Adapting resort and timeshare business strategies

Published January 1, 2010

by Brian Welch
Media producer
askMANDO.com

As a result of the tightening economy, the hospitality industry has aggressively adapted its approach to doing business, particularly among new developments, to reflect the shifting preferences of consumers.

Are there opportunities that exist along with the current challenges within the resort and timeshare sector?

Bill Guthrie is a partner with the law firm Foley & Lardner LLP, and is a member of the Real Estate Practice and the Hospitality, Resort & Golf Industry Team. His practice focuses on the condominium, resort and hospitality industries.

Guthrie recently answered some questions on this topic.

Q: How are resort managers, operators and developers adapting the way they do business as a result of the current state of the economy and the shifting preferences of consumers?

A: There has been a significant focus on cost containment in all facets of the industry. Developers have had to focus on streamlining marketing and sales channels to only those that are most cost effective and successful. Developers are increasing the FICO score of their buyers and requiring more cash down. Resort Managers and operators have been focused on maintaining the resort experience while attempting to lower costs and handling an increase in slower paying or defaulting owners.

Q: Specifically, what are some of the challenges faced by the resort and timeshare sector? Can opportunities be created as a result?

A: Financing is the largest challenge for the timeshare sector. The number of hypothecation lenders that service the industry has dropped and those that remain have tightened their lending criteria significantly. In a capital-intensive business with negative cash flows in the early years of the product, this has created significant challenges for some developers. For those developers who are able to get cash, this provides a significant opportunity to expand as we have seen with the Holiday Inn Vacation Club. The demand for financing and evidence of strong performance of the industry’s loan portfolio provides an excellent opportunity for new entrants into the timeshare lending arena. We have seen some evidence that new sources of financing are now examining the sector.

Q: What is the trend as far the creation of new products that will minimize use of balance sheets, improve returns on invested capital, and lower marketing costs?

A: A variety of public company developers are seeking to create new products which minimize the use of balance sheets, improve returns on invested capital and lower marketing costs. Ritz Carlton recently launched a new trust-based structure which achieves these benefits while competing with the existing destination clubs in a manner that fully protects consumers. Wyndham Vacation Ownership, Inc. has announced its asset affiliation model which is a fee for service time share model with little or no capital deployment on Wyndham’s part. The model is designed to provide a turn key solution for developers and/or banks in possession of completed unsold unused condo or hotel inventory. WVO uses its existing sales and marketing distribution channels to sell already constructed inventory for a fee as points based Wyndham time share.

Q: What do resort managers, operators and developers need to know about the formation of target-marketed boutique timeshare and resort projects?

A: Consumers clearly understand the value proposition of timeshare. Many developers are seeing tour flow tracking to plan and sales efficiencies exceeding expectations. Both close rates and pricing remain strong. Consumers still want to experience their vacations. The change is in the time spent on vacation and location. People are taking shorter vacations closer to home. This presents opportunities for target-marketed boutique projects marketed as drive-to locations.

Q: Tell us about any expanded opportunities for new alliances, marketing arrangements, and joint ventures.

A: The newest opportunity is the private club residence program. In its simplest form, it is a private club within a number of other private clubs. This type of product is attractive to discriminating buyers who demand a private club experience. The model involves the formation of a private residence club which owns or leases private residences at a variety of locations around the world. These residences will be generally located within private clubs and will include a membership in the private golf club attached to the community. This new innovative product provides opportunities for existing golf clubs to increase utilization of the clubs.

An additional opportunity is reciprocity with other clubs and/or extending playing privileges with other clubs. The economics associated with owning and operating a private golf club are drastically changing. In almost all circumstances, private clubs recognize that they have excess capacity, especially during non-peak times. Furthermore, members are demanding greater flexibility in playing privileges at affiliated golf courses or other golf courses located in the same geographic area. For multi-course owners, this situation presents a unique opportunity in that they can generally make all of their clubs available to the members and provide reciprocal playing privileges. For clubs that are not owned by multi-course owners, the clubs generally must enter into reciprocal playing privileges agreements with affiliated clubs. Appropriate safeguards must be put into place to ensure that clubs are not overburdened.

Q: What creative exit strategies exist for distressed assets?

A: We have designed several different plans for distressed whole ownership assets that are unable to sell in today’s market. These strategies involve timeshare offerings and short-term travel club offerings that generate cash flow for the property and create sales opportunities while the developer reacts to current market conditions. Through these structures we have enabled properties to generate cash flow to pay bills and assisted in the creation of a plan that ultimately will pay off existing lenders allowing for the restructuring of some loans. Moreover, we have generated excitement at the property for existing owners who were otherwise looking at a troubled project with a bankrupt developer.