Fee-Based Services: Pay Someone Else to Do the Dirty Work?

Transcription

1 Fee-Based Services: Pay Someone Else to Do the Dirty Work? Tom Balames Managing Member, Accelerated Assets, LLC Ron Goldberg President, Wellington Financial Kelly Olinger VP Asset & Relationship Mgmt., Hilton Grand Vacations, Inc. William Ward President, Ward Financial Company Tuesday, May 8 th :00 am Neopolitan 1

2 Ask us questions using Mobile App! Use the EventMobi mobile app to anonymously submit questions during this session. We ll answer them as they are received. Scroll down to the bottom of the Session Description and look for Session Engagement Ask A Question

3 OVERVIEW Terminology Evolution of Fee-Based Services Pros and Cons of Fee-Based Services The Brand s Perspective The Developer s Perspective Sales Operational Financing Illustration of the Business Model Sales Portfolio Methodology Continues to Evolve Characteristics of Suitable Fee-Based Service Projects Questions and Answers Please attend Financing the FBS Model Wed. 1:30 2:45

4 GLOSSARY / TERMINOLOGY Capital Light An entity (FBS Provider) utilizes their expertise and sales infrastructure to generate commission revenue by selling a third-party Resort Developer s intervals without having the capital investment or exposure to financing for the acquisition or development of the Resort. The capital investment into the Resort and the project financing is undertaken by the Resort Developer. Fee-Based Service Sales (FBS, FBS Sales) The FBS Provider conducts sales for a third-party Resort Developer (FBS Client). The FBS Provider earns commissions on the sales. Also known as Fee-for-Service or FFS. Portfolio Retention The Notes Receivable generated from Fee-Based Service Sales are retained by the third-party Resort Developer. Just-In-Time (JIT) FBS Provider acquires units/intervals from the Resort Developer in close timing proximity to when the FBS Provider intends to sell the intervals. The Resort Developer receives a pre-determined price for the units/intervals. Timing of the JIT purchase can be all-atonce or staggered. The Notes Receivable generated from the interval sales are the property of the FBS Provider. Other Services (in addition to sales) FBS Providers also may also obtain the rights to manage the Resort and may also be engaged by the FBS Client for portfolio servicing, administrative services, reporting and analytics, title and escrow services and construction/design consulting.

5 Evolution of Fee-Based Service Model

6 HGV S FEE BASED BUSINESS Blackstone acquired Hilton Worldwide in 2007 and brought focus to reducing capital spend for timeshare development marked HGV s entry into FBS with Grand Pacific Resorts at MarBrisa, and Anderson Ocean Club in Myrtle Beach. Since 2011 HGV s FBS portfolio has expanded to include 11 projects in 9 markets with six different partners. Projects have evolved from repurposing of existing assets to ground-up development of new resorts. Deal structures have evolved to include HGV now investing capital alongside development partners through joint ventures and providing FBS to that JV.

7 K E Y D E V E L O P M E N T P A R T N E R S 3 rd Party Developers Property Names (dates) # of units 1 HGV Investment ($ millions) Estimated Gross Volume ($ millions) Since 2010 Elara 2012 (Conversion) 2 1,200 Sunrise Lodge 2012 (Conversion) 3 83 $21 2 $1,540 1, Grand Islander 2014 (New Build) ,590 1,940 2,601 units added $61M HGV investment $5B estimated gross volume Las Palmeras 2016 (Conversion) Anderson Ocean Club 2011 (Conversion) Ocean (New Build) Ocean Oak Resort 2015 (New Build) v $61M vs. ~$1.3B 4 MarBrisa 2010 (Conversion) Borgo Alle Vigne 2013 (New Build) (1) Represents number of units under management as of 12/31/17. (2) Elara subsequently purchased by Blackstone and HGV in a Joint Venture in July (3) Sunrise subsequently purchased by HGV in October (4) Represents the capital HGV would have spent if these weren t Fee-for-Service projects: estimated product cost of 25% applied to the $5B estimated gross volume. Disclaimer: Past performance does not necessarily predict future results Hilton Grand Vacations Inc. Proprietary 7

8 T H E C A P I T A L - E F F I C I E N T M O D E L A L L O W S H G V T O D E V E L O P I N V E N T O R Y R A P I D L Y A N D S U P P O R T H I G H E R S A L E S HGV Contract Sales ( ) (Millions of Dollars) 18.5% ROIC 29.2% ROIC CAGR ( ) 1,400 1,275 Total 10% 1,200 1,068 1,172 1, FFS 39% [VALUE] Owned Developed JIT (10)% 17% % FFS 17% 31% 39% 58% 56% 54% Disclaimer: Past performance does not necessarily predict future results Hilton Grand Vacations Inc. Proprietary

9 PROJECTS THAT TRANSITIONED TO FBS SALES Cibola Vista Phoenix, AZ Conducted own sales from Marketed to Arizona and California Large Call Center and on-site Sales Center In 2010 contracted with Bluegreen to conduct sales Doubled annual sales volume. No unsold inventory Now develops successive phases for Bluegreen sales Manhattan Club New York City Conducted own sales for 12 years Contracted with Bluegreen to sell limited # of units Developer continued to conduct its own sales also Combined, the annual sales volume doubled Bluegreen obtained higher prices for same inventory Developer later built units specifically for Bluegreen

10 PROS and CONS of Fee-Based Service Model

11 C A P I T A L - E F F I C I E N T B U S I N E S S M O D E L 26 % 26 % 26 % 54% 20 % 54% 20 % 54% 20 % Fee-for-Service Capital: Third Party Capital Revenue Streams: Commissions & Brand Fees Club & Resort Management Rental & Ancillary Margin: vs. Developed - lower vs. JIT - lower Return: vs. Developed - higher vs. JIT - higher Just-in-Time Capital: HGV Capital Revenue Streams: Sales of VOI Financing Club & Resort Management Rental & Ancillary Margin: vs. Developed - lower vs. FFS - higher Return: vs. Developed - higher vs. FFS - lower Developed Capital: HGV Capital Revenue Streams: Sales of VOI Financing Club & Resort Management Rental & Ancillary Margin: vs. JIT - higher vs. FFS - higher Return: vs. JIT - lower vs. FFS - lower Note: Above charts reflect percentage of 2017 Contract Sales ($1,275 million). Disclaimer: Past performance does not necessarily predict future results Hilton Grand Vacations Inc. Proprietary 11

12 ITEM Average Price per Week Annual Sales Volume Predictable Sales Achieve Full Sellout On-Site Sales Center? Recovery of Defaults to Re-Sell PROS - Sales Advantages Branding and Points based sales can attain higher price per week than stand alone project. Also attains a higher percentage of cash from sales. Independent resort generally sells at the resort site only. Fee-Based Sales Provider can sell on site and via system-wide sales centers. Results in much, much higher sales volume. FBS Provider has significant prior sales history and existing sales network and can define projected monthly, quarterly and annual sales thresholds. Independent resort can have pockets of low season that are difficult to sell. Points based systems sell a package of points for use through the brand s entire network and are not resort specific sales. A must for a stand alone project. May or may not be required for FBS sales. A stand alone resort generally needs to foreclose on defaulted consumer contracts (time consuming & expensive). FBS Providers tend to have points systems where use rights on defaulted contracts are easily terminated and therefore leads to quick and inexpensive recovery of defaults.

13 ITEM Local Sales Market No Sales and Marketing Headaches Reduce Project Debt Faster Reduces G&A Expense Reduces HOA subsidy Credit aspect of HOA payments PROS - Operational Advantages If FBS Provider is conducting all sales at other network locations, then there would be no reliance on local sales. Marketing and sales is complicated and expensive. The FBS Provider develops marketing initiatives, generates the leads, conducts the sales tours and incurs all the up-front costs for all the sales and marketing. The faster sales pace from a FBS Provider amortizes Construction Financing or Inventory Financing more rapidly. Reduces interest expense. Reach free and clear portion of inventory sales quicker. There is less administrative and overhead expense incurred by FBS Client. No contract processing, no sales administration, no bundling and shipping of consumer contracts. Faster sellout means quicker transition of HOA operating expenses from developer to the interval owners. If the resort level HOA receives dues from a Master HOA (at FBS Provider level) then there is no credit loss or past due collections of maintenance fees. In some instances the FBS Provider absorbs all HOA responsibility.

14 ITEM Resort Management Branding ITEM Debt Repayment Financing Brand Quality Notes Financing Options Prior Timeshare Experience Legal Compliance PROS Operational Advantages Managing a resort hospitality property can present challenges. In most instances the FBS Provider also obtains the management rights to the resort. The FBS Provider may be a brand name that elevates the quality and image of the resort. PROS - Financing Rapid and predictable pace of sales generates consistent repayment of Construction Loan or Inventory Loan. Notes generated by FBS Provider have the same credit quality and characteristics as notes generated from sale of their own projects. FBS sales generates brand quality notes for independent developer to be financed by Lender. Developers engaged under FBS contracts have more financing options than unproven independent resort. Prior timeshare experience is not necessary to obtain financing for developers engaged in FBS contract. Lenders view FBS Provider as better equipped to maintain legally compliant sales and marketing.

15 ITEM Commission Expense Equity Requirement No Guarantee of Sales Relinquish Management Fees Brand Standards Requirement Return on Equity CONS Range on commission due to FBS Provider is 65% - 72%. Can significantly stress the potential profitability from sales. Profitability still remains in note portfolio. The combination of the commission and Release Payment on Construction or Inventory Debt makes it difficult to achieve positive cash flow from sales. A solution is higher equity level in project and lower debt and lower release payment. It has never occurred, but what happens if FBS Provider fails to meet sales goals? What remedies are available to developer and to Lender? In most situations the FBS Provider obtains resort management. Alleviates the obligation of management, however Developer relinquishes management fees. FBS projects must meet Brand Standards required by the FBS Provider. The requirements may add additional cost above what an independent developer may have budgeted. Increases product cost. Further reduction of profit. The reduction to profitability from the Commissions and potentially increased product cost reduces return on equity. The additional yield on notes receivable takes time to harvest. The extended period to capture all cash flow is an issue for some investors.

16 ILLUSTRATION OF SALES ONLY - COMPARISON (in $000 s) Traditional FBS Sales Differences Units Same # of Units Avg. Price per week $20K $23K Potentially higher avg. price Total Sales $50, % $57, % = Higher total sales Cash Sales $5,000 10% $11,500 20% Potentially more cash sales Down Payments $5,000 10% $10,300 18% Usually higher down payments Borrow Against Notes $34,000 85% $30,300 85% Same Advance Percentage SOURCES OF CASH $44,000 88% $52,100 91% Higher % of cash from sales Sales Expense vs. Commission ($27,500) (55%) ($40,200) (70%) Commission > S&M Expense General & Administrative ($3,500) (7%) ($1,100) (2%) Reduced G&A HOA subsidy (estimated) ($2,600) (5%) ($1,000) (2%) Faster sellout reduces subsidy USES OF CASH ($33,600) (67%) ($42,300) (74%) Higher total expenses NET BEFORE PRODUCT COST $10,400 21% $9,800 17% Less net from sales

17 ILLUSTRATION OF PORTFOLIO DIFFERENCES (in $000 s) Traditional FBS Sales Differences Amount of Note Portfolio $40,000 $35,600 Lower. More cash sales Average Rate 14.5% 14.5% Can vary Average Note Term (months) Can vary Total Potential P&I Payments $76,000 $67,600 Smaller portfolio = less pmts. Less: Defaulted Payments ($15,200) 20% ($10,100) 15% Better credit. Buy-backs. Impact from Early Payoffs ($6,400) 20% ($5,700) 20% Slightly smaller portfolio Repay Receivable Loan ($34,000) ($30,300) Smaller portfolio = lower loan Interest on Receivable Loan ($9,600) ($7,000) Potentially better loan terms Portfolio Servicing Costs ($3,400) ($3,400) Same NET FROM PORTFOLIO $7,400 $11,100 Higher net yield from notes

18 COMBINED and COMPARE All Three Methods (in $000 s) Traditional FBS Sales JIT Sale Total Sales $50,000 $57,400 $57,400 COMBINED TO DEVELOPER: Sell Units to FBS Provider n/a n/a $14,300 (1) Cash Flow from Interval Sales $10,400 (2) $9,800 n/a Net Yield from Note Portfolio $7,400 11,100 n/a TOTALS $17,800 $20,900 $14,300 1) Sale of Inventory to FBS Provided under Just-In-Time arrangement may range from 20% to 30% of retail sellout. Example uses 25% of retail. Developer is a merchant builder for FBS Provider. 2) Timing of cash flow from sales would be more rapid under FBS Sales Model compared to Traditional. 2) The Traditional model is highly dependent on controlling sales and marketing expense. Commissions in FBS Sales setting would be higher than Traditional that has efficient sales and marketing. FBS sales expense (i.e. commission) and pace is predictable with FBS Sales model.

19 CONTINUED EVOLUTION OF THE FBS MODEL Projects now specifically acquired or purpose-built for FBS. The diversity of revenue from capital-light projects and internally developed/owned project important for FBS Providers. Emergence of hybrid projects with both FBS Sales and Just- In-Time inventory. Developers, Lenders and Investors now can view historical performance of FBS. Emergence of Joint Venture relationships between Developers and FBS Providers. Repeat Customers Developers are proceeding with their second or third FBS Projects.

20 CHARACTERISTICS OF SUITABLE PROJECTS Attractive resort destination Important - Does it add new sales penetration/distribution for FBS Provider? Does it add additional inventory for a sold out destination for FBS Provider? How many units? Not too few, and not too many. Can FBS Provider provide input on plans / design? Must meet life-safety and brand standard requirements Is there room for a sales center? Does Developer have financing and equity? If project cost is too high, it won t work Is the project entitled? How difficult are approvals / permits? If new construction is it a difficult site? Timing when would inventory be ready? Is capable Contractor and subs available? If new construction, then prior development experience is important How does FBS provider decide if suitable for FBS Sales or Just-In-Time

21 Question and Answer segment Audience participation welcome! Please attend: Compare and Contrast: Financing the FBS Model vs. Traditional Timeshare Wednesday 1:30 2:45 Milano 1

22 WE NEED YOUR OPINION: In the ARDA World App go to Agenda Tuesday then open Fee-Based Services: Pay Someone Else to Do the Dirty Work? Scroll down to Evaluate Speakers, Session Content and Format.