ROFR Speculation

GregT · Feb 27, 2012

All,

Note: this is baseless speculation. -------> total speculation <-----

But I believe that Marriott will begin to actively exercise ROFR sometime in 2012 and that we may look back upon right now as the final opportunity to buy cheapo Platinums (and high quality Golds).

Why do I believe this?

Clue #1: I can see it now with HGVC. I bought my HGVC 1BR Platinum for $2,900 in Aug 2010. HGVC needed inventory and began exercising ROFR mid-2011. Today I'm thinking about buying another HGVC 1BR Platinum (because I am nuts) and they are now selling for $6,000 - $7,000 -- because Hilton buys every Platinum (and high quality Gold) at lower prices. So much for my cheapo HGVC.

Clue #2: The last Recorded Trust Documents for Marriott from late January 2012 showed a couple of bulk deposits from some of the bigger properties (Kauai Lagoons, Ritz Carlton Vail, Newport Coast) but virtually all of the other deposits were small stuff -- reacquired weeks (foreclosures?) in modest quantities. Marriott may have already loaded its largest unsold inventory quantities -- and at some point will need new product. ROFR is a clear way to get that property, as we have long speculated.

Clue #3: No sign of new developments or modest build-out of planned developments in Marriott land -- and certainly nothing on the size that would provide the $250M in Trust Points needed to support $600M in points sold annually at retail pricing. Will Marriott repeat the Ritz Carlton move and start putting the other Ritz Carlton properties in the Trust too, like they did with Vail? That would generate alot of points (and would be great!) -- but would certainly blur the distinction between DClub and RitzClub.

Clue #4: Their (currently plentiful) inventory won't go on forever. They have $489M of Finished Goods at September 30 2011 (5 months ago) and $200M more in Work-in-Process. They sell approx $60M of it each quarter (to generate $150M in Trust Points sold at retail each quarter) so they can go 1.5 more years from today before burning through their FG at current sales clip. Including WIP? A little more than 2 years. That sounds like a long time but they must be planning their next inventory requirements.

So, at some point here, they will start replenishing -- and $60M in product cost per quarter is alot of product to provide ---- think about it this way: they need to deposit into the Trust 4,000 weeks --- worth 3,750 points each --- per quarter. That results in 15M of saleable points needed per quarter to generate $150M of product at retail prices (the current sales clip). That's alot of product!

I could clearly be wrong here -- but I think its worth contemplating the possible end of cheap Marriott Platinums if someone is on the fence and thinking about buying that rocking 3BR Grande Vista or 3BR Grand Chateau as an uber-trader.

Thoughts?

All the best,

Greg

bizaro86 · Feb 27, 2012

GregT said:
So, at some point here, they will start replenishing -- and $60M in product cost per quarter is alot of product to provide ---- think about it this way: they need to deposit into the Trust 4,000 weeks --- worth 3,750 points each --- per quarter. That results in 15M of saleable points needed per quarter to generate $150M of product at retail prices (the current sales clip). That's alot of product!

I agree that they will start exercising ROFR aggressively long before they start building out additional resorts, as it'll be cheaper for them. That's the biggest benefit of the trust to them. They can sell a ROFR week from any resort at a sales centre anywhere, since points are points.

The only part of your analysis I would quibble with is their current rate of sales. Does that 60mm$ per quarter include upgrades by current owners as they join the trust? I would suspect that group of people are the most likely demographic to buy trust points, and once the one's who will have, their sales momentum may slow considerably. It's much harder to get a new customer than to sell more to an existing customer.

windje2000 · Feb 27, 2012

GregT said:
All,

Note: this is baseless speculation. -------> total speculation <-----

But I believe that Marriott will begin to actively exercise ROFR sometime in 2012 and that we may look back upon right now as the final opportunity to buy cheapo Platinums (and high quality Golds).

Why do I believe this?

Clue #1: I can see it now with HGVC. I bought my HGVC 1BR Platinum for $2,900 in Aug 2010. HGVC needed inventory and began exercising ROFR mid-2011. Today I'm thinking about buying another HGVC 1BR Platinum (because I am nuts) and they are now selling for $6,000 - $7,000 -- because Hilton buys every Platinum (and high quality Gold) at lower prices. So much for my cheapo HGVC.

Clue #2: The last Recorded Trust Documents for Marriott from late January 2012 showed a couple of bulk deposits from some of the bigger properties (Kauai Lagoons, Ritz Carlton Vail, Newport Coast) but virtually all of the other deposits were small stuff -- reacquired weeks (foreclosures?) in modest quantities. Marriott may have already loaded its largest unsold inventory quantities -- and at some point will need new product. ROFR is a clear way to get that property, as we have long speculated.

Clue #3: No sign of new developments or modest build-out of planned developments in Marriott land -- and certainly nothing on the size that would provide the $250M in Trust Points needed to support $600M in points sold annually at retail pricing. Will Marriott repeat the Ritz Carlton move and start putting the other Ritz Carlton properties in the Trust too, like they did with Vail? That would generate alot of points (and would be great!) -- but would certainly blur the distinction between DClub and RitzClub.

Clue #4: Their (currently plentiful) inventory won't go on forever. They have $489M of Finished Goods at September 30 2011 (5 months ago) and $200M more in Work-in-Process. They sell approx $60M of it each quarter (to generate $150M in Trust Points sold at retail each quarter) so they can go 1.5 more years from today before burning through their FG at current sales clip. Including WIP? A little more than 2 years. That sounds like a long time but they must be planning their next inventory requirements.

So, at some point here, they will start replenishing -- and $60M in product cost per quarter is alot of product to provide ---- think about it this way: they need to deposit into the Trust 4,000 weeks --- worth 3,750 points each --- per quarter. That results in 15M of saleable points needed per quarter to generate $150M of product at retail prices (the current sales clip). That's alot of product!

I could clearly be wrong here -- but I think its worth contemplating the possible end of cheap Marriott Platinums if someone is on the fence and thinking about buying that rocking 3BR Grande Vista or 3BR Grand Chateau as an uber-trader.

Thoughts?

All the best,

Greg

I agree that Marriott timeshares are currently undervalued. Getting a week's occupancy in a nice two bedroom beachfront villa for little more than the MF is IMHO a steal.

As Warren Buffet once said about market values and intrinsic values:

Ben Graham, my friend and teacher, long ago described the
mental attitude toward market fluctuations that I believe to be
most conducive to investment success. He said that you should
imagine market quotations as coming from a remarkably
accommodating fellow named Mr. Market who is your partner in a
private business. Without fail, Mr. Market appears daily and
names a price at which he will either buy your interest or sell
you his.

Even though the business that the two of you own may have
economic characteristics that are stable, Mr. Market's quotations
will be anything but. For, sad to say, the poor fellow has
incurable emotional problems. At times he feels euphoric and can
see only the favorable factors affecting the business. When in
that mood, he names a very high buy-sell price because he fears
that you will snap up his interest and rob him of imminent gains.
At other times he is depressed and can see nothing but trouble
ahead for both the business and the world. On these occasions he
will name a very low price, since he is terrified that you will
unload your interest on him.

Mr. Market has another endearing characteristic: He doesn't
mind being ignored. If his quotation is uninteresting to you
today, he will be back with a new one tomorrow. Transactions are
strictly at your option. Under these conditions, the more manic-
depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning
or everything will turn into pumpkins and mice: Mr. Market is
there to serve you, not to guide you. It is his pocketbook, not
his wisdom, that you will find useful. If he shows up some day
in a particularly foolish mood, you are free to either ignore him
or to take advantage of him, but it will be disastrous if you
fall under his influence. Indeed, if you aren't certain that you
understand and can value your business (TIMESHARE) far better than Mr.
Market, you don't belong in the game. As they say in poker, "If
you've been in the game 30 minutes and you don't know who the
patsy is, you're the patsy."

Source: 1987 letter to stockholders - Berkshire Hathaway Annual Report

MOXJO has been saying this for some time, and putting his money where his mouth is. The time to buy good weeks is now.

billymach4 · Feb 27, 2012

Plausible.....

"Clue #4: Their (currently plentiful) inventory won't go on forever. They have $489M of Finished Goods at September 30 2011 (5 months ago) and $200M more in Work-in-Process. They sell approx $60M of it each quarter (to generate $150M in Trust Points sold at retail each quarter) so they can go 1.5 more years from today before burning through their FG at current sales clip. Including WIP? A little more than 2 years. That sounds like a long time but they must be planning their next inventory requirements. "

I just have a hard time believing the sales numbers. $60M per quarter?
Where do you get these numbers? Are these hard numbers that you have verified? Or is this also part of the overall example to support this fictional speculation example?

GregT · Feb 27, 2012

billymach4 said:
I just have a hard time believing the sales numbers. $60M per quarter?
Where do you get these numbers? Are these hard numbers that you have verified? Or is this also part of the overall example to support this fictional speculation example?

No, these are real numbers from their Form 10-Q filed with the Securities and Exchange Commission. For the quarter ended Sept 30, 2011 they sold approx $140M of points, and the inventory cost of those points sold was approx $60M. So they had gross margin of $80M for the quarter. I believe for the 9 month period ended Sept 30, they sold $442M of points (can't recall the inventory cost of those points).

I'll post a link to the SEC filing when I'm back online - thx

ondeadlin · Feb 27, 2012

Assuming for a moment that you are correct, your post re-ignites the debate over whether or not ROFR actually leads to higher prices. Without weighing into the nitty gritty of that debate, I would posit that what ROFR is most useful for is setting a floor for prices. Prices typically don't fall much when ROFR is being exercised.

That would be good for current owners, but it wouldn't raise prices.

So if you consider current prices "cheapo", my bet would be that they stay that way, or close to that way, even if ROFR is exercised.

If what you're predicting is a significant rise in value of resale Marriott timeshare weeks ... well ... I wish there was a futures market for that, because I'd bet against you all day long.

windje2000 · Feb 27, 2012

ondeadlin said:
Assuming for a moment that you are correct, your post re-ignites the debate over whether or not ROFR actually leads to higher prices. Without weighing into the nitty gritty of that debate, I would posit that what ROFR is most useful for is setting a floor for prices. Prices typically don't fall much when ROFR is being exercised.

That would be good for current owners, but it wouldn't raise prices.

So if you consider current prices "cheapo", my bet would be that they stay that way, or close to that way, even if ROFR is exercised.

If what you're predicting is a significant rise in value of resale Marriott timeshare weeks ... well ... I wish there was a futures market for that, because I'd bet against you all day long.

Resale prices are not likely to exceed cost to build, but that represents a bit more than some of the recently observed resale prices.

billymach4 · Feb 27, 2012

Forget about the ROFR debate for a minute....

I know I am a cynical Tugger. But 150M per quarter of Trust sales? That is alot of Marriott Kool Aid in this economy!

What am I doing wrong?

dioxide45 · Feb 27, 2012

Marriott still has one resort where we should expect a multi million dollar dump of inventory in to the trust. That is Oceana Palms where the second tower should be open for occupancy in Spring of 2013.

It would make sense for them to begin exercising ROFR more actively now and in to the future. The trust is very heavy in only a few resort and is in serious need of inventory in many legacy resorts. They should be actively working to build that prime inventory in the trust.

GregT · Feb 27, 2012

All,

I agree -- it is interesting/surprising the actual sales activity at SpinCo.

The link following is to the 10-Q filed for the 3 months ended September 2011, and reports their financial position on that date.

Some data from the securities filing for the third quarter 2011:

Sales of points -- page 2:

Sales for the last 3 months: $147 million
Sales for 2011 year-to-date (9 months so far): $442M

Marriott's Cost for those points -- page 2

Cost of points: $61M
Cost of points for 2011 year-to-date (9 months): $177M

Inventory -- page 11:

Finished goods at September 2011: $489M
Finished goods at December 2010: $652M
Work-in-process at September 2011: $231M
Work-in-process at December 2010: $203M

Sourced from this report:

http://www.sec.gov/Archives/edgar/data/1524358/000119312511333556/d237757d10q.htm

I'm not trying to make this into a ROFR/Non-ROFR debate -- I'm not sure where I really stand on that. I see how HGVC's ROFR is impacting me, a relatively viable buyer --- I'm backing away from bidding the higher prices, and yet, prices are undeniably higher. I have no idea if they will settle back down to the original levels.

Nor am I trying to defend the viability of SpinCo's business model -- but they are clearly selling points to someone. Whether it is existing owners or new owners I do not know. But someone is buying points.

My only objective in this thread is to present the position that current pricing for Platinums/High Quality Gold may not last forever (and that I think it could end relatively soon). Implicit in that is my belief that I believe pricing will go up when Marriott actively exercises ROFR. I believe we will see competing market forces here as owners despair of rising MFs and seek to sell -- against the impact of a determined buyer (Marriott) who must feed a hungry dragon (Trust Points).

We will see what comes in the months/years ahead, but I hope this is at least a worthwhile dialogue.

All the best,

Greg

vacationtime1 · Feb 27, 2012

billymach4 said:
Forget about the ROFR debate for a minute....

I know I am a cynical Tugger. But 150M per quarter of Trust sales? That is alot of Marriott Kool Aid in this economy!

What am I doing wrong?

$150,000,000 of quarterly sales. Suppose the average sale is $25,000 -- a modest amount considering that it represents about 2,500 DC points, or alternate year use.

That represents 6,000 ~~victims~~ sales.

If Marriott/Spinco is selling in 30 locations, that means 200 sales per location.

Which translates to two sales each day in each location.

Which is certainly possible.

taffy19 · May 20, 2012

dioxide45 said:
Marriott still has one resort where we should expect a multi million dollar dump of inventory in to the trust. That is Oceana Palms where the second tower should be open for occupancy in Spring of 2013.

It would make sense for them to begin exercising ROFR more actively now and in to the future. The trust is very heavy in only a few resort and is in serious need of inventory in many legacy resorts. They should be actively working to build that prime inventory in the trust.

We heard in Las Vegas that Marriott is starting construction within two weeks on tower 3. It is finally happening and tower 4 will be completed during 2016. We heard it from the salesman but I heard it from other people too.

More points for the trust. We were also told that they are ahead of schedule with the sales of points.

FractionalTraveler · May 20, 2012

I think ROFR will be balanced with new strategic acquisitions/partnerships to be announced.

Existing DC owners don't want to buy more of the same product; they want to buy into new products to expand their portfolio.

New Trust owners will want to gain access to properties not currently available in the Trust. That is what ROFR will provide.

IMHO The future of all new program enhancements is called the Destination Club!

Saintsfanfl · May 20, 2012

Exercising ROFR on the less desirable locations will dilute the value of the trust. Also, if this were actually true they would be exercising right now, and they are not. Even if they are running out of inventory, they have much more value building new than buying unwanted. Building new is the big sales pitch. It's amazing how bad the salesperson snubbed their nose at Ocean Pointe during a presentation at Oceana Palms. They have a reputation to uphold. They will not maintain it if word gets out that the good stuff is more difficult to come by.

Saintsfanfl · May 20, 2012

FractionalTraveler said:
I think ROFR will be balanced with new strategic acquisitions/partnerships to be announced.

Existing DC owners don't want to buy more of the same product; they want to buy into new products to expand their portfolio.

New Trust owners will want to gain access to properties not currently available in the Trust. That is what ROFR will provide.

IMHO The future of all new program enhancements is called the Destination Club!

What properties are not available for points? Isn't it only the properties that are not part of the program regardless?

FractionalTraveler · May 20, 2012

Saintsfanfl said:
What properties are not available for points? Isn't it only the properties that are not part of the program regardless?

DC points available from enrolled owners are not the same as purchased beneficial interests in the Trust.

GregT · May 21, 2012

Saintsfanfl said:
Exercising ROFR on the less desirable locations will dilute the value of the trust. Also, if this were actually true they would be exercising right now, and they are not. Even if they are running out of inventory, they have much more value building new than buying unwanted. Building new is the big sales pitch.

I actually think the value of the Trust is enhanced if they ROFR the good Platinum and Gold weeks.

I still think buying weeks via ROFR is superior to building new. I think they should build something new/acquire something already built to add to their sales pitch.

Thanks!

Greg

mjm1 · May 21, 2012

Greg, this is interesting. I agree that they would do well to buy more of the existing resorts to make them available to DC members. They have so many great properties in nice locations, which is why so many of us purchased to begin with, why wouldn't they want to make their entire network available to make it most appealing to new owners (rhetorical)?

They will also be starting the new building at Ko Olina in about 18 months, so that is additional new space that will be available to DC trust owners.

As far as new properties, I would like to see them add something in either the Monterey peninsula or Napa area. San Francisco would be a good option too. All of these are expensive areas, so acquiring an existing property or converting some of their hotel space might be options. I know that concept was discussed on another thread.

It will be interesting to see how they proceed.

Cheers.

kjd · May 21, 2012

There are many good reasons why Marriott should go ahead with expansion plans at existing resorts as well as ROFR the lower prices on re-sales. They have enough resorts in great locations to attract new business for the time being. The sales numbers are encouraging. These sales numbers also reveal another dynamic.

The cost of annual maintenance fees compared to renting a unit is not scaring off new customers. It appears that the "sell your timeshare now" ads appeal only to the "weak hands" who are current owners. The shakeout of the weak hands will continue for awhile but will eventually subside. When that happens the prices on Ebay will significantly increase. Personally, I welcome the new buyers as persons who aren't interested in "bean counting" and more interested in the quality of their vacation lifestyle. Some might say they have been hoodwinked for paying the retail prices from Marriott. I think they know what they're doing and obviously the timeshare lifestyle is motivating their purchase.

Looking ahead Marriott probably will be taking advantage of ROFR prices after their inventory dumps. Owners who moan and groan about maintenance fees will sell out cheap while the rest of us move on.

cp73 · May 21, 2012

Inventory available ???? I think 5 years!!!

GregT said:
All,

Sales of points -- page 2:

Sales for the last 3 months: $147 million
Sales for 2011 year-to-date (9 months so far): $442M

Marriott's Cost for those points -- page 2

Cost of points: $61M
Cost of points for 2011 year-to-date (9 months): $177M

Inventory -- page 11:

Finished goods at September 2011: $489M
Finished goods at December 2010: $652M
Work-in-process at September 2011: $231M
Work-in-process at December 2010: $203M

http://www.sec.gov/Archives/edgar/data/1524358/000119312511333556/d237757d10q.htm

Greg,

Assuming the data you provided is correct I don't think your analysis on #4 is correct. According to my calculations I believe they have 3 years of finished goods inventory left and if you factor in the work in process I would estimate 5 years total. I don't believe you took into consideration that the value of the inventory is at the lower of cost or market, not selling price. If you look at the relationship (margin) for the last nine months you can see there is a 2.5 times markup of the cost to the selling price. Now if you look at your finished goods value of inventory at $489 you can see this will last for 3 years at current sales volume. Using that same markup on the work in process will add another 2 years. So I believe we have 5 years of inventory available...No reason to start stocking up yet! Did I miss something or is this correct?

pwrshift · May 21, 2012

There seems to be a lot less activity on eBay these days, at least where I own. I did see a Manor Club silver that didn't sell for $1 no reserve. Any sales I've seen over the last few months for platinum at Beachplace and Canyon Villas seemed to be getting higher prices, so maybe there's some recovery out there. But sales do seem slower now.

Brian

GregT · May 21, 2012

GregT said:
Clue #4: Their (currently plentiful) inventory won't go on forever. They have $489M of Finished Goods at September 30 2011 (5 months ago) and $200M more in Work-in-Process. They sell approx $60M of it each quarter (to generate $150M in Trust Points sold at retail each quarter) so they can go 1.5 more years from today before burning through their FG at current sales clip. Including WIP? A little more than 2 years. That sounds like a long time but they must be planning their next inventory requirements.

My computation here is that at September 30, 2011, they had $689M in near-ready inventory. That was $489M in Finished Goods and $200M in WIP. They are selling ~$60M of that FG every quarter. So they can probably go 10-11 quarters (from September 30, 2011) with their inventory from that date.

cp73 said:
According to my calculations I believe they have 3 years of finished goods inventory left and if you factor in the work in process I would estimate 5 years total. I don't believe you took into consideration that the value of the inventory is at the lower of cost or market, not selling price.

Let's keep kicking it around -- I'm happy to look at your computations and maybe I missed something. I feel good that I was using the right cost number ($60M of points) versus the retail sales number ($150M).

But I'm glad we are having the dialogue in case they do start ROFR one of these days. I wish we'd all had a different debate in May 2010 -- what if they stop allowing resales in DClub after June 2010??

Best,

Greg

SueDonJ · May 21, 2012

GregT said:
... Let's keep kicking it around -- I'm happy to look at your computations and maybe I missed something. I feel good that I was using the right cost number ($60M of points) versus the retail sales number ($150M).

But I'm glad we are having the dialogue in case they do start ROFR one of these days. I wish we'd all had a different debate in May 2010 -- what if they stop allowing resales in DClub after June 2010??

Best,

Greg

IMO "Crunching The Numbers With Greg" should be required reading for those of us with any interest in Marriott's business. I wouldn't know where to look or how to decipher the financial reports, and appreciate very much that you do it to get the discussion ball rolling. Nice work, again, and thanks again.

In that giant Speculation thread prior to the rollout we did talk some about how Marriott could or might distinguish external resales from direct purchases, but like most resale v. direct discussions on TUG those tangents branched off into some contentious talk that was best to curtail. I think the broader question of "will external resales be disallowed at any point?" was wrongly perceived by some as something that direct purchasers would want to happen, instead of something that would follow Marriott's history of allowing Weeks devaluations in certain circumstances.

cp73 · May 21, 2012

Greg,

I guess I was off slightly also...Here is my new cal...$489 + $231 (FG plus WIP) divided by $177 cost of points for 9 months = 4.067. This is for a 9 month period so that equates to 4.067*9= 36.3 months...or just over 3 years.

Chris

MOXJO7282 · May 21, 2012

pwrshift said:
There seems to be a lot less activity on eBay these days, at least where I own. I did see a Manor Club silver that didn't sell for $1 no reserve. Any sales I've seen over the last few months for platinum at Beachplace and Canyon Villas seemed to be getting higher prices, so maybe there's some recovery out there. But sales do seem slower now.

Brian

Slower because IMHO sellers aren't as desperate to sell and don't have to rely on ebay to get a low ball offer so there is less auctions taking place.

ROFR Speculation

GregT

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bizaro86

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windje2000

billymach4

GregT

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ondeadlin

windje2000

billymach4

dioxide45

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GregT

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vacationtime1

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taffy19

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Saintsfanfl

Saintsfanfl

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GregT

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mjm1

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kjd

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cp73

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pwrshift

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GregT

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SueDonJ

cp73

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MOXJO7282

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