Wyndham – Hotel, Timeshare & Vacation Ownership Competitors Face Challenging 2008

Implications: Despite this mid December 2007 change in guidance; Wyndham should continue its leadership as the largest vacation ownership (VO) operator in 2008. Its more bargain hotel brands are likely to be more stable than its pricier competitors during any possible downturn.   Many of the lodging stocks have already been slashed as Marriott and Starwood delivered reduced 3rd QTR 2007 earnings. Analysts discounted the impact of reduced business travel, the concern is how will the VO divisions of Wyndham, Marriott, Starwood, Bluegreen, perform in ‘08.   Historically, (VO) is highly resilient during major economic recessions, but this slowdown is deeper and could impact upscale timeshare developers like Marriott, Starwood, Hilton, etc.     The WYN Group and Bluegreen should be less vulnerable in ’08 as they offer better price/value and/or sell VO in more drive to and mid market locations. Overall, VO operators should be less impacted in ‘08 than the overall hotel sector.

Analysis: Timeshare – is it resilient against recession?  

The vacation ownership industry (VO) has become far too complex to continue to believe in the simplistic view that there will be clear sailing for all developers as we move into 2008. This commentary section will explore the issues; the need for more transparency from the publicly traded co’s involved in VO and the future need for more frequent tracking information from the American Resort Development Association (ARDA) which has been enormously helpful, but needs to go even further on the research side. More importantly, there are other critical issues that developers face in 2008 that are just as essential to success as the macro environment unfolds.  

Historically, timeshare developers firmly believe that they offer a shield against recession because: timeshare is a sold rather than sought after product; that timeshare developers aggressively market and sell their product rather than wait for customers to walk through the door; that today VO is sold more as a “prepaid vacation” rather than a real estate alternative; and many Americans today are starting to follow their European counterparts in considering their vacation a birthright. In addition, VO is also being presented by most developers as a more affordable alternative to renting vacations so the value proposition can look even more attractive in a down economy (see www.redweek.com for sample of model used by developers in selling timeshare affordability versus traditional vacationing).  

There are many correlation studies linking hotel performance with GDP growth and other key economic indicators; forecasting the VO industry growth, however, may be nearly impossible. Several PowerPoint slides were included in Wyndham Worldwide Investor Day – December 11, 2007 presentation which showed that timeshare growth was not affected by the Gulf War recession in 1991 or the Sept. 11 slowdown of 2001. The slides also showed no correction with timeshare sales and housing sales. The full story may not be precisely reflected in these slides. After Sept. 11th, airline activity was virtually halted for several months, or significantly reduced and people were afraid to travel especially to places like Orlando or Las Vegas where lots of timeshare was sold. Hence, timeshare sales for key developers like Marriott were adversely affected. But timeshare sales came back relatively quickly once the key destination markets started to recover. The recovery for the VO industry was much faster than the overall hotel sector. While timeshare was initially impacted, it did show strong resiliency in the recovery after Sept. 11th. The best timeshare performer in the post Sept. 11 period was Bluegreen due to all their drive to locations.  

Despite what has happened in the past, I believe that the slowdown in 2008 is unique versus what happened in prior recessions and may be different in how it impacts vacation ownership developers even it we don’t enter a full recession with two quarters in a row of negative GDP growth (see below).  

Timeshare Outlook for later part of 2007 and 2008?  

Based on the ARDA studies by E&Y and PricewaterhouseCoopers, the $10 billion dollar U.S timeshare industry growth in 2006 increased a very healthy 14-16%. However, there was a small negative sign in the PricewaterhouseCoopers 2007 Financial Performance Study (showing 2006 full year results) which indicated that timeshare owners were starting to delay making their annual maintenance payments. This potentially indicates that we will likely see an increase in default rates in 2007 for select developers especially those that do not use solid credit standards in issuing loans. Unless the default rate increase is substantial this should not have any large impact as most developers have implemented effective processing systems to take back defaulted units.  

Overall 2007 industry growth should not be as robust as it was in 2006 as several branded publically traded developers faced an assortment of problems notwithstanding the economy. The timeshare divisions for Marriott and Starwood both had poor 3rd QTR’s with revenue increasing only 1.2% at Starwood and 4% at Marriott. Profitability appears flat at both brands and the preliminary guidance for 2008 at Starwood VO and residential businesses is even grimmer. Yet, a review of the quarterly reports at these brands doesn’t clearly blame any of the VO performance decline on the economy. In fact it has become virtually impossible to fully understand what’s going on at these co’s by reading the minimal disclosure in the quarterly press releases or public documents; a variety of issues appear to be contributing to the weaker than usual performance. Both developers seem to have unfavorable and/or insufficient inventory mix vs. prior year, while Starwood has had construction delays and project management issues, etc. Hilton Grand Vacation Club prior to going private appeared to be having problems with unusually high levels of revenue deferrals due to new standards in FAS 152 which affects how companies recognize revenue generated by the sale of timeshares that have not been fully completed. 

While Marriott and Starwood appear to be struggling in 2007, the timeshare divisions at Wyndham and Bluegreen have done very well with growth in the 20% range. One can only conclude then that these firms are either better managed or are in segments that have stronger consumer preference. Large independent developer David Siegel, chief executive officer of Central Florida Investments which owns the Westgate timeshare group, claimed in an article in Business News on September 3, 2007 that Westgate's sales have increased 25 percent this year over last year. Further he said "Time shares are about vacations, and the real-estate market is about homes," "People always want vacations, and we're booming.”

Ironically, it has been the luxury segment of the VO market along with the very high end fractional niche that has grown the fastest in the past five years. It is now theorized, however, that luxury developers are simply facing more challenges and perhaps experiencing higher levels of consumer price resistance than more value orientated mid or upper mid level competitors. It should be stated that in the past few years approximately 65%-70% of the timeshare growth has come from price increases versus volume and much of this has been led by the luxury brands.  

Wyndham’s rebranding will eventually move them into a higher tier, but with their Worldmark by Wyndham brand (previously Trendwest), they are still priced considerably below the upper tier VO competitors. Wyndham’s biggest challenge in 2008 may not lie with its hotel or VO brands but rather what to do longer term with its RCI vacation exchange and rental operations. This billion dollar division is the WYN Groups slowest growth area with significant bottom line concerns. A replacement for former RCI president Ken May has yet not been announced and this position will be difficult to fill as it will go head to head against smaller but more profitable competitor Interval International and their industry icon CEO, Craig Nash. Good news for Wyndham is that RCI is also very well diversified and should hold up fairly well against major recessionary impacts.  

Another huge issue facing the luxury timeshare operators is that is has been enormously difficult for co’s like Marriott, Starwood, Hilton, etc. to continue to replace high end sold inventory with new projects in equally enticing destination areas due to the scarcity of land and high cost of construction, etc. This gives an expansion edge again to middle and upper middle end developers who have more flexibility at this time in enhancing their networks. This has also forced Marriott and other luxury operators to develop more joint venture VO projects which are potentially more troublesome to manage effectively.  

Any major declines in major tourist destinations in 2008 could also impact tour flows for the large destination oriented developers. In 2008 there is cautious optimism at best at the tourist bureaus of the major destination areas. Las Vegas already got hit with a 19% decline in gaming revenues for Strip Casinos in Nov. 2007 vs. prior year, the largest decline in five years. All of this implies that tour flows may be adversely affected in some destinations in 2008 and this could impact sales. This may require that select developers be more aggressive in the first day incentives used for consumers to attend a sales presentation and that will impact probability per FAS 152.  

In conclusion, while the economic indicators have grown ominous, the timeshare industry is not broken. Problems facing the VO divisions at Starwood and Marriott are fixable, but perhaps not fully in 2008.  And yes, there could be some economic impacts facing these divisions this year. The rest of the industry should hold up fairly well as it has in the past. However, I am concerned that evidence is mounting that consumers are curbing their spending. As such I don’t see the industry growing 20% in 2008. For consumers who have seen the net worth of their home decline 5%-15% or more, it might be just a bit harder to sell them a timeshare regardless of how good the sales pitch is.    

Critical Need for Analysts to Study the VO Industry in-Depth and for Enhanced Vacation Ownership Tracking  

In the past year both Hilton and Sunterra (now Diamond Resorts International) became private), and the number of publically traded vacation ownership co’s and/or divisions became even smaller. This leaves only Marriott, Starwood, and Wyndham as public companies and any major significance. Disney has the Disney Vacation Club, but it is not widely followed by the analysts simply because with $300 million in annual revenues it is only a tiny contributor to Disney’s annual $35 billion in top line results. Other publicly traded VO companies, ILX Resorts Inc. (ILX) and Silverleaf Resorts (SVLF) are highly niche oriented and don’t necessarily provide comparable results as to what’s going on with the industry as a whole. Hyatt Vacation Ownership another success luxury operator is also private.  

Over the years, the industry’s trade association, the American Resort Development Association (ARDA) has done a tremendous job in improving the quality and depth of research available on the industry.  A listing of this research can be found at:

http://www.ardafoundation.org/AM/Template.cfmSection=Chronological_listing

Most useful studies for the analysts are the annual studies conducted by PricewaterhouseCoopers on the industry financial benchmarks and the State of the U.S. Timeshare Industry, conducted by Ernst and Young which provide the key size and growth statistics in detail. E&Y also reports includes estimated current and future supply numbers estimates (i.e. units expected to be built, planned units, 2008 and beyond, etc.).  

Also of key interest are the research studies by Ragatz: (Resort Timeshare Consumers: Who They Are, Why They Buy, 2006 Edition; Non-Buyer Studies; the Shared-Ownership Industry), and Yesawich, Pepperdine, Brown & Russell and Yankelovich partners (now called Ypartnership, LLC and Yankelovich, Inc.). Key studies are also available from the exchange companies, Interval International (Future Timeshare Buyers, U.S. Membership Profile 2006), and RCI.  

The weakness is that the most important studies are done annually; this in itself represented a big change as not that far in the distant past these studies were done periodically and not necessarily every year. But the problem now is that by the time the data is collected, and the reports released, the information becomes outdated and only useful from a historical basis. Obviously, what is needed which has been used by the hotel industry for many years is quarterly and even monthly tracking data. Let’s eliminate monthly data as that is simply unrealistic. Perhaps the answer is that the annual study remains the same and is supplemented by a new quarterly tracking report conducted by both PricewaterhouseCoopers and E&Y that becomes available for subscribers online.  

The above type of enhanced research has long been proposed. The issue is how to fund it, can it be profitable, will there be enough third parties interesting in purchasing the research, and will developers cooperate on providing quarterly type data.  

Recommendations    

1. Place positive pressure on ARDA to enhance their research efforts by adding quarterly financial tracking and sales data – propose when you call, that you will subscribe to the new research (help fund it if reasonable cost) assuming that the data when available is timely and meets your needs; propose that you will be willing to participate in conference any calls to help launch the quarterly benchmark industry tracking study. Email: Darla S. Zanini, dzanini@arda.org; executive vice president, ARDA Research Institute.

2. Make it your business to continue studying the vacation ownership industry, the accounting, financing, the jargon, and the industry trends. I would further recommend that in 2008 you attend at least 1-2 conferences, including either; 1) the Annual ARDA Convention & Exposition, April 6-10 which will be held in Las Vegas at the Venetian Resort Hotel Casino; or 2) the 10th Annual Interval International Vacation Ownership Investment Conference (October 6-9 Orlando, Peabody Orlando Hotel)

3. Don’t hesitate to call investor relations at the major publicly traded VO companies to address your key unanswered questions or ask to be transferred to an executive in the VO area that can address your inquiries. Hopefully in time there will be more disclosure, and even more transparency. Minimally you will find that your questions will be in part addressed at future investor relations road shows presentations.