SPINCO's 9-30-2011 SEC filing

The First amendment to the Form 10 filed by VAC (Spinco) on September 9 included financial data through the 2nd quarter, 24 weeks ended June 17, 2011. Note 14 to those financial statements indicates all is not well with the numbers for Spinco, to wit:

14. SUBSEQUENT EVENT

In preparing our company to operate as an independent, publicly traded company following the spin-off of our common stock by Marriott International, our management assessed its plan for undeveloped land and built Luxury inventory, including unfinished units, and the current market conditions for such assets.

Given our strategies to match completed inventory with our sales pace and to pursue future “asset light”development opportunities, late in the third quarter of 2011, management approved a plan to accelerate cash flow through the monetization of certain excess undeveloped land and excess built Luxury inventory. If we are able to dispose of this excess land and built inventory, we will eliminate the associated carrying costs.

We identified certain excess undeveloped parcels of land in the United States, Mexico and the Bahamas that we will seek to sell over the course of the next eighteen to twenty-four months. We used recent comparable sales to estimate the current fair value of these land parcels. Management also intends to offer incentives to accelerate sales of excess built Luxury inventory over the next three years. We determined the fair value of our excess built inventory through an evaluation of the associated vacation ownership projects and cash flow projections that reflect current market conditions.

Because we expect that proceeds from our planned land sales and their estimated fair value will be less than their carrying values, and because the fair value of this built Luxury inventory is less than its current carrying value, we expect to record a non-cash charge of between $275 million and $325 million in our third quarter 2011 financial statements to write-down the value of these assets.

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(above source page F-72 of the Second Amendment to the VAC Form 10 - http://files.shareholder.com/downlo...70ea2691995/MVW_Form_10_Amd_No._2_9-30-11.pdf )

Luxury is defined on page F-50 of the same document

Definitions

We operate our business in four segments:

In our North America segment, we develop, market, sell and manage vacation ownership products under the Marriott Vacation Club and Grand Residences by Marriott brands in the United States and the Caribbean. We also develop, market, sell and manage resort residential real estate located within our vacation ownership developments under the Grand Residences by Marriott brand.

In our Luxury segment, we develop, market, sell and manage luxury vacation ownership products under the Ritz-Carlton Destinations Club brand. We also sell whole ownership luxury residential real estate under the Ritz-Carlton Residences brand.

In our Europe segment, we develop, market, sell and manage vacation ownership products in several locations in Europe.

In our Asia Pacific segment, we operate Marriott Vacation Club, Asia Pacific, a points program we introduced in 2006 that we specifically designed to appeal to vacation preferences of the Asian market.

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It would appear that much of the problems with the operating performance of what will become VAC is related to the Luxury segment - Ritz Carlton.

Segment operating results appear on page F-51. Luxury clearly created virtually all of the operating loss and was the cause of much of the historical 2009 impairment hit, which is broken down by segment on page F-45.

Inventory is broken down on page F-63 of the same document

Also of interest is the only difference I found between the September 9, 2011 First Amended Form 10 and the September 30, 2011 Second amended Form 10. The last pages of the pdf file are Annex A, the draft solvency opinion of Duff & Phelps, which addresses the values of the assets and liabilities of both MAR and VAC post transaction. It makes its first appearance in the Second Amendment.

The actions described in the Subsequent Event note address actions taken late in the third quarter of 2011, when the Duff and Phelps appraisers/bankers were performing their engagement.

Was Duff & Phelps 'uncomfortable' with the MAR asset values? The timeline sure makes that look possible. And that in turn makes one wonder about the quality of E&Y audit of MAR.

No surprises here. The loss in real estate values has already occurred. This write-down is a non-cash cost to get their balance sheet asset values in order prior to the actual spin-off. I think we already knew that they would be trying to sell their "excess" undeveloped real estate assets. I am glad to see that they are addressing these issues now.

There is some very interesting reading here. I took special note of the risk assessment which begins on page 19.

BocaBoy said:

No surprises here. The loss in real estate values has already occurred. This write-down is a non-cash cost to get their balance sheet asset values in order prior to the actual spin-off. I think we already knew that they would be trying to sell their "excess" undeveloped real estate assets. I am glad to see that they are addressing these issues now.

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Technically, it is an accounting entry which neither generates nor uses cash in this accounting period.

MAR spent $275-$325 MM more cash (or its equivalent) to acquire these assets than they will receive for them when they sell. That's an economic loss.

I was surprised that much of the problem lies with luxury. I was also surprised that they had to take another write down on these assets.

I guess I'm more easily surprised than you.

windje2000 said:

I was surprised that much of the problem lies with luxury.

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Marriott spent huge sums to acquire large pieces of property at Kauai Lagoons and Kapalua Bay for development as Ritz Carlton Club. Both of these acquisitions included golf courses and prime ocean-front land. Kauai Lagoons never really got off the ground, and the few units built were re-badged as Marriott Vacation Club. The Kapalua Bay project is now built-out but sales have been disappointing to say the least. Marriott gambled big on Ritz Carlton Club and lost. All of Spinco will pay the price for those missteps.

windje2000 said:

Technically, it is an accounting entry which neither generates nor uses cash in this accounting period.

MAR spent $275-$325 MM more cash (or its equivalent) to acquire these assets than they will receive for them when they sell. That's an economic loss.

I was surprised that much of the problem lies with luxury. I was also surprised that they had to take another write down on these assets.

I guess I'm more easily surprised than you.

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Yes, it is a big and real economic loss, but the cash is already out the door and this adjustment recognizes that. They are getting their house in order for the future.

So didn't the brains behind Spinco understand the valuation issue with respect to Ritz Carleton and the undeveloped properties? Don't you think that is part of the plan in the spinnoff/acquisition from Marriott and valued accordingly? They may be smarter than you think (or at least we can hope this is so).

The problem is that MVCI kept the same boneheads that caused a 3/4 of a BILLION dollar write-off.... They erased 8-9 years of profits and showed that they really had no idea what they were doing...

The ole Cornell boys really should be among the unemployed. They drove the golden goose into the ground at warp speed, yet, got to stay.... Un-friggin-believable

I must say I found this eye-opening. The Ritz Carleton aura was masking fairly catastrophic losses. Did anyone go through a Ritz Carleton presentation? I'm wondering just how much they were charging for access to the "luxury" collection. Since we all have good insight into how inflated Vacation Club prices were, I can only assume that R-C prices were in the stratosphere.

OldPantry said:

Did anyone go through a Ritz Carleton presentation? I'm wondering just how much they were charging for access to the "luxury" collection. Since we all have good insight into how inflated Vacation Club prices were, I can only assume that R-C prices were in the stratosphere.

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My recollection from previous visits was that, in May 2008, 3 weeks in St. Thomas were $150K (total, not each week). The way the weeks system worked was you buy 3 weeks and could reserve 2 weeks in Platinum and 1 week in a shoulder season. MFs were approx $12K/year, I believe, for the 3 weeks.

The salesman pointed out that St. Thomas was the least expensive way to buy into their program, and that Maui was $500K for the 3 weeks (same approach).

When I was there in January 2011, they'd switched to a points system, and the points required for a one week stay in St. Thomas was $90K.

This is from memory, but I believe is accurate. The point system is similar to the Marriott system, but more rigid (no banking/borrowing).

This new disclosure in the SEC filing could also explain why Ritz Carlton's are finding their way into DClub -- DClub may be the best way available to utilize/monetize that built-out inventory.

Best,

Greg

GregT said:

My recollection from previous visits was that, in May 2008, 3 weeks in St. Thomas were $150K (total, not each week). The way the weeks system worked was you buy 3 weeks and could reserve 2 weeks in Platinum and 1 week in a shoulder season. MFs were approx $12K/year, I believe, for the 3 weeks.

The salesman pointed out that St. Thomas was the least expensive way to buy into their program, and that Maui was $500K for the 3 weeks (same approach).

When I was there in January 2011, they'd switched to a points system, and the points required for a one week stay in St. Thomas was $90K.

This is from memory, but I believe is accurate. The point system is similar to the Marriott system, but more rigid (no banking/borrowing).


This new disclosure in the SEC filing could also explain why Ritz Carlton's are finding their way into DClub -- DClub may be the best way available to utilize/monetize that built-out inventory.

Best,

Greg

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Thanks Greg. I think that makes it pretty clear. Just on maintenance fees, they were looking for a nightly payment of $571, with seven of the nights in shoulder season. Add in opportunity cost (say $7500 a year on $150,000, or 5%), and that nightly cost looks more like $927. No wonder their sales were weak. Even rich folks might think twice about plunking down that kind of scratch. You can rent some mighty nice units around the world for $900/night, and not lock up the cash.

GregT said:

This new disclosure in the SEC filing could also explain why Ritz Carlton's are finding their way into DClub -- DClub may be the best way available to utilize/monetize that built-out inventory.

Best,

Greg

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Yup - that's also my reaction on including RC in DClub.

I guess there wont be any new development for a while

I guess that makes my decision to not join the points program a little easier to swallow. The whole "You will not be able to get into new resorts without joining" sounds like a very hollow threat right now.

GregT said:

This new disclosure in the SEC filing could also explain why Ritz Carlton's are finding their way into DClub -- DClub may be the best way available to utilize/monetize that built-out inventory.

Best,

Greg

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The Marriott Destination Club may be the only way for the Ritz Destination Club to unload the Ritz inventory, that few consumers are willing to purchase.

One issue that causes me concern in the Spinco SEC filing is the language in the summary about how Spinco will create revenue: "We generate most of our revenues from four primary sources: selling vacation ownership products; managing our resorts; financing consumer purchases of vacation ownership products; and renting vacation ownership inventory."

Looking at those four sources:

1. Selling vacation products: I look upon the creation of the Destination Club and the sale of memberships to legacy owners as a type of churning. For example, as a legacy owner, I bought into the program but did not buy any additional points. But that was a minimal onetime fee and not a major investment. Can Spinco come up with significant revenue by inducing more legacy owners to buy into the club at a fee of between $595 and $2,000. Spinco states: "As a result of these initiatives, the percentage of sales from our owners and their referrals has increased to approximately 70 percent as of June 17, 2011.” So the major revenue source of Spinco at this time appears to be hitting up existing owners to try to get more money by continued tweaking of the system. How long can that continue? Are Legacy Owners going to be wiling and able to spend real money to buy Destination Club points? If not, will Spinco have to significantly drop the prices for points in order to induce more sales of the points product.

2. Managing resorts: If Marriott hadn’t aggressively tried to expand into high end products such as Ritz-Carlton, Kauai Lagoons, Marco Island, this source of revenue might make sense. After all, there are a lot of existing well run resorts that most of us are very happy with. I’m just not smart enough to figure out whether the carrying costs on the white elephants can drag down Spinco. For example, even if Spinco were able to sell undeveloped land, will there be white elephants that operate at a loss? If there are, does Spinco have the legal right to remove them from the Spinco umbrella by selling the non-performing resorts? I don't know if Spinco has the legal right to discontinue the unprofitable operations and how they could accomplish that.

3. Consumer Financing. I don’t see how you can rely on long term securitzation of consumer financing of unsecured debt of this type, because the resale value of the products being financed in substance are worth much less than the debt.

4. Inventory rental: Finally a source of income I understand. I don’t know how well this will fare in a recession, and pray that we don’t reach the point where our maintenance fees are significantly less than the cost to rent.


The frightening thing to me is that the continued health of Spinco depends in large part on existing owners continuing to spend more money purchasing points or in new customers buying a Destination Club product that in its current form most of us probably wouldn't recommend to friends or family. I hope this ends well.

Bunk said:

The frightening thing to me is that the continued health of Spinco depends in large part on existing owners continuing to spend more money purchasing points or in new customers buying a Destination Club product that in its current form most of us probably wouldn't recommend to friends or family. I hope this ends well.

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When I talk to people around the pool at MOC (MMO for II people), I haven't run across one person who is TimeShare-Wise. If Marriott relied on a populous of TUGers to sell to, they would have gone out of business a long time ago. Maybe time, word-of-mouth and the internet will eventually change that. My greatest concern is that this new company, if they survive the next decade, will start buying legacy weeks for pennies on the dollar and depositing them into the Trust, and within a couple decades, legacy week owners will be in the minority and loose their voting rights. It probably won't affect me, but it will affect the beneficiaries of my trust...

GaryDouglas said:

When I talk to people around the pool at MOC (MMO for II people), I haven't run across one person who is TimeShare-Wise. If Marriott relied on a populous of TUGers to sell to, they would have gone out of business a long time ago. Maybe time, word-of-mouth and the internet will eventually change that. My greatest concern is that this new company, if they survive the next decade, will start buying legacy weeks for pennies on the dollar and depositing them into the Trust, and within a couple decades, legacy week owners will be in the minority and loose their voting rights. It probably won't affect me, but it will affect the beneficiaries of my trust...

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Yep, Gary - I agree that there are many reasons to be concerned. I hate to bury my head in the sand, but if I spend too much time thinking about such things, it robs any joy of owning a timeshare.

Given the miserable state of affairs in the economy and the timeshare industry, figuring out a formula to make Spinco a profitable stand-alone corporation will be quite a trick. Even with these pre-spinoff writedowns, Spinco operating costs are going to rise if for no other reason than they now have to pay for using the Marriott name. Those escalating costs will ultimately be born by us the timeshare owners. If Spinco becomes too abusive to its owners/customers through escalating fees and other manipulations, the Marriott brand will be damaged and Marriott may decide to withdraw from the whole arrangement. Ultimately owners may sue to break the relationship with Spinco and choose a different resort management company. Even if that option is possible at some sold-out resorts, it would surely be a miserable path for everyone involved. There are already many sad examples in the timeshare industry that show us how bad it can get. If/when it reaches that breaking point, I will simply dump my weeks for whatever pennies I can get and consider myself wiser for not throwing away good money after bad.

Ironically, the whole reason why I agreed to buy a timeshare in the first place was because I believed I could trust in the Marriott name to provide a superior experience in a shady industry tainted with many bad players. That foundation of faith appears to be on shaky ground now.

What's the Spinco's definition of "undeveloped inventory"? I assume it means projects that never were started. If not, then some current resort owners may have problems.

There are several Marriott resorts that have "undeveloped inventory" on their premises. All the present owners have in these locations is a promise from Marriott to complete the resort. Resorts like Oceana Palms, Grand Chateau, Lakeshore Reserve, Crystal Shores, Kuau'i Lagoons, etc all have promised owners that future development will be completed. Many of these resorts have amenities that were promised owners but will not be completed until the resort is completed. Some of these promises of completing resort amenities have dragged on for more than five years.

The question of Spinco's willingness to complete these resorts in a timely manner and give the owners what they were promised, must be asked. The owners who have patiently waited for their resort's amenities to be fully completed have not gotten what they paid for. In many cases bigger pools, larger lobbys, more recreational areas, more parking, expanded retail, etc were part of the sales package touted to prospective buyers. In other words, we haven't got what we paid for.

Another alarming question is what Spinco's idea of "completion" is. Will the undeveloped portions of existing resorts now be used for other purposes than originally intended? Those new uses could be detrimental to your vacation enjoyment.

kjd said:

What's the Spinco's definition of "undeveloped inventory"? I assume it means projects that never were started. If not, then some current resort owners may have problems.

There are several Marriott resorts that have "undeveloped inventory" on their premises. All the present owners have in these locations is a promise from Marriott to complete the resort. Resorts like Oceana Palms, Grand Chateau, Lakeshore Reserve, Crystal Shores, Kuau'i Lagoons, etc all have promised owners that future development will be completed. Many of these resorts have amenities that were promised owners but will not be completed until the resort is completed. Some of these promises of completing resort amenities have dragged on for more than five years.

The question of Spinco's willingness to complete these resorts in a timely manner and give the owners what they were promised, must be asked. The owners who have patiently waited for their resort's amenities to be fully completed have not gotten what they paid for. In many cases bigger pools, larger lobbys, more recreational areas, more parking, expanded retail, etc were part of the sales package touted to prospective buyers. In other words, we haven't got what we paid for.

Another alarming question is what Spinco's idea of "completion" is. Will the undeveloped portions of existing resorts now be used for other purposes than originally intended? Those new uses could be detrimental to your vacation enjoyment.

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Marriott/Spinco isn't legally required to complete projects where owners bought during pre- and mid-construction phases; the paperwork that you sign when purchasing makes that clear with disclosures in a number of places. Even the promotional materials make it clear. Take a look at this Crystal Shores at Marco Island promotional video; any scenes showing the expected completed project have this language superimposed:

"Developer's conceptual renderings and animation. Features and amenities are proposed and subject to change. Estimated completion date is December, 2013."

We bought SurfWatch mid-construction and knew there was a risk that the project wouldn't be completed exactly as advertised. The Marriott rep didn't dwell on that negative point but she certainly mentioned it, it was highlited in all the promo materials, and the docs we signed contained several related provisions.

From reading TUG it seems to be a fact of timeshare life - not limited to Marriotts - that you take this risk when buying at an incomplete resort. I agree with you that it would be nice if Spinco were to announce a complete schedule of re-start dates for the mid-construction resorts (Marco, Las Vegas, etc.) but it probably won't happen. They may not even know themselves which resort(s) will be ultimately completed as advertised, which will remain as is currently, and which will be some form in between.

I don't think it's productive right now to dwell on what disclosures were made in the past.

To me, looking to the future, the more important questions include: (i) Is there funding available to complete the underdeveloped projects i.e. Oceana Palms, Grand Chateau, Lakeshore Reserve, Crystal Shores, Kuau'i Lagoons; (ii) If the underdeveloped projects are completed, will Spinco be able to sell enough points packages to pay for this; (iii) Do the underdeveloped projects in their present condition generate enough income from sales, maintenance and rent to pay for their costs (keep in mind they must absorb more of the overhead since the unbuilt portions of the project won't pay a proportionate share; and (iv) What is the financial condition of the Ritz-Carlton portion of the Spinco umbrella.

Bunk said:

I don't think it's productive right now to dwell on what disclosures were made in the past.

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I'm not pointing out the disclosures for no reason at all. They're in response to kjd's post stating that, "... All the present owners have in these locations is a promise from Marriott to complete the resort. ..." I do think it's productive to point out that the existing disclosures prove there was no such promise, and that Marriott/Spinco suffers no legal requirement to complete every project as advertised.

Bunk said:

To me, looking to the future, the more important questions include: (i) Is there funding available to complete the underdeveloped projects i.e. Oceana Palms, Grand Chateau, Lakeshore Reserve, Crystal Shores, Kuau'i Lagoons; (ii) If the underdeveloped projects are completed, will Spinco be able to sell enough points packages to pay for this; (iii) Do the underdeveloped projects in their present condition generate enough income from sales, maintenance and rent to pay for their costs (keep in mind they must absorb more of the overhead since the unbuilt portions of the project won't pay a proportionate share; ...

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All good questions, agreed. But they're also not much different than similar questions which could be asked if Spinco, or even the new DC Points product, weren't pieces of the puzzle. Weeks owners at every incomplete project/resort have always had good reason to be concerned about the economy's effect on their resorts.

Bunk said:

... and (iv) What is the financial condition of the Ritz-Carlton portion of the Spinco umbrella.

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Again, similar to a question that could have been asked if Spinco wasn't a puzzle piece. Just change a few words and you get this, "What is the financial condition of the MVCI portion of the MAR umbrella?"

{eta} I'm not trying to take this thread off track here by pointing out that some of our ownership-related questions aren't any different now with Spinco than what we were questioning before Spinco was announced. IMO the most important question to ask now is, what negative effects can our ownerships suffer because Spinco has been introduced into the picture, that we would not suffer if Spinco wasn't in the picture?

SueDonJ said:

All good questions, agreed. But they're also not much different than similar questions which could be asked if Spinco, or even the new DC Points product, weren't pieces of the puzzle. Weeks owners at every incomplete project/resort have always had good reason to be concerned about the economy's effect on their resorts.

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However both Spinco and the DC Point product magnify these concerns.

1) The ability for Spinco to raise cash to complete products will be much more difficult that had it remained part of Marriott. That makes it much more difficult for them to complete partial projects.

2) The DC Point product also adds some concern as there is less impetus to finish partial projects given they can likely acquire points inventory for less than the cost to complete many of these projects. Further, he points product allows them to "sell" small resorts over and over again - they can sell points to 100,000 families pointing them all to the beauty of prime weeks at Crystal Shores if they want - before once weeks ran out they had to build more inventory or sell a different location (granted they could always tout the ability to trade into Crystal Shores, but I don't think it's the same).

This has been an interesting and illuminating discussion, but it highlights one of the sad truths about this forum and the timeshare industry. The industry is so precarious that it makes no sense for interested and informed buyers (like those populating this board) to buy points (or weeks) from a developer at the prices they must ask to support their business model. Yet, without those sales, the industry cannot support the successful properties that all of us want.

A very sad state of affairs. But, I intend to enjoy my weeks for as long as I can and not dwell on all the negatives. Our timeshare investments may not be turning out as we hoped, but we are continuing to receive value from our investments (in the form of enjoyable stays are nice properties) and very few of us are going hungry because out timeshare investments have not panned out. I've made far worse mistakes in my life -- I'm not going to lose sleep or waste time wringing my hands over this.

Well, given this information about the sales contract I think the entire intent of the Spinco has to be called into question. When I purchased my Grand Chataeu units I was told in no uncertain terms that there would be a rooftop pool on top of the parking garage. Not only that, I was shown a model of it which today still resides in the lobby. There was also a promised expanded parking garage and a larger lobby with a larger Marketplace retail store.

These amenities were meant for the benefit of present owners as well as future ones and were part of the sales presentation regardless of what the contracts supposedly say. Is the Spinco going to turn into a scapegoat for Marriott's broken promises to owners? I hope not.

ocdb8r said:

However both Spinco and the DC Point product magnify these concerns.

1) The ability for Spinco to raise cash to complete products will be much more difficult that had it remained part of Marriott. That makes it much more difficult for them to complete partial projects.

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Good point, investors will certainly recognize that Spinco doesn't have the MAR umbrella coverage that MVCI did. If/when the economy recovers to the point where "vacation lifestyle" becomes a less risky venture, Spinco will have less investor protection than MVCI-under-MAR did at one time. But pretty much every timeshare developer lost investors and/or stopped construction at incomplete resorts when the economy tanked. None of them stand a chance at longterm survival if the economy doesn't rebound.

ocdb8r said:

2) The DC Point product also adds some concern as there is less impetus to finish partial projects given they can likely acquire points inventory for less than the cost to complete many of these projects. Further, he points product allows them to "sell" small resorts over and over again - they can sell points to 100,000 families pointing them all to the beauty of prime weeks at Crystal Shores if they want - before once weeks ran out they had to build more inventory or sell a different location (granted they could always tout the ability to trade into Crystal Shores, but I don't think it's the same).

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But theoretically, if/when the economy rebounds, doesn't the DC product make it easier for Spinco to raise funds from new purchasers because they're not constrained by a finite number of intervals at specific resorts? If they can sell the possibility of a reservation of a certain interval over and over again, limited only by the number of DC Points that exist, isn't that better than if they're limited by the number of certain intervals that exist?

I understand investors are the more important cash cow for Marriott/Spinco and that the overall economy's affect on luxury purchases is the more formidable stumbling block now. But I think that if/when the economy rebounds, as long as Spinco retains the Marriott name in some fashion (which it intends to) then most timeshare purchasers won't care - and some won't even realize - that the corporate structure is different now.