January 2009 - Jeff Healy

The Principle of Change
The Re-Emergence of Timeshares and Fractionals in the Current Economic Climate

Jeff Healy, President, ResortCom Interntaional


 

Wow – Timeshare may be in vogue again! Given the current economic outlook and past downturn cycles, we project to see a strong re-emergence of Timeshare development and conversions in the short to mid-term future. Here is why:

For the past five or so years, it appeared that truly new timeshare development, and especially new developers into the timeshare market, was no longer considered the best use of a real estate asset. Many existing timeshare companies may have continued to expand to new resorts and sites but rarely did any brand new to the industry developers appear (neither in the U.S. nor Mexico).

Even many of the existing timeshare developers chose to expand their mixed use developments with other real estate development options.

As a result, the condo market really flooded the development market in many locations on both sides of the border such as Puerto Vallarta, Cancun, Playa del Carmen, Miami, Las Vegas, San Diego, Phoenix, etc. A subset of these ventured into the “condo-hotel” version - which as an economic model is still somewhat of a mystery to me: the ROI of the hotel didn’t work by itself when I built it at cost, but now I am going to sell it to 200 owners at “retail” and split the SAME NOI of the SAME hotel?

Second to condos, fractionals (including true PRC’s and even going into Destination Clubs) became very popular. We saw many of our timeshare clients move more into this product.

And then of course all hell broke loose by the middle of 2007. Besides the U.S. mortgage market collapse, general economy, unemployment, oil up, then down, financial industry, lack of capital market, reduction of consumer credit, and probably just as important, the lack of consumer confidence and similar issues in many global markets, the second home market and condos became overbuilt and overpriced. Construction costs went through the roof, land costs became borderline ridiculous and many of the buyers were buying for pure investment and speculation. This era has now irrevocably ended and a new era will begin. Both timeshare and certain fractional options have now moved back towards the top of some best use of real estate assets.

What will most likely occur over the next several years is that “just built” condos will be repositioned as possible timeshare or fractional projects. Since many condos are built in similar physical style that works with both, it is a natural consideration. Depending on the size of the project, existing (or the ability to add) amenities and overall luxury quality may dictate what makes the most sense. Even though fractionals were part of the past five years, they still remain a solid option for certain real estate assets.

Timeshare makes a lot of sense when the location is good for vacation or visiting (some urban locations), the project is larger and has the right amenities. The benefit of timeshare is its mid-market focus. This maximizes the largest buying group possible. Also, timeshare use RIGHT NOW, trends at record numbers. Our clients’ reservation activity is up over 40% for 2009 reservations over 2008 actual use. This also bodes very well for amenity revenues at the resort!Fractionals can make sense when the location is outstanding, it is a smaller size project (50 units or less preferably), luxury quality and again has the right amenities. There are still many affluent buyers sitting on the sidelines that can afford to buy the right product. And especially now, if they feel they are getting a good price.

What’s more, both products can provide very strong economic consistency for a resort: both models provide annual dues that should cover the operating budget of the resort. This allows for consistent revenues to maintain the employees of the resort at levels that may not make sense in a pure hotel (seasonality). The timeshare traveler stays more nights per stay than a hotel guest. The timeshare traveler has more guests per unit than hotel guests. And, timeshare travelers spend more money on resort amenities than hotel guests. Thus, in tougher times, like now this business model keeps the resort at higher occupancy and delivers more robust and ongoing revenues.

However, one major challenge stands in the way of repositioning existing condo projects: the old timeshare and fractional financial model is not working any longer.

Old U.S. Model

Very little profit was actually earned on the pure selling of timeshare. This was a result of high product costs and especially high sales and marketing costs (some as high as 60%). In many cases, the final profit was between 5-10% (then you pay some taxes). All of the profit was earned in the financing of the timeshare receivables generated to the consumers. In most cases, with only 10% down, the consumer was given developer financing at approx. 15% interest rate for 7-10 years. Then a financial company would loan against

(hypothecate) these receivables at rates closer to 7-8%. The spread then became the most profitable portion of this business. In many cases, the development would generate over $100M in these receivables, allowing the developer to earn 7-8% annually in profits.

Original Mexico Model

Back in the 80s and 90s, because of the lack of financing available to the Mexico resort developer, for many years a true real estate profit and cash flow model emerged.  Accordingly, many resorts were built with product costs of 15-20%, efficient sales and marketing programs were costing 35%, admin was another 5%. Thus, 35-40% profit was created from the pure sale of timeshare. Then, any interest on the receivables (15%) was gravy on top. In addition, most resort groups required a minimum of 25% down and usually averaged over 50% cash from every deal. This allowed the business to cover the sales and marketing costs and much of the construction costs without any actual external financing. It meant that the business may have to grow at a slower pace, but was fundamentally very strong. The other major difference was the mixed use concept at the resort. In Mexico, most resorts ran like resorts (hotels) with rental business, major amenity and restaurant revenues and truly a full-service resort atmosphere. The old timeshare product in the U.S. was much more condominium style.

Of course all this has changed in the last ten years. As financing become more readily available South of the border, financial models in Mexico have become closer to the U.S. model while the prevalent mixed use concept pioneered in Mexico gained a foothold in the US.

Thus, with the lack of some construction financing and now receivable financing, the timeshare and fractional business will need to change. We anticipate some of these changes to revert back to some of the fundamentals of 10 plus years ago the continued emerging of more professional sales and marketing programs occurring.

Summary

In summary, we believe that many non-performing high quality condo projects and new developments will reconsider timeshare and fractional as the best use for the asset. Realistically, the best use should always consider some level of mixed use (some hotel portion, some timeshare). Then it could even be expanded to have some fractional and even SOME condos. For new entrants, our recommendation is to make sure you surround yourself with some very strong and experienced professional help. Timeshare (and to a lesser degree, fractional) have many moving parts. Strong legal, feasibility analysis, product plan design, amenity recommendations, resort operations and back of house timeshare operations are critical to the overall success.

Future for our Business

On the positive side, the timeshare business continues to produce strong usage results. We are also seeing a strong pipeline of new business. This is coming in both the timeshare side and the luxury fractional side. Many of this is in the form of resort management.

On the negative side, there is a trend towards decreasing timeshare sales volumes and traditional hotel rental (retail). We are also witnessing an increase in some delinquency and foreclosure rates for both the timeshare loans and maintenance fee dues by 2-3 % across the many portfolios we manage.

So we remain very optimistic – but cautious. We look at these next few years as a time for new opportunities. We have prepared ourselves to be ready and very open minded to new ideas.

ResortCom Internationa
ResortCom has been in business since 1985. ResortCom specializes in financial services, resort operations and vacation club management for the timeshare and luxury fractional markets. With all of these services, ResortCom can provide 100% of the operational and back office services for a timeshare or fractional resort developer, except for building it and selling of the intervals. The summary of all of the primary services is:

  • Loan Servicing
  • Portfolio Management (Collections)
  • Maintenance Fee Billing and Collections
  • Merchant Credit Card Processing
  • Resort Management
    • Timeshare Resorts
    • Luxury Fractional Resorts
    • Full Service Resort Properties
  • HOA/Club Management
  • Reservations/Owner Services
  • Concierge/Club Services
  • Resort Rental Marketing (Suite Getaways)
  • Travel Club/Travel Products

ResortCom maintains its primary headquarters in San Diego, California. It also has an office in Ft. Lauderdale, Mexico City and San Francisco. ResortCom currently has 500 employees (includes Resort employees), 135 of which are in the San Diego office.

ResortCom has created very strong strategic relationships in the area of timeshare and fractional sales and marketing, project feasibility, legal structures, etc.

Market Niche and Clients

ResortCom International’s market has been International. Most of its current clients are located in Mexico and the Caribbean. However, many of these clients’ customers are from all over the world. ResortCom currently supports eight languages in our reservation center. In addition, ResortCom partnered with another International financial services and trust company based in Europe. This group has operations all over the world in all key major markets. ResortCom continues to look for ways to be a global total solution for its clients. ResortCom also has brought in a new partner, Tom LaTour (25 years as CEO and Chairman of Kimpton Hotels). Together with ResortCom Elite, has roled out a luxury brand for the fractional market called LaTour Signature. ResortCom has also grown into new business areas as a result of its operating platform, such as health medical travel.

Jeff Healy
619-683-2470
jhealy@ResortCom.com
www.ResortCom.com


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