Graham Thompson
  June 29, 2011 - Ohio

Timeshare Market Update
  by Victor F. Faris, Managing Officer

Market Overview As the timeshare market continues to recover from the dramatic contraction of the tourism industry and overall decline in consumer discretionary spending, Western Reserve believes a “dose of equity” is needed to aid this recovery and recapitalize this highly leveraged industry

  • Significant consolidation is expected among smaller private operators, which do not possess critical mass to pursue public equity and are too small and complex for most institutional investors; however, the current market environment bodes well for strategic buyers seeking to execute roll-up acquisition strategies, thereby growing their operating platform
  • Many timeshare operators are seeking additional capital, but most are pursuing alternatives to traditional industry-specific debt financing
  • The timeshare industry is notoriously complex due to the nature of the relationships among timeshare developers, resort managers, customers, lenders and shareholders; however, this situation represents a unique investment opportunity to those who understand such intricacies
  • Currently, there are several institutional investors working to develop an understanding of the industry, but there is room for only a handful of sponsors due to its size and complexity


Public Market Performance  

  • The timeshare industry declined precipitously during the most recent recession due to excess leverage, collateral deterioration and a weakening in resort real estate valuations; however, the industry has recovered from its 2009 lows and is continuing its recovery in-line with the broader market
  • Marriott International, Inc. (NYSE: MAR) announced in February 2011 that it will spin off its timeshare operations and development business to provide investors with a “pure play” timeshare firm while refocusing Marriott International’s strategy toward traditional hospitality management functions
  • MAR’s decision to spin off its timeshare business as an independent, NYSE-listed firm will improve investor awareness and understanding of the industry, as many analysts who currently cover MAR are expected to continue coverage of Marriott’s timeshare segment following the spin off
  • MAR’s spin off will add transparency to an industry often overlooked by Wall Street
  • MAR is 3.0 to 5.0 times larger than many of its smaller public counterparts and if the MAR offering performs well,  this may allow for the possibility of other timeshare related equity offerings


Improvement in Securitization Issuances

  • Timeshare developers typically provide financing options for their customers, charging average interest rates between 12% and 16%
  • Following sales of timeshare interests, developers often pool and securitize balances due from customers; these securities are issued to the public and typically are guaranteed by the developers. Larger, diversified developers (e.g., Wyndham) enjoy higher advance rates and lower yields
  • Before the economic downturn, timeshare companies issued collateralized debt securities at advance rates between 80% and 90% and with yields between 6% and 8%; however, beginning in 2008 advances on customer receivables plummeted to rates below 60% with yields soaring above 10%
  • In 2008, timeshare companies began collecting and publishing the credit quality of customers’ securitized accounts receivable, as measured by purchasers’ average FICO scores; as a result of this additional disclosure, the yields on many classes of timeshare ABS rose significantly
  • Currently, timeshare companies are completing receivable securitizations of receivables backed by customers with average FICOs between 700 and 725 and expect advance rates of approximately 75% to 90%; these receivable securitizations are yielding between 5% and 8%, many ABS classes backed by purchasers with undisclosed FICO scores typically yield 12%
  • In the past, timeshare companies derived significant cash flow from the interest rate spread on financed purchases and ABS yields; however, due to the perilous combination of rising customer defaults, declining advance rates and escalating yields, this source of cash has been limited


2011 Brings an Increase in Activity to the Timeshare Capital Markets

  • May-2011:  Chapter 11 Bankruptcy Estate of Island One Resorts, a large private operator of nine resort properties is recapitalized and reorganized by Timeshare Acquisitions LLC
  • May-2011:  Cerberus Capital Management closes its $94m acquisition of Silverleaf Resorts (announced on February 3, 2011), a 75% premium over Silverleaf’s pre-announcement market capitalization.
  • Apr-2011:  Chapter 11 Bankruptcy Estate of Tempus Resorts, assets are acquired by Tempus Resort Acquisitions LLC, an affiliate of Diamond Resort Holdings and Guggenheim Partners
  • Feb-2011: Marriott International announced the spin off of its timeshare business, Marriott Vacation Club International.  Many analysts expect the offering to be priced between 7.0x – 10.0x Enterprise Value to 2012P EBITDA (“EV/EBITDA”)


Timeshare Consumer and Operator Outlook

  • Net timeshare originations plunged 35% to $6.3 billion in 2009 and are down over 40% from the 2007 peak.  Total revenues for many of the larger public operators increased in 2010 due to stabilization in receivables portfolios and stronger interest income
  • Buyers now perceive timeshare purchases almost solely as a lifestyle investment
  • Timeshare owners continue to fall behind on timeshare loans; however, default rates as of December 2010 were at 8.5%, down from their peak in January 2010 when 10.0% of timeshare owners were in default
  • The resale market for timeshare owners has been difficult to navigate, with a 2010 median resale price of $9,000 and some resales selling as low as 10% of the original purchase price
  • In some instances, cash-strapped timeshare owners are trying to  give their units back to developers, but most developers already have excess inventory
  • Timeshare operators have been under pressure to trim HOA fees; however, this may lessen as hotel and condominium occupancy and rental rates rise


Larger Operators are Capitalizing on Current Capital Markets Conditions

  • The industry is currently in need of a “reset” period where pricing needs to adjust to reflect perceived value.  This reset period has been delayed as pricing adjustments have been limited by lenders, who are unwilling to take discounts on developer debt balances
  • Larger timeshare operators such as Marriott, Wyndham, Starwood, Hilton, Disney, Bluegreen and Silverleaf have shored up balance sheets and have effectively navigated the recent recession.  These operators have been successfully issuing securitizations, with five of these major operators issuing securitizations totaling approximately  $2.5b in 2010 and 2011YTD
  • The timeshare securitization market is recovering with securitization issuance totaling $1.5b, $1.8b and over $2.5b, in 2008, 2009 and 2010 respectively
  • Note restructuring has produced credit enhancements, helping larger operators mitigate and absorb the recent increase in membership defaults. Credit enhancements including overcollateralization, additional reserves and excess spread have been implemented by larger timeshare operators
  • There is a current dislocation in the timeshare capital markets as larger operators are able to access capital while smaller, distressed operators are in need of and currently seeking capital


Select M&A Transaction Activity

  • Timeshare lenders are looking for long-term solutions when dealing with distressed assets.  They prefer “fee for service” or other mortgage portfolio work-outs over upfront discounts on their debt
  • Select distressed recapitalizations and acquisitions include:

        May-2011:  Island One Resorts, a large private operator of nine resort properties consisting of a customer base of over 50,000 owners is recapitalized and reorganized by Timeshare Acquisitions LLC

        Apr-2011:  Tempus Resorts is acquired by Tempus Resort Acquisitions LLC, an affiliate of the Diamond Resort Holdings and Guggenheim Partners

        Mar-2011:  Bluegreen announces that it is exploring strategic alternatives for the Company's Bluegreen Communities business segment

        Sep-2010: Centerbridge Partners acquired the resort finance business from GMAC Commercial Finance, which primarily consists of a $1.0b portfolio of loans related to timeshare resorts throughout North America

        Sep-2010:  Diamond Resorts Corporation acquired the majority of the assets of ILX Resorts through a stalking horse bid. ILX Resorts filed for Chapter 11 bankruptcy in March 2009. Diamond purchased the assets for $29.7m, which was composed of $5.9m in cash and the assumption of the debtors’ obligations under Textron Financial’s loans

        Jan-2010:  Shell Vacations is recapitalized by York Capital Management.  York acquired an equity interest in the company and provided working capital, partially replacing its existing senior term loan


Relevant Public Comparable Metrics

  • Timeshare resort valuation multiples have recovered from the 2009 lows and are in line with 2007 valuations, signaling that future revenue and EBITDA growth may be priced into current public market valuations
  • Analysts are currently valuing public timeshare operating assets between 7.0x – 10.0x 2011P EBITDA, while traditional hotel assets are trading at 12.0x – 14.0x 2011P EBITDA.  This difference is evident in the multiples below, as larger diversified hotel operators (i.e. Marriott and Starwood) are trading at 3.0x  – 6.0x EV/EBITDA premiums over other timeshare focused businesses


Western Reserve Transaction Overview

Western Reserve represented Island One, Inc. in its reorganization by Timeshare Acquisitions LLC.  Island One, based in Orlando, Florida, is one of the largest privatelyheld timeshare developers in the United States.  Founded in 1981, the Company has grown from a single site to an organization that has successfully acquired, developed and redeveloped nine properties in Florida and the U.S. Virgin Islands.   Island One’s affiliate, Club Navigo allows customers to gain access to a larger network of 29 affiliate resorts.


Island One filed a Chapter 11 bankruptcy case in September 2010, and its plan of reorganization was confirmed and became effective in May 2011. The reorganized company will retain operation of its eight resorts in Florida and divest of certain other inventory and assets.  The Company’s executive team remains intact, with Deborah Linden, Board Co-Chair, focusing on business development and strategic planning and Sterling Stoudenmire IV assuming the role of Chief Executive Officer. 


“Western Reserve is happy to have helped provide a solution that has produced a stronger, more viable entity going forward.  Working with Island One has been a gratifying experience, and after 20 months, it is nice to structure a transaction that keeps the organization intact and satisfies all parties involved,” said Western Reserve Managing Director, Victor F. Faris.


Linden said, “Western Reserve was instrumental in finding and maintaining the interest of a capital partner that understands the industry and can integrate and implement our growth strategy.  For the past 20 months, Vic and his team have provided great service and advice, helping our Company to arrive at the best possible outcome for all vested parties.  We are now financially and structurally well-positioned to capitalize upon a very deliberate strategy for growth.”


About Western Reserve

Western Reserve Partners delivers customized investment banking solutions for middle-market companies.  The firm’s Managing Directors average more than 15 years of experience and have directly executed more than 550 transactions.  Western Reserve is a member of M&A International Inc., the world’s leading alliance of investment banking firms, with 44 members and more than 500 professionals across 39 countries.