Real Estate Forum - November 2008

Timeshare Developers Hurt By Credit Crunch

THE TIMESHARE INDUSTRY IS FEELING THE PINCH from the financial crisis. In an effort to bring back liquidity to the sector, its lobbying organization has asked the federal government if a credit insurance fee can be used to secure investment-grade paper backing vacation ownership property.

The move is in response to a Treasury Department request for public comments on a program outlined in the Emergency Economic Stabilization Act of 2008 that would guarantee the payment of principal and interest on troubled assets originated or issued prior to March 14. The American Resort Development Association sent a letter to the White House Counsel of Economic Advisors on Oct. 14 inquiring whether “a federal guarantee of timeshare investment-grade paper in exchange for a credit insurance fee paid to the US government would be considered under any government-backed insurance program,” including the Troubled Assets Relief Program.

According to ARDA’s president and CEO, Howard Nusbaum, some timeshare developers are currently unable to monetize the loans they receive from consumers who buy units at their properties. Part of the problem can be traced to the breakdown of the securitization market. “A customer buys a product

^NUSBAUMfrom a developer, gives a down payment and then a note for the rest,” he says. “A developer then pledges that

note to a lender who will give him cash for it. Right now, lenders are not feeling very warm toward any type of lending on consumer or commercial-backed mortgages.”

Consequently, some developers are “purposely” slowing down their sales efforts. “If you can’t monetize the paper, you are in a negative cash flow situation,” Washington, DC-based Nusbaum explains.

He says that underlying loans in the sector are performing well; the sole difficulty is that developers cannot turn that paper into cash. Nusbaum adds that his organization has been told by government officials that any debt obligation that is unable to be monetized would be considered a troubled asset. However, an answer to whether a credit insurance fee, similar to personal mortgage insurance given to homebuyers, could be applied would not come until sometime this month. “We are not looking for a bailout,” he says. “We were just looking for a fee that we could pay to guarantee our paper to try to get more liquidity.”

In a recent report, Friedman, Billings, Ramsey & Co. Inc. senior equity research analyst-lodging, C. Patrick Scholes, writes that “we are not overly optimistic that this measure will be approved in the near term.” At greatest risk, he continues, is Wyndham Worldwide, because its timeshare model “is highly dependent on the cash provided by securitizations.”—Maria Wood

“If we have a hotel with a quality assurance problem, we’ll give the owner an appropriate amount of time to deal with it because it’s too important to the guests and the brand,” says Wyatt.

Maintaining the customer experience is essential in a downturn, perhaps even more so than in good times. Like slashing rates, cutting guest services and amenities is not a preferred option. “That was another strategy some companies employed post-9/11, while others didn’t,” Murray says. “There is some disagreement about who was right. But if you are really trying to drive market share and you take the tack that the customers staying in your hotel today are just as valuable to you as the ones that stayed two years ago, then why would you negatively impact their experience in your property?

“At the same time,” he continues, “if it gets dramatic enough, a customer will understand a change in service at some point, as long the people in the hotel really care about their stay and still engage them in an extremely positive way. But that is clearly not the first preference and is not where we have gone yet as an organization.”

Moreover, hotel companies will be deliberate in what corporate-level cuts they make. Murray says that many companies reduced their sales and marketing groups in the previous downturn, only to find they were short-staffed when the economy turned upward. Rather, now is the time to aggressively court new business. “Those organizations that were out there engaging their customers in a difficult period of time created loyalty that could not be changed,” he says. “I don’t think you’ll see folks do across-the-board cutting. They’ll be very strategic about what they do.”

Ironically, now may also be the time to invest in new technologies and property upgrades. “One of the lessons we learned from the last cycle was the value of having real-time information,” says Naveen Kakarla, executive vice president at Hersha. “We invested in proprietary tools that integrate sales and business mix information. Companies that have the ability to generate close to real-time P&L data throughout the course of a month instead of reacting to last month’s numbers and have the capability to warehouse information from the brands are going to have the ability to move market share a bit more quickly.”

Furthermore, with occupancy down, units are freed up for renovations. “This is the ideal time to take rooms out of commission and get them repositioned for the longer term,” Kakarla adds. “There is a handful of our core assets that we might improve and invest in more heavily across the next 12 to 18 months in anticipation of the recovery.”

And a rebound is sure to come, even though it’s anybody’s guess when it will occur. The industry has survived down times before and will again do so. “Choppy seas make good sailors,” says Wise. “At the end of this, we’ll all be better operators.” ◆