida that was acquired through a loan foreclosure and an insurance agency. During the three and nine months endedSeptember 30, 2022 , the Company recognized loss before income taxes related to these other businesses of$31,000 and income before income taxes of$0.9 million , compared to income before income taxes of$0.1 million and$1.3 million during the three and nine months endedSeptember 30, 2021 , respectively. During the nine months endedSeptember 30, 2021 , the Company reversed$0.3 million of rent expense as a result of rent abatements obtained by the restaurant located inSouth Florida due to the effects of the COVID-19 pandemic on its operations. 53
--------------------------------------------------------------------------------
Reconciling Items and Eliminations
Reconciling items and eliminations in the Company's segment information include the following:
?
Corporate General and Administrative Expenses
BBX Capital's corporate general and administrative expenses for the three and nine months endedSeptember 30, 2022 were$5.7 million and$17.1 million , respectively, compared to$3.2 million and$10.5 million , respectively, during the three and nine months endedSeptember 30, 2021 . During the three and nine months endedSeptember 30, 2022 and 2021,BBX Capital's corporate general and administrative expenses consisted of the costs of various support functions, including executive compensation, legal, accounting, human resources, investor relations, and executive offices. The increase in corporate general and administrative expenses for the three and nine months endedSeptember 30, 2022 compared to the same periods in 2021 reflect higher executive compensation, including$1.0 million and$2.7 million , respectively, in share based compensation expense from restricted stock awards granted inJanuary 2022 .
Interest Income
BBX Capital's interest income for the three and nine months endedSeptember 30, 2022 was$0.6 million and$1.8 million , respectively, which includes (i)$0.8 million and$2.3 million , respectively, of interest income on its note receivable fromBluegreen Vacations and (ii) the elimination of interest income recognized by a wholly-owned subsidiary of the Company relating to the credit facility provided to IT'SUGAR.
Provision for Income Taxes
The Company estimates its effective annual income tax rate on a quarterly basis based on current and forecasted operating results for the annual period and applies the estimated effective income tax rate to its income or loss before income taxes reduced by net income or loss attributable to noncontrolling interests in joint ventures taxed as partnerships. In addition, the Company recognizes taxes related to unusual or infrequent items or resulting from a change in judgment regarding a position taken in a prior period as discrete items in the interim period in which the event occurs. The Company's effective income tax rate for the three and nine months endedSeptember 30, 2022 was approximately 30% and 29%, respectively, and was different than the expected federal income tax rate of 21% due to the impact of nondeductible executive compensation, valuation allowances related to losses incurred in a foreign jurisdiction, and state income taxes. The Company's effective income tax rate for the three and nine months endedSeptember 30, 2021 was approximately 25%, was different than the expected federal income tax rate of 21% due to the impact of nondeductible executive compensation and state income taxes. The effective income tax rate for the nine months endedSeptember 30, 2021 excludes a discrete income tax expense of$4.0 million related to the gain on the consolidation of IT'SUGAR. ? 54
--------------------------------------------------------------------------------
Net Income or Loss Attributable to Noncontrolling Interests
As a result of the bankruptcy filing by IT'SUGAR and its subsidiaries, the Company deconsolidated IT'SUGAR as ofSeptember 22, 2020 and derecognized the related noncontrolling interest in IT'SUGAR. OnJune 17, 2021 , the Company reconsolidated IT'SUGAR as a result of IT'SUGAR's subsequent emergence from bankruptcy and again recognized the noncontrolling interest in IT'SUGAR. As IT'SUGAR is a partially-owned subsidiary,BBX Capital is required to attribute income or loss to the noncontrolling interest in IT'SUGAR during the periods in which IT'SUGAR is consolidated in the Company's financial statements. As a result, for the periodJanuary 1, 2021 toJune 16, 2021 , IT'SUGAR's activities are not included in the Company's attribution of income or loss to noncontrolling interests, but during the three and nine months endedSeptember 30, 2022 and the three months endedSeptember 30, 2021 , the Company attributed income related to IT'SUGAR activities to the noncontrolling interest in IT'SUGAR. The net loss attributable to noncontrolling interests during the three and nine months endedSeptember 30, 2022 was$24,000 and$0.2 million , respectively, compared to net income attributable to the noncontrolling interests of$0.1 million and$0.4 million , respectively, for the three and nine months endedSeptember 30, 2021 , respectively, reflecting income or loss attributed to a 19% noncontrolling equity interest in a restaurant the Company acquired through foreclosure and the aforementioned IT'SUGAR noncontrolling interest.
Consolidated Cash Flows
A summary of our consolidated cash flows is set forth below (in thousands):
For the Nine Months EndedSeptember 30, 2022 2021
Cash flows provided by operating activities $ 16,921
29,511
Cash flows (used in) provided by investing activities (26,887)
17,336
Cash flows used in financing activities (9,796)
(22,237)
Net (decrease) increase in cash, cash equivalents and restricted cash$ (19,762)
24,610
Cash, cash equivalents and restricted cash at beginning of period 119,045
90,387
Cash, cash equivalents and restricted cash at end of period $ 99,283
114,997
Cash Flows from Operating Activities
The Company's cash from operating activities decreased by$12.6 million during the nine months endedSeptember 30, 2022 compared to the same 2021 period primarily due to (i) an increase in trade inventory balances, (ii) lower sales of real estate inventory by BBXRE, and (iii) higher operating losses at Renin, partially offset by a higher return on investments of unconsolidated real estate joint ventures.
Cash Flows from Investing Activities
The Company's cash from investing activities decreased by$44.2 million during the nine months endedSeptember 30, 2022 compared to the same 2021 period primarily due to (i) the purchase of$32.8 million of marketable securities, (ii)$6.9 million of cash acquired in connection with the consolidation of IT'SUGAR inJune 2021 , (iii) higher purchases of property and equipment in 2022, which includes the impact of capital expenditures related to IT'SUGAR's new retail locations, and (iv) lower returns of investments in unconsolidated real estate joint ventures, partially offset by (i) higher proceeds from the sales of real estate and property and equipment and (ii) lower investments in unconsolidated real estate joint ventures.
Cash Flows from Financing Activities
The Company's cash from financing activities increased by$12.4 million during the nine months endedSeptember 30, 2022 compared to the same 2021 period primarily due to lower repurchases of Class A Common Stock, partially offset by lower borrowings on Renin's revolving line of credit during the 2022 period compared to the same 2021 period. ? 55
--------------------------------------------------------------------------------
Seasonality
BBX Sweet Holdings' businesses are subject to seasonal fluctuations in trade sales, which causes fluctuations inBBX Sweet Holdings' quarterly results of operations. Historically, IT'SUGAR has generated its strongest retail trade sales during the months from June through August, as well as during the month of December, when families are generally on vacation, whileBBX Sweet Holdings' other operating businesses generally generate their strongest trade sales during the fourth quarter in connection with various holidays inthe United States .
Commitments
The Company's material commitments as of
The following table summarizes the contractual minimum principal and interest payments required on the Company's outstanding debt and payments required on the Company's non-cancelable operating leases by period due date as ofSeptember 30, 2022 (in thousands): Payments Due by December 31, Unamortized Debt After Issuance Contractual Obligations (1) 2022 2023 - 2024 2025 - 2026 2027 Costs Total Notes payable and other borrowings (2)$ 764 10,500 29,873 3,457 (376) 44,218 Noncancelable operating leases 5,663 44,227 34,823 48,721 - 133,434 Purchase an additional 40% interest in the Altman Companies (3) - 9,400 - - - 9,400 Total contractual obligations 6,427 64,127 64,696 52,178 (376) 187,052 Interest Obligations (4) Notes payable and other borrowings 782 5,637 2,087 2,463 - 10,969 Total contractual interest 782 5,637 2,087 2,463 - 10,969 Total contractual obligations$ 7,209 69,764 66,783 54,641 (376) 198,021
(1)The above table excludes certain additional amounts that the Company may invest in the Altman Companies or its sponsored joint ventures.
(2)Obligations under Renin's credit facility with TD Bank, which had an aggregate balance of$38.4 million as ofSeptember 30, 2022 , are presented based on the scheduled principal payments and stated maturity date ofOctober 2025 currently contemplated in the loan agreement. As ofSeptember 30, 2022 , Renin was out of compliance with the financial covenants under the credit facility, and TD Bank provided several formal notices to Renin that Renin is in default under the credit facility. Although TD Bank has not exercised any remedies under the facility as a result of the default, TD Bank's remedies include the acceleration of amounts outstanding under the facility, and such acceleration would contractually obligate Renin to repay such amounts ahead of the scheduled repayment dates contemplated in the loan agreement. If Renin is required to repay all or a portion of its$38.4 million of borrowings, such repayment would have a material adverse effect on the Company's liquidity and financial position. (3)Subject to certain adjustments, including, but not limited to, reimbursements for excess working capital and predevelopment expenditures incurred at the time of purchase. The above table does not include the obligation to purchaseJoel Altman's remaining 10% equity interest in the Altman Companies for$2.4 million at his option or in other predefined circumstances. (4)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 atSeptember 30, 2022 .
Liquidity and Capital Resources
As ofSeptember 30, 2022 , the Company had cash, cash equivalents, and short-term investments of approximately$135.8 million . Management believes that the Company has sufficient liquidity to fund operations, including anticipated working capital, capital expenditure, and debt service requirements, and respond to the challenges related to the COVID-19 pandemic, inflationary trends, increased interest rates, and the current economic environment for the foreseeable future, subject to mitigation and cost reduction efforts and management's determination of whether and/or the extent to which it will fund the operations and commitments of its subsidiaries. As previously disclosed, management has evaluated and will continue to evaluate the potential operating deficits, commitments, and liquidity requirements of its subsidiaries and may determine not to provide additional funding or capital to subsidiaries whose operations it believes may not be sustainable or do not support additional investment. 56
--------------------------------------------------------------------------------
The Company's principal sources of liquidity have historically been its available cash and short-term investments, distributions from unconsolidated real estate joint ventures, and proceeds received from sale of real estate.
In addition to the above sources of liquidity, the Company expects to receive quarterly interest payments on the promissory note that was issued byBluegreen Vacations in favor ofBBX Capital in connection with the spin-off of the Company. The original principal amount of the note was$75.0 million ; however, inDecember 2021 ,Bluegreen Vacations prepaid$25.0 million of the principal balance, reducing the outstanding balance to$50.0 million . Amounts outstanding under the note accrue interest at a rate of 6% per annum, with interest payments scheduled to occur on a quarterly basis. However,Bluegreen Vacations may elect to defer such quarterly interest payments, with interest on the entire outstanding balance thereafter to accrue at a cumulative, compounded rate of 8% per annum until such time asBluegreen Vacations is current on all accrued payments under the note, including deferred interest. All outstanding amounts under the note will become due and payable onSeptember 30, 2025 or earlier upon certain other events.Bluegreen Vacations is permitted to prepay the note in whole or in part at any time. The Company believes that its current financial condition will allow it to meet its anticipated near-term liquidity needs. The Company 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 the Company on attractive terms, or at all. The inability to raise any needed funds through the sources discussed above would have a material adverse effect on the Company's business, results of operations, and financial condition.
Anticipated and Potential Liquidity Requirements
The Company currently expects to use its available liquidity to fund operations (including corporate expenses, working capital, capital expenditures, debt service requirements, and the Company's other commitments described above) and make additional investments in real estate, its existing operating businesses, or other opportunities, including the potential repurchase of its common stock. However, as discussed above, the Company's management intends to evaluate any operating deficits, commitments, and liquidity requirements of its subsidiaries as a result of inflationary trends, higher interest rates, and general economic conditions and may make a determination that it will not provide additional funding or capital to its subsidiaries.
InJanuary 2022 , the Board of Directors approved a share repurchase program which authorizes the repurchase of up to$15.0 million of shares of the Company's Class A and Class B Common Stock. The repurchase program authorizes the Company, in management's discretion, to repurchase shares from time to time subject to market conditions and other factors. The timing, price, and number of shares which may be repurchased under the program in the future will be based on market conditions, applicable securities laws, and other factors considered by management. Share repurchases under the program may be made from time to time through solicited or unsolicited transactions in the open market or in privately negotiated transactions. The share repurchase program does not obligate the Company to repurchase any specific amount of shares and may be suspended, modified, or terminated at any time without prior notice. During the nine months endedSeptember 30, 2022 , the Company repurchased 115,782 shares of its Class A Common Stock at an average per share purchase price of$9.27 , including fees.BBX Capital Real Estate The Altman Companies InNovember 2018 , BBXRE acquired a 50% membership interest in the Altman Companies, a joint venture between BBXRE andJoel Altman 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 that any profits generated for BBXRE andJoel Altman would primarily be through the equity distributions that BBXRE andJoel Altman receive through their investment in the managing member of such joint ventures. Therefore, as the timing of any such distributions to BBXRE andJoel Altman is generally contingent upon the sale or refinancing of a completed development project, BBXRE andJoel Altman generally contribute capital to the Altman Companies for its ongoing operating costs and predevelopment expenditures on an ongoing basis, as well as to the managing member of newly formed joint ventures, based upon their current respective ownership of the Altman Companies. Further, BBXRE's contributions of capital to the Altman Companies for such expenditures are expected to increase in 2023 and future periods as a result of BBXRE's 57 -------------------------------------------------------------------------------- obligation to acquire an additional 40% of the Altman Companies fromJoel Altman inJanuary 2023 . During the remainder of 2022, BBXRE currently anticipates that it will invest up to$2.0 million in the Altman Companies for planned predevelopment expenditures, ongoing operating costs, and potential operating shortfalls related to certain projects. Further, based on its current pipeline of new potential development projects, and certain existing development projects for which the equity contributions to the joint ventures are expected to be funded over time, BBXRE currently estimates that it may invest up to$10.0 million in development joint ventures during the remainder of 2022, which is lower than previously anticipated due to increased uncertainty related to certain projects and an expected shift in the timing of the commencement of certain projects from 2022 to 2023. However, the timing of the commencement of such projects and the pace of development may result in such estimated investments for the remainder of 2022 being made in 2023 or a later period. Further, material adverse changes in market conditions may result in the Altman Companies electing to not move forward with such investments and forfeiting its deposits and predevelopment expenditures related to such projects. Furthermore, BBXRE currently expects that it will contribute an estimated additional$1.25 million toABBX Guaranty, LLC , a joint venture between BBXRE andJoel Altman that provides guarantees on the indebtedness and construction cost overruns of new real estate joint ventures formed by the Altman Companies, in 2022. Pursuant to the operating agreement of the Altman Companies, BBXRE is required to acquire an additional 40% equity interest in the Altman Companies fromJoel Altman for a purchase price of$9.4 million , subject to certain adjustments, inJanuary 2023 .Joel Altman 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 in the affiliatedAltman-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 .
BBXRE currently expects that it may invest in excess of
If the division commences the development of warehouse and logistics facilities, BBXRE expects that it will seek to develop such projects through joint ventures with third party investors and that it will invest in the managing member of the joint ventures formed to invest in such development projects. While there is no assurance that this will be the case, if joint ventures are formed to invest in projects, BBXRE expects that it will be reimbursed for all or a portion of its previously incurred predevelopment expenditures by such ventures. Further, in the event that BBXRE closes on development financing for such projects, BBXRE expects that it would be required to contribute at least$5.0 million to a wholly-owned subsidiary that will provide guarantees on the indebtedness for the funded projects and that such cash would be restricted from being utilized in BBXRE's other operations. BBXRE has entered into agreements to acquire five land parcels for the purpose of developing logistics facilities for an aggregate purchase price of approximately$60.0 million . BBXRE has completed due diligence on two of these parcels, which have an aggregate purchase price of approximately$35.0 million , and paid nonrefundable deposits totalling$0.9 million on these parcels, although the deposit on one of these parcels is contingently refundable if BBXRE is unable to obtain entitlements for the development. The agreements for the remaining three parcels are subject to the successful completion of due diligence, and the escrowed deposits paid by BBXRE in connection with the agreements are refundable until the end of the applicable due diligence periods. As indicated above, if BBXRE moves forward with any or all of these projects, BBXRE expects that it will develop the projects through joint ventures with third party investors and it will assign the agreements to the applicable joint ventures. Accordingly, if BBXRE moves forward with any or all of these projects, BBXRE expects that it would fund a portion of the land and development costs as the managing member and would seek third party debt and equity financing for the remainder of such costs. Other The operating agreements of certain real estate joint ventures in which BBXRE is an investor contain customary buy-sell provisions which could result in either the sale of BBXRE's interest or the use of available cash to acquire the partner's interest, and the Company's commitments and liquidity requirements described above do not include amounts that the Company could pay as a result of the initiation of these provisions. 58
--------------------------------------------------------------------------------
IT'SUGAR currently expects to incur in excess of$10.0 million of capital expenditures during 2022 to fund construction costs associated with new retail locations and the expansion of existing retail locations.BBX Capital has loaned$4.0 million to IT'SUGAR to partially fund such capital expenditures throughSeptember 2022 and loaned IT'SUGAR an additional$3.0 million inOctober 2022 .
Renin
During the year endedDecember 31, 2021 ,BBX Capital contributed$15.0 million to Renin to provide additional liquidity for working capital. Further, inMay 2022 , Renin borrowed$13.5 million fromBBX Capital for Renin to pay down Renin's term loan with TD Bank by$10.0 million and to provide additional liquidity for working capital requirements. InSeptember 2022 ,BBX Capital made a$1.0 million capital contribution to Renin for working capital. The capital contributions and loan to Renin were necessitated primarily as a result of the impact of global supply chain disruptions, the increased costs of Renin's operations, and compliance with the covenants under the terms of Renin's credit facility with TD Bank. As further discussed in this report, Renin may require additional funds to address the ongoing defaults under the credit facility with TD Bank. As ofSeptember 30, 2022 , the aggregate amount outstanding under the credit facility with TD Bank was$38.4 million . Further, as a result of the resolution of a dispute between Renin and one of its suppliers,BBX Capital contributed$2.0 million to Renin in 2021 in order to fund the first half installment of the settlement payable by Renin to the supplier and contributed an additional$2.0 million to Renin inJune 2022 in order to fund the final installment of the settlement.BBX Capital currently estimates that it will provide at least$4.0 million of additional capital contributions to Renin prior to the end of fiscal 2022 to fund expenditures related to the winding down of certain of its facilities and for working capital. WhileBBX Capital may consider providing additional funds to Renin in future periods to fund working capital and its commitments,BBX Capital's management will evaluate the operating results, financial condition, commitments and prospects of its subsidiaries on an ongoing basis and may determine that it will not provide additional funding or capital to its subsidiaries, including Renin.
Credit Facilities with Future Availability
As of
LOCS Credit Facility
InJuly 2021 ,BBX Sweet Holdings and certain of its subsidiaries, including Las Olas Confections and Snacks, entered into a credit agreement (the "LOCS Credit Facility") withFirst Horizon Bank (formerly known asIberiaBank ) which provides for a revolving line of credit of up to$2.5 million that matures inJuly 2023 . Amounts outstanding under the LOCS Credit Facility bear interest at the higher of the Wall Street Journal Prime Rate plus 50 basis points or 3.0% per annum, and the facility requires monthly payments of interest only, with any outstanding principal and accrued interest due at the maturity date. The LOCS Credit Facility is collateralized by a blanket lien on all of the assets of the borrowers under the facility and is guaranteed byBBX Capital . The facility contains certain financial covenants, including a minimum liquidity requirement forBBX Capital as guarantor under the facility and a requirement that the borrowers maintain a zero balance on the facility for thirty consecutive days during each calendar year during the term of the facility. As ofSeptember 30, 2022 , the outstanding amount under the credit facility was$2.3 million , and the effective interest rate was 6.75%.
TD Bank Credit Facility
As Renin was out of compliance with the financial covenants under its credit facility with TD Bank as ofSeptember 30, 2022 , Renin's line of credit under the facility had no contractually committed availability as ofSeptember 30, 2022 , although TD Bank has continued to allow Renin to utilize the line of credit for its operations. As ofSeptember 30, 2022 ,$38.4 million was outstanding under the TD Bank credit facility.
Off-balance-sheet Arrangements
BBX Capital guarantees certain obligations of its wholly-owned subsidiaries and unconsolidated real estate joint ventures as described in further detail in Note 13 to the Company's condensed consolidated financial statements included in Item 1 of this report. 59
--------------------------------------------------------------------------------
The Company has investments in joint ventures involved in the development of multifamily rental apartment communities, as well as single-family master planned for sale housing 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 ofSeptember 30, 2022 andDecember 31, 2021 , the Company's investments in these joint ventures totaled$46.6 million and$53.0 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 Note 13 to the Company's condensed consolidated financial statements included in Item 1 of this 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.
© Edgar Online, source