Where is Teddy Roosevelt When We Need Him?

In the early years of the 20th century, President Theodore Roosevelt acquired the nickname “The Trust Buster” for vigorously attacking the business monopoly system that had become prevalent throughout American commerce; 44 large trusts were dissolved during his presidency. “The steel, rail, and oil industries cannot be controlled by a small group of men,” he said, “but most important of all, we must anticipate the day when a timeshare industry generating billions of dollars in sales will emerge, and we must ensure that it is not dominated by a handful of large, powerful interests.”

Those weren’t his exact words, but we’re in the midst of a presidential campaign where each major party candidate feels entitled to make up their own facts in support of a worthy cause—or even a dubious one and is The Chronicle entitled to less? Were he alive today, Teddy would probably have some harsh words for the recent developments in the timeshare industry? The past year has seen a continuation of the trend toward consolidation, capped by the announcement that Diamond Resorts, which had been a major acquirer, was, in turn, being acquired by Apollo Global Management for $2.2 billion. The Apollo group previously owned Tempus Resorts, based in Orlando, which had been acquired by Diamond in 2011. Now Apollo is acquiring Diamond, and will, therefore, get the old Tempus assets back again.

In 2015, Holiday Inn bought Silverleaf Resorts, Diamond bought Gold Key Resorts, and there were several other smaller transactions. Prices are good, and if the owners of a company are looking for an exit strategy, the past couple of years have been a good time to create what Wall Street refers to as a “liquidity event.”

Consolidation is the natural progression of any maturing industry and, 40 years into its life cycle, timeshare has reached that point. The industry that was once composed of many small, entrepreneurial, sales and marketing driven organizations is now controlled to a significant degree by a relatively small number of large, professionally managed corporations.
What does consolidation mean for the industry? As medium-sized firms disappear, will new players emerge in their places?

There are a number of benefits to the trend toward larger entities, perhaps the foremost of which is credibility for the industry. The entry of Hilton and Marriott in the mid-1980s boosted the image of timeshare to a new level, due to the companies’ credibility and also because of the management skills they brought to a segment that was long on sales and short on administration.

A downside to the recent consolidation trend is the increased difficulty in tour generation and higher costs per tour experienced by most mid-sized companies. Talk to any developer about their most pressing concern and it won’t be long before the word “tours” enters the conversation. Large brands have access to substantial in-house traffic and opt-in lists through their timeshare resorts and hotel affiliates and their higher price points enable them to absorb tour generation costs that non-brands cannot. With traditional generation sources such as mail and outbound phone rooms becoming obsolete or ineffective, independents are scrambling for new methods that produce the results that mail and phone did a decade or two ago.

In some instances, acquisitions have altered market dynamics. For a couple of decades, Gold Key was the dominant presence in the Virginia Beach market. Now, Apollo/Diamond, which has a presence in markets all over the world, is the dominant player in Virginia Beach, but without the local involvement in government and civic affairs. Will the market change, and will a competitor emerge, either locally or in the form of a brand?

For Colebrook, consolidation has meant the shrinking of its market. Companies generating hundreds of millions of dollars in annual sales almost invariably utilize the securitization markets, and their borrowing needs consist of nine figure warehouse lines, not $30 million hypothecation loans. During 2015, Colebrook lost two loans inches from the finish line when the prospective borrower was acquired just before the closing date.

What does the future hold? It’s unlikely that the timeshare industry will be reduced to a half-dozen Goliaths, for while there are advantages to size and scale, there are also areas in which independents, even smaller ones, can compete effectively. Many are acquiring product at a cost that was unheard of a decade ago, often less than 10% of sales and sometimes just 1-2%. When the timeshare industry first emerged, people were astonished that a $50,000 condominium could be sold in increments for a total of $300,000. The second stage of astonishment occurred with the realization that it was possible to lose money doing so. It’s a lot harder to lose money with a product cost of 5%, even with a high sales and marketing cost. It’s not uncommon to see companies with sales and marketing expenses of 65% or higher that are profitable, due to the low cost of product.

As far as new entrants filling the void created by acquisitions, we’re not seeing bottom-up growth in the form of companies building new condominiums and selling them. The product cost, including front-loading of amenities, and the expenses associated with the marketing ramp-up make it very difficult for a new company to enter the industry with new product. But it’s not necessary to build new properties today because there’s plenty of inventory out there. Companies that own condominium or rental properties are dedicating some of the units to timeshare, with phasing that mitigates large startup costs. Others are buying inventory in existing vacation ownership resorts, or acquiring older resorts in total along with the management contract. They are forming clubs with a variety of choices and selling memberships at prices much lower than the large companies. The key is the composition and quality of the inventory. Is it sellable without extensive capital improvements? How healthy is the Homeowners’ Association? Do the maintenance fees of the acquired inventory blend into the club dues structure?

If a property can be placed in marketable condition without exorbitant expense, and the HOA is reasonably stable, the viability of a project is dependent upon sales. Consolidation usually results in expense trimming, leaving good salespeople looking for jobs, marketing channels available for use, and attractive sales facilities for lease. A new operator can take advantage of these opportunities, and any company that can generate tours and sell will be able to acquire all the inventory they can handle.

Consolidation has made it more difficult for independents to market effectively, and it has changed the landscape of some local markets. It’s unlikely that we will again see anything like the 1990s, with dozens of fairly sizable independent companies building new resorts. It’s more probable that most of the building will be done by a few large companies, and new entrants will be primarily acquiring existing inventory or timeshare resorts, or converting non-timeshare product. Even modest rates of attrition create plenty of inventory to support a number of new entrants. Coincidentally, these companies are excellent prospects for Colebrook.

The key to the success of smaller and mid-size companies will be their ability to compete for tours with companies that have access to vast in-house databases and economies of scale. Quick and lithe, however, is often a good match for big and powerful, and we expect to see a number of new companies filling the void created by the recent wave of acquisitions. Teddy would like that.