S. J O R D A N
A S S O C I A T E S
Luxury Destination Advisors




                                Executive Summary:
    ...
- DISCLAIMER-

Opinions expressed are subject to change without notice.  While all reasonable care has been taken to ensur...
Noteworthy:


                                   Jon Haahr – Managing Partner, Silverportal Capital


     “Demographic an...
SHARED-OWNERSHIP BUSINESS MODELS:
    The shared ownership travel space is comprised of Private Residence Clubs (Equity Mo...
Though the “White” paper details company specific and industry flaws, many of
   which have led to recent Destination Club b...
“Like many emerging industry platforms, the Destination Club industry has endured a
         tumultuous period defined by m...
RAGATZ1 STUDY - 2008 REVIEW
                                                                                    Starting j...
AFFILIATION WITH EXTERNAL
                                                        EXCHANGE COMPANY



                    ...
DESTINATION CLUBS

                                                                                                       ...
Conclusion:

    The Destination Club industry has emerged as a formidable travel option over the past
    decade.  With n...
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SJA Destination Club White Paper

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SJA Destination Club White Paper

  1. 1. S. J O R D A N A S S O C I A T E S Luxury Destination Advisors Executive Summary: DESTINATION CLUB WHITE PAPER July 2009 Prepared by: Scott Jordan tel.: 312-451-6210 scott@sjordanassociates.com 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 con- tained herein is presented in good faith, and is not untrue or misleading at the time of publication, Jordan Associates Luxury Destina- tion 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 con- sequential damages or loss arising from any use of this report or their contents.  This report may not be reproduced, distributed, or pub- lished 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 ex- pressed views presented in this information. - SOURCES - The following sources were referenced for information/data provided in the Destination Club White Paper. AAA Affluence Research Center ARDA Crittenden Research Fractional Life Fractional Homes International Jones Lang LaSalle Owls Head Partners LLC Ragatz The Reserve Collection Sherpa Report Steeplechase Development Advisors 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 manage- ment team and collaborative partners include hospitality industry leaders in sales and marketing, management, strategy, fi- nance, operations, and development. Jordan Associates has offices in Chicago and Salt Lake City. J o r d a n A s s o c i a t e s Destination Club White Paper 2
  3. 3. Noteworthy: Jon Haahr – Managing Partner, Silverportal Capital “Demographic and secular drivers for vacation real estate are so powerful that they will overcome a multitude of mistakes, but violation of the public trust or investor confidence aren’t among them. Fractional vacation ownership is an area in which potential members have a significant amount of interest, but only a modest amount of understanding.” “To maximize the long-term opportunity then, the potential member needs to focus on their own education and look to successful industry road maps. The maturation of the public REIT market over the past decade provides a good road map in many ways. What you see are companies that have worked toward accounting transparency, standardized financial reporting, and independent governance, supported by a strong and influential industry association in NAREIT. The result has been a high degree of public confidence and hundreds of billions of dollars in capital raised.” “From an industry perspective, sponsors and industry influencers must take an institutional rather than a retail perspective. Their goal should be to create companies that will deliver the quality product represented and withstand financial scrutiny at the most sophisticated level. The benefits of such a strategy are clear – a high degree of satisfaction by the members and the investment sources.” J o r d a n A s s o c i a t e s Destination Club White Paper 3
  4. 4. SHARED-OWNERSHIP BUSINESS MODELS: The shared ownership travel space is comprised of Private Residence Clubs (Equity Model), Private Destination Clubs (Usage Model), luxury villa/vacation home rentals, and Timeshare (Pre-Paid Travel). Private Destination Clubs, luxury villa/vacation home rentals, and timeshare are considered time-business models and refer to the concept of purchasing access to or use of a vacation home/resort property. Shared ownership reflects an owner’s actual use of a vacation home. The high-end segment of the shared level due to the perception of modest ownership industry started in the early margins/financial upside and chal- Unlike most Residence Clubs 1990’s when Steve Dering (now Man- lenges associated with scaling the (Investec's investment in aging Principal, DCP International) model including the securitizing of Hideaways Club being an noticed luxury real estate (2nd/ receivables/consumer paper (time- vacation homes) in Park City, Utah, share receivable sales volume of $10.6 exception), institutional capital was only used 2-3 months of the year billion in 2007 versus $2.3 billion in has funded Destination Clubs at at most and otherwise sat empty. Steve sales volume for Destination/ the operational and project levels developed an equity-based shared Residence Clubs). as a result of the platform’s ownership platform, Private Residence perceived scalability and Club, allowing 4-12 families to share A new travel option was created at the ownership (each with deeded title) of a turn of the century, Private Destina- financial upside (investors own luxury home. Benefits of this structure tion Clubs. Private Destination Clubs real estate and Member deposits included amortizing high-end services give Members access to exotic resi- are unsecured to the Club’s other (i.e. concierge) and costs such as prop- dences around the world in return for obligations including debt and erty taxes over a larger number of an upfront deposit and annual dues at operational expenses). individuals/families, lowering price- a cost-per-night comparable or better points for owning a multi-million dol- than high-end hotels. Destination lar home, and providing access to lux- Clubs, seen as a cost-effective alterna- Institutional Investments - Private ury homes around the globe (ability to tive to luxury hotels, villa rentals, and Destination/Residence Clubs. exchange time at participating proper- second home ownership, provide • Exclusive Resorts - operating/ ties). The Private Residence Club busi- Members with concierge services and company investment (Steve Case). ness model is based on generating access to 3,000-3,500 PSF homes allow- • The Yellowstone Club - $375 million revenues/fees from fractional sales & ing large groups and families to vaca- investment (Credit Suisse). marketing, real estate brokerage serv- tion together. Unlike second home ices, product design, financial plan- ownership, Members enjoy their vaca- • Everlands – construction financing ning, legal, and property management. tion at a Destination Club with no (Lehman Brothers). To date, most institutional investors maintenance hassles and offer more • Abercrombie & Kent Residence Club have been reluctant to fund Private privacy than a hotel. – Fortress Investment Group’s ac- Residence Clubs at the operational quisition of Bellehavens/Crescendo. CURRENT OPTIONS AVAILABLE FOR TRAVELERS: Retail Investments - Private Destination/Residence Clubs. • The Hideaways Club received an TIME-EQUITY CONTINUUMSM equity investment from Jonathan Feuer (CVC Capital Partners) and EVERY “TIME” CHOICE EXCEPT “VACATION RENTAL” INCLUDES Nick Bettany (Rentim Investments). SOME ELEMENT OF EQUITY AND EVERY “EQUITY” OPTION INCLUDES In January of 2007, Investec Private THE RIGHT TO USE “TIME.” Bank’s Growth & Acquisition Fi- nance division provided The PURE TIME PURE EQUITY Hideaways Club with senior and No equity - No Responsibility 100% Real Estate Ownership mezzanine financing to enable the 100% Responsibility Club to acquire its first properties before official launch. CONDO HOTEL • Major equity investment in Quintess TIME DESTINATION ELITE SOLE VACATION SHARE CLUB FRACTIONAL OWNERSHIP by a private investor in 2008 (inves- RENTAL FRACTIONAL tor also prepared to substantially & increase commitment for 2009). PRCs “PREPAID VACATION” “REAL ESTATE OWNERSHIP” Source: Elite Destination Homes J o r d a n A s s o c i a t e s Destination Club White Paper 4
  5. 5. Though the “White” paper details company specific and industry flaws, many of which have led to recent Destination Club bankruptcies, the platform is sustainable if founded on proper business strategies including achieving scale. Travel Clubs and hedge funds have Many institutional and retail inves- Though the “White” paper details investments in Destination/Residence tors are inquiring whether troubles in company specific and industry flaws, Clubs. Fortress Investment Group, a the Destination Club industry are due many of which have led to recent Des- New York based hedge fund and inves- to fundamental flaws in the business tination Club bankruptcies, the plat- tor in Abercrombie & Kent Residence model. Destination Clubs typically form is sustainable if founded on Club, saw the opportunity to co-market require a constant inflow of cash and proper business strategies including Residence Club Memberships with new Members to acquire new proper- achieving scale. existing timeshare clients (portfolio ties, service debt, support corporate company - Intrawest) while Abercrom- overhead, and make good on promises It is important to note that industry bie & Kent entered the shared owner- to Members. Bringing 5-star hotel level failures (Lusso/High Country Club/ ship space to leverage their core “travel services to individual properties Yellowstone) and the recent increase and safari” platform. around the globe is an expensive logis- in Member resignations were not tical challenge. Until a Club reaches caused by service levels and/or satis- Branded hotel companies such as scale, the constant need for new Mem- faction levels of Destination Club Hyatt Vacation Ownership, St. Regis bers means that existing Members of- Members. Prior to the credit melt- (Starwood), Ritz Carlton (Marriott), tentimes are supporting expensive cor- down, most Clubs had satisfaction lev- and Fairmont Raffles Hotels Interna- porate sales and marketing efforts. els over 90% and a minimal number of tional launched Private Destination/ resignations. Residence Clubs. Destination/ Scale is important for a sustainable and Residence Clubs are an extension of the profitable Destination Club for two For the Destination Club industry to company’s travel platform assisting reasons. First it allows a Club to amor- move forward, Clubs must evolve to these hoteliers with reaching a cliental tize capital expenditures (i.e. concierge “Destination Club 2.0.” “Destination not interested in hotel or timeshare services/online reservation system) Club 2.0” entails providing higher lev- accommodations. Hoteliers oftentimes over a large amount of residences, and els of financial transparency and ac- leverage unproductive land surround- secondly enables Clubs to lower aver- countability to Members and executing ing hotels by building out Destination/ age cost-per-home from purchasing on sustainable investment strategies Residence Clubs. Additional synergies residences at a bulk discount. This that are not overly reliant on debt. As between hotel and Destination/ means Destination Clubs can reduce part of this transformation Clubs be- Residence Clubs include centralizing their administrative burden per Mem- come more opportunistic, quickly ad- and exchanging services, maximizing ber because additional Members are justing to and capitalizing upon market staff utilization/efficiency, and reduc- there to pay the freight, and a larger developments such as acquiring dis- ing Club sales expenses by marketing proportion of every dues dollar col- tressed real estate. The current credit Memberships to hotel guests. lected is going to servicing the homes. crisis provides an excellent opportunity for Clubs with access to cash/equity As with residential and commercial real estate markets the credit crisis of 2007-2009 has significantly impacted the shared ownership space and nega- tively influenced public opinion as to whether the industry is sustainable. Travel Investment Destination Clubs have suffered from the absence of debt and equity financ- Destination ing, devaluing property valuations/ Club inability to refinance, unavailable consumer/end-loan financing and con- sumer note securitization, and an im- balance of supply (resignations) and demand (Membership sales). These factors led to the failure of a number of Lifestyle Destination Clubs in 2008/2009 that aggressively loaded up on debt/credit to acquire real estate, sustain opera- tions, and pay club overhead expenses. Today’s opportunity exists at the intersection of the consumer’s desire for travel, interest in investment opportunities and lifestyle tastes. J o r d a n A s s o c i a t e s Destination Club White Paper 5
  6. 6. “Like many emerging industry platforms, the Destination Club industry has endured a tumultuous period defined by macro-economic factors beyond the control of the indus- try (credit crunch) coupled with select Destination Club mismanagement.” (credit lines) to pick up distressed real the recession (strong interest by ened their balance sheets through spe- estate assets. This includes working Members for increased access to vine- cial assessments/equity investments, with lenders (REO/distressed securi- yard resorts). Membership surveys selling real estate assets, and cutting ties) and borrowers (seller financing) to conducted by a leading Destination costs to weather the financial storm. pick up residences in areas with strong Club in 2008 indicate vineyards rank Clubs are striving to maintain pre- histories of second home ownership amongst the most desired locations. mium services to existing Members and pricing barriers to entry. through this process. Napa Valley is visited by as many as “Destination Club 2.0” five million people each year (three As the economy strengthens, Clubs initiatives are not an option for million stay overnight) making it the with strong balance sheets will be in an second most popular tourist destina- ideal position to capture market share the industry but a “must reality” tion in California. Half of these Napa from bankrupt Clubs and travelers to succeed given the recent loss visitors reported annual incomes in who see the Destination Club platform of Member/Investor confidence in excess of $100,000 and they spent on as a flexible, attractive travel option. the sector, increasingly average $233 per person per day. Des- competitive market landscape tination Clubs have the opportunity to (i.e. luxury villa rentals), and reach America’s most affluent, accom- plished, and settled consumers: recent surveys by the American Affluence Research Center that • 75% are married suggest the potential market for • 87% own homes vacation homes (including full • 51% are between 35 and 55 years old ownership and Destination/ with 74% between 35 and 65 Residence Clubs) declining • 64% household incomes exceed substantially from 2007 due to $100,000 the recession. • 47% have college degrees with 34% having graduate degrees • 28% are in upper management “Destination Club 2.0” initiatives in- • 67% have two incomes per household clude implementing next generation • 67% travel overseas and are active in sales and marketing distribution chan- nels, international expansion and golf, skiing, tennis, sailing or jog growth, marketing the industry as “Green” friendly, and adopting spe- Like many emerging industry plat- cialty platforms (i.e. vineyard residence forms (Internet – early 2000’s), the Des- fractionals) to increase brand recogni- tination Club industry has endured a tion and stimulate Membership sales. tumultuous period defined by macro- economic factors beyond the control of A specialty platform of interest to the industry (credit crunch) coupled many Destination Clubs is vineyard with select Destination Club misman- shared ownership given vineyard agement. Destination Club market tourism’s continued strength through leaders have responded by strength- In response to the demand for vineyard resorts and given the attractive demographics pre- sented above, Bellstar Hotels & Resorts, a leading hotel manager, operator, and developer in Western Canada, launched The Reserve Collection, which offers a unique opportunity for oenophiles to own deeded real estate and enjoy the vineyard experience without the management hassles. J o r d a n A s s o c i a t e s Destination Club White Paper 6
  7. 7. RAGATZ1 STUDY - 2008 REVIEW Starting just a decade ago, Destination Clubs have Shared ownership industry growth over the been the fastest segment of the luxury travel market past four years: during this span, the annual sales ($610 million annual sales in 2007 up from $140 volume increased from about $1.5 billion to $2.2 million in 2003). However, Destination Club sales volume fell 43% in 2008 (year over year) to $348 billion in 2007; +$754.5 million or +48.9%. million due to the recession. SUMMARY PERFORMANCE OF 2008 PERFORMANCE – SHARED OWNERSHIP. ACTIVE PROJECTS 2008 2007 Fractional Interests 77 84 • Fewer active projects Private Residence Clubs* 61 69 (included closed sales, presales, and re-sales). TOTAL: 138 153 Destination Clubs 12 21 *Over $1,000 per square foot Source: Ragatz Associates SALES PERFORMANCE: 2008 (MIL.)* Fractional Private Residence Destination Clubs ALL Interests Clubs • Total sales volume of $1.5 billion (included closed $263 $912 $349 $1,525 sales, presales, and re- sales), -34% (change 2007 17% 60% 23% 100% to 2008). *Includes closed sales, presales and resales Source: Ragatz Associates - Little change in operating costs (Member dues). TRENDS IN SALES PERFORMANCE - More exchange 2007 TO 2008 (MIL)* affiliations. Change: 2007 to 2008 Amount Percent Fractional Interests -$222 -46% Private Residence Clubs -$290 -24% DC -$261 -43% TOTAL: -$773 -34% *Includes closed sales, presales and resales Source: Ragatz Associates J o r d a n A s s o c i a t e s Destination Club White Paper 7
  8. 8. AFFILIATION WITH EXTERNAL EXCHANGE COMPANY Fractional Private Interest Residence All Shared- Affiliated Projects Clubs Ownership 2007 Yes 78% 51% 66% 60% No 22% 49% 34% 40% Total: 100% 100% 100% 100% Source: Ragatz Associates • (above): Overall, sales performance better than whole ownership. - Many purchasers of fractional ownership are cash buyers and not dependent on obtaining a mortgage. If they do need to raise finance against their primary home, they are most likely to fall into the category of consumers which banks are still willing to lend to (high value in home and a sound credit rating). - Trends in the past have illustrated that the people purchasing fractional ownership are not principally moti- vated by investment factors, predominantly sought as a lifestyle investment. - Traditional second home purchases exposes the purchaser to the full purchase price, all the annual upkeep, and maintenance costs and potentially long periods in which the property will remain unused all of which are negatives under the current market conditions. TRENDS IN TOTAL SALES PERFORMANCE 2004 TO 2008 (MIL.)* 2004 2005 2006 2007 2008 $1,543 $1,968 $2,122 $2,297 $1,525 +$1,012 +$425 +$154 +$176 -$773 +191% +27% +8% +8% -34% *Includes closed sales, presales and resales Source: Ragatz Associates • (above): Historical view of shared ownership sales volume. (MIL). - 2004 was the most significant growth year, both in absolute and relative terms. This was due to the industry really escalating for the first time, and a smaller absolute growth from which to begin. - 2005 was another good year, as the industry stabilized into a more rational growth curve. - 2006 was a relatively slow growth year, due primarily to a 21% decline in the Destination Clubs and a bank- ruptcy (Tanner & Haley). - 2007 another growth year, and could have been more dramatic if not for the general decline of the overall residential and whole-ownership resort real estate industries throughout most of the U.S. - As the industry matures and becomes more widely understood by income-eligible households, it is fully expected that all preceding sales performance indicators will improve.  Remaining market depth in the US. • Estimated that 50,000 households in the U.S. now own shared ownership, including Fractional Interests, Private Residence Clubs, and Destination Clubs. • Now 5,421,415 households in the U.S. with incomes over $200,000 or about 3.8% of all house- holds. Current penetration rate for shared ownership is just about 1.0%. • If the penetration rate reaches 5.0%, means another 202,000 buyers and 80.2% of the market remain. Does not assume additional income-eligible households over time. J o r d a n A s s o c i a t e s Destination Club White Paper 8
  9. 9. DESTINATION CLUBS 2007 $348 million sales volume in 2008 (-43%) $610 • 5,800 Destination Club Members in 2008. 12 clubs in active sales 21 - Down from 6,400 7 non-equity and 5 equity Members in 2007. 5,800 members 6,400 30 years; 7 owners per share Source: Ragatz Associates DESTINATION CLUBS • Average initial deposits 2007 and annual dues both declined from 2007. Average residence: value of $3 million & 3,000 square feet - 80-100% refund of the initial deposit fee upon Average initiation deposit: $305,000 $326,500 leaving the Club. Average annual dues: $25,200 $28,000 Source: Ragatz Associates • In favor of shared-ownership coming back faster and stronger than whole-ownership. - Historical demand for vacation homes. - Access to unique properties. - Back to basic values. - The value proposition.  Buy what can use, i.e., speculation is gone.  Buy what can afford, i.e., preserve your wealth.  Hassle-free, i.e., “show up and enjoy.”  Flexibility and variety, i.e., exchange and experience.  Down-spending/broader market.  Positive image relative to whole ownership and timeshare. 1 Ragatz Associates is an international consulting and market research firm, specializing in the resort real estate industry.  It was founded in 1974 by Dr. Richard Ragatz.  Clients represent both the private sector (from small, individually owned companies to international corporations) and the public sector (from small mu- nicipalities to national governments). Services include: market analysis, feasibility analysis, project evaluation, consumer surveys, consumer focus groups, eco- nomic impact analysis. The firm has worked on over 2,500 assignments in the resort real estate industry. The majority have been feasibility analyses for resorts located in 46 states and 70 countries. In addition, the firm has been involved in several landmark studies in the resort real estate industry. In regard to fractional industry projects and private residence clubs, Ragatz Associates has completed over 400 feasibility analyses, 100 focus groups and 50 consumer surveys.  The firm has organized eight national conferences on the topics and conducted several national surveys. J o r d a n A s s o c i a t e s Destination Club White Paper 9
  10. 10. Conclusion: The Destination Club industry has emerged as a formidable travel option over the past decade.  With nearly 6,000 Members and $348 million in sales in 2008 alone, the industry has matured from its origins to effectively compete with luxury travel alternatives such as elite 5-Star hotels and resorts.   However, the industry is facing its most challenging crisis as consumers drastically curtail discretionary spending on travel in reaction to decimated stock portfolios and plummeting real estate values. Couple this with the recent violation of public trust associated with the bankruptcy of numerous Clubs and the industry has been put “on notice.” The industry has an opportunity to respond to these predicaments and regain consumer trust by executing and fulfilling one of the industry leader’s mission statements:  “To create far more rewarding vacations for Club members.” As Jon Haahr stated in the “Noteworthy” section, to fulfill this mission the industry needs to build a foundation of trust emu- lating the success of the public REIT markets and provide “accounting transparency, standardized financing reporting, inde- pendent governance, supported by a strong and influential industry association (~NAREIT). The result has been a high degree of public confidence and hundreds of billions of dollars in capital raised.” It is in times of crisis where leadership and character is forged.  Now is such a time for the Destination Club industry. !"#$%&'()*$&+,,- ./0/&1,")*2"3'%415)6/+3%)73/&43')&43)6&,'8% !"#$%&'($)*'+$%),$'-&$()-&$)*-.(#% <;I; :I; AB11B4C*)4D)E4110F*)G/*H 7I; 9I; 8I; @I; /*)*012*)341/52 ?I; >I; =I; <I; ;I; 678 679 677 67: 6:; 6:< 6:= 6:> 6:? 6:@ 6:8 6:9 6:7 6:: 6;; 6;< 6;= 6;> 6;? 6;@ 6;8 /*)*-.(#% B('N <%-)JK+L),'( :M<< BOP'%".O !"#$%&'()"* +,-+ ! ! "# Above: Historically, people take holidays no matter how depressed the state of the country’s economy may be. Historically, people take holidays/vacation no matter how depressed the state of the country’s economy may be. J o r d a n A s s o c i a t e s Destination Club White Paper 10

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