INVESTORS ARE LIKING TIMESHARE STOCKS
Source: Business Wire
February 22, 1999
The timeshare industry got a much needed boost earlier this year when Sunterra Corp. (NYSE:OWN) ,Vistana Inc. (Nasdaq:VSTN),
Fairfield Communities (NYSE:FFD), Trendwest Resorts (Nasdaq:TWRI), and Silverleaf Resorts (NYSE:SVR) reported good
earnings for the fiscal year.
With the release of the financial results for the 5 companies, investors apparently are liking what they see.
The advent of exchange networks and numerous points-based timeshare programs, as well as the entry of many "reputable
brands" (like Marriott, Four Seasons, and Hilton) into the business, has really invigorated the vacation-ownership
industry -- in addition to helping eliminate some of the more sordid associations that consumers have with timeshare
operators.
The hard sell is still there, and attending a presentation is no more fun than it ever waw, but the price/value
proposition is becoming increasingly compelling for many buyers. Just how compelling is it to own a timeshare?
In 1980, only 155,000 households owned a timeshare week, and there were only about 500 timeshare resorts worldwide.
At latest count, there are now over 4 million timeshare owners and more than 4,000 resorts in 80 countries -- that
translates into a compound annual growth rate in sales for the industry of 16% for the last 27 years. In the last
year alone, the business grew its sales by 25%.
In a very similar fashion to the auto industry (build the car, sell the car, finance the car), vacation ownership
companies finance a large amount of their sales (build the resort in saleable chunks, sell the resort, and finance
the sale). When these companies sell the vacation intervals, they usually finance 80-90% of the sales in-house
after receiving a 10% deposit from the customer. This financing generally bears interest at fixed rates and is
collateralized by a first mortgage on the underlying vacation interest.
Timeshare companies derive income from their financing activities because
their borrowings for initial resort construction usually bears interest at variable rates, and the firms' loans
to vacation intervals purchasers bear interest at fixed rates. This shows up as "interest income" on
an itemized revenue account on the income statement. The firms bear the risk of an increase in interest rates with
respect to the loans they owe to lenders, so they often engage in interest rate hedging activities to reduce the
risk and impact of potential increases. Despite the potentially favorable spread characteristics over the long
term, timeshare firms often securitize their mortgage receivables (especially in a "show me the money"
environment, and to allay investor fears about debt loads) -- which represents cash flow derived from a financing
activity but shows up in part as a recognized "gain on sale of receivables" in yet another itemized revenue
account on the income statement.
Of course, there is nothing wrong with this; it's simply a part of doing business. Investors that want insight
into the exact nature of these movements should take a closer look at the cash flow statements. Particular attention
should be paid to the operating items: ongoing changes in operating accounts (like real estate and development
costs) can dwarf net income, constituting a significant part of what it takes to do business in vacation ownership.
In addition, traditional "capital expenditures" are aligned in investing activities. Sunterra and others
are probably looking to continue to add to their resort portfolios through future acquisitions, which really makes
this a part of its inventory-building business model (also to round out a firms' resort offerings).
As previously discussed, the business relies on financing activities to generate cash, especially debt issuance
and the occasional securitization. Far from constituting a complete discussion of the business models of these
companies, this brief look should serve as a reminder to investors that in order to understand a business all the
financial statements need to be looked at in a holistic fashion. Investors can't just isolate the income statement
and expect to understand what's going on.