DVC was made for the Coronavirus (for Disney, that is)

[Brian Noble]

I admit the title is clickbait, but I'm ending my third week with no where to go, so bear with me.

I've long believed that one of the results of 9/11 is that Disney (the company) decided that DVC was a great way to transfer the risk of owning a bunch of hotel rooms from themselves to individual owners. I think we are seeing that play out now.

If you were around as a Disney fan during the year or two after 9/11, it was a different world and it took a *long* time for travel demand to recover. Half of Port Orleans was closed for the better part of a year. The first half of POP (The Classic Years) was delayed for almost two years. The second half (The Legendary Years) sat molding for close to a decade. Disney was offering a "buy four get three free" promotion on resort packages--easily the most attractive they've ever done. All of that was due to the travel slump, when the company suddenly found itself sitting on an enormous pile of hotel rooms it couldn't fill, particularly at the higher end.

Since 9/11, Disney has steadily expanded DVC, and almost without fail removed rooms from cash inventory. The rundown:

2002: BCV opens
2003: Pop Classic opens (but was six months from completion when 9/11 happened).
2004: SSR opens, replacing the Disney Institute (cash rooms)
2007: AKV opens (new construction, plus converting the top two cash floors of AKL).
2009: BLT opens (replacing the North Wing cash rooms at Contemporary)
2012: AoA opens (new cash rooms, but on the infrastructure started prior to 9/11 a decade before.)
2013: VGF opens
2015: PVB opens (bungalows plus conversion of two cash buildings)
2017: CCV opens (cabins plus conversion of ~1/2 of WL's cash rooms.)
2019: Grand Destino opens (expansion of cash rooms, primarily for convention business)
2019: Riviera opens (replacing some cash buildings in CBR)

Until Riviera, all of those converted/replaced cash rooms were at Deluxe resorts. The only new cash rooms are mostly Value and a handful of Moderate. During that time, Disney also de-annexed land from RCID (the company's own private government) and either sold or leased it to others: The Four Seasons/Golden Oak to the east, and Flamingo Crossing to the west.

In other words, Disney steadily reduced its hotel room exposure, while cashing on on DVC construction with substantial short term sales at the expense of longer-term rental revenue.

I wrote this almost four years ago, but it bears repeating, so I'll just quote it:

Now, 9/11 is a black swan event, and it seems odd for a company to make capital allocations expecting another. But, there are other ways in which travel demand can falter. For example, there was reportedly a study done to see how high oil prices would have to get before Orlando became an unprofitable destination. The answer: something between $160 and $200 in 2007 dollars. So, by largely monetizing a resort within the first few years after construction, the future doesn't really matter as much---Disney has already recouped its profits on the resort investment. Timeshare owners are also more resilient to economic headwinds, because the room is "already paid for" so they are more likely to still visit even when things get tough. True, they might spend less while there, but at least they are there spending *something* vs. not coming at all.

C-19 is nothing if not another black swan event---and probably a bigger one in terms of travel demand than 9/11. I saw the following on twitter (and it may not be completely accurate, but the author covers the airline industry):

Phil LeBeau
@Lebeaucarnews

Who is still flying? No many people. @TSA screened just 124,021 people yesterday (including flight crews) in the U.S. compared to 3.41 Million on the same day last year.
8:54 AM · Apr 3, 2020

Unlike 9/11, C19 doesn't just close air travel. It closes all travel.

We are seeing a lot of DVC owners very angry that Disney is not doing anything for them as their points expire. It is entirely possible that that was the plan.

 

[CraigInPA]

I agree with everything you've said, except the conclusion.

DVC is a way to convert under performing land and hotel space into a profitable yearly return. It does this because the members pay for maintenance, including maintenance of shared facilities.

We don't really know how the formula for shared facilities works. If I was negotiating it, I would have tied the percentage that DVC pays to the ratio of occupied rooms in DVC and the hotel. That way, if the hotel business has a down turn, DVC would pay a higher percentage of shared facility maintenance. If the hotel business is hot, DVC would pay a lower percentage of shared facility maintenance. In a recession, DVC members will still go to the resort, because the room is already paid for, unlike the hotel side of the business. So, DVC may be paying a higher percentage of shared facility maintenance in a recession.

I don't think it's a nefarious plan on the part of TWDC to stick DVC members with paying maintenance fees when they can't go to the resort. This pandemic is unexpectedly bad, and I doubt anyone but an epidemiologist or a disaster movie writer could have predicted it.

 

[Brian Noble]

I don’t think it’s nefarious per se. But I do think the transfer of risk was intentional.

 

[_auroraborealis_]

I don’t think it’s nefarious per se. But I do think the transfer of risk was intentional.

It was absolutely intentional. I keep saying something similar.

Disney like DVC because it transfers risk. As timeshare owners, if you believe the "saving on years of vacations," the trade you are making is shouldering the risk of the timeshare ownership. As a renter, you're trading savings over cash for the risk of a non-refundable booking. Throughout the transactional chain, DVC is about risk transfer, flowing downhill - Disney, then owners, then renters.

 

[bobbiwoz]

Understood, and stayed away from timeshares until we bought DVC. I’m patiently waiting to see how it plays out.

 

[TraderSamWDW]

I think you are right just over complicating it. The transfer of risk was totally intentional. It puts people on Disney property without the cost of maintaining the rooms and resort.

Disney has looked at outsourcing the hotels a few times. They don't need to any more.

A hotel room has to be rented. A dvc room already is...for 50 years. If it goes unused, the upkeep still gets paid for. After 9/11 when port Orleans FQ was shuttered they still had to maintain it, at their expense. They would probably love almost all rooms to be DVC

 

[CraigInPA]

I don’t think it’s nefarious per se. But I do think the transfer of risk was intentional.

That was exactly the point I was attempting to make.

 

[dsnymnkyuncle]

My response quoting the OP was not posted due to 'spam' concerns and said to contact a moderator. I am new here and can't find contact information for a moderator. Could someone point me in the correct direction?

 

[dsnymnkyuncle]

It seems I missed the requirement of 10 posts to be allowed PM. Sorry.

 

[LAX]

It was absolutely intentional. I keep saying something similar.

Disney like DVC because it transfers risk. As timeshare owners, if you believe the "saving on years of vacations," the trade you are making is shouldering the risk of the timeshare ownership. As a renter, you're trading savings over cash for the risk of a non-refundable booking. Throughout the transactional chain, DVC is about risk transfer, flowing downhill - Disney, then owners, then renters.

Unfortunately, many DVC owners don't understand (or refuse to accept) the cascade of risks being passed on, which is why we are seeing so many threads on angry owners complaining about losing points and Disney not willing to help popping up like wild fires!

LAX

 

[Sandisw]

Unfortunately, many DVC owners don't understand (or refuse to accept) the cascade of risks being passed on, which is why we are seeing so many threads on angry owners complaining about losing points and Disney not willing to help popping up like wild fires!

LAX

This!

 

[taaren]

C-19 is nothing if not another black swan event---and probably a bigger one in terms of travel demand than 9/11. I saw the following on twitter (and it may not be completely accurate, but the author covers the airline industry):

Nassim Taleb does not think COVID 19 is a black swan event.

Just thought it was an interesting nitpick in your use of phrasing, not disparaging your point about Disney and DVC.

I agree with the assessment that Disney wanted to hedge its risks on real estate, but my guide was 100% honest with us when we bought in 2008. DVC is a guarantee that someone will buy park tickets and keep spending money at the resort, even in a recession. Which is even better than unloading maintenance costs onto those guests.

 

[gdrj]

I think the primary motive is to build resorts and recoup those funds quickly and tremendous profit.

 

[Brian Noble]

Just thought it was an interesting nitpick in your use of phrasing, not disparaging your point about Disney and DVC.

Yeah, that's fair--It wasn't unpredictable, and lots of people predicted something very much like this could happen. The trick is predicting *when*. ;-)