NATIONAL REPORT—Spinning off timeshare businesses isn’t anything new. While analysts agree timeshare isn’t going anywhere in the short term, there’s concern for its future when Airbnb and millennials are considered.
“It may be instructive to recall why hotel companies first got into timeshare 30 years ago,” said Mark Eble, managing director at CBRE. “In the early days, timeshare, while famously profitable, suffered from a checkered reputation in terms of consumer perceptions and aggressive sales practices.”
Hospitality groups like Marriott and Hilton shied away from licensing their brands to “old school” timeshare developers because of these concerns. To mitigate these risks, the hotel chains opted for acquisition to maintain control. This action resulted in the “acceleration [of]timeshare sales by boosting consumer confidence and permitting a more gentle sales pitch,” he said.
Branded hotel companies have now been “spinning off” their timeshare businesses. Some of these decisions have been made with economic impacts in mind. For example, timeshare tends to be more sensitive to macroeconomic trends. “This could be a reason for large companies seeking to lower their risk profile to separate the businesses, though as of late, the growth in the timeshare industry has been compelling,” said Chris Hornbeck, CEO of Resort Insiders, a sales, marketing and development firm in the vacation ownership industry. Another advantage to a hospitality group spinning off a timeshare business is the increase in strategic flexibility and flow of operations overall.
“The larger the company and the more diverse, the more difficult it is to launch new initiatives and generally remain agile in today’s ever-changing business environment,” he explained. “This is especially true in the case of a hospitality company where the goals of two business units are different as hotel and timeshare may often conflict. The ability for executives to focus an entire organization’s resources on a common set of goals, rather than sharing functions and resources with other disparate factions of the organization, should greatly improve efficiency and execution.”
Timeshares today are also being promoted more than they used to be. Take Hilton Grand Vacations as an example. “That really didn’t exist 15 years ago,” said Bruce Ford, SVP and director of global business development at Lodging Econometrics. “It was a small, little, ‘oh, by the way’ kind of thing that has evolved substantially.” Hilton Grand Vacations Inc., which began “regular way” trading on the New York Stock Exchange (NYSE) in January, has a total of 5,079 properties and 825,747 rooms (as of June 30).
The spin-offs have also maintained brand connection, which enables hospitality groups to coordinate cross-marketing efforts. “This may help calm the nerves of consumers who bought into brand promises,” Eble said. On the other hand, marketing initiatives can also interfere with one another.
“It may be more difficult to manage and resolve brand marketing and strategy differences between two entities with potentially divergent financial objectives,” he said. “Remember why they merged in the first place.”
Marriott spun off Marriott Vacation Club as Marriott Vacations Worldwide Corporation in 2011. “One has to conclude that whatever synergies that may have existed with consolidation have been extracted,” Eble said. “The best is that the companies will have higher values separately than together.” The pure-play public timeshare company has 64 units and 13,456 rooms (June 30). Add Vistana (which was Starwood’s timeshare spin-off) to the entire equation, and Marriott’s timeshare totals rise to 87 units and 21,723 rooms.
As with anything, there are disadvantages. “The most obvious disadvantage is additional corporate-level costs; having two companies is more expensive than having one,” said Michael Bellisario, senior research analyst at Robert W. Baird & Co., a wealth management, investment banking, asset management and private equity services firm. “The timeshare businesses were usually operated fairly independently when they were part of the bigger hotel company, so dis-synergies are relatively minimal.” Despite the potential spin-off challenges, the “timeshare spin-offs have performed well,” he said.
“The growth strategies and costs of capital for the two businesses are often different, and when they are separated, the stand-alone companies can more aggressively pursue growth strategies and investment opportunities commensurate with their respective costs of capital,” Bellisario explained.
From an investor’s perspective, the spin-offs have also made the pure-play hotel business easier to both understand and value. Returns on invested capital have increased because of this as well as stock valuations, he noted.
“Today, the pure-play companies are being valued at higher multiples, so splitting up the hotel business from the timeshare business allows a company to unlock value for shareholders,” Bellisario said.
Wyndham Worldwide is the latest hospitality group to split into two hospitality companies: a pure-play hotel company and a timeshare business. In this specific case, the company is splitting its hotel business from other parts of the Wyndham business, which includes Wyndham Vacation Ownership (221 properties, totaling 24,918 rooms, as of June 30). This will be combined with Wyndham Destination Network, which includes the RCI timeshare exchange network.
“Wyndham believes the current valuation of the combined company does not reflect the true value of the different businesses, especially if they were stand-alone companies,” he said. “The Wyndham split is a classic example of the sum of the parts is greater than the whole.”
In addition to its threat to the hotel business, Airbnb impacts the timeshare business. “Just as its effect on lodging is only now coming into focus, timeshare owners are testing their ability to list what they own on Airbnb,” Eble said. “As with hotels, there may be local legal restrictions. Additionally, the timeshare HOA covenants may restrict rentals.” Other analysts agree.
“Airbnb is a threat to the timeshare business just like it is to the hotel business,” Bellisario said. “The flexibility and the optionality that Airbnb provides to prospective users is quite attractive and the platform has become a viable alternative to buying a timeshare—more options, more flexibility, no upfront costs, no annual fees, taxes, insurances, etc.”
Timeshare’s future is unknown, especially with upcoming generations. “It is not yet clear to what degree the millennial and younger generations will embrace timeshare,” Eble said. “It has been well publicized that these groups are not buying primary residences on a scale anything like their parents. It follows that they also may have a reduced appetite for owning versus renting vacations.” For now, though, timeshare is expected to grow.
“At the end of the day, timeshare is a consumer discretionary and consumer financing business, so macro factors that impact these two pieces are key to watch,” Bellisario said. “Also, the timeshare businesses continue to evolve and offer more options and flexibility for owners to make the product more attractive and more competitive with the changing times.” HB
