# Hedge Funds unhappy with DRI, Inc.



## nuwermj (Oct 22, 2015)

GREENWICH, Conn., Oct. 21, 2015  /PRNewswire/ -- FrontFour Capital Group LLC and ADW Capital Partners  L.P., significant shareholders of Diamond Resorts International, Inc.  (NYSE:  DRII),  announced today that they have delivered a letter to the President and  CEO of Diamond Resorts International to express their frustrations with  the Company's underperformance, despite commendable execution by the  management team, and to request that the Board of Directors explore  available strategic alternatives, including a sale of the Company, in  order to unlock shareholder value.

Here is the letter.
http://www.prnewswire.com/news-rele...-diamond-resorts-international-300163626.html

Are there any financial experts here that can interpret this for us?


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## nightnurse613 (Oct 23, 2015)

The only interest to me is the proposed $50M repurchase of inventory!!


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## Ty1on (Oct 23, 2015)

nuwermj said:
			
		

> Are there any financial experts here that can interpret this for us?



I wouldn't classify myself as a financial expert, but I read the letter, and here is what I get.

DRI's key indicators are very strong and indicative of a stock valuation that is higher than it currently is.  The reason for this undervaluation, in the investors' minds, is other investors that are shorting the value of the stock because of fears of the direction in which the industry as a whole is going.  They specifically list inventory buyback, the asset-light model, and perceptions of industry lending practices as catalysts of the short-selling.

What they are saying is, "Hey, you guys have done a great job, and we recognize that the value of our corporation is greater than the market realizes.  Let's take this company private while the stock price is low, giving us and other investors the opportunity to roll our public stock ownership, at current market value, into private equity, before others figure out the value and start bidding up the stock price."

A consequence of simply writing and publishing this letter, whether or not is was the intent, is that you may see stock price increases as other investors either take a closer look at the company's financials, or simply take their word for it and jump in while they can.  Corporations and investors sometimes promulgate news releases for the sole purpose of manipulating the market.


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## nuwermj (Oct 23, 2015)

Ty1on said:


> They specifically list inventory buyback, the asset-light model, ... as catalysts of the short-selling.



I wonder why these short sellers don't like the capital-light model. In another thread Steve Nelson (T_R_Oglodyte) asks "why more companies aren't doing the same thing"; "Why pay good money to buy/build inventory when you can get it for nothing."
[*] And I agree him. Bluegreen has also adopted a capital-light strategy (similar too, but exactly the same as DRI's). DRI's capital-light model seems like a good strategy to me. So I wonder why the short sellers have reservations?

[*] http://tugbbs.com/forums/showpost.php?p=1807710&postcount=11


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## Ty1on (Oct 23, 2015)

nuwermj said:


> I wonder why these short sellers don't like the capital-light model. In another thread Steve Nelson (T_R_Oglodyte) asks "why more companies aren't doing the same thing"; "Why pay good money to buy/build inventory when you can get it for nothing."
> [*] And I agree him. Bluegreen has also adopted a capital-light strategy (similar too, but exactly the same as DRI's). DRI's capital-light model seems like a good strategy to me. So I wonder why the short sellers have reservations?
> 
> [*] http://tugbbs.com/forums/showpost.php?p=1807710&postcount=11



Capital Light isn't the same thing as deedback acceptance.  In the Capital Light model, the company "buys" a condo project from a separate developer.  But instead of paying them for the project lump sum, they buy units in phases as they sell.  This way, the timeshare company doesn't have to carry the inventory it isn't ready to actively sell, and is able to narrow the gap between paying the capital cost of the development and realization of sales proceeds (through deposits and securitization).  I think the downside of this is that the company has no control over the design and "visual branding" of the resort, and that there is slightly less long run profit (The project developer, after all, has to see enough of the profit to carry the capital itself).


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## nuwermj (Oct 23, 2015)

Yes, Bluegreen is doing this (buying units in phases as they sell) but I am not aware of any resort at which DRI operated this way. They will buy units in phases from a separate developer at the newly announced Kona property, but that hasn't even broken ground yet. Do you know what other location DRI has purchased in phases from a separate developer?

Regardless. DRI does call the voluntary surrender program and the defaulted-owner recovery program "Capital Efficient." Attached is a slide shown to share holders that illustrates the usage. Maybe capital efficient and capital light are not the same thing. I confess that I have used the terms interchangeably.

Thanks for your feedback.






https://drive.google.com/open?id=0BzHfVJaaWOsmMHJvUEl1Y1FzX0k


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## Ty1on (Oct 23, 2015)

nuwermj said:


> Yes, Bluegreen is doing this (buying units in phases as they sell) but I am not aware of any resort at which DRI operated this way. They will buy units in phases from a separate developer at the newly announced Kona property, but that hasn't even broken ground yet. Do you know what other location DRI has purchased in phases from a separate developer?
> 
> Regardless. DRI does call the voluntary surrender program and the defaulted-owner recovery program "Capital Efficient." Attached is a slide shown to share holders that illustrates the usage. Maybe capital efficient and capital light are not the same thing. I confess that I have used the terms interchangeably.
> 
> ...



Yep, capital efficient, but capital-light is a specific financial term.


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## raygo123 (Oct 23, 2015)

Ty1on said:


> Yep, capital efficient, but capital-light is a specific financial term.


I understand cap light, it seems somewhat contrary to repurchase inventory.  Is this their buyback program pennies on the dollar?  And is this their cost, or realized profit potential?

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## Ty1on (Oct 23, 2015)

raygo123 said:


> I understand cap light, it seems somewhat contrary to repurchase inventory.  Is this their buyback program pennies on the dollar?  And is this their cost, or realized profit potential?
> 
> Sent from my Nexus 7 using Tapatalk



Repurchase works perfectly with Cap Light.  The idea is minimizing product cost to maximize margin.  Also, with Cap Light, remember that you can schedule to forego paying for units until you need them.  Thus, a glut of repurchases, the company isn't stuck with the cost of newly built inventory at the same time.


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## nuwermj (Oct 23, 2015)

Ty1on said:


> Yep, capital efficient, but capital-light is a specific financial term.



In that case DRI does not employ a "capital-light" strategy. Again, other then the new Kona location, there is no resort in the DRI network that fits the definition.


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## raygo123 (Oct 23, 2015)

So, as part of the inventory repurchase $50 million, is the kona property part of that, or just buy backs?

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## Ty1on (Oct 23, 2015)

raygo123 said:


> So, as part of the inventory repurchase $50 million, is the kona property part of that, or just buy backs?
> 
> Sent from my Nexus 7 using Tapatalk



No, the repurchase budget they suggested would presumably be for buybacks only.  An Asset Light new project would be new purchases.

$50M is a lot of buyback money when you are charging owners to give deeds back to you LOL


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## raygo123 (Oct 23, 2015)

That's my point, but was not sure, that has to be a projected revenue gain.  Smoke and mirrors huh?

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## Ty1on (Oct 23, 2015)

raygo123 said:


> That's my point, but was not sure, that has to be a projected revenue gain.  Smoke and mirrors huh?
> 
> Sent from my Nexus 7 using Tapatalk



It could be the expense of administrating the buyback program (over and above the fee they charge) and sales commissions on reselling them.  I'd love to see the details of their plan.  Also, assuming not every DRI deed is worthless, they could also be shill buying them via EBay and other resources.


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## raygo123 (Oct 23, 2015)

Zack has a #1 buy rating on DRII. So must have some credibility.  That's amazing considering the sector.  Buy in hopes of short squeeze.  44% of float is short

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## nuwermj (Oct 23, 2015)

Ty1on said:


> $50M is a lot of buyback money when you are charging owners to give deeds back to you LOL




Diamond will be paying maintenance fees on those intervals/points until they are sold. This, according to Diamond, is the biggest cost of the voluntary surrendering of points.


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## Ty1on (Oct 23, 2015)

nuwermj said:


> Diamond will be paying maintenance fees on those intervals/points until they are sold. This, according to Diamond, is the biggest cost of the voluntary surrendering of points.



Very good information...


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## T-Dot-Traveller (Oct 23, 2015)

*DRI - stock price & hedge fund owners*

I love reading info like this - bet you my wife won't care .

Thank you all for the analysis & tea leaf reading .


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## nuwermj (Oct 23, 2015)

Ty1on said:


> Capital Light isn't the same thing as deedback acceptance.



For what It's worth (I'm primarily trying to learn how timeshare systems work) ... 

Bluegreen seems to consider inventory recovery programs part of their "Capital Light" strategy. This is from Bluegreen's parent, BFC Financial Corp.'s 10-K for 2014 (p. 95).

"Bluegreen’s capital-light business strategy also includes Secondary Market Sales pursuant to which Bluegreen enters into secondary market arrangements with certain resort POAs [Property Owner Association] and others on a non-committed basis, which allows Bluegreen to acquire VOIs [Vacation Ownership Interests] generally at a significant discount as such VOIs are typically obtained by the POAs through foreclosure in connection with maintenance fee defaults."


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## raygo123 (Oct 23, 2015)

nuwermj said:


> For what It's worth (I'm primarily trying to learn how timeshare systems work) ...
> 
> Bluegreen seems to consider inventory recovery programs part of their "Capital Light" strategy. This is from Bluegreen's parent, BFC Financial Corp.'s 10-K for 2014 (p. 95).
> 
> "Bluegreen’s capital-light business strategy also includes Secondary Market Sales pursuant to which Bluegreen enters into secondary market arrangements with certain resort POAs [Property Owner Association] and others on a non-committed basis, which allows Bluegreen to acquire VOIs [Vacation Ownership Interests] generally at a significant discount as such VOIs are typically obtained by the POAs through foreclosure in connection with maintenance fee defaults."


I believe Wyndham also is going at it with OVATION.
Buy low sell high, simple. I know the capital light, but this is a first, I ever heard it applied.  

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## Ty1on (Oct 23, 2015)

nuwermj said:


> For what It's worth (I'm primarily trying to learn how timeshare systems work) ...
> 
> Bluegreen seems to consider inventory recovery programs part of their "Capital Light" strategy. This is from Bluegreen's parent, BFC Financial Corp.'s 10-K for 2014 (p. 95).
> 
> "Bluegreen’s capital-light business strategy also includes Secondary Market Sales pursuant to which Bluegreen enters into secondary market arrangements with certain resort POAs [Property Owner Association] and others on a non-committed basis, which allows Bluegreen to acquire VOIs [Vacation Ownership Interests] generally at a significant discount as such VOIs are typically obtained by the POAs through foreclosure in connection with maintenance fee defaults."



They probably do consider recovery as part of their cap-light program, but your excerpt pertains to their buying intervals in non-Bluegreen resorts and including them in Bluegreen inventory.


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## raygo123 (Oct 23, 2015)

More consolidating,  Wyndham is more of a management provider, also finish out development.  More a  Kazan approach.

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## nuwermj (Oct 24, 2015)

Ty1on said:


> They probably do consider recovery as part of their cap-light program, but your excerpt pertains to their buying intervals in non-Bluegreen resorts and including them in Bluegreen inventory.



What makes you think this? If they were non-bluegreen resorts then the intervals would be added to Bluegreen's Vacation Club. That hasn't happened. Where are the deeds going when Bluegreen sells them?


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## raygo123 (Oct 24, 2015)

nuwermj said:


> What makes you think this? If they were non-bluegreen resorts then the intervals would be added to Bluegreen's Vacation Club. That hasn't happened. Where are the deeds going when Bluegreen sells them?


I thought the same thing.  They would not have to negotiate with themselves.

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## raygo123 (Oct 24, 2015)

nuwermj said:


> What makes you think this? If they were non-bluegreen resorts then the intervals would be added to Bluegreen's Vacation Club. That hasn't happened. Where are the deeds going when Bluegreen sells them?


I thought the same thing.  They would not have to negotiate with themselves.

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## Ty1on (Oct 24, 2015)

nuwermj said:


> What makes you think this? If they were non-bluegreen resorts then the intervals would be added to Bluegreen's Vacation Club. That hasn't happened. Where are the deeds going when Bluegreen sells them?



Actually, you're right, I didn't catch the "secondary market" the first time I read it.


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