Tuesday, September 25, 2007

Sun Setting for Cay Clubs?

The future of Cay Clubs looks dependent upon the successful merger with Keys Hospitality Acquisition Corp - a shell company formed to acquire other businesses.

Shareholders of Keys Hospitality Acquisition will soon vote on whether to acquire Cay Clubs.

The merger has significant risks. Filings with the SEC detail those risk factors. These will be distributed to the voting shareholders. According to the filings, if 20% of IPO shareholders vote against the merger, the deal will not happen.

Cay Clubs is clearly in trouble - despite layoffs, cancelled fishing tournaments, and backing out of other deals. Currently, Cay Clubs is past due on payments - while much more coming due.

According to filings with Security and Exchange commission, "At March 31, 2007, Cay Clubs had approximately $91 million in long-term indebtedness, of which approximately $73.8 million matures within one year and the remainder matures within three years. Cay Clubs is presently past due on $1.0 million in payments on $54.3 million in underlying indebtedness, of which approximately $9.2 million has been declared in default by the lender."

Below are some of the most notable risk factors detailed in the SEC filing:

  • Inability to renew or refinance indebtedness as it matures and to remedy a default and repay past due amounts on existing indebtedness could cause Cay Clubs to surrender the related asset and adversely impact its ability to continue executing its business plan.
  • Cay Clubs’ inability to pay its property management and/or lease payments to previous buyers has impacted Cay Clubs’ credibility in the market.
  • Cay Clubs is subject to the risks of the real estate market and the risks associated with real estate ownership and development, including the risks and uncertainties relating to the cost and availability of construction materials, services and land for new properties.
  • Although Cay Clubs owns certain of its condominium resort facilities, certain properties are actually owned by Sunvest Communities U.S.A. L.C. or its affiliates and therefore Cay Clubs is forced to rely upon Sunvest or its affiliates in order to properly execute its business plan with respect to such properties, and if such business plan is unable to be properly executed, Cay Clubs’ revenues and earnings will be reduced.
  • If Cay Clubs’ relationship with IMG Academies is terminated, then such event could prevent Cay Clubs from executing all or a portion of its existing business plan and therefore significantly reduce Cay Clubs’ revenues and earnings.
  • Cay Clubs is vulnerable to the risk of unfavorable weather conditions and continued inclement weather could reduce Cay Clubs’ revenues and earnings.
  • Cay Clubs faces significant competition.
  • Cay Clubs’ future growth requires additional capital whose availability is not assured.
  • Because Cay Clubs’ business depends on the acquisition of new land, the unavailability of desirable land could reduce Cay Clubs’ revenues or negatively affect its results of operations.
Amazingly, the board of directors of Keys Hospitality Acquisition "determined unanimously that the merger proposal is fair to, and in the best interests of, Key and its stockholders.

According to the filing:

"directors determined the fair market value of Cay Clubs by analyzing the value of each of Cay Clubs’ properties in the following manner: (i) valued the unsold condo-hotel units based on past sales of units at the property and in comparable Cay Clubs properties; (ii) valued the unsold wet and dry boat slips based on market comparables; (iii) valued any amenities, extra land or development rights in the property based on the price a developer would pay for the land in order to achieve a reasonable profit margin; and (iv) valued the potential cash flow from hotel/resort operation by using a multiple of eight times cash flow (derived from Cay Clubs’ financials and projections for the particular property). For each Cay Clubs’ property, an asset value was reached by adding the four sources of value described above (if applicable) and any debt associated with the property was subtracted from such amount to arrive at an equity value for each property. The board did not apply any discounts for time value of money or risks. These equity values for all of the Cay Clubs’ properties were then aggregated to yield a total equity number significantly in excess of the initial consideration to be paid to Cay Clubs’ members in the merger. In addition, Key’s board also reviewed projected sales and earnings that can be generated by Cay Clubs and compared these to public companies operating
in segments similar to Cay Clubs. Accordingly, Key’s board has unanimously approved and declared advisable the merger and unanimously recommends that you vote or instruct your vote to be cast “FOR” the approval of the merger proposal."
Notice part "(i) valued the unsold condo-hotel units based on past sales of units at the property and in comparable Cay Clubs properties."

This alone is a red flag and means that Keys Hospitality is not pricing the condo units based on post-crash prices, but on prices it received in the past.

Given the monumental crash in the South Florida condo market, Keys Hospitality Acquisition Corp. shareholders might want to do their own evaluation of the value of the Cay Clubs assets.

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