Friday, June 03, 2005

Trading Below Net Current Asset Value, and real estate related? A CHEAP STOCKS Dream (Or Nightmare)?
Part I of II
Silverleaf Resorts
Ticker: SVLF
Price: $1.30
Market Cap: $48 million
Average Daily Volume: 52000
P/E: 4
NCAV: $77.2 million

It sounds too good to be true. A company trading below its net current asset value, with real estate exposure. Avid readers of our research know from past postings that if there’s one thing we like better than NCAV companies, it’s companies with exposure to land. Here at Cheap Stocks, we were excited upon discovering this tiny timeshare developer. But the more research we did, the more wary we became. Caution is the name of the game with this company we decided….But isn’t it always with NCAV companies?
Silverleaf, a Dallas Texas based company, owns 12 timeshare resorts in Texas, Missouri, Illionos, Georgia, Massachusetts, and Florida. This company has seen it’s share of tough times in recent years; at one point, it had more than 20 timeshare resorts.(More on that later)

For an overview of the company, the following is taken directly from the company’s 2004 10K report:

The principal business of Silverleaf Resorts, Inc. (“Silverleaf,” the “Company,” or “we”) is the development, marketing, and operation of “drive-to” and “destination” timeshare resorts. As of December 31, 2004, we own eight “drive-to resorts” in Texas, Missouri, Illinois, and Georgia (the “Drive-to Resorts”). We also own four “destination resorts” in Texas, Missouri, and Massachusetts (the “Destination Resorts”). In February 2005, we obtained approval to operate a fifth destination resort in Florida, which was acquired in October 2004. Also in 2005, we reclassified one of our Drive-to Resorts in Texas to a Destination Resort.
The Drive-to Resorts are designed to appeal to vacationers seeking comfortable and affordable accommodations in locations convenient to their residences and are located near major metropolitan areas. Our Drive-to Resorts are located close to principal market areas to facilitate more frequent “short-stay” getaways. We believe such short-stay getaways are growing in popularity as a vacation trend. Our Destination Resorts are located in or near areas with national tourist appeal and offer our customers the opportunity to upgrade into a more upscale resort area as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the Destination Resorts (collectively, the “Existing Resorts”) provide a quiet, relaxing vacation environment. We believe our resorts offer our customers an economical alternative to commercial vacation lodging. The average price for an annual one-week vacation ownership (“Vacation Interval”) for a two-bedroom unit at the Existing Resorts was $9,671 for 2004 and $9,510 for 2003.
Owners of Silverleaf Vacation Intervals at the Existing Resorts (“Silverleaf Owners”) enjoy certain distinct benefits. These benefits include (i) use of vacant lodging facilities at the Existing Resorts through our “Bonus Time” Program; (ii) year-round access to the Existing Resorts’ non-lodging amenities such as fishing, boating, horseback riding, tennis, or golf on a daily basis for little or no additional charge; and (iii) the right to exchange a Vacation Interval for a different time period at a different Existing Resort through our internal exchange program. These benefits are subject to availability and other limitations. Most Silverleaf Owners may also enroll in the Vacation Interval exchange network operated by Resort Condominiums International (“RCI”). Our new destination resort in Florida is not under contract with RCI; however it is under contract with Interval International, Inc., a competitor of RCI.

Silverleaf traded as high as $29 1/8 back in 1998, but has since fallen on hard times. In 2000, losses started mounting, and the company’s credit rating was slashed. In 2001 the company cut back sales and marketing efforts, and had to negotiate extensions of its credit facilities. Amid a cash crunch, there were doubts that the company could continue as a going concern. In June 2001, Silverleaf's common stock was delisted from the NYSE and it began trading on the OTC market. In May, 2002, the company exchanged nearly $57 million of its 10 ½ percent senior subordinated notes for $28.5 million in 6 percent senior subordinated notes, and 65 percent of the company’s outstanding stock. Clearly, a company in deep trouble. In May, 2004 Silverleaf was off the OTC, and onto the OTC Bulletin Board. This does not sound like a great story; sounds more like a company on the road to bankruptcy.

Fast forward to 2005, and Silverleaf is showing signs of life, having turned a profit for 5 straight quarters (note the current P/E ratio of 4). Silverleaf has shed some assets, but picked up some new ones as well (mainly land). Stay tuned for Part II of this report which we’ll run next week. We'll explore some of the more recent events, go into detail about the risks inherrent in this company, as well as get into the NCAV components and calculation.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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