SPECIAL REPORT: Credit Crunch Squeezes Florida Timeshare Industry

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(ORLANDO, FL) - The global credit crunch is now hurting the $10.6 billion time-share industry. And one of the hardest hit markets is Orlando, considered the time-share capital of the world.

In the last few weeks, Wyndham Worldwide's time-share group, the world's largest time-share company, and Central Florida Investments Inc./Westgate Resorts, the industry's largest privately held company, each laid off hundreds of Orlando-area employees as a result of the tightened credit markets. In the case of Westgate Resorts, which generates more than $1 billion in annual time-share sales revenue from 28 resorts in 11 states, the company is still experiencing strong demand and sales, but the lack of liquidity is forcing the company to lay off employees practically companywide.

Westgate Resorts principals declined to comment for the story. Wyndham Vacation Ownership spokesperson Lisa Burby, however, said the current economic conditions has forced the company to slow down its development pipeline and general sales and marketing efforts next year, and focus more on the higher-end clientele that has a greater propensity to buy and pay for vacation ownership units.

"We bundle loans, put them into a conduit and securitize them," added Burby, whose company has 145 vacation ownership resorts around the world and more than 800,000 owners. "With the credit markets being as tight as they are, it is affecting us because we can't get credit as quickly (to finance new consumer loans)."

Basically, the lifeblood of the timeshare industry is having the ability to securitize or hypothecate consumer loans through third-party financial institutions. In return for essentially selling this consumer debt at a discount, or pledging their customers' time-share notes as collateral in return for more capital, timeshare owners gain critical liquidity to operate their day-to-day businesses and generate more sales. With the credit markets all but frozen, though, the timeshare industry is "selling itself out of business by generating consumer loans through sales while being unable to monetize them," according to a letter by Howard Nusbaum, president and CEO of the American Resort Development Association.

That credit Catch-22 prompted an ARDA-led initiative to petition for federal assistance under the Emergency Economic Stabilization Act of 2008 recently passed by Congress. Specifically, in the letter drafted Oct. 22 to the White House Counsel of Economic Advisors, ARDA is "respectfully requesting Federal assistance to open frozen credit markets in the form of a federal guarantee of timeshare investment grade paper in exchange for a credit insurance fee paid to the U.S. government."

The ARDA letter went on to state: "Indications from the financial sector that has participated in numerous timeshare mortgage note sales and financing transactions involving a number of industry companies suggest some form of a credit wrap will provide immediate liquidity and this form of assistance could actually create a profit for the government while opening frozen credit markets, saving jobs and helping to maintain the industry's contribution to the U.S. economy.

The contribution represents 565,300 full- and part-time jobs, $62 billion in overall direct and indirect spending to the U.S. economy and more than $8 billion in local and state tax revenues, according to ARDA.

The contribution couldn't be felt more than in Florida, where the timeshare industry represented $14.3 billion to the statewide economy in 2005, a 25.6 percent increase from '02, according to a study conducted by PricewaterhouseCoopers in conjunction with the ARDA International Foundation, ARDA's research and educational arm.

"The shared ownership industry does not have a demand problem," says Midlan International CEO Michael Butler, one of the industry's leading consultants. "The shared ownership industry is suffering from a liquidity problem with the banks. The shared ownership industry if it were able to obtain liquidity would carry on with very little negative impact. And if the government would listen to us and assist us to overcome that liquidity crisis we could keep this industry very healthy.


"The banks are getting nervous and not lending anymore. What's happening is the banks are hoarding cash. And until the market starts to thaw, our pace of sales as an industry is slowing down. As we're running out of liquidity, we're laying people off and as we're laying people off it's starting to spiral through the economy and this is the same thing that other industries are experiencing. We are experiencing it a bit more because we are so liquidity dependent to be able to turn our money over. This is going to have a major impact on Florida and Florida employees."
   


Indeed, because Florida leads the nation in the number of time-share resorts (378) and the number of time-share units (47,400). According to the ARDA study, Florida's time-share properties and companies generated 161,100 full- and part-time jobs and $2.1 billion in tax revenue to local, county and state governments.

The majority of that economic impact, of course, is generated in Orlando, which features 125 resorts and more than half of Florida's vacation units (28,000). Additionally, Orlando is the corporate headquarters for most of the industry's biggest vacation ownership companies, including the publicly traded Marriott Vacation Club and Ritz-Carlton Club brands, Hilton, Starwood Hotels and Wyndham Worldwide's Vacation Ownership divisions, and Westgate, which represents Central Florida's seventh largest employer with more than 8,000 people.

"Once we get through this credit crisis, our industry is still positioned to be the little engine that could -- that one piece that historically shows a robustness during a downturn," Nusbaum notes. "The only reason why this one has been different is because of the credit lock up. So ARDA is doing everything it can to unfreeze those credit markets as quickly as possible.

"And that's why when on Oct. 12 the U.S. government came out and said, 'hey businesses, if you're having a problem based on the credit crisis, explain to us why that's happening, how that's happening, and how we might be a solution."
   
Not everybody is being drastically affected by the credit crunch. For example, Marriott Vacation Club and Marriott's high-end Ritz-Carlton Club developments are mostly self-funded through the parent company, according to company spokesman Ed Kinney, allowing the company to hold onto its mortgage notes until the market gets healthier.

"We support the trade association's efforts to act on behalf of the industry as a whole and have been actively contributing to these ideas and submissions," Kinney added. "Marriott, however, is in a far more favorable position in that we have not relied on third party lenders to support our growth and provide financing to purchasers."

Meanwhile, Starwood Vacation Ownership reports that certain markets are still performing well, including Orlando where Starwood's Sheraton Vistana and Sheraton Vistana Villages properties are having "pretty good years," according to spokesman David Matheson.
   
"The lack of financing and the credit crunch is less impactful to the big brands," Matheson pointed out. "But all of the hospitality and travel industry is being impacted now in one way or the other. And vacation ownership is not impervious to the challenges."

Like so many in the industry, however, Marriott Vacation Club International president Steve Weisz remains bullish on the industry. At least that was his opinion at the recent Vacation Ownership Investment Conference in Orlando.

As one of the panelists at an Oct. 8 presentation, titled, "Meet the Leaders," Weisz told a packed conference hall that he is "very optimistic in the growth and continued success of the timeshare business."


"This is a consumer-led recession, not a business-led recession, he added. "We as a company believe having a timeshare component as part of lodging is a nice complement. ... Our timeshares have held up relatively well. And our fractional and whole ownership stuff largely carries the Ritz-Carlton name that starts at $250,000 or $3 to $9 million for homes. So that's not for the faint of heart.

"The high-net worth individual is not caught up in the sub-prime (crisis). They're smart and sit on the sidelines, and that's how they made their money. We have great product in great locations, which we're fortunate to have. It will sell, it's just a matter of when."