ARDA Developments - January 6, 2009The vacation ownership industry is in the precarious path of an economic hurricane and major players in the industry are filling sandbags and heading toward high ground hoping to weather the storm. In order to survive these challenging times, companies will need to dramatically transformation their operations with swift action, revised strategy and streamlined operations.
Vacation ownership companies are being impacted by a multitude of macroeconomic factors and are struggling to respond in a decisive manner. Due to the current state of the economy, industry experts and economists believe that consumer travel will decline significantly. As a result, vacation ownership companies have publicly and privately disclosed that, in the near term, lower tour flow and a contraction in contract closings is expected. Exacerbating this situation is the widespread resetting of lending terms by financial institutions. Lower advance rates on land loans and mortgage hypothecations, as well as higher interest rates, appear to be contagious and are beginning to significantly impact companies in the industry. While the changes in travel habits may be short term, it should be expected that changes by lenders will be more permanent.
As vacation ownership companies navigate this treacherous terrain, many may encounter numerous financial and operational challenges. The response to these challenges will be the difference between success and failure. Several companies have announced significant reductions in workforce, while others are altering operating norms by requiring larger down payments at closing. The effects of the global economic crisis are so widespread that in October 2008, the American Resort Development Association (“ARDA”) announced that it had requested loan guarantees from the federal government to help bolster the vacation ownership industry. While many of these initiatives may provide temporary relief to companies that are experiencing liquidity crises, the long-term survival of industry participants will lie with those companies that are able to swiftly respond and adjust to this rapidly changing environment.
Revisions in Corporate Strategy and Reporting
The challenges before vacation ownership companies are vast and complex. Many vacation ownership companies have already begun reviewing and revising corporate strategy in anticipation of this economic turbulence. While these strategies will continue to be driven by lead generation and tour flow, companies will be forced to take a closer look at cash flow and profitability metrics. It is likely that the performance of tour channels and sales centers will continue to be evaluated on VPG, but net cash at closing will clearly become a critical metric. The contraction in interest rate spreads on mortgage portfolios will cause companies to focus more attention on each sale. It is also expected that companies will implement stronger controls over first day incentives and gifting programs.
Lenders and investors will likely increase their attention on the specific details of a company’s corporate strategy and require companies to provide more timely and accurate reporting of actual operating results. This reporting will likely include the details of cash inflows and outflows, profitability of tour channels and sales centers, detailed reports of construction spending, and detailed default reports. The frequency of this reporting will likely increase as well. Sales and mortgage information, which has typically been provided on a monthly basis, may be required weekly. Reports that were normally required annually or quarterly will now be required monthly. Lenders may also require increased assurance on the information provided. As such, companies should expect that lenders will require the review of an internal audit department or an independent financial advisor.
Review of Assets
Due to constrained capital markets and reduced consumer spending, companies will be forced to carefully review their assets including raw land, developed property, and mortgage asset pools to determine an optimal strategy. This review will prompt companies to make difficult decisions regarding the highest and best use of their capital and may lead to the disposition of various non-core assets to raise additional cash. Companies should also expect that lenders and investors will implement heightened scrutiny and due diligence standards for future acquisition and development requests.
Increased Focus on Collections
The timely collection of customer mortgages is vital to the success of a vacation ownership company. Due to increased delinquencies, companies will need to carefully evaluate collection departments, to ensure maximum efficiency. It is expected that many companies may choose to outsource this function to companies that have more expertise and a successful track record in mortgage servicing. It is also likely that companies will expand the use of third party collection agencies for their delinquent receivables.
The current economic forecast is that vacation ownership companies are in the direct path of a category 5 hurricane. Are you prepared?
Susan Gordon & Bob Krawczyk are both Managing Directors with Mackinac Partners, LLC, a national financial advisory firm that specializes in complex and financially distressed situations. Mackinac Partners is a leading advisor to vacation ownership companies. For additional information please visit www.mackinacpartners.com or contact them at (248) 258-6900, sgordon@mackinacpartners.com or bkrawczyk@mackinacpartners.com. 
