Vacation time-shares must rank near the bottom of anyone's must-have list these days, not far from designer water, animal shrinks and personal spa consultants. That the high-pressure industry is reeling comes as no surprise. What's less obvious is why the business didn't fall apart sooner, especially since it is caught in the same securitization collapse that buried subprime mortgages and other asset-backed securities.
Banish any thoughts that time-share developers are immune from the economic downdraft. Marketing of new time-shares is being drastically cut. Time-share financing is extremely tough. Securitization is nonexistent. A kind of commercial financing called inventory loans, necessary as a bridge between development and securitization, is now moribund. In December, Textron Inc., inventory lending's driving force, said it was exiting the field. In 2007, Textron Financial Corp. provided more than $800 million in new funding to vacation ownership.
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Time-share sales in 2007 totaled $10.6 billion, according to a study by
Ernst & Young LLP.
Through the third quarter of 2008, says Howard Nusbaum, CEO of industry
group American Resort Development Association, sales were "on par with
2007, maybe 5 to 10% ahead." He estimates last year's sales were down
10% to 15% "at most." Scott Burlingame, editor and publisher of trade
magazine Vacation Ownership World, believes that with "the bottom
dropping out in the fourth quarter," 2008 figures could be down 25%.
This year is expected to be much worse. The biggest player, Wyndham
Vacation Ownership, announced in December that it would cut 4,000 jobs,
wiping out sales and marketing programs. That should reduce sales 40%
this year, to $1.2 billion, says Wyndham Worldwide Corp.
Wyndham and Marriott International Inc., the
second-largest developer, appear diversified enough to weather the
downturn. Ditto for the time-share units of other chains, including Starwood Hotels & Resorts Worldwide Inc., Hilton Hotels Corp. and Walt Disney Co. But the fate of others is less certain. Privately held Westgate Resorts, owned by Central Florida Investments Inc., has already cut staff by almost 40%.
Moody's Investors Service downgraded publicly traded Bluegreen Corp.'s
debt in late November and warned of the growing possibility of default.
This followed the collapse of an acquisition play on Bluegreen by
privately held Diamond Resorts International, which had bought
another rival, Sunterra Corp., for $750 million in 2007. Lack of
financing cratered the deal, Bluegreen said. That may be true enough.
However, Boca Raton, Fla.-based Bluegreen now trades below $2 a share.
Diamond's nonbinding offer in July was for $15 a share.
Time-share securitization has been around since the mid-'90s. A
company underpins a new development by selling new time-shares, usually
20% down, with the rest financed. Revenue tends to come in monthly.
Dozens are necessary to finance each room. So a developer bundles
future time-share receivables, which secure funding for development.
In the latest Standard & Poor's update, outstanding
securitized time-share transactions stood at $2.85 billion in October,
down from a peak of $3.04 billion in July. S&P noted delinquencies
topped 4.2%, with defaults at a still-low 0.70%. Both are rising, but
not to the degree in other lending classes.
How come? Some possibilities: Time-shares are often nonrecourse
loans, meaning a buyer is personally on the hook for the entire amount,
whether he walks or not. Under the terms of securitization, a developer
can substitute nondelinquent assets, so the pool isn't fixed like
subprime. And there are the economics of the market. The average
time-share costs $19,500 but is immediately worth half that in the
resale market. Online secondary market site Sell My Timeshare Now
reports the average offers last year ran between $4,000 and $5,000. So
hard-pressed owners either suck it up and make payments, knowing at
least they'll get a vacation week out of it, or jettison shares for
huge losses to escape their contracts.
Nusbaum says the secondary market is all over the place in terms of
professionalism and likens it to "where used autos were in the 1960s."
A spokesman for Sell My Timeshare Now counters that secondary sales are
surprisingly robust, even if owners take a beating. That may help keep
defaults down, but it doesn't bode well for new sales. New inventory
remains high, one analyst says. But even an unrelenting sales pitch may
not be enough to convince a beleaguered consumer that it's worth
forking over $20,000 for a week's vacation.
Matt Miller covers distressed investing for The Deal.
Comments
With all due respect, Matt Miller of The Deal got several facts wrong in his recent piece on the timeshare industry (“Time Bomb?” February 6, 2009). Mr. Miller lumps timeshare securitization in with sub-prime mortgages and the like. Nothing could be farther from the truth. Timeshare loans are small in amount, short in duration and use fixed rates.
The future of the vacation ownership industry (which includes timeshares, fractionals, private residence clubs and related products) is not about the financial instruments of Wall Street, but rather the wanderlust of Main Street. There are 76 million baby-boomers that are extremely compelled by the value proposition of better vacationing with timeshare– and for the price of a modest automobile, one can own a vacation for life. Unlike crowded hotel rooms, a timeshare unit offers the extra space, flexibility and comforts which allow people to take their kids and loved ones along for the ride.
Our industry has historically weathered market recessions relatively well, and while we are seeing some developers purposely slowing down new sales during the current period (because of the inability to monetize the consumer notes), occupancy rates remain high and owners are still traveling to their timeshare destinations. In fact, while traditional hotel stays are seeing large declines because corporate travel is down, the industry’s vacation ownership products continue to offer a tremendous value for the consumer and the economic impact of their spend in the destinations.
As to Mr. Miller’s thoughts about the secondary or resale portion of the marketplace, he is right that default rates remain much lower than its counterparts in say, the traditional home- mortgage market. That, I believe, is a testament to the value and demand of these products—and a sign of what a great vacation option timeshares are and have been for decades for families who value vacationing.
People need to be reminded that timeshares and other vacation ownership offerings are use products, not appreciating real estate investments. As such, no one should be under the false impression that timeshares are to be acquired for any purpose other than to use. At the same time, consumers need to know that the secondary market or resale marketplace is unregulated and that it’s a “Buyer Beware” proposition. For tips on making sure you are protected during a resale transaction, please visit our website at www.arda.org for tips on buying a resale.
The financial instruments developers use to secure funding is secondary to the overriding reasons why timeshares are here to stay. Timeshare is now a staple of the lodging industry options. It’s alive and well because tens of millions of Americans want the rejuvenation and high quality of family life that comes with better vacationing. Sincerely,
Howard Nusbaum
President& CEO
The American Resort Development Association