• Marriott gets distance from timeshare

Marriott International announced that it was getting closer to spinning off its timeshare business, which will be named Marriott Vacations Worldwide.

The unit is expected to become the world's biggest stand-alone timeshare business, at a time when the offering continues to suffer across the hotel sector. For Marriott, the group said that the split would be in "the best interests" of both companies, allowing the timeshare "to expand faster over time".

Stephen Weisz, president and CEO of Marriott Vacations, said that the group, which currently has over 400,000 owners, was on track to launch by the end of the year. Marriott International shareholders will control the company, receiving an unspecified number of shares for each Marriott share.

The group first put its Marriott brand on timeshare products in 1984 and last year saw the timeshare business bring in around 10% of the group's total revenue, with $1.58bn, having peaked at $2.24bn in 2007. It now uses both the Marriott and Ritz-Carlton brands for vacation ownership, which it says makes it one of the only companies to offer a dual product platform in the timeshare market.

After the spin-off, the timeshare business will pay Marriott International $50m annually for the use of the Marriott name and variable fees to Marriott International and Ritz-Carlton based on sales volumes.

The decision is in line with trends towards asset-light operations in the sector and within the company itself. The group said that the spin-off would allow Marriott International to further advance the strategy of separating real estate from management and franchise operations.

Within the timeshare business, the group said that it would also look to pursue an asset-light structure, disposing of excess assets such as undeveloped land. The nature of the timeshare business  means that it is likely to retain assets, at least in the short term, but the group said that it did not currently need to develop new resorts.

In the future, it said that it would look to transactions which did not involve, or limited, its capital investment, structured as turn-key developments with third-party partners, purchases of constructed inventory just prior to sale, or fee-for-service arrangements.

Marriott International has, in recent years, been cutting overhead costs at the timeshare business, ahead of the planned spin-off. In last week's filing it said that it expected low debt levels ($947m at 25 March, against $3.56bn in assets) and limited near-term capital needs would enable it to maintain a level of liquidity that ensured financial flexibility, giving it the ability to pursue strategic growth opportunities, withstand potential future economic downturns and optimise its cost of capital at the new business.

There has been some criticism of the deal, with accusations that Marriott International is less looking to allow its businesses to specialise and more looking to jettison the timeshare business before it pulls the core lodging business down with it.

Although revenues at the group's most recent full-year results were off-peak, they were by no means disastrous. However, revenues are bolstered by the fees paid by existing owners and according to Marriott's own figures new contract sales for its timeshare and residential products were almost halved since the 2007 peak.

The interest in asset-light timeshare is one the group shares with Starwood Hotels & Resorts – a fellow multi-brand timeshare operator – which is also looking to make its business less capital intensive. Although the group spoke of its timeshare business as a strong source of cash at its most recent results presentation, it is not currently expanding.

Talking to Hotel Analyst previously, president and CEO Frits van Paasschen said that the group would be in the vacation ownership business for a long time to come, but that it would be "considerably smaller" than it was at the height of the last cycle. He added: "We've determined that, the return characteristics of that business, even at the height of the last cycle and certainly today aren't such that it will ever be of the size that it was as the peak".

Van Paasschen attributed the decision to its strategy of focusing on the group's management business, but has not decided to take as drastic a measure as Marriott International. The president and CEO said that the company had enough inventory to date that it didn't need to make a decision about where to reinvest and where to "slow things down".

For both companies and indeed other operators in the sector, the timeshare business was a good source of development cash, as well as driving revenues at properties, with owners eager to spend money based on the perception that they had already paid for their holidays. For developers, it was also seen as important to have a timeshare element to a well-rounded brand stable.

However, both Marriott International, Starwood Hotels & Resorts and fellow timeshare fan Wyndham Worldwide were forced to take write-downs during the downturn, causing them to re-assess their vacation ownership businesses.

 

HA Perspective: Prior to the current downturn, the timeshare industry was keen to put forward the idea that it was recession proof. Attend any timeshare event and consultants would dazzle you with graphs pointing to the top right corner of the screen, in contrast to the wobbly lines put up to represent the fortunes of the hotel sector. The crash has put an end to such nonsense (at least for the time being).

Timeshare has always been a great product if you wanted to buy your holidays in advance and have a degree of certainty about where you were going and how much you were spending.

Unfortunately, the habits and circumstances of consumers shifted away from it. Instead, many timeshare developers leapt onto the residential property investment bandwagon (if they were ever off it).

The opportunity to buy an advance holiday became the chance to "earn money while others slept" to borrow from the late and unlamented Guestinvest. The condo hotel racket was a particular blight in the US and while no mainstream hotel operator was particularly embroiled, the risk of contagion was enough to persuade most hoteliers to rethink their strategies.

Until the crash, it had seemed a perfect way to fund resort development. Timeshare buyers would fund the development of the resort which in turn was guaranteed a steady stream of management fees in servicing the owners of the timeshare units.

But the big problem was that most buyers would be disappointed. The units they bought, while possibly reasonable value as advance holidays, proved bad value as real estate investments.

The involvement of the big names in hospitality helped improve things. Firstly, by providing a guarantee that cowboy practices would not be tolerated, and secondly, by improving the basic economics of the business model.

On the latter point, the main advantage was in the reduced selling costs. A typical timeshare development spends about half of what it charges punters on marketing and sales. For the biggest and strongest brand names, such as Disney, these costs came down to about 25%.

But the crash in residential values in the US has torpedoed the prospects of most timeshare development in the world's biggest market. And the drying up of mortgage finance pretty much ended prospects outside the US as well.

There is no doubt that the second home market will eventually recover and with it opportunities for timeshare, fractional and its myriad offshoots. In some cases, some niche players in the market would argue that the opportunities have never gone away.

But the synergy that was there three to four years ago between hotel operators and timeshare has gone away, probably for good. Marriott is making a sensible call.

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