Published in The Orlando Sentinel on May 22, 2000
By Jack Snyder
of the Seninel Staff
Troubled time-share developer Sunterra Corp. is mulling which assets to sell to bail itself out of a financial
sinkhole that could destroy the company.
And, competitors and other industry people say, the Orlando-based company has assets well worth fighting over.
"They have some excellent destinations," said David Siegel, president of Central Florida Investments
and developer of Westgate Resorts in Orlando.
Siegel, a 20-plus-year veteran of the time-share business and one of Orlando`s largest operators, said he could
be a bidder, depending on which resorts are offered.
But he would not say which ones he may be interested in.
"I think a lot of my competitors might be interested in the same things, and I wouldn`t want to tip my hand."
Sunterra also has a huge pool of time-share owners -- about 300,000 -- to which products and services can be marketed.
"That ownership base at each resort is very valuable," said Edward McMullen, managing director of Shell
Vacations LLC of Chicago.
McMullen, who has worked in the time-share business since its earliest days and was president of Orlando-based
Hilton Grand Vacation Co., said he thinks plenty of buyers would go after Sunterra`s properties.
"I don`t think they`ll have any problem finding a ready market," he said.
Sunterra, one of the world`s largest owners and managers of time-share resorts, hasn`t decided which assets may
be sold, said Lin Morison, chief executive officer. Those assets span the world.
It has 50 resorts in the United States, including a dozen in Hawaii, six in Florida and eight in California, and
40 in other countries, including Japan, Europe and the Caribbean.
In Orlando, Sunterra owns and operates Polynesian Isles Resort, Cypress Pointe and Embassy Vacation Resort Grand
Beach.
After going public in August 1996, Sunterra grew faster than garden weeds through an aggressive acquisition strategy,
surging from nine resorts and 25,000 owners to the 90 destinations and 300,000 owners today.
But in the fourth quarter of last year, the company wrote off $43 million in mortgage receivables -- debt so past
due that it was considered uncollectible. The money was owed by time-share unit buyers who defaulted.
Sunterra also reported a fourth-quarter loss of $58.4 million and announced a management reorganization.
The grim news continued in the first quarter this year with a $15.6 million loss and, even worse, trouble with
its lenders. The company missed a scheduled $6.5 million payment to one lender and defaulted on a $4 million bank
loan. The missed payment and loan default were clear indications of Sunterra`s worsening financial condition.
Sunterra blames its growing problems on the bad debt and restructuring charges, as well as higher marketing costs
and weak advance bookings.
Others said the company`s breakneck growth pace simply caught up with it.
Sunterra clearly had become a giant in the business. Last year`s revenue exceeded a half-billion dollars. However,
its loan debt as of Dec. 31 was $682 million. That increased to $711.7 million at the end of March.
Siegel said the time-share business depends on borrowed money. "You`re dead without your lenders," he
said.
Sunterra last week conceded its dire position, saying it must raise cash to continue in business.
Asked if the company would consider reorganizing under bankruptcy-court protection, chief executive Morison said:
"At this juncture, no."
Time-share developers make money in several ways and, by all accounts, Sunterra was doing well in all until its
recent troubles.
Profit centers include unit sales, which are typically in weekly intervals. A $200,000 condominium might sell for
an average $20,000 a week over 50 weeks. That`s a gross of $1 million on one unit.
Then, there`s fee income from property management and rental services, and the money made marketing products and
services to unit owners.
But the real profit center is in financing.
"Time-share is not a real estate business per se," said John Melicharek, a lawyer in the time-share section
of the Orlando office of Baker & Hostetler LLP. "It`s as much a financing business as anything."
For example: The developer sells a $20,000 time-share week for $2,000 down, accepts a promissory note secured by
the mortgage, then pledges that note to a lender for money.
The kicker is the time-share buyer may be paying 15 percent annual interest while the developer is paying 8 percent.
Giant developers, such as Sunterra, can generate a huge profit on the hundreds of millions of dollars they borrow
on such a favorable spread.
Melicharek said developers run the risk of buyer default, which requires expensive foreclosure and remarketing
costs. And those marketing costs can be substantial -- as much as 40 percent to 50 percent of the sales price.
However, efficient operators often beat that down to around 30 percent, he said.
The time-share business started in Europe. When it migrated to this country more than 30 years ago, it got off
on the wrong foot. Many developments were simply conversions of beachfront motels and were poor values. Fraudulent
marketing practices further damaged the industry`s image.
But for several years now, resorts have been built specifically for time-share operations. Fraudulent marketing
is largely a thing of the past.
That`s because the profit potential eventually drew giant corporations -- such at Walt Disney Co., Hyatt Hotels
and Hilton Hotels -- into the business.
Few in the business even want to talk publicly about Sunterra`s situation. Said a spokeswoman at one Orlando resort:
"There`s so much positive going on, I don`t want to comment on that."
But time-share veteran McMullen was direct: "Sunterra is a troublesome issue. Their owners around the world
need to be protected."
But, he added, he thinks time-share`s future is bright.
That was seconded by Bob Miller, president of Marriott Leisure Inc., a subsidiary of Marriott International, and
current chairman of the American Resort and Development Association, the time-share industry`s trade group.
Sunterra`s troubles are a small blip on a big picture, he said.
"The industry has been doing well and owner satisfaction is high," Miller said. "We`ve had double-digit
sales growth, and we don`t see why that shouldn`t continue."
That likely means continued resort development in Orlando, which is the time-share capital of the world with more
units than any other area.
That`s one of the reasons Sunterra decided in 1998 to locate its headquarters here, settling into offices in MetroWest
in west Orlando.
That`s where Sunterra`s executives are trying to work out the company`s future.
One decision was executed earlier this year when work was halted on the $22 million conversion of a former Montgomery
Ward store on West Colonial Drive into a huge call center and headquarters.
But Morison said no decision has been made on whether the property will be sold.
"We`ve made no final determination on what to do with it," he said.
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