Timeshare stocks look attractive… as does their debt. I know what you are thinking – time shares are the last place I want to be investing right now. Just look at hotels – demand has evaporated. Just look at the google search history:
But there may be some things you don’t know about the timeshare business model that may show they are more resilient than you think.
Out of the timeshare stocks, I’ll use Wyndham Destinations (WYND) as the example. WYND generates revenue through two ways:
I’ll briefly explain “ownership” as I think most people are familiar with it. The company sells VOIs and in exchange the purchaser can use a specific unit in a property for a week or so. Or they can use allotted points to go to another property.
Typically, WYND and the other players either sell the VOI and get paid upfront or have financing options for the customer. (Note: yours truly recently attended a timeshare pitch – it was around $15k to buy the unit showed to me and they offered financing around ~14-15%).
After the purchase though, the purchaser must continue to pay an annual maintenance fee, which is the share of costs and expenses of operating and maintaining the property. So here we have a major difference between hotels. Hotels have to cover opex and maintenance of the property through its sales revenue (i.e. selling nights). Timeshares already have a book of business that they collect maintenance fees to cover costs. Timeshare costs cover:
“housekeeping, landscaping, taxes, insurance, resort labor, a management fee payable to the management company, and an assessment to fund a reserve account used to renovate, refurbish and replace furnishings, appliances, common areas and other assets, such as structural elements and equipment, as needed over time”
A lot of these costs a hotel must cover even if revenues are zero. Sure they can cut costs, but some of these (taxes and insurance) don’t go to zero just because sales are. Plus, the timeshare is clearly receiving a management fee here as well.
There is a risk that people stop paying these maintenance fees, but that really happened in the last recession because the timeshare managers weren’t maintaining the properties well.
How are timeshare stocks different than 2008/2009? Timeshare companies are different now in a few ways:
- They are mostly all independent – VAC used to be a part of Marriott and Starwood, Hilton Grand Vacations is now independent from Hilton.
- No longer sell high-end products – prior to the financial crisis, the timeshare companies got into “high end” time shares in residential units, which collapsed. They no longer focus on this.
- No longer sell to sub-prime – as shown later, WYND’s credit book has an average FICO of ~720 compared to sub-prime, low-FICO borrowers in the prior downturn
Before I dive more thoroughly into the company, I want to explain really quickly why I am focused on WYND and keep this in mind for the remainder of the post:
Why WYND? There are other Timeshare stocks with good names like Hilton and Marriott…
- Roughly 1/3 of WYND’s exchange business comes from membership fees, balance is from members swapping timeshares. Cash is actually received when they book, not at the time of stay. So any timeshare opportunists out there may be swapping for 2021 as we speak… and WYND will be collecting cash.
- Another 17% from WYND come from HOA and property maintenance fees. This is very stable.
- Solid liquidity: WYND put out a press release that it has $1.3BN of cash and $883MM of receivables it can finance. It therefore has plenty of liquidity to weather the storm.
The one benefit in favor of Hilton (HGV) and Marriott (VAC) is that they charge annual membership fees at the beginning of the year and have already collected the cash. WYND automatically deducts on a monthly basis. I’d prefer to have the cash in the door day one, but beggers cant be choosers.
Sources of Revenue:
Vacation Ownership
- Timeshare sales (pretty intuitive)
- Consumer Financing:
- Finance the purchases noted above. Average customer FICO was 727, 727, 726 for 2019,2018, and 2017 respectively
- During 2019, the company generated $1.5BN of receivables on $2.3BN of gross VOI sales – timeshare companies typically securitize this, which WYND does, so that they create capacity on the balance sheet to sell more VOIs.
- Property Management:
- Company has 3-5 year property management agreements, which typically renew automatically
Vacation Exchange
- This essentially means that you can use your time share as currency for an “exchange” on another platform. RCI is a popular company for this. The tour that I did was in Florida for example, but I could exchange my points to go to a Disney vacation club or Aspen.
- The vast majority of revenue here is driven by annual membership dues and fees for facilitating exchanges.
- OK – if there aren’t many exchanges this year due to a slowdown in travel, that will get hit, but annual membership fees should be very stable
Now that we’ve gone through the revenues side, we should look at the major expenses. I.e. Let’s stress test WYND.
Cost breakdown
I’m doing this to see how much is variable vs. fixed and what they can cut to preserve cash. Note, I pulled these breakdowns from Hilton Grand Vacations because they do a great job breaking it out line by line whereas WYND brackets a lot of it together:
- Cost of VOI sales – represents the costs attributable to the sales of owned VOIs recognized, as well as charges incurred related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects. If you’re not selling new VOIs or acquiring new inventory and customers aren’t exchanging, this probably can flex considerably lower.
- Sales & marketing – relatively obvious. But if you know you’ll have no sales in the next few months, you could cut this back tremendously. Perhaps 90%.
- Rental and ancillary services expense – These expenses include personnel costs, rent, property taxes, insurance and utilities. These costs are partially covered through maintenance fees of unsold timeshare slots and by subsidizing the costs of HOAs not covered by maintenance fees collected. These are relatively fixed, however.
- Resort & club management fees – payroll and other admin costs associated with running the clubs. I think this could be cut back drastically, but maybe will say 50%.
- Financing – financing charges for securizations, but is offset by financing income
- General & Administrative – back office costs in general. I assume this could be cut somewhat, but might be 75% fixed.
All in, I would say not super variable cost structure, but also not terrible.
Financial Summary
Here is my breakdown of what I expect could happen to WYND for the balance of 2020. Yes, it looks brutal, but at the same time, with a complete halt of travel its not really as bad as you think. They actually remain EBITDA positive throughout this year. If you look at the price of Timeshare stocks too, I can’t help but think this is priced in.
How does this translate into FCF? Believe it or not, I think the co could be FCF positive this year:
Therefore, if I think the business isn’t permanently impaired, we could be scooping it up for a great discount. This actually will build the company’s liquidity position as well.
Valuation
Looking out to 2022, WYND is trading at <3.5x EPS and ~4.5x EBITDA. That seems way too cheap to me.
Finally, why is the debt interesting?
If the company maintains over a $1bn of liquidity this year, they will have no problem addressing their next maturity, a $250MM tranche in 2021. Right now, that bond trades at around 90 for a YTW of 17.6%. I’ll take that all day. Frankly, the company may want to scoop some bonds up on the open market. Buying the bonds at even 95 cents would save the company ~$12.5MM in principal plus additional savings from interest expense.
