The timeshare business, once considered the low-rent district of the lodging industry, now looks like a lifesaver for major hotel chains. While U.S. hotel occupancy rates and room rents have yet to recover from the post-9/11 travel slump and the effects of corporate cutbacks, timeshare sales are growing by double-digit rates. And, with aging baby boomers looking for vacation options, there's plenty of room for growth.
Sales of timeshare units increased 12.5% to $4.8 billion in 2001, according to Ragatz Associates, a market researcher in Eugene, Ore. Industry experts expect similar growth for 2002 when the final numbers are tallied.
Between 1991 and 2001, the number of households owning timeshares more than doubled, from 1.18 million to 2.7 million, according to Ragatz Associates. That still represents only 5% of eligible timeshare buyers, hospitality execs say. “Timesharing is just in its infancy,” says Troy Jones, manager of Ernst & Young's hospitality group in Los Angeles.
Timeshare development provides a nice antidote to what's happening in the core lodging business. Revenue per available room (RevPAR) plummeted 7.1% in 2001 and was expected to fall 2.6% further in 2002, according to a January report by Ernst & Young's Hospitality Advisory Services.
Meanwhile, average daily room rates were expected to fall 2% in 2002 to $83, which would follow a 1.3% decline in 2001, according to Ernst & Young.
Now, major hotel chains are boasting to shareholders about their timeshare coups. In addition to helping generate cash from sales and financing, timeshare clientele drive revenue for resort restaurants, golf courses and shops.
Marriott International reported that its timeshare division posted revenues of $1.2 billion in 2002, up 20% from the previous year's figure of $1 billion. Marriott's 2002 timeshare sales accounted for 14.3% of the company's overall $8.4 billion in revenue last year, a 6% increase over 2001.
Other hotel companies reported big gains as well in this burgeoning sector. The timeshare division of Starwood Hotels and Resorts Worldwide recorded $98 million in earnings before interest, taxes, depreciation and amortization (EBITDA) on revenue of $363 million in 2002, or a 27% EBITDA margin. Compared with the prior year, EBITDA increased 42.4% while revenues rose 6.7%. Timeshare EBITDA accounted for about 8% of the company's overall 2002 EBITDA of $1 billion, and timeshare revenues accounted for 9.3% of Starwood's $3.9 billion in revenues.
Marc Falcone, a gaming, lodging and leisure analyst for Deutsche Bank in New York, predicts that timeshare divisions will eventually contribute about 10% of a hospitality company's annual profits — up from an estimated 6% to 8% today. “Hotel companies believe it's a business that has significant growth prospects, particularly in markets like Hawaii,” Falcone says. “They're committed to growing the business as long as the demand is there.”
Rising Credibility
Timeshares allow consumers to buy an annual allotment of time in resort condominiums. Typically, the allotments are broken into weekly intervals; thus, a timeshare buyer of one week is guaranteed use of the condo one week each year. Prices for a timeshare week range from about $8,000 to $50,000, depending on a timeshare's location, size and the level of luxury, amenities and services. On average, a timeshare week cost about $13,900 in 2001, a 6.8% increase from the previous year, according to Ragatz Associates.
Timeshare buyers also can choose to enter into “fractional” timeshares. Fractionals generally are sold in time allotments ranging between two and 13 weeks, and are most common in regional destinations that nearby owners can visit several times a year, says Ed Kinney, a spokesman with Marriott Vacation Club International. Fractionals first appeared in the timeshare industry in the 1980s, but failed to generate much interest until the last couple of years when developers added large doses of luxury to the concept.
In 2001, the average cost of a fractional week in the U.S. was $34,000, while fractional sales totaled $428 million, according to Ragatz Associates. Timeshare execs don't expect to see an explosion in fractional growth anytime soon. Fractionals will remain a specialty product for a small market segment. Of Marriott Vacation Club's 53 timeshare properties, for example, only six are fractionals.
For consumers, timeshares essentially are a second home without the headaches of full-time ownership: A management company oversees the property for an annual fee paid by timeshare owners. In addition, timeshare owners can swap the time they've purchased for time in resorts throughout the world. Exchange companies that provide those services include Resort Condominiums International (RCI) of Parsippany, N.J., a subsidiary of Cendant Corp., and Interval International of Miami.
The phenomenal growth of the timeshare industry coincides with the billions of dollars the major hospitality companies have poured into timeshare development over the past several years. In 1984, Marriott was the first major hotelier to venture into the business, while others such as Hyatt, Hilton, Disney, Four Seasons and Starwood followed throughout the 1990s.
Together with the growth of reputable independent timeshare companies, such as Cendant's Fairfield Resorts, the major hotel brands have helped reverse the smarmy reputation that the industry earned in its early years. Back in the 1970s, the timeshare business was known for high-pressure salesmen and less than scrupulous business practices. Salesmen also sold timeshares as a real estate investment that would generate a profit, when in reality timeshares lost their residual value. That hasn't changed — timeshares generally still lose between 20% and 50% of their value over time.
That's not a problem for the growing masses of middle-aged baby boomers who want the advantages of owning a resort property without the hassles. The target market, according to Ragatz Associates, is boomer families headed by couples who range from age 40 to 59. About half of all timeshare owners have incomes between $50,000 and $100,000, according to Ragatz Associates, and about 35% have incomes of more than $100,000.
About half the U.S. population either falls within that prime age range today or will reach it in the next 20 years, according to U.S. Census figures. While owners are aware that their timeshares' values will depreciate over time, they are attracted by the guarantee of having a room every year and other benefits of ownership, such as exchange programs that let them swap time at resorts around the world.
The presence of the top hotel brands in the timeshare business has led to increased consumer confidence in the concept. “Clearly they have given the business more credibility,” says John Burlingame, executive vice president of Hyatt Corp.'s Hyatt Vacation Club in Chicago, which owns eight resorts in the U.S. “And I think buyers are more knowledgeable than ever about the product and see the brands as consistent with what they want for their lifestyle.”
The shift away from small-time operators is continuing. Combined, big hotel brands and well-capitalized independent developers now account for 60% of U.S. timeshare sales, up from 40% five years ago. During roughly the same period of time, the number of U.S. timeshare resorts has climbed from 1,200 to 1,600.
Synergy Profits
Typically, timeshares generate returns of more than 20%. Developers not only pocket profits from timeshare sales, but they also make money from interest they receive on five- to seven-year loans they make to timeshare buyers, according to Steven Miner, director of research for Ragatz Associates, which is affiliated with Cendant's RCI timeshare exchange company. Essentially, specialty lenders make consumer financing available to developers, who then pass it on to buyers after adding 300 or 400 basis points to the interest rate. The rates consumers pay have generally been around 14% for the last several years.
Major hospitality brands, however, boast that they can boost timeshare returns by keeping critical sales and marketing costs well below the industry average of about 50% of net timeshare revenues. Although hotel timeshare officials declined to pinpoint how much of that expense they're able to slice off, one big way they do it is by mining membership rosters of their various hotel loyalty programs for potential timeshare buyers.
Hospitality companies also capitalize on other synergies, such as building timeshares next to company-owned hotels or as part of the hotel itself. Timeshare resorts typically boast year-round occupancy of 85%, which provides a steady customer base for golf courses, bars, restaurants, shops and spas. In the Hyatt Vacation Club program, timeshare users spend between $50 and $200 a day at Hyatt hotels, depending on the timeshare resort's location and its proximity to a hotel, says Burlingame of Hyatt Vacation Club.
Growth Restraints
Timeshares exhibit a range of unique characteristics that temper impulses to more aggressively develop the product, despite the synergies and returns they offer. Unlike traditional hotels that are developed in towns and cities throughout the country to serve different types of travelers, timeshares cater exclusively to tourists. Major hotel firms, therefore, focus on proven resort destinations that tend to be densely developed.
So unless the companies have vacant ground next to a hotel, finding suitable sites can be a challenge. In some cases, hotel companies are converting existing hotels to timeshare condos. At the 142-room Highlands Inn in Carmel, Calif., for example, Hyatt Vacation Club completed its conversion of 92 rooms into timeshares in January.
And, despite growing demand, the sales cycle can be lengthy. A developer can be involved in a project for 10 years before all the units are sold and paid for. During that process, timeshare companies contend with customers who rescind their decision to buy, as well as buyers who default on developer-provided financing.
These days, however, the biggest constraint holding back more robust timeshare growth is a lack of capital. Major hotel companies finance their timeshare divisions out of cash flow, but they're reining in spending because of the hospitality industry's sluggishness.
Starwood Vacation Ownership, for example, expects to receive $175 million this year from Starwood Hotels to develop the 51-unit first phase of its Westin Kierland Villas in Scottsdale, Ariz., which will open in mid-2004. It also will fund the expansion of existing resorts in Orlando, Fla., and Myrtle Beach, S.C.
That's about the same amount of capital received by Starwood Vacation Ownership last year. But Starwood's timeshare division could use more, says David Matheson, vice president of investor relations for Starwood Hotels.
“We have a lot of opportunities,” he laments, “just not as much capital as opportunities.”
Managing Loyalty
One of the most appealing traits of timeshares is the returns they continue to generate even after development — from both a financial and brand perspective.
By law, timeshare owners have a right to select their own management company. But hotel firms that provide the management can continue to pocket a 10% profit on annual owner fees, which stand at about $370 per interval today, according to John Sweeney, executive vice president of Las Vegas-based RCI Consulting. The company is a consultant to the timeshare industry and is affiliated with Cendant's RCI timeshare exchange firm.
Building brand loyalty is critical. By providing excellent timeshare management, even more profits can be gleaned for the hotel parent company, says Antoine Dagot, president and CEO of Hilton Grand Vacations Co., the timeshare division of Hilton Hotels Corp. of Beverly Hills, Calif.
“Once they become a timeshare member, they're a member for life,” he explains. “So (timeshare owners) are going to go out of their way to stay in your hotels in their other travels.”
The issue of satisfaction becomes even more critical in cases where timeshare owners financed their timeshare purchase with loans from the hotel's timeshare division.
“If the customers aren't happy,” Sweeney says, “they have a great way of telling you.”
Joe Gose is a Kansas City-based writer.
U.S. TIMESHARE UNITS BY STATE
There are an estimated 315,000 timeshare units worldwide, with 130,000 located in the United States. Domestically, Florida offers by far the largest number of timeshare units with nearly 28,000. South Carolina is a distant second.
| State | Total units |
|---|---|
| Florida | 27,670 |
| South Carolina | 12,010 |
| California | 11,850 |
| Colorado | 6,250 |
| Virginia | 5,560 |
| Missouri | 5,530 |
| North Carolina | 5,360 |
| Nevada | 5,000 |
| Hawaii | 4,800 |
| Arizona | 4,630 |
| Source: Ragatz Associates | |
U.S. TIMESHARE SALES VOLUME RISES STEADILY
During 2001, sales volume in the U.S. timeshare industry totaled $4.8 billion, up 14% for the year. Strong growth in sales volume was evident throughout much of the 1990s. Meanwhile, worldwide sales volume for timeshares registered $8.6 billion in 2001, up 11% for the year.