Credit Crunch Affects Disney's Timeshare Division

[calgarygary]

That's a good point. There have already been signs that DVC is not being terribly aggressive on the ROFR front these days. Of course, in some cases they don't need to be. Thanks to all of the "buy where you want to stay" comments, I think it's becoming increasingly rare that buyers will simply opt for the cheapest Home available.

DVC doesn't have to be particularly aggressive with resorts like HHI, VB and even OKW since it's increasingly rare for people to buy those destinations just to get into the system.

Add-on demand still exists for VWL, BCV and BWV so reasonable ROFRs are still at least a break-even proposition.

BLT and AKV are in active sales so DVC has to be most aggressive there. DVC isn't going to let those pass for significantly less than retail.

The most interesting resort will be SSR since it is in active sales and has the most points in the system (meaning most resales.) Of course, adding the THV to SSR can only help resale prices.

When it comes right down to it, you first need a seller willing to accept a low-ball offer in order for the ROFR floor to truly be challenged. If I were in the market, I'd probably test the waters myself. It certainly is a buyer's market right now.

But even without aggressive price control from DVC, it's not going to turn into an immediate fire sale environment.

I believe that in today's economy, that it is a given that there will eventually be more sellers than buyers so downward pressure will result. The depth of the downward pressure will be determined by the capital that Disney will utilize for rofr. If I were at all on the fence regarding a DVC purchase/sale; I would sell asap before the lack of a line of credit has its full impact on DVC sales and I would wait to buy.

 

[dis-happy]

Thanks for posting the article link. DVC is a cash cow and I fear we may all be getting milked in the coming seasons.

Would have thought that the sale of bundled mortgages would have gone toward the short term construction loans and costs (more so than rofr). Hope they haven't over-extended with 5 properties going up at once. Wonder who is laying awake at night crunching the figures. Hawaii is the least far along, it will be interesting to see if they delay things there.

 

[DisDaydreamer]

Today I was watching the Congressional meetings with the bank heads. They were saying the same. "We can't lend money because we don't have anyone to sell the loans to now"... Hope someone figures this all out.

 

[JimMIA]

To me, the news that 75% of the new DVC sales are financed is a little disturbing. I've always been one who is hesitant to say whether an individual family should or should not finance a DVC purchase because I have no real idea what their financial picture is. But for three-fourths of the purchasers to finance such a luxury purchase makes me think a lot of people have gone in over their heads. Reminds me of my neighbor's firesales on his Benz, Cobra, and boat!

DVC, like the banks, has gotten away with making bad loans because they had no intention of ever collecting them. They packaged the loans, sold them to investors (many speculators) and they were done.

If, in fact, DVC can't find a market for bundled loans, you will see a drastic tightening of DVC's credit standards. And I'm sure they can't -- a mortgage on a timeshare is certainly a much less marketable asset than a mortgage on a home or commercial property.

People will say, no biggie, if the buyers don't pay the loan, DVC just forecloses, but you can't make a living that way. DVC makes a living by selling timeshare interests at spectacular profit margins and turning the cash over almost immediately. Collecting the money over time, and suffering credit losses and collection expenses in the process, is not a brilliant business plan.

 

[BWV Dreamin]

To me, the news that 75% of the new DVC sales are financed is a little disturbing. I've always been one who is hesitant to say whether an individual family should or should not finance a DVC purchase because I have no real idea what their financial picture is. But for three-fourths of the purchasers to finance such a luxury purchase makes me think a lot of people have gone in over their heads. Reminds me of my neighbor's firesales on his Benz, Cobra, and boat!

DVC, like the banks, has gotten away with making bad loans because they had no intention of ever collecting them. They packaged the loans, sold them to investors (many speculators) and they were done.

If, in fact, DVC can't find a market for bundled loans, you will see a drastic tightening of DVC's credit standards. And I'm sure they can't -- a mortgage on a timeshare is certainly a much less marketable asset than a mortgage on a home or commercial property.

People will say, no biggie, if the buyers don't pay the loan, DVC just forecloses, but you can't make a living that way. DVC makes a living by selling timeshare interests at spectacular profit margins and turning the cash over almost immediately. Collecting the money over time, and suffering credit losses and collection expenses in the process, is not a brilliant business plan.

This article about Disney is really old news....this has been known at least 3 weeks ago. Disney does not want to hold this paper....because they can no longer "securitize" these loans, look for the interest rates to go up. They will need to make up the lost profit, and it will start there. Again, Disney does not want to hold this debt on their balance sheets. I was always wondering if one didn't get a home equity, line of credit, or finance thru Disney, just who would be lending money for a timeshare? And especially now in this state of economic times....well we now know its not the banks!!!

 

[JimMIA]

I was always wondering if one didn't get a home equity, line of credit, or finance thru Disney, just who would be lending money for a timeshare?

Except for the options you list, the answer has always been "nobody" as far as I know.

DVC is the only entity I know of who would issue a mortgage on a DVC timeshare. Home equity loans and lines of credit are secured by your home, not by the timeshare. And other than that, the only "timeshare" loans I know about have always been simple personal signature loans at rates substantially higher than DVC or home equity rates. Home equity has always actually been the most cost-effective financing.

I agree that if DVC is actually going to carry these loans, they will have to charge a MUCH higher interest rate, and I think they already are. If I'm not mistaken, they're already charging a rate of 15.5% or something ridiculous like that, and I'd expect that to go much higher. If there is no credit available for families' primary homes, or their cars, I have big trouble figuring out how they are going to get financing for timeshares and 97" plasma TVs!

I think some of the earlier posters are really onto something -- DVC is going to have to find a balance between resources committed to maintaining ROFR levels and resources committed to financing new purchases. If they let ROFR levels slip too low, only the completely clueless would buy direct from DVC. But if they don't aggressively finance their own product, the data suggest that would be a major problem for 75% of their prospective customers.

Interesting problem -- glad it's not mine!

 

[tjkraz]

I believe that in today's economy, that it is a given that there will eventually be more sellers than buyers so downward pressure will result. The depth of the downward pressure will be determined by the capital that Disney will utilize for rofr. If I were at all on the fence regarding a DVC purchase/sale; I would sell asap before the lack of a line of credit has its full impact on DVC sales and I would wait to buy.

Hard telling exactly where things will go.

As I was writing my reply I looked at resales on TTS. This is hardly scientific but last time I looked at their listings (3-4 mos ago) they had about 120 SSR resales. Now it's around 90. And of those about a dozen were listed as sale pending.

I figured there would be a moderate increase in the number of listings, and was surprised to find less.

I certainly wouldn't want to be one of the people who bought at $94 and is now looking at selling for around $75 less commission. But it does appear the bargain hunters are active.

As for ROFR, Disney usually doesn't bite at anything less than $25 under their current price, so this really isn't a fire sale in that regard. Just bad timing for any recent buyers who may need to sell.

TWDC is a big company with deep pockets so it's hard telling when/if this crunch may impact ROFR. The article was informative but didn't include any new quotes from Disney reps. So it's entirely possible this line of credit could be reestablished at any time. The article said it expired in December and the groundbreaking on Hawaii was just 2-3 weeks before that in late-November. So I can't see there being any direct correlation between this news and Hawaii being canceled/delayed.

Also, IIRC the article stated that Disney may not cash-in the mortgages this year--it never said that they couldn't. The short-term loss may end up being a long-term gain for Disney--or they may just be waiting for a more favorable market to sell off the notes. That philosophy could change if money gets tight.

 

[BWV Dreamin]

Except for the options you list, the answer has always been "nobody" as far as I know.

DVC is the only entity I know of who would issue a mortgage on a DVC timeshare. Home equity loans and lines of credit are secured by your home, not by the timeshare. And other than that, the only "timeshare" loans I know about have always been simple personal signature loans at rates substantially higher than DVC or home equity rates. Home equity has always actually been the most cost-effective financing.

I agree that if DVC is actually going to carry these loans, they will have to charge a MUCH higher interest rate, and I think they already are. If I'm not mistaken, they're already charging a rate of 15.5% or something ridiculous like that, and I'd expect that to go much higher. If there is no credit available for families' primary homes, or their cars, I have big trouble figuring out how they are going to get financing for timeshares and 97" plasma TVs!

I think some of the earlier posters are really onto something -- DVC is going to have to find a balance between resources committed to maintaining ROFR levels and resources committed to financing new purchases. If they let ROFR levels slip too low, only the completely clueless would buy direct from DVC. But if they don't aggressively finance their own product, the data suggest that would be a major problem for 75% of their prospective customers.

Interesting problem -- glad it's not mine!

Yes, very interesting concerning ROFR. Prices have been driven down by increased resales inventory, now another threat from Disney's financing issues. I predict further free fall in resales prices.....and Disney may not be in a position to buy them back!

 

[tjkraz]

I predict further free fall in resales prices.....

How much and by when?

 

[BWV Dreamin]

How much and by when?

Don't know, but BCV has passed ROFR at $82/pt. That should tell us something........

 

[jgus]

I wouldn't be surprised if Disney buys a bank, or somehow already owns one for credit card processing, etc. If they do, who knows, maybe they will get TARP money. I think Disney will let ROFR slip a little, but they will never let it free fall. That would hurt their new DVC sales.

 

[tjkraz]

Don't know, but BCV has passed ROFR at $82/pt. That should tell us something........

More info would help. Were there banked or borrowed points? What were other terms of the sale?

DVC's spread has historically been around $20-25 on resale ROFRs. At last check they were selling BCV for $106 so $82 is near their limits. Not much to be made when you are only netting $24 on the deal and have to pay closing costs at least twice (once to re-acquire points, another time to sell to new owner) plus the other paperwork and overhead involved. If the 2009 or 2010 points have been touched, I don't see any way DVC would consider it. Just to sell the points as an add-on they would have to supplement the contract with other holdings or put it in the closet for 1-2 years. That diminishes the value even further.

Also consider that we are seeing the impact of the dwindling contract at BCV, plus the added impact of BLT as a new destination resort. DVC certainly does not have the waiting lists it once did with people ready, willing and able to spend $106 per point on a resort that only has 33 years of ownership remaining. Compare that to the 50 years at BLT and dues which are 25% lower--suddenly BCV doesn't look as good as it did a couple years ago.

Perhaps the better question to ask is why DEMAND for BCV is such that the seller's best offer was $82. There was a time when anything in the low-$90s was snapped up immediately. Hard to place the blame solely on the economy when people are still spending $107 per point for BLT, AKV and VGC.

 

[Tamplain]

well I just was informed of a resale at WL with 300 2008 and 300 2009 points at $70 point. Don't know if anyone is going to take a crack at ROFR on it. Very interesting but more cash than I wanted to put out.

Funny someone said they wouldn't buy at HHI, etc to get into the system but I don't know I considered it really hard just recently on a Resale for HHI. Since we probably would only be able to do Disney every other year and we love the beach as well (Still love VWL the best) it seemed like a great oppourtunity as the price was I think in the range of $62 a point.

Just with the economy want to hold on to my money and LOC. But who knows if it drives the cost per point down further and Disney lets it pass could be an inticing way to get into the system and do both beach and disney without breaking the bank.

 

[anna08]

Interesting article....thanks for posting poohstx.

A quote from the link : Any slip at Disney Vacation Club could have broader implications for Disney's parks-and-resorts division, where the time-share unit has become an important growth engine. The theme-park division accounts for more than a quarter of Disney Co.'s total revenue


can't help but think this recent allocation, which has ticked off more than a few Members could have longer term ramifications. I think if people feel they are getting less out of their ownership, they could decide to sell. We're getting one day less of a vacation stay every single year. .

This was also my response in the huge thread on reallocation. I think this has the potential for a major negative impact on cash in park revenues. I believe there are good DVC sales for the last 2 quarters because there were eager BLT purchasers, then the jan 15th small add-on ploy.... There will have to be some MUCH better incentive to get me to lay out cash for the next add-on. We already feel some guilt for our disney plans with many friends around us not being able to vacation at all this year. We certainly see no reason to buy spend more money to extend our vacations to beyond our points right now.

 

[calgarygary]

Hard telling exactly where things will go.

As I was writing my reply I looked at resales on TTS. This is hardly scientific but last time I looked at their listings (3-4 mos ago) they had about 120 SSR resales. Now it's around 90. And of those about a dozen were listed as sale pending.

I figured there would be a moderate increase in the number of listings, and was surprised to find less.

I certainly wouldn't want to be one of the people who bought at $94 and is now looking at selling for around $75 less commission. But it does appear the bargain hunters are active.

As for ROFR, Disney usually doesn't bite at anything less than $25 under their current price, so this really isn't a fire sale in that regard. Just bad timing for any recent buyers who may need to sell.

TWDC is a big company with deep pockets so it's hard telling when/if this crunch may impact ROFR. The article was informative but didn't include any new quotes from Disney reps. So it's entirely possible this line of credit could be reestablished at any time. The article said it expired in December and the groundbreaking on Hawaii was just 2-3 weeks before that in late-November. So I can't see there being any direct correlation between this news and Hawaii being canceled/delayed.

Also, IIRC the article stated that Disney may not cash-in the mortgages this year--it never said that they couldn't. The short-term loss may end up being a long-term gain for Disney--or they may just be waiting for a more favorable market to sell off the notes. That philosophy could change if money gets tight.

I am not at all surprised that the current listings are down as DVC is an emotional purchase not a financial one. Emotions dictate holding on to your DVC until the last possible moment. As economic problems continue, and DVC owners find that they can not take advantage of their ownership, the number of available units will increase and the downward pressure on sales will also increase. Remember, it is not just the listings at TTS that have resulted in the drops in resale pricing that have passed rofr.

I wouldn't be surprised if Disney buys a bank, or somehow already owns one for credit card processing, etc. If they do, who knows, maybe they will get TARP money. I think Disney will let ROFR slip a little, but they will never let it free fall. That would hurt their new DVC sales.

If Disney had the ability/interest to buy a bank or already had sufficient stake in one we wouldn't be having this conversation.

 

[tjkraz]

I am not at all surprised that the current listings are down as DVC is an emotional purchase not a financial one. Emotions dictate holding on to your DVC until the last possible moment.

I went back to find that old info and it actually dates back to the beginning of August--over 6 months ago. At that time there were 110 SSR resales listed at TTS vs. about 90 right now.

I understand what you are saying about it being an emotional purchase. But I certainly expected the situation to be worse now. January / February is usually a big time for resale listings anyway since annual dues are payable. On top of that we've had the stock market collapse, six months of additional job losses, the announcement of BLT and yet SSR listings are down about 15%.

No the comparison is not terribly scientific, but the result is still truly shocking to me.

But back to the issue of resale pricing, one thing that we shouldn't lose sight of is the true purpose of ROFR. It's not really to prop-up resort pricing, rather it's to keep funneling buyers to DVC as the primary sales outlet.

In and of itself, DVC really shouldn't care whether resale prices are falling for BCV, BWV, Vero, etc. The real question is whether those falling prices will impact the resorts DVC really wants to sell--specifically BLT, AKV, VGC and SSR.

A year ago it was a widely-accepted fact that DVC had waiting lists for BCV points in most Use Years. DVC would exercise ROFR, but they did it selectively and only when the terms were favorable. Even still, members would often spend MONTHS waiting for DVC to re-acquire the points they sought.

What none of us know is how that situation has changed today. How has demand for BCV points been impacted by factors like BLT sales, dwindling contract length at BCV, member demand for add-ons in this economic climate, and so on.

Hope mentioned a BCV contract that passed ROFR at $82 per point. That seems to be a lot lower price than we have seen for BCV in the past. But ponder the "why"s. WHY would DVC pass on that contract? If they could immediately sell the points at $106 each and turn a profit, there's no reason not to. The logical assumption is that demand for BCV is down considerably.

The same answer would appear to hold true when questioning why that contract would even sell at 82 pp in the first place. The seller shouldn't have to accept $82 if there were people offering $85 or $90. So again it appears demand is down.

In the coming months and years, it's expected that resale prices will decline. After all, we're talking about timeshare contracts with fixed ending dates...dates which continue to draw nearer and nearer. And increasingly DVC has to question what it has to gain by exercising ROFR. For instance, is there any benefit to DVC exercising ROFR on Vero points at $45 each? Probably not. I doubt the buyer is going to say "oh well, that didn't work out so let's go spend 2.5 times as much to buy BLT points direct." And I doubt DVC has any waiting lists for VB points.

Depending upon one's perspective, I bet we will continue to see some great deals passing ROFR--perhaps from this point forward. DVC has the ability to monitor both their own sales activities and resale transactions. Unless they see evidence that a growing amount of business is being lost to resale, there's no reason for DVC to overreact and start buying up contracts recklessly.

 

[tjkraz]

Tim, I'm not surprised sales are currently up. They're selling new resorts to the first flush of "must have" buyers with cash and/or credit. How long will sales stay up in a down market after they've skimmed off the cream layer of ready buyers?

If you think about it, DVC has done a pretty shrewd job of setting themselves up in this regard. The results cited were for 1Q of Fiscal Year 2008. In 2Q they will have the "must have" buyers from the Grand Californian Founding Member program. Then in the 3Q they will have VGC opened-up to other DVC members and the general public.

SSR sales will also be mixed in there with sales re-opening for the treehouses.

So DVC has bought itself a good 6 months to ride that wave of latest-and-greatest before the economy may start catch up with them. And if it does...they certainly won't be alone.

 

[BWV Dreamin]

If you think about it, DVC has done a pretty shrewd job of setting themselves up in this regard. The results cited were for 1Q of Fiscal Year 2008. In 2Q they will have the "must have" buyers from the Grand Californian Founding Member program. Then in the 3Q they will have VGC opened-up to other DVC members and the general public.

SSR sales will also be mixed in there with sales re-opening for the treehouses.

So DVC has bought itself a good 6 months to ride that wave of latest-and-greatest before the economy may start catch up with them. And if it does...they certainly won't be alone.

Get real on Disney's earnings....they are down 32% from last quarter (I think it was only last quarter). They are hurting big time, lets get real on Disney's earnings. Factors can skew those positive earnings quarter, and new sales were definitely one of them. I just can't believe the kool-aid thats being drank. Time to move onto the coffee!!!

 

[tjkraz]

Get real on Disney's earnings....they are down 32% from last quarter (I think it was only last quarter). They are hurting big time, lets get real on Disney's earnings. Factors can skew those positive earnings quarter, and new sales were definitely one of them. I just can't believe the kool-aid thats being drank. Time to move onto the coffee!!!

Obviously I wasn't referring to TWDC as a whole but to DVC specifically. There are dozens of business units which make up The Walt Disney Company and nothing that DVC can do is going to compensate for overall declines.

According to the Sentinel article 1Q sales were up for DVC. If BLT was the reason for that bump is there a logical reason to dispute my suggestion that VGC may give them a similar bump in 2Q and 3Q? Why all of the negativity?

 

[BWV Dreamin]

Obviously I wasn't referring to TWDC as a whole but to DVC specifically. There are dozens of business units which make up The Walt Disney Company and nothing that DVC can do is going to compensate for overall declines.

According to the Sentinel article 1Q sales were up for DVC. If BLT was the reason for that bump is there a logical reason to dispute my suggestion that VGC may give them a similar bump in 2Q and 3Q? Why all of the negativity?

I like my DVC, I have no complaints. I am not too affected by the change...I am speaking from a business perspective. Most posters hear have no idea what financial positions Disney holds, nor losses or gains they have had. They don't look past how it has affected "them". Those that don't get totally educated on alot of the financial aspects, will just keep making blatant statements. I am only speaking from the other side....