Sja Crisis Module 0510


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Sja Crisis Module 0510

  1. 1. S. J O R D A N A S S O C I A T E S Luxury destination Advisors Destination Club White Paper Module: CRISIS MANAGEMENT HOW THE INDUSTRY IS RESPONDING TO THE RECESSION/CREDIT CRUNCH. June 2010 Prepared by: Scott Jordan tel.: 312-451-6210 11 2 2 N . C l a r k S t . , S u i t e 3 6 0 3 , C h i c a g o , I L 6 0 6 1 0 • t e l e p h o n e : 3 1 2 - 4 5 1 - 6 2 1 0
  2. 2. - DISCLAIMER- Opinions expressed are subject to change without notice.  While all reasonable care has been taken to ensure that the information contained herein is presented in good faith, and is not untrue or misleading at the time of publication, Jordan Associates Luxury destination Advisors, makes no representation as to its accuracy or completeness and it should not be relied upon as such.   The information is supplied on the condition that the reader or any other person receiving the information will make his or her own determination as to its suitability for any purpose prior to any use of the information.  Neither Jordan Associates Luxury destination Advisors nor any officer or employee of Jordan Associates Luxury destination Advisors accepts any liability whatsoever for any direct, indirect, special or consequential damages or loss arising from any use of this report or their contents.   This report may not be reproduced, distributed, or published by any recipient for any purpose without the prior express consent of the publishers.  Nothing contained herein shall be construed as conferring by implication estoppel or otherwise any license or right under any patent, trademark, or copyright of Jordan Associates Luxury destination Advisors or any third party.  The value of the investments to which this report relates and their income yields may go up or down.  The information referred to in this report may not be suitable for private investors.  If you are in any doubt, seek advice from your investment advisor.  This information is provided “as is’ and no representations or warranties, either express or implied of accuracy, merchantability fitness for a particular purpose, or any other nature are made with respect to this information or to any expressed views presented in this information. - SOURCES - The following sources were referenced for information/data provided in the Destination Club White Paper. ARDA Crittenden Research Fractional Life Jones Lang LaSalle Ragatz The Reserve Collection Sherpa Report The Veras Group Wall Street Journal About Jordan Associates: Jordan Associates is an advisor to the luxury travel industry including shared ownership, timeshare, hotels and resorts. Clients include the leading hotelier in Canada, Bellstar Hotels & Resorts, and other hospitality brands. Jordan Associate’s management team and collaborative partners include hospitality industry leaders in sales and marketing, management, strategy, finance, operations, and development. Jordan Associates has offices in Chicago and Salt Lake City. S . J o r d a n A s s o c i a t e s! Destination Club White Paper 2
  3. 3. “This game is part of the past Ray. It reminds of what was once good and can be again.” - Terrance Mann from the movie Field of Dreams MEMBERSHIP SALES - Abercrombie & Kent Residence Club. DISTRESSED CLUBS. • Reduced Equity Membership Pricing by 40% to reflect the changing real estate Destination Clubs are pursuing a market.  Annual dues remain the same and all Club benefits apply.  The Club’s variety of strategies to boost cash flow/ portfolio includes multi-million-dollar residences in the finest beach, mountain sustain operations and preserve and golf destinations worldwide. refundable deposits during the current recession including targeting members . One-Time Capital Contribution Annual Dues from distressed/bankrupted clubs. In an effort to “roll-up” dues paying 15-Night Annual Plan Was $225,000 Now $135,000 $17,000 members, prospective members 30-Night Annual Plan Was $390,000 Now $234,000 $29,000 oftentimes receive more favorable terms than were offered to existing members 45-Night Annual Plan Was $495,000 Now $297,000 $42,000 due to the value of picking up much needed cash flow. Most members from bankrupted Clubs (even among “Value • Introduced a Two-Year Trial Membership for those who want an extended Clubs” ~ upfront deposit less than opportunity to experience Club life before making a long-term commitment.  $100,000) prefer not to pay an upfront Trial Members pay normal Club dues plus a 10% premium that will be credited deposit and risk another financial loss to their capital contribution if they later join as a permanent equity member.  (members of a major Destination Club, Lusso, lost in excess of $350,000 when • Enhanced the Travel Credit Program to allow members to exchange nights the Club declared bankruptcy in 2009). towards Abercrombie & Kent travel, from adventure cruises in the Galapagos, to 22 new villas in Europe, African safaris, even once-in-a-lifetime experiences Ultimate Escapes (U.S.) / like trips to Antarctica. Everlands (U.S.) In 2009, Ultimate Escapes announced an exclusive agreement with members of including ensuring availability and Equity Estates (U.S.) / the now defunct Everlands Club to join reassuring members of their deposit’s Hideaways Club (U.K) Ultimate Escapes under preferred security. Clubs realized that retaining Equity Estates Fund I, LLC announced membership terms. As part of the existing members takes priority over the formation of a strategic alliance with strategic agreement, Everlands allocating valuable resources on The Hideaways Club, Europe’s largest exclusively shared with Ultimate marketing in an effort to capture an Residence Fund. The two companies Escapes a database of more than 500 elusive customer base. As a result of offer owner/members access to nearly qualified prospects who expressed focusing on existing members, Clubs 30 vacation homes in 23 destinations interest in Club membership. hoped to capture additional revenues creating the largest global portfolio of from member upgrades and valuable residences available through an equity- MEMBERSHIP SALES - referrals to friends and family. based model. Under the agreement PROMOTIONS. terms, Equity Estates and The STRATEGIC ALLIANCES TO Hideaways Club will each make nights Clubs also offered membership plans at ALLOW MEMBERS USE OF available for reciprocal use for travel special prices/terms to prospective RESPECTIVE CLUBS. beginning in 2010. members new to the Destination Club experience in a effort to capture Clubs engaged in reciprocity agreements allowing Club members to Quintess, LRW (U.S.)/ deposits (allow Clubs to refund existing use respective Club properties. The The Oyster Club (Ireland) memberships under 3 in/1 out policies) advantage of establishing reciprocity Quintess, LRW and The Oyster Club and dues (fund operating expenses). agreements over mergers/joint ventures announced in 2009 a strategic alliance to Clubs such as Abercrombie & Kent is if one Club declares bankruptcy it has allow members use of their respective Residence Club and Quintess launched limited impact on the viability of the Clubs. As a result of the alliance, new programs to take Clubs on virtual other Club. Reciprocity agreements are members of each Club have reciprocal “test drives,” enabling members to get valuable as long as the homes are of access to the homes of the other Clubs the full experience without a large equivalent size/quality as it broadens creating a choice of more than 90 luxury upfront commitment. the portfolio with limited capital vacation homes and experiences in SUSPEND SALES & MARKETING investment (fills location gaps in more than 50 destinations worldwide. ACTIVITY – FOCUS ON CORE MEMBERS. respective Clubs). Historically, reciprocity deals are structured under a Clubs are increasingly focused on one-year renewable contract. providing services to existing members S . J o r d a n A s s o c i a t e s! Destination Club White Paper 3
  4. 4. The goal of many clubs is to stabilize operations by increasing dues and lowering operating expenses while maintaining availability. Clubs are increasingly looking towards a “zero-sum” business model whereby income equals expenses and no ad- ditional memberships are needed to fund operations (building a base for growing the Destination Club when economic conditions improve). SECURE EQUITY CAPITAL/ assessment, members most likely will • Selectively liquidate assets by INVESTMENTS (RETAIL/INST). ask the following questions: selling properties to members Securing institutional capital in the • What options did the Club look who have visited the properties current recession has been problematic at to cover budget shortfalls and and shown an affinity to for most Clubs. An alternative strategy why did the Club choose the purchase. is securing capital from existing assessment charge approach? members (become shareholders of the Club entity) versus pursuing • Is the assessment enough or is ALTER RESIGNATION POLICIES. institutional investors who have been more capital needed? Clubs are evaluating whether to allow negatively impacted by the credit crisis member controlled sales of Club and largely rotated out of the real estate • Has the Club done everything to memberships to third parties. Select sector. reduce operating costs? Clubs are empowering members to resell their memberships (pricing not Quintess, LRW (U.S.) • Is the Club providing controlled by the Club) while limiting documentation on the usage of other financial provisions to third Quintess, LRW secured a major equity dues (pay down operating parties by fixing annual dues. Allowing commitment in 2008 from a Forbes 400 expenses, debt etc.)? members to alter standard resignation investor of over $210 million. The transaction was the largest infusion of policies accelerates sales reducing the • Will the Club place special number of members on resignation lists capital announced for a luxury assessments proceeds into a (jump the “resignation queue”). Destination Club. The commitment will protected “Escrow” account? be used for the development of new businesses, corporate mergers and The risks/opportunities involved with acquisitions, and for real estate approving member controlled sales REAL ESTATE ASSET SALES. include: development projects. Real estate asset sales are oftentimes the only option when Club operating • Members may “low ball” their INCREASE ANNUAL DUES AND expenses exceed dues (negative cash memberships creating a fire sale CUT OPERATING EXPENSES. flow), institutional/retail investor that would not encourage future capital unavailable, and lenders sales or allow members who are The goal of many Clubs is to stabilize reluctant to extend capital to refinance listing membership at higher operations by increasing dues and properties. However, the downside is prices to exit the Club. lowering operating expenses while selling houses tightens availability for maintaining availability. Clubs are o Available option would be existing members. Clubs have the increasingly adopting a “zero-sum” option of increasing availability under to allow members to sell business model whereby income equals this scenario by lowering member their memberships at 80% of expenses and no additional nights-per-property, spreading out what they paid and the memberships are needed to fund reservations, and rolling over nights Club does not take the operations (build a base for growing the into future years. customary 20% (non- Destination Club when economic refundable deposit). conditions improve). Existing members Property liquidation considerations: are resistant to “doubling-down” on • Members may be exposed to Club dues wherein the original signed • Sell properties that have the litigation on the sale (allowing membership terms have been most value versus cannibalizing member controlled sales could suspended or severely modified by a real estate inventory by selling create a structured investment “capital call.” However for Clubs in multiple lower value properties. which could open SEC distress, members are willing to pay “security” issues). additional dues versus witnessing their • Offer discounted memberships Clubs go bankrupt and face the (can devalue the position of M Private Residences dilemma of paying a deposit to another existing members) versus selling (Calgary AB) Club to maintain their travel lifestyle. properties to fill the void while Up until March 31st of 2008, M Private waiting for real estate to recover. Residences instituted a new resignation For Clubs evaluating the decision to increase dues/levy a special policy for members that provided S . J o r d a n A s s o c i a t e s! Destination Club White Paper 4
  5. 5. “One hundred percent of this charge is slated to pay for the operational costs of the club. We think it’s a one-time measure to deal with an absurd market measure. There is a false understanding in the industry of operating solely on annual dues; sales are necessary in even the best of times.” ! ! ! ! ! ! ! ! - Jim Tousigant - CEO, Ultimate Escapes additional liquidity. Club effectively created a market for its shares and RESTRUCTURE PRICING, STRUCTURE, AND MEMBERSHIP PLANS. allowed members to sell their shares on M Private Residences (Canada). a 1 in/1 out basis (previously the Club Club had a sister management company, Teger Resorts, which was absorbed into ran a 2 in/1 out model). Under the new the Club to keep overall management costs low during the recession. The Club platform, when members resigned from saw a drop in the average value of its homes and so M Private lowered share the Club they joined a resignation list. prices. B Share prices were reduced from CN$250,000 to CN$210,000 (21 days of Prospective members put in an offer for usage). At the same time the Club raised its annual dues to make sure they the class of shares/price they wanted to covered the Club’s ongoing operating expenses. buy. The first person on the resignation list with that share class decided In the fall of 2008, the Club decided to move from a “for-profit” to a “non-for- whether they wanted to accept the offer. profit” structure due to the challenges associated with selling memberships. If the first person on the list decided the Under the previous “for-profit” model, M Private Residences owned the real offer was too low, then the second estate and paid fees to the management company for sales and marketing and person on the list could decide if they management services. This model was deemed unsustainable due to the wanted to accept the offer. If no-one on recession/credit crisis. Management moved to the “non-for-profit” model, which the list accepted the offer, then the does not rely on membership sales and dues cover operational/administrative prospective Member decided if they costs to sustain the Club in the near term. Members are now owners of M Private wanted to raise their offer and the Residence Inc., a Canadian “non-for-profit” corporation that owns all the M process would start over again. Private homes and the board is made up entirely of shareholders of the Club. FINANCIAL RESTRUCTURING. RENTAL INCOME. Clubs renegotiated mortgage interest To raise cash flow Clubs offered rentals during non-peak seasons subordinate to rates, deferred upcoming payments, existing Member reservations. As membership sales start to grow in the future as reduced principal payments, and the recession eases/ends, the use of rental agreements would decrease as well. attempting to extend “term” loans to reduce debt payment obligations with lenders. DELAYED CLUB LAUNCH. Botiga (UK). With property prices continuing to fall in 2009, luxury Destination Club, Botiga, delayed the purchase of its first group of homes. Botiga commenced operations in 2007 and had originally planed to build a global portfolio of homes including individual residences, member-only boutique hotels, and operations in urban locations all within 4-6 hour flying time from London. Diamante Residences (Calgary, Alberta) Diamante started its launch program in the summer of 2008, but due to financial market turmoil decided not to move forward. S . J o r d a n A s s o c i a t e s! Destination Club White Paper 5
  6. 6. CLUB ACTIONS. Ultimate Escapes (2nd largest Destination Club by members, Escapes for one share of SAAC common stock valued at 1,300, created by a merger of Ultimate Resort and Private $7.94 per share, implying an equity value of approximately Escapes in 2008 ~ $200 million valuation). $57.0 million. Ultimate Escapes undertook staff layoffs and cut salaries in Ultimate Escapes members entitled to receive up to an the 2009 (competing Destination Club and industry leader aggregate of 7,000,000 earn-out units in Ultimate Escapes Exclusive Resorts announced a 10% reduction in its (each unit exchangeable for one share of common stock in workforce to rein in operational costs). In addition to staff Secure America) based on meeting certain performance reductions, the Club also reduced its mortgage interest on targets: some properties, and made significant cuts in marketing and overhead costs. • Up to 3.0 million in additional units of Ultimate Escapes, if Adjusted EBITDA in 2010 or 2011 is Ultimate sought a $22 million assessment from members between $23.0 million and $27.0 million. ($15-18,000 per Member) equal to about a year’s dues to keep the business going and cover operational expenses. • Up to 4.0 million additional units of Ultimate The assessment was designed to cover heavy losses in real Escapes, if Adjusted EBITDA in 2011 or 2012 is estate values and a sharp decline in new membership sales between $32.0 million and $45.0 million. experienced by the Club. The assessment was to allow Ultimate Escapes to operate through tough times and Quintess, LRW (Leading Residences Of The World) – 2nd preserve member deposits. Largest Destination Club By Real Estate Value With Over $250 Million In Owned Real Estate And 3rd Largest “One hundred percent of this charge is slated to pay for the Destination Club By Members With Over 500. operational costs of the Club. We think it’s a one-time measure to deal with an absurd market measure. There is a The Quintess, LRW management team recognized the false understanding in the industry of operating solely on impact of the economic recession and developed a annual dues; sales are necessary in even the best of times.” comprehensive plan in the 4th quarter of 2008 to address it Jim Tousigant - CEO. working with members individually, in small groups, and through conference calls as well as with its investors to Members who did not pay the special assessment were ensure long-term stability and growth (allow the Club to previously suspended from utilizing the Club. In August of operate independent of sales activity). 2009, Ultimate Escapes lifted the suspension so the Club could again reap the dues it was forfeiting under the Of interest: suspension. Newly reactivated members were charged outstanding dues and any unpaid assessment charges (if • The Club trimmed operating expenses in 2009 by 35%. member selected payment plan - interest deducted from the redemption proceeds upon a reactivated member’s • Asked members through a Club-wide vote to pay higher resignation). dues and fees and approve certain changes to the terms of their membership to reflect current conditions. Members who supported the original assessment received 3 "enrichments" as sweeteners for the deal: from 3 to 7 • Added new members in 2009 (very limited) and planned additional nights annually for 3 years, upon resignation to seek consolidated opportunities that would advance receive 90% of the current value of the deposit (up from the Club’s position of strength in the industry. 80%), and participation in the Club’s Assessment Repayment Plan. Members who reactivated did not receive • Planned on capitalizing on very favorable real estate the first two “enrichments.” opportunities in places that members enjoyed most. Ultimate Escapes – Secure America Acquisition • Annual equity commitment from a private investor Corporation Signs Definitive Agreement for Business (contracted for next eight years) to cover real estate Combination with Ultimate Escapes Holdings, LLC. acquisitions while utilizing non-refundable part of upfront deposits to fund the Club’s sales and marketing In September of 2009, Ultimate Escapes announced a operations. business combination with Secure America Acquisition Corporation (SAAC), homeland security business. Secure America would make a minimum $20.0 million contribution to Ultimate Escapes in exchange for 4,687,500 units of Ultimate Escapes, based on a $186 million valuation of Ultimate Escapes. After the closing of the transaction, members of Ultimate Escapes would be eligible to exchange each of their approximately 7,178,841 units of Ultimate S . J o r d a n A s s o c i a t e s! Destination Club White Paper 6