Sja State Of Union Module 1009 (2)


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Sja State Of Union Module 1009 (2)

  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: STATE OF THE UNION A BALANCED VIEW OF THE DESTINATION CLUB INDUSTRY October, 2009 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 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 conse- quential 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. “Go the distance.” - Ghost “Go the distance.” - Ghost Core reasons for the industry’s cur- largely self-regulated although standard rent struggles include: a slide in member- contract laws and other consumer protec- These were the words of a ghost di- ship sales (consumers have cut back on tion do apply), and plummeting real estate recting and encouraging Ray Kinsella in discretionary spending due to the reces- values. the movie Field of Dreams to build a base- sion), lack of debt financing/infusions of ball diamond in a corn field. Ray was on Fallen real estate asset values have investor capital leading clubs to reduce the verge of losing his farm to foreclosure. reduced the collateral value supporting marketing expenses causing sales to de- Local townspeople and Ray’s brother-in- destination club member refundable depos- cline even further, withdrawal of profits/ law who purchased the farm’s note from its and clubs that loaded up on real estate dividends leaving clubs undercapitalized, the local bank were shocked to hear that at the peak of the market with cheap credit/ extensive leverage/high cost of financing, Ray was plowing under some of his corn debt are now feeling the effects of that ad- lack of financialFeasibility ******** Club transparency and over- acreage to make way for a baseball field. diction. For these clubs, once mortgage December 24, 2008 sight (unlike timeshare which operates Ray kept his focus and commitment to holders are repaid, little or no equity is left under specific laws, destination clubs are building the ballpark and was ultimately over to refund member deposits. rewarded when thousands of cars stretch- ing over the horizon were seen headed to his farm with passengers willing to pay money for the opportunity to experience a “Field of Dreams.” As Terrance Mann stated in the film, “For it is money they have and peace they lack.” Like Ray, the destination club indus- try is facing a daunting challenge. The real estate/credit crisis has resulted in a pre- cipitous drop in new member enrollments and a significant contraction in the avail- ability of debt financing/lines of credit affecting destination clubs’ ability to ac- quire new properties and service existing obligations (banks are calling-in and de- clining to renew even performing loans). Bankruptcies at High Country Club, Yel- lowstone Club, and Lusso has spooked destination club members and led to a rise in resignations and a fundamental breach of trust in the industry. Recent destination club bankruptcies are not the first time the destination club industry has contracted or its viability has been called into question, though 2008’s performance was the most serious situa- tion. In 2006, the Chapter 11 bankruptcy filing by Tanner & Haley, then one of the industry’s major players, left more than 800 members as unsecured creditors. More than half of the 60 destination clubs established since Exclusive Resorts pioneered the platform have come and gone including wealthy founders who tried to build ultra exclusive global destination clubs. Yellowstone Club World, founded by Billionaire, Tim Blixseth, declared bank- ruptcy in 2008 while Ciel, founded by Billionaire J. Joe Ricketts (Ameritrade), *Numbers in parentheses above indicate the number of new clubs added in that year changed direction in 2007. *LUSSO Collection has now filed for bankruptcy J o r d a n A s s o c i a t e s! Destination Club White Paper 4
  5. 5. “...the destination club industry is facing a daunting challenge. The real estate/ credit crisis has resulted in a precipitous drop in new member enrollments and a significant contraction in the availability of debt financing/lines of credit affecting destination clubs’ ability to acquire new properties and service existing obligations (banks are calling-in and declining to renew performing loans).” Clubs like High Country Club and Reorganization strategies for destina- Following is an excerpt from Lusso’s Lusso attracted early-adopters with mem- tion clubs with little or no equity had membership contract. bership prices far lower than what was minimal impact on increasing cash flows “In our continued commitment to needed to operate a self-sustaining club as evidenced by High Country Club’s financial security and disclosure we have representing a significant portion of the bankruptcy. The High Country Club reor- introduced a range of financial initiatives total membership base. As a consequence, ganization plan (originally termed “Suc- designed to promote financial transparency these clubs grand fathered early adopters cess Plan” and later called “Stabilization and security for our members. Deposit- at low annual dues upon purchase and Plan”) was formed to assist the club in Trust is the cornerstone of these initiatives. depended on selling new memberships to moving to a more sustainable business DepositTrust means all real estate interests pay for the heavy expenses associated with model (not reliant on new memberships). will be held by subsidiary LLC’s owned by running a club. High Country Club instituted a special the club. Lusso pledges ownership interest assessment, made cutbacks in availability, In response to this crisis the industry in these LLC’s to a Trust set up to benefit and let go nearly all their staff including launched reorganization strategies to stem our members. membership deposits are a the Chief Financing Officer and two of the the bleeding including refinancing/retiring secured obligation of the club. The Trust, CEO’s brothers only to see the club file debt, unloading high cost destinations, though initially directed by the club on bankruptcy in 1Q/2009. eliminating low-use locations, trimming behalf of members, may not be managed operational costs, adjusting cash flow The status of refundable deposits in and controlled by the members themselves models, and adding daily surcharges and bankrupted destination clubs such as High should they so choose.” special assessments. Special assessments Country Club and Lusso were in jeopardy “In addition to DepositTrust, the and reduced home availability only led to when liabilities exceeded club assets (“un- club’s range of financial initiatives in- higher resignation velocities and industry derwater”). Lusso marketed a platform cludes the following: financial statements observers questioned whether a one year called “DepositTrust” to potential mem- are subject to an independent audit by gift of extra revenue to club owners could bers as a refundable deposit ~guarantee. Grant Thornton LLP, financial reporting enable clubs to survive over time. J o r d a n A s s o c i a t e s! Destination Club White Paper 5
  6. 6. to members semi-annually showing alloca- “Unbelievable” Terrance Mann upon meeting Shoeless Joe Jackson tion of member deposits, financial reporting showing that net sales cover the club’s abil- “It’s more than that, it’s perfect” Ray Kinsella ity to repay member deposits, and commit- ment that 85% of membership deposits are The destination club Model can be a sound and profitable platform if structured used for real estate and held in cash. Com- correctly as evidenced by the success of the industry’s largest destination club, Exclusive bining DepositTrust with contractual com- Resorts. Clubs such as Exclusive Resorts have created significant barriers to entry for mitment to financial security and disclosure, market upstarts since the amount of up-front capital required to purchase real estate ensures members have the best financial assets and achieve scale is much larger than what was needed five years ago. Up-front assurance package in the industry.” capital is essential for club sustainability as evidenced by Leading Residences of the World’s (insufficient up-front capital from parent company Cendent) forced merger with The lesson was clear; Safeguards such Quintess. as “DepositTrust” are only helpful to mem- bers when there is equity in the properties Exclusive owns over $1 billion of real estate bought at below market levels. The held by the subsidiary LLC’s. If LLC’s owe 3,500 member destination club reviewed their annual financial report with members in more on the properties than the present mar- January of 2009. A third party re-appraisal of Exclusive Resort’s real estate and finan- ket value, safeguards such as DepositTrust cial balance sheets found that the club remained in compliance with the Net Asset Test provide little value to members. conducted as of December 31, 2008. Excerpts from that report are included below. “Exclusive Resorts is confident moving forward even after trimming 10% of its workforce. We have reduced marketing expenses and corporate overhead, but not our - MERGERS & ACQUISITIONS - services. We have added 60 properties in 2008. We are moving forward in the business. Mergers and Acquisition activity in Despite the economic downturn in the second half of 2008, Exclusive Resorts acquired the destination club industry has been over 350 new memberships last year.” robust over the past decade. Clubs “The Net Asset Test is designed to confirm that the value of our assets is sufficient attempted to build membership/home to meet our obligations, including repaying all refundable membership deposits accor- critical mass needed to sustain dance with the terms and conditions of our club membership agreements. We operate operations, facilitate growth, and the club with the objective of being in compliance with the Net Asset Test at all times. compete with market leader Exclusive We calculate this test and report the results quarterly to our Board of Directors and Resorts. Mergers since the industry’s annually to our members.” inception included: “To calculate the Net Asset Test, we add together the appraised fair market value of our real estate holdings with our cash holdings, and then subtract from this amount all • Havens Clubs merged with secured debt and all refundable membership deposits. We then determine whether these Bellehavens – renamed Bellehavens assets exceed these liabilities on December 31 of each year. This test in not intended to be • Bellehavens and Crescendo a liquidation analysis or a prediction of future conditions or results.” acquired by Abercrombie & Kent – A&K Private Residence Club “The numbers used in calculating the Net Asset Test are audited or determined by • Signature Retreats merged with an expert, independent third-party. The fair market value of our real estate holdings was Portofino determined by CB Richard Ellis, one of the largest and most respected real estate ap- praisal companies in the World, under generally accepted appraisal standards. Our • Ultimate Resorts acquired Tanner board of directors has instituted a formal process where Exclusive Resorts continuously & Haley updates our real estate appraisals. In fact, CB Richard Ellis conducted 75% of those • Ultimate Resorts and Private updated appraisals during the past 60 days.” Escapes merged – Ultimate Escapes “Our cash balances are determined by the actual cash equivalents we have on hand, • Quintess, Leading Residences of the the amount of debt is all secured debt, and refundable membership deposits include the World, DreamCatcher form total amounts refundable under our club membership agreements should 100% of our Quintess, LRW members elect to resign. All is reflected in our consolidated financial statements which are audited by Ernst & Young, one of the big four national accounting firms.” In September of 2009, Secure America Acquisition Corporation “We are pleased to report that as of December 31, 2008, just as at previous year- (NYSEAMEX: HLD) and Ultimate end 2004, 2005, 2006, and 2007, Exclusive Resorts is in compliance with the Net Asset Escapes announced a public listing of Test, which we believe continues to demonstrate the strength and vitality of the club.” shares. The company is utilizing a Exclusive’s Net Asset Test calculation is stronger than the Destination Club Asso- “Special Purpose Acquisition ciation (DCA – industry regulatory body) regulations where the Code of Conduct calls Company” to effect the transaction (a for member clubs to have “the financial resources necessary to meet at least 66.6% of the company specifically formed purely to aggregate amount payable to members upon termination as of December 31st of each acquire other companies). If the year.” The DCA believed that if a club could demonstrate assets equaling or greater than transaction is executed, Ultimate 66.66% of the total amount of refundable membership deposits owed to members, the Escapes will be traded on the NYSE club would be able to repay the majority of the club’s debts owed to members if the club Amex exchange and the club will be faltered. Many believe the downfall of destination clubs such as Lusso and High Coun- subject to NYSE Amex disclosure try Club came about because they skated too close to this 2/3rd rule rather than main- requirements as a public company. taining stronger asset backing like Exclusive Resorts. Exclusive’s surveys show satisfaction rates of 95% amongst the members (as of J o r d a n A s s o c i a t e s! year ending 2008). “It’s a young, yet to mature tindustry C l u bwhen tcompetitors have D e s i n a t i o n and W h i e P a p e r hard times sometimes it’s guilt by association…but overall the concept works and it’s an incredible way to vacation,” said Jeff Potter, CEO Exclusive Resorts 6