Recently Inside Timeshare has been collaborating with Irene Parker, who writes for the online Financial Journal The Street. Irene is a long time Diamond owner and has had many battles over the years, she has highlighted the way members are treated and the continual upgrading resulting in many people having financial difficulties.
She has written many articles on the subject of timeshare, mainly showing the financial side regarding the stocks and shares. Thanks to Irene and The Street, Inside Timeshare was able to break the news about the buyout of Diamond by Apollo Global Management. So it would seem that members of Diamond Resorts in Europe are not alone in how they are treated, they do have allies over “The Pond”.
Scott Miller published an article in Latticework titled My Investment Case for Diamond Resorts International, this appeared to incense quite a few people, so Irene added her questions to it creating the Virtual Interview. This is it, hope you enjoy.
Is There a Disconnect Between Timeshare Owners and Venture Capitalists?
My apologies to John Bird and John “subprime” Fortune
By Irene Parker
July 7, 2016
I believe there is a bit of a “disconnect” between owners and venture capitalists.
Mr. Scott Miller, founder of Greenhaven Road Capital wrote the above article in defense of Diamond Resorts International.
The following are my responses to Mr. Scott Miller’s declarations about Diamond Resorts. His instructor was Adam Wyden of ADW Capital. Front Four Capital and ADW sent a letter to David Palmer last year urging a leveraged buyout – or in Wall Street lingo – exploring alternative ways of maximizing shareholder values……
My virtual interview with Mr. Miller:
Mr. Miller: There, I wrote the dreaded word: T-I-M-E-S-H-A-R-E. The story here is clear – the company is a predator. Timeshares are terrible products that people only buy after being tricked into attending a sales pitch. Every parent who loves their child should emphasize brushing teeth and warn their babies to never, ever, ever buy a timeshare. We could argue where timeshare companies sit in the hierarchy of corporate sleaze. Conventional wisdom has them above tobacco and guns and about even with gambling.
There is no doubt that the “ick” factor is high with timeshares. So how and why did we end up buying shares in Diamond Resorts? Are we on our way to investing in the seven deadly sins?
Let me also mention that Adam Wyden of ADW Capital helped me understand the company. Adam is as sharp as they come and has a fantastic track record.
Would you have guessed that the largest purchaser of timeshares for Diamond Resorts is existing customers? Sixty-five percent of sales are made to families who already own at Diamond Resorts; this is arguably the most informed customer on the planet – an existing customer who chooses to buy more. This does not sound predatory to me.
Irene: Please read 5,000 complaints about Diamond on the internet. We are not all just dummies who don’t know how to use points wisely. One of us has an MBA and a Ph.D. Also, it would be good to look at:
DRIP – Diamond Resorts International Protestors – a website of over 1000 British owners trying to get out of Diamond contracts. Yes, they are existing owners. Monarch Grand Vacations, Hawaii at Poipu Point, the Tahoe Beach and Ski Club and Intrawest all have angry owner websites.
Mr. Miller: So, if the people purchasing these timeshare interests are informed (since they are typically already an owner), they just must be financially irresponsible – sub-prime borrowers drunk on easy credit, right?
Irene: That’s me! I was so mesmerized by the numbers in front of me; it took over two hours for my MBA to kick in and ask, “At what interest rate?” The answer was, “18%.” Wait, I have an 800 credit score. “Don’t worry, the sales agent said, when you get home you can take out a home mortgage loan or something.”
Mr. Miller: For the company to be predatory, this must be a simple case of a big, bad company repeatedly taking advantage of overwhelmed consumers like payday loan companies.
Irene: How’s this?
I am at the Cancun resort in Las Vegas and went to a breakfast where they said they would simply update me about the changeover to Diamond. I was told that I should have been invited to a dinner where I would have been given options, decided by a judge in a legal ruling against Monarch due to their bankruptcy. They proceeded to show me a print out that said when my current term expires in August. I would have to pay $573 per quarter to Monarch. They said that due to the bankruptcy, I would have no equity. That was option one. Pay more, have nothing. The other option they said was to transfer into Diamond at a cost of $12,000 plus and pay a yearly maintenance fee of $1,700. Less than the $2,292 I would soon be giving Monarch. They also told me that I would then have equity of $41,000 that I could sell. I was in tears. I do not have any extra money. In fact I have been looking for ways to get out of Monarch for over a year now. They said that was not an option and that as an owner, I was now proportionally responsible for their debt. I felt trapped and signed all the papers to transfer, with no idea how I can pay. After reading the comments above I am even more scared. I am trying to start my own business and am already in severe debt. They claimed when they ran my credit though that it looked better than most and assured me I qualified for financing. I would have to pay off, basically transfer to credit cards, which I can barely make my payments on now before I could look to sell. One of the reps assured me that she would put me in touch with someone who could help me sell my points. She even gave me her cell phone number to call after the sale/transfer is finalized. I am really scared though. Please help! We have to do something. It seems as though they have no qualms about lying to and robbing people for their own benefit.
Irene: I guess the quality assurance closer was out sick that day.
Mr. Miller: Here again, the numbers tell a different story. The average credit score (FICO) for a Diamond resorts customer is 756.
Irene: Roddy Body explained how this works for the 650 FICO score buyers in his article, “The Enabler and the Lifeline: Diamond Resorts and Quorum FCU” written for Southern Investigative Reporting Foundation. Diamond’s annual report says they should be able to maintain a 2 to 5% default rate. That’s a funny goal. The 90 full time collectors employed full time via a dealer making 100,000 calls a week are pretty effective (KROLL bond report).
Mr. Miller: With Diamond Resorts, we have addressed the “ick” factor and some misconceptions about who the customers are and why they are buying. That is a start, but Diamond has become a top five position in the fund.
The customer value proposition is another criterion I find important. Given that 80% (note: added a 20% additional element of happy Diamond owners) of Diamond Resorts buyers are existing customers, they must believe the value proposition holds up.
Irene: Define customer value proposition.
Mr. Miller: People love being able to give weeks to their children and grandchildren.
Irene: When we checked out of Los Abrigados this past spring, the person packing his trunk next to me said he had stayed at the resort for five months. I asked him how he liked Diamond. He said he stays at the pool to warn new victims and goes to presentations just to annoy the sales agents and take their gift. He added, “I tell my kids when they give me trouble, I am going to make sure to see that they inherit our Diamond points.” He was from Wisconsin. I have written instructions in our trust advising our kids to disavow the points despite the language in Diamond’s contract stating it is for eternity.
Mr. Miller: Diamond Resorts claims the payback on a timeshare is 8-10 years.
Irene: This is a hotly debated point between all timeshare owners and developers that will probably never be resolved.
Mr. Miller: The largest downside to the customer that I see is the undeveloped secondary/resale market for all timeshares.
There are a few websites and specialized brokers in timeshare hotbeds like Maui, but timeshares are hard to sell in general, and when they do sell, it is often at a very significant discount to the original price paid. In summary, customers experience a reasonable value proposition tempered by the lack of a secondary market.
The secondary market has undoubtedly had its growth stunted because the absence of the market creates an opportunity for the timeshare companies.
Irene: Finally, a point we can agree on!
What was the reasonable value proposition?
Mr. Miller: The secondary market is the primary place where the interests of the company and customer diverge. Diamond Resorts and the other major companies, such as Marriot and Wyndham, have the right of first refusal on every timeshare resale.
Irene: Right of first refusal can be a good thing for owners, but beyond the scope of this interview.
Mr. Miller: Every year 3-4% of property owners walk away from their timeshare because of a change in financial circumstances, death, divorce, or lack of usage and an inability to navigate the secondary market. Diamond Resorts will typically repurchase these units for maintenance fees owed, which is a tiny fraction of what it would cost to build a new unit.
For example, a timeshare interest that would sell for $25,000 can often be purchased by the company for $3,000 in back maintenance fees. A robust secondary market would clearly yield higher resale values.
For Diamond Resorts, it is cheaper to recapture inventory than to build new projects. This practice of “recapturing” inventory is done across the industry, and in the case of Diamond Resorts allows them to keep their current rate of sales without building new properties. They don’t have to build another resort to maintain current sales and profitability levels.
This low-cost source of inventory does come at the expense of those who no longer value their timeshare, but is beneficial for the company since it improves the margins and lowers the capital intensity of the business.
Irene: The oral representation clause is also very helpful. Attorney Mike Finn describes this as “a license to lie” so that a duped buyer has no way out.
A path to sustained growth through synergistic acquisitions at reasonable multiples is not emphasized in the story of a predator.
The short thesis has several variants but two primary themes. The first is that this is a good industry that looks cheap until the financing for timeshares disappears. Most buyers secure mortgages for their interests, and the company packages these loans and resells them twice a year. If they cannot resell the loans, the machine grinds to a halt.
The other short seller theme is that government regulation is imminent; the Consumer Finance Protection Board (CFPB) should gut the industry. However, the industry is 40+ years old and has significant regulation at the state level.
Irene: I’m sorry, but there is no significant regulation at the state level according to attorney Clarion Johnson who has published reports for The Capitol Forum. One of his reports talks about how the Florida AG office only pursues a handful of cases out of a thousand because the Governor knows timeshare is good for Florida. They are overwhelmed with timeshare complaints. AARP and the legislators agree timeshare is good for Florida so let sleeping dogs lie (that’s us).
The Florida AG refused to pursue my complaint; I received only an acknowledgement letter from the Nevada AG. Only the Arizona AG pursued the complaint.
Despite signing a contract that says I can sell points, not one of the 64 members of the Licensed Timeshare Resale Broker Association will buy or sell Diamond points. They feel they are worthless on resale. They will buy and sell all Diamond’s competitor’s points. This also helps Diamond sales. As a former licensed stockbroker, I find this disturbing.
Mr. Miller: Consumers have a cooling off period that allows them to exit the transaction, for any reason, several days after the purchase is made in the timeshare offices.
Irene: The decision to buy a timeshare for first time buyers is based on how well they like the resort and the cheap vacation they received. It’s not until they return home and book the vacation when they learn about limited availability and increasing maintenance fees. Check the internet complaint sites for examples.
For existing owners, we’re told there will be better availability if we buy more points. I feel stupid falling for it, but Intrawest said not to feel bad. They have several lawyers and bankers who did too. Trying to book a NYC place, I could have booked online for $1100 what $4000 in maintenance fees would buy for the same week in February. They don’t get into the mechanics of affiliated in your tour.
Mr. Miller: The notion of the CFPB gutting the Diamond Business is fighting the fights of yesteryear.
Irene: I think the CFPB cares more about consumers than Mr. Miller suspects. Henrietta sounded shocked when I filed my complaint.
Mr. Miller: The current business practices, in my opinion, do not need additional regulation.
Irene: TV Financial expert Dave Ramsey says timeshare has a 98% dissatisfaction level. He thinks people that buy timeshare are out to lunch.
Mr. Miller: The magnitude of price decline caused by CFPB rumors relative to the likelihood of action and damage caused by CFPB action to Diamond Resorts and their current business practices creates an interesting buying opportunity.
Where does this all end? I believe that Diamond Resorts eventually will become a private company and will continue to prosper outside of the spotlight.
Irene: Mr. Miller is a prophet and the letter ADW wrote to Diamond Resorts urging a leveraged buyout must have helped too. They were disappointed in shareholder performance.
Mr. Miller: There is little reason for the company to be public. They do not need capital. Given the strong cash flows and high insider ownership, the current management team can pursue an LBO.
When does it happen? Timing is hard to predict. However, when connecting the dots, I think there is a reasonable likelihood it occurs in the next three months.
Irene: A second prophecy fulfilled.
What is less well understood, and appears in no sell side research, is something called 1818 Partners.
1818 Partners should really be called “Management has options for 5 million shares (6% of the company) struck at $12.56 that expire in July 2016.” I told you Adam Wyden was bright. As someone who focuses on insider ownership and management incentives, this is a nice cherry on top.
Irene: It sure is.
Mr. Miller: When we factor in the benefits of being private, the valuation, the ownership, the options, and the announced process, I would not bat an eye if this company was sold for $30 per share (almost a 50% premium to our purchase) before the options expire in July.
Irene: Wall Street has a new Nostradamus.
Scott Miller is the Founder of Greenhaven Road Capital
As can be seen there is a lot of controversy about Diamond Resorts, so take heart, eventually the tide will turn and owners / members in both the USA and Europe will be singing together as the laws and regulations on how the product is sold are tightened in the consumers favour.
Inside Timeshare thanks Irene Parker for her contributions of information on what is happening. I hope that we can work together and bring news to both the US and EU. Have a good weekend.