Recovering from Covid-19: Evil and Earnest, History and Resilience

All of us in the Vacation Ownership/Timeshare Industry are examining past downturns for clues on how to survive this one. “Those who do not learn from history….” We all know the aphorism. But history does not repeat itself, exactly.

New technology, scientific advances, and population explosion constantly transform our economy, a process which Joseph Schumpeter called “creative destruction.” Since the inception of timesharing in the 1960’s, the VOI [vacation ownership industry], the financial markets which support it, and the credit markets which depend on it, all have changed exponentially. We have met many challenges. But Covid-19 is unique because of its severe impact on so many people. When we aggregate the economic, cultural, regulatory, behavioral, and medical impacts of Covid-19, there are very few people it does not affect.

Ultimately VOI is a people business. And unlike our changing world or a mutating virus, people are not much different today than we were in Shakespeare’s time. The same tragedy, comedy, fear, heroism, greed, kindness, mendacity, and leadership we see people display during this pandemic, we can find in Macbeth, King Lear, and A Midsummer Night’s Dream.

“Lord, what fools these mortals be!”, indeed. The consistency of human behavior over time, while everything else changes, is what we really learn from history. Understanding human behavior is how we shape our destiny. To illustrate, I offer two different examples. Both were large timeshare companies that ran into difficulty in 1989. Each had financed multiple receivables portfolios with failed savings & loan companies. My Resolution Trust Corporation (RTC) team was tasked with working out both credits and maximizing recoveries.

The first company had been run by a notorious “Developer Evil” in prison for financial and securities-related crimes. Resort title abstracts were a mess, with double-decks, phantom deeds, and unrecorded liens. A rescission order had been issued at several Evil resorts, allowing some consumers to walk away from timeshare obligations, others were entitled to refunds. The resort amenities were minimal and the units were modest. Most of the HOA’s were inactive or insolvent, and maintenance fees were unsustainably low. Finally, the Evil portfolios had been sloppily underwritten; many obligors had poor credit or low income, and some had never completed down-payments. Also, there was a recession on. I expected huge write-offs on the Evil portfolios. Seeing little chance for recovery, we assigned this workout to an RTC team member with little credit experience, and no banking or timeshare background.

Related: Financing Our Way Through a Pandemic

The second company was run by “Developer Earnest”, a quality-driven guy with no legal or ethical issues. Earnest and his company cooperated fully as we worked through their credit facilities and portfolios. Most of their resorts were beautiful, with luxurious units, golf courses, water parks, and equestrian centers. The only exception was a rather plain facility in Orlando. The Earnest HOAs were solvent, with higher maintenance fees than the Evil properties and established reserves. Earnest had originated receivables with good credit and solid income. Titles were clean, documentation was complete, everybody had made a full down-payment. There were no rescission orders or refunds. I saw an excellent opportunity for recovery here. We assigned this credit to our top workout officer, a former banker with years of experience financing timeshare portfolios and resorts.

In both cases, we failed to understand human behavior. Also, it turned out that thinking like a banker is not always the best approach.

The Evil properties were all regional, drive-to seashore resorts. Customers could afford a half-tank of gas even in the recession, so if their Evil resort was overbooked, they would just drive to another one nearby. Customers didn’t particularly care about the developer’s sins. Because fulfillment was easy, many owners got a lot of value from their timeshares. Although some were out of work or had high debt-to-income (DTI), they didn’t want their money back. Nor did they want to read the exhaustive HOA budgets we prepared justifying a special assessment for back taxes and deferred maintenance. They just wanted to pay and stay in the program, despite limited affordability.

Our Evil workout officer recognized the importance of fulfillment and value. He pushed us hard to offer payment deferments and flexible accommodations, mitigating the impact of the recession on affordability and enjoyment. The focus became keeping Evil customers on vacation and maintaining, or rebuilding, loyalty. People with temporary financial hardship were not canceled. Instead we allowed limited use if they maintained partial payments on their loans, with access increasing as their payments increased. Few owners cared that others were vacationing without being completely current. So long as each could keep vacationing for the foreseeable future, they paid what they could afford for that privilege, and were amenable to reservation curtailments, title corrections and temporary closures while we completed the workout. The majority of the Evil customers either kept paying or resumed paying once they could afford it. Ultimately, we collected about 63percent of par on the Evil portfolios, recovering about 80 percent of the taxpayers’ money, even after our contributions to cover temporary shortfalls. We only lost about 20 percent on a portfolio we thought could be a total write-off.

Related: The World of Finance Seven Months into a Pandemic

It turned out that the free, public beaches next to Developer Evil’s properties were more popular than the exclusive 18-hole golf courses, riding stables, and water parks at Developer Earnest’s resorts. We quickly burned through the Earnest reserves, as the company’s insistence on not charging owners for amenity use and no public access caused operating shortfalls. Developer Earnest was an early innovator of the club concept, so resorts were spread across the country. There was almost no day use, and expensive airfare meant fewer owners could afford to vacation during the recession. This caused a steep drop in fulfillment, and a reduction in value for the consumers.

The Earnest workout officer took a strict approach to enforcing consumer contracts, disregarding the connection between fulfillment and value, and ignoring the temporary impact of the recession on affordability. Despite high vacancy, anyone delinquent on loan or maintenance payments was prohibited from vacationing, and delinquent contracts were aggressively canceled. This cycle of dissatisfaction and loss exacerbated more delinquency and destroyed customer loyalty. So, despite superior consumer credit and income, and notwithstanding Developer Earnest’s heavy investment in the projects, a significant portion of these portfolios defaulted. We actually recovered less on several Earnest portfolios than we did on Evil’s. A notable exception was Earnest’s modest property in Orlando. It didn’t have much in the way of amenities, and the units weren’t fancy. But in 1990, even in a recession, people wanted to be in Orlando, and that portfolio paid like clockwork.

The experiences with Evil and Earnest taught my RTC team three essential elements impacting consumer behavior in our industry: fulfillment, affordability, and value. In the thirty years since, I have seen these three elements work all over North America, in the Caribbean and Hawaii: at successful timeshare, travel club, campground, residence, fractional and hybrid Projects; in hypothecations, securitizations, inventory loans, and equity transactions; in boom times, busts, workouts and start-ups. Everywhere we find fulfillment, affordability and value, we find success.

To counteract the impacts of Covid-19 on Fulfillment, do everything you can to increase usage. Maximize contact with your customers via e-blasts, mail drops, social media, and outbound calls. Where safe and appropriate, encourage more day use. Until marketing is back in swing, convert mini-vac platforms for owner use. Multi-site clubs should consider making the resort closest to each customer available for expanded amenity access, even if their ‘home’ resort is elsewhere. Recommend future bookings, incentivize customers to make extra reservations, and offer bonus time.

Related: Post-Pandemic: What Will the Travel & Hospitality Industry (Have to) Look Like?

To counteract the impacts of Covid-19 on affordability, train-up your financial services personnel to collect customers, not just dollars. Offer temporary arrangements where needed: deferments, curtailments, paid extensions, refinances, interest-only payments, and payment plans – always with some type of continued usage conditioned upon the customer paying under the temporary program. Most industry lenders and securitization servicers will allow you this flexibility; even if they don’t, it’s worth temporarily sacrificing eligibility to ensure long-term customer retention and receivables performance.
To counteract the impacts of Covid-19 on value, consider making a small charitable donation in the name of each customer who remains up-to-date on payments but misses a vacation. Or give them a credit towards future vacations, perhaps pay one year’s exchange fees if applicable. If you provide accommodations for emergency workers or medical personnel, make sure you promote it and give your owners all the credit. Consider allowing owners who occupy during Covid-19 to reserve empty accommodations for their families or friends. It keeps those owners connected during the pandemic and can even lead to referrals and upgrades. If you have secondary or tertiary benefits in your program (shopping discounts, affinity points, discounts on other services not impacted by Covid-19), feature them and expand them wherever feasible. Or offer future “certs” for amenities at or near your projects, like restaurants, golf, ski, or adventure courses.

Ultimately, do whatever it takes to maintain the loyalty of customers and to keep them in the long run. Remember what you spent to acquire each customer and the future revenue stream they represent. Most importantly, remember that at the end of this long night we’re not in the VOI industry or the finance business…we’re in the people business.

Harry Van Sciver has a lifetime of experience in the resort industry. He has spent 35+ years in banking, collections and receivables finance, and owned several timeshare projects. He is the co-founder and Director of Fairshare.Solutions, which specializes in portfolio collections and customer re-acquisition. Harry is also the president of Whitebriar Financial Corporation, and serves on the Resorts Group, Inc. board of directors.