When a hotelier first told me about the economics of timeshares, I rushed to find any timeshare stocks I could because of the potential for capital gains. At the time, there were really only a couple of microcap stocks in the timeshare sector. Then timeshares vanished altogether as big hotel chains gobbled them up.
The reason timeshares were purchased by big hotel chains is because they saw the potential for capital gains, too! Timeshares are the ultimate cash cow and a perfect extension of any hotel brand.
Here’s how timeshare economics work. A firm draws down mortgage debt, probably in the 7%-9% range, and these days that is going to be even lower. The firm builds the timeshare resort. Then it sells each unit 52 times! That’s insane! Imagine being able to sell your house 52 times. Even better, some units sell or at least get down payments before the resort even breaks ground.
That’s not all. Some people purchase the timeshare but elect to do so using company financing. So not only is the timeshare reaping the rewards of the sale, they are making a spread by financing the purchase at 14% while paying the 7%-9% mortgage. Then, when the people actually use the resort, the timeshare firm makes even more money by charging them fees for food and other services.
I was frustrated by the disappearance of timeshare stocks, but the big hotel chains spun off a few of them. Now you can buy into timeshare stocks again and reap capital gains.
Timeshares – Marriott Vacations Worldwide Group (VAC)
Marriott Vacations Worldwide Group (VAC) holds 62 properties representing almost 13,000 units and 420,000 owners in 10 countries. It also owns the Ritz-Carlton Destination Club brand, and it’s in the best growth position as far as I’m concerned. Annual EPS grows at about 20% annually, and the stock is trading at 22 times FY2014 estimates.
Second-quarter results were boffo, with adjusted EBITDA up 20% and diluted earnings up roughly the same, and continued single-digit percentage growth in contract sales and development.
This timeshare stock has $170 million of cash on hand and $570 million in debt (down from $678 million at the beginning of the year). BAC even managed a securitization of a pool of $24 million of notes receivable from aforementioned people who chose to finance their units. This brought in $22.5 million in cash to company, which will pay 6.25% on the pool.
VAC is the stock for capital gains, as the company raised earnings guidance from a median of $2.55 to $2.73 for the full year. I think you buy VAC for 20% capital gains.
Timeshares – Diamond Resorts International (DRII)
Diamond Resorts International (DRII) has 313 properties in 35 countries. Diamond came public last year and is still in the process of shaking out some of its high-interest debt.
However, DRII’s second quarter came in pretty solid. Total revenue was up 20%, adjusted EBITDA increased a whopping 60%, Vacation Interest Sales grew by 17%, the company generated $19 million in operating cash, and it set up a $445 million senior-term loan, in the process wiping out its 12% senior secured notes.
The company projects pre-tax income of $106.5 million for the year, although a lot of that (and more) will get wiped out by corporate interest expense, losses from debt extinguishment, and cost of sales for timeshare properties. Still, that is a massive increase from previous guidance of $77 million.
The company doesn’t really have clear EPS estimates, however. This is an improving company, but I personally would need more clarity before buying.
Timeshares – Interval Leisure Group (IILG)
Interval Leisure Group (IILG) is a spinoff of IAC/InterActiveCorp (IAC) and has a massive global network of timeshare properties – some 2,900 resorts over 80 countries, with 30,000 owners. IILG has also moved aggressively into just managing properties and renting, as their actual building phase has ended, and it has moved into acquisitions.
Interval’s most recent quarter saw membership and exchange revenue fall 9% while management and rental revenue exploded higher by 92%. Adjusted net income was up 8% and adjusted EBITDA was up 7%.
Free cash flow fell 15% to $46.5 million, however, and IILG company has $75 million in cash and $268 million in debt. It trades at 15 times FY15 earnings, and analysts project 15% annualized growth beginning next year.
Still, I worry that Interval has moved away from core building operations, and would stay away from this one.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
