# Starwood Sells $125 Million in Timeshare loans to a private party



## nodge (Jun 9, 2009)

Hi Gang,

Here is an article that appears to be written in English, yet seems Greek to me.  Are there any financial gurus out there that can explain what this all means?

When SVO does something involving $181 million that includes a statement that "[t]he notes have not been and will not be registered under the Securities Act of 1933, as amended, or any state securities laws," I tend to raise an eyebrow or two. 

-nodge


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## esk444 (Jun 9, 2009)

nodge said:


> Hi Gang,
> 
> Here is an article that appears to be written in English, yet seems Greek to me.  Are there any financial gurus out there that can explain what this all means?
> 
> ...



It's a private placement debt agreement.  Basically, Starwood is trying to raise money by issuing debt to investors instead of getting a loan from a bank, probably because the credit markets are still too tight.  

Anyways, it looks like the debt is backed up with timeshare loans.  When the timeshares buyers repay their loans to Starwood, Starwood is obligated to forward that cash to the debt holders to a certain point.

As for it not being registered under the 33 Act, it's no big deal.  It just means that the debt is probably ONLY being sold to insitutional investors who have already done their due diligence on the deal.  If they want to sell the debt to regular investors (i.e. retail investors or the general public), they have to register it with the SEC and it could delay the deal for months.  Since the institutional investors have already done their research, there is really no reason to protect them by having the SEC spend months looking at the agreement since regular investors can't buy the debt.

Anyways, the institutional investors (probably hedge funds) are still protected from fraud by the securities laws, it just doesn't have a SEC person scrutinize every little thing in the document to make sure a lay person understands it.


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## BocaBum99 (Jun 9, 2009)

if this is what I think it is, it's really good for the industry that someone is buying timeshare loans.  That frees up cash for developers so that they can sell more and build more resorts.


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## nodge (Jun 9, 2009)

Thanks for the financial lesson!

So let’s see if I got it straight  . . . . “Starwood Hotels and Resorts,” [HOT] the parent company of SVO, basically got some up-front money from an institutional investor in exchange for agreeing to give all future cash generated from SVO’s timeshare loans to that investor for a limited time?

Well, I guess I have three questions then:

1.  If HOT gets credited with the revenue from this deal, won’t SVO’s balance sheet be even worse during the time when all SVO loan payments are forwarded to the investor, thereby making SVO even more of a financial dog to the HOT higher-ups?; 

2.  How much of the up-front money received by HOT from the institutional investor will be going to SVO?  If it’s secured by SVO’s resources, shouldn’t SVO get at least a little of the bounty?  Maybe even just enough to pay for a long promised on-line reservation system?; and,

3.  Could this be viewed as a big step toward HOT “cashing out” its timeshare business?  With no new projects on the horizon, SVO’s top dog jumping to the HOT mothership last Fall, and now HOT essentially selling SVO’s outstanding timeshare loans to a third party for quick up-front cash, what’s keeping HOT in the long term timeshare game?

If "option 3" is the ultimate goal of HOT (a publically traded corporation), shouldn't all major transactions (you know like . . . say . . . . anything over $100 million give-or-take) leading to that goal be subject to SEC scrutiny too?

-nodge


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## duke (Jun 9, 2009)

BocaBum99 said:


> if this is what I think it is, it's really good for the industry that someone is buying timeshare loans.  That frees up cash for developers so that they can sell more and build more resorts.



These loans are most likely sold at a "discount".  That is, SVO would receive a percentage (50%, 80%, etc.) of the loans face value. SVO would also probably get a small percentage fee for collecting and processing the loan payments.  However, the total loan payment received would go to the new owner of the loan.  

These loans are "Assets" of SVO so by selling them at a discount it would hurt their balance sheet as well as reduce the income they would receive each month on their income statement.  

But, it is possible, since these loans carry very high interest rates, that the loans were actually sold for a gain.  Since interest rates are so low now ... as long as the historical defaults are low  ... it is actually possible that they were sold for a gain and this improves the SVO Balance Sheet.

Either way, SVO turns an asset into cash that can be used to develop more timeshare properties!


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## nodge (Jun 9, 2009)

duke said:


> Either way, SVO turns an asset into cash that can be used to develop more timeshare properties!



According to the article, HOT sold the loans, not SVO.  With the VP bonus season only a few months away, all those private jet service bills piling up, and the hotel portion of the company bleeding cash, can we really be optimistic that this new found cash will lead to any new timeshare developments?  

I'm thinking SVO won't even see enough of that cash to afford another round of luggage tags for some of us.

-nodge


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## esk444 (Jun 9, 2009)

That's not an article, it's a company press release.  A very poorly drafted press release I might add.  After reading it more carefully, it looks the issuer of the notes in not Starwood, but rather "SVO 2009-A VOI Mortgage Corporation."

SVO 2009 looks like its an entity set up to hold the timeshare mortgages written by Starwood.  Starwood dumped $181M worth of timeshare mortgages into SVO 2009, of which 69% of them are used as collateral for the $125M 8% or so loan to the private investors.  

If SVO 2009 is Starwood's mortgage arm, I would assume that SVO 2009 would use that cash either to issue more timeshare loans to buyers of timeshares.

I would add that many buyers of mortgage-backed securities no longer are willing to buy 100% of loans from anyone.  They want the people issuing the loans to have some skin in the game, which will hopefully make them more cautious with their underwriting standards.  Hence, Starwood is required to retain 31% of the timeshare loans, plus I'm guessing the 8%+ interest rate is probably above what banks normally charged back when they were giving out loans.  

Anyways, I don't necessarily see anything nefarious or unusual with this transaction.  Real estate developers always try to unload their consumer loans that they write to sell property to outside investors.  It frees up cash and lets them concentrate on what they do best, real estate development.


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## nodge (Jun 9, 2009)

Could be.  I guess it all depends on which Starwood entity actually received the proceeds from the sale.

I guess we'll just have to wait for a new video that explains it all to us to appear on MSC.

-nodge


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## Captron (Jun 9, 2009)

If I am reading the details right:

HOT got $125 million for security of $181M of loans. HOT maintains a 31% interest in the $181M. The new owner takes all payments for 12-24 months and then it converts to a 8% fixed rate for the remainder. Starwood then gets whatever interest exceeds 8% (ie. a LOT for their timeshare loans) By getting all of the payments for the first 12-24mos, the owner reduces exposure significantly in a short period of time. This assumes that the conversion to the 8% fixed rate takes place after the first 12-24 months which is not explicitly stated but seems to be implied.

The new owner, if kept to maturation, would get the $125 M (minus defaults)+ all interest for 12-24 months + 8% fixed rate for the remainder of the term.

HOT gets $125 million now + interest in excess of 8% after 2 yrs. They lose all the first 12-24 months worth of interest and the 8% paid after the 2 yr mark.

This gives HOT some immediate cash in exchange for losing some long term earnings. A common practice in tight financial times. This will likely go into keeping things afloat until the economy turns around. Nodge, bonuses come under those costs this will likely go to, yes, you are right on.


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## jarta (Jun 9, 2009)

This selling of loans is not a new tactic by Starwood.  The only thing different about selling these timeshare loans/mortgages is that it is through a private placement financing arrangement.  That and the fact that the money will probably be used to reduce Starwood debt rather than being used as "seed money" for the next development.

Starwood has always maintained that timeshare mortgages are different than sub-prime home mortgages because of how the loans are documented.  IMO, maybe; maybe not!

The plan Starwood put out a few months ago as to what it was going to do to make the company survive and thrive in this lousy economy said that more loans would be sold off.  That it actually happened should be no surprise.      ...   eom


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## malyons (Jun 9, 2009)

jarta said:


> The plan Starwood put out a few months ago as to what it was going to do to make the company survive and thrive in this lousy economy said that more loans would be sold off.  That it actually happened should be no surprise.      ...   eom



not only no surprise, but it's actually good news.  unfortunate that they won't use this money as the so called seed money, but it's a step in the right direction.  this is very normal in the real estate development world, and a necessary move for a company who is not really in the business of servicing mortgages.


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## komosatp (Jun 10, 2009)

There are two other important motivations for Starwood which haven't been mentioned.

1. Mark-to-market accounting: each quarter recently Starwood had to take a hit to earnings because of assets like this on their books.  Even though people were still paying everything on time, Starwood had to take a paper loss on its financials just because the market has decided that these types of loans are no longer attractive investments.  Getting these off the books allows them to have more steady earnings and a healthier financial position.

2. A security like this might be eligible for sale into one one of the many government bailout programs that have been created.  But Starwood might not have been eligible for the one that would buy these loans, so if it packages them up and sells the to an entity that CAN sell into one of these programs, it has an way to take advantage of the program, by getting a buyer to take it off its hands at a fair price.


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## skim118 (Jun 11, 2009)

*nodge is always suspicious of Starwood  & rightfully so !*

This deal illustrates is a legal transaction that allows Starwood(HOT) to pretend that it's $181 mil timeshare portfolio is worth $181 mil on it's books, brought you by "structured finance specialists" !

The reality is that they had to discount their loan portfolio by giving up the first 8% annual interest($29 mil) to this newly created entity, but this accounting fiction avoids immediate impact to Starwood's balance sheet.

It's true that Starwood gets $125 mil upfront, but given the huge debt that needs to be refinanced in coming years this cash is not going to go far.

As many Starwood properties head into foreclosure like W San Diego, St Regis Monarch, their future management fee stream is also going to be affected.  

The biggest albatross on Starwood currenly is the St Regis Bal Harbor; they destroyed a beautiful Sheraton Hotel and built a Vacation residence property that they are choking with inventory and will have a hard time selling at the the prices they originally envisioned.


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## philyphan (Jun 11, 2009)

This is why the country is so messed up right now.  Everyone is a financial genius.  Folks, a loan document is a asset that has some value.  If i lend you $100 and you agree to pay me back $110.  I can sell that loan to someone else for $105 to get my profit quicker and the new owner assumes the risk.  This is called a secondary market.  Some of you might have heard of Freddie Mac, same thing with mortgages.


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## clsmit (Jun 11, 2009)

As others have mentioned, Starwood gets the spread between the 8% and what they loan out the money for. When you finance from Starwood you pay about 14% (that was what we were offered on our last 2 developer purchases that got us to 5*). Starwood had said in their last quarter report that they were planning on selling these loans.

They need the cash to pay day to day stuff. They need a lot of cash to keep things running when no one rents rooms or buys timeshares. See this article for more info:http://www.cfo.com/article.cfm/13720407/3/c_2984789?f=pull_quote_tout

They don't own the Starwood-flagged properties that have defaulted, like the one in San Diego, so they won't use these proceeds to pay for them. (Huh? I can hear some of you say.)

CLSMIT'S Layperson Guide to Hotel Ownership and Management
There are up to 3 entities involved in a typical US hotel

The owner of the property. This is a company that owns the physical space -- the real estate. It can be a private company, a REIT, or even just a person. Example: Host Hotels and Resorts (HST).

The company managing the property. This can be the same company that owns it, but doesn't have to be. The company managing the property is responsible for housekeeping, front desk managment, etc.

The company who's name is on the sign. Example: W, Sheraton, Westin. This company can own and/or manage the property, but doesn't have to. The companies that own and manage the property, in order to have the name, have to agree to adhere to the standards set by the flag. That's why you may see a hotel start as a Holiday Inn and later become a DoubleTree. The building doesn't change (they might change the decor), just the name on the outside. In Starwood's case, they have spent the last few years selling their properties and focusing on management and keeping the standards consistent for each brand.  See page 15 of this presentation http://phx.corporate-ir.net/Externa...9MzM3NzA5fENoaWxkSUQ9MzIyOTkyfFR5cGU9MQ==&t=1 for more details.


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## skim118 (Jun 12, 2009)

philyphan said:


> This is why the country is so messed up right now.  Everyone is a financial genius.  Folks, a loan document is a asset that has some value.  If i lend you $100 and you agree to pay me back $110.  I can sell that loan to someone else for $105 to get my profit quicker and the new owner assumes the risk.  This is called a secondary market.  Some of you might have heard of Freddie Mac, same thing with mortgages.



I may not be a financial genius, but I do work in the financial field & let me explain my issue with the Starwood deal again.

If $100 loan you are talking about is being sold at $84, then accounting rules will cause you to report $16 loss on the asset sale immediately.

Starwood sold $181 mil of their timeshare loans that are defaulting at a higher rate than their loan-loss reserves at a discount; but creating this new entity lets them pretend everything is fine and lets them avoid a instant hit to their income statement & spread the pain over the next two years.

I always wondered who are these people that were crazy enough to finance a Westin/Sheraton developer purchase at 14%  ?  I am also quite sure that they are going to default at a much higher rate than the 8% default rate factored by Starwood(source 10-K) in the coming years.


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## jarta (Jun 12, 2009)

skim,   ...   "I am also quite sure that they are going to default at a much higher rate than the 8% default rate factored by Starwood(source 10-K) in the coming years."

So, being Starwood, having cash flow problems and owning the loans, what should you do?  Keep them or sell them off and take the loss now?  Seems like an easy decision for me.

But, Starwood has always sold off its timeshare loans (really, merely a revenue stream) to obtain money for its next development.  Now, Starwood has put new developments on hold because it needs operating cash.  Same type of sale, but a different use of the proceeds from the sale.  I just don't see the big deal here.      ...   eom


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## LisaRex (Jun 12, 2009)

jarta said:


> But, Starwood has always sold off its timeshare loans (really, merely a revenue stream) to obtain money for its next development.  Now, Starwood has put new developments on hold because it needs operating cash.  Same type of sale, but a different use of the proceeds from the sale.  I just don't see the big deal here.      ...   eom



I guess the obvious question is that if they are selling off their only asset, what are they going to use for seed money for future developments? I don't see the banks loosening up on credit for luxury timeshare developments any time in the near future.   The TS division was very profitable at one time.  No longer.  And if they're no longer receiving revenues from outstanding loans, why would Starwood keep that division?


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## abdibile (Jun 12, 2009)

This sounds like a typical ABS securitization to me.

Starwood was never in the busines sof giving out loans to buyers but was in the business to sell timeshare units.

Thi is the same as GM and GMAC or Ford and their financing arm. GMAC just helped to sell more cars by providing loans to buyers.

In recent years they always securitized the timeshare loans instead of keeping them on their balance sheet. Same with auto loans.

The problem was, that since the financial crisis was started (yes, mainly by ABS that had subprime loans in it) no company was able to securitize loans anymore because there were no buyers.

This transaction is very positive for the economy (loans are available again) and Starwood (they can provice timeshare loans again and have more cash to build new resorts).

The deal works like this:

Investors bought a senior interest of 69% of the timeshare loans and receive 8% interest on it.

All cashflows (14-16% interst plus repayment) of the timeshare loans in first 2 years go to these investors for these 8% plus some repayment of the loan amount.

After two years a portion of the cashflows from the loans goes to Starwood (not specified how much).

Starwood still owns the 31% Junior part of the loans. 

So all defaults and other credit problems of the timeshare buyers hit Starwood in the first place.

Only if more than 31% of the total loan amount is lost due to defaults, the investors in the note lose money. Starwood owns the first loss piece in the loans.

But Starwood also receives the differnce between what they charge the buyers (14-16%) and the 8% they pay to the investors.

Starwood was probably unable to get rid of more than 69% of the loans due to financial crisis/market conditions. 

But it is a first positive sign of securitization market (and hopefully economy) coming back to life


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## philyphan (Jun 13, 2009)

The 181 million is the total amount if paid over the term (principal and interest) of the loan not what is invested (loan amount - profit).  Starwood is a developer not a mortgage co.  Just as GM set up a finance co to sell cars and toll brothers, kb etc have mort co to sell homes.  Starwood offers financing to sell units.  They receive no money until the loans are paid off or sold.  they can do either but most companies sell the paper to recapitalize themselves.  it is a loss in the long run but a profit and capitalization short term which can be put into other investments and developments.  This is what the congress was calling the credit freeze.  not that people couldnt get loans, but the secondary market wasnt buying them.  This a great sign that the economy is improving.  these are good loans with a good payoff and private investors are again willing to spend money on them.


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## skim118 (Jun 15, 2009)

philyphan said:


> The 181 million is the total amount if paid over the term (principal and interest) of the loan not what is invested (loan amount - profit).



Are you a Starwood employee or do you have an inside connection in Starwood to have more details than SEC filings ?  

The reason I am asking is because Starwood in their 8-K SEC filing dated 6/8/2009 clearly indicate that they sold $181 mil in face value aka principal amount, contrary to what you wrote.


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## rocky (Jun 15, 2009)

All of this is just painful to read and think about.  Wait until Starwood decides SVO is no longer part of their core business strategy and sells the whole thing to someone else -- hopefully everyone bought where they want to go, because in the end that's all you really have.  Elite status, starpoints -- that stuff could disappear.


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## bizaro86 (Jul 13, 2009)

> The reason I am asking is because Starwood in their 8-K SEC filing dated 6/8/2009 clearly indicate that they sold $181 mil in face value aka principal amount, contrary to what you wrote.



Starwood did sell 181 million worth to a third party. However, they own 31% of the third party, so some of the 181 million is going from Starwood, to the third party, and back to Starwood. That is why the net proceeds to Starwood are less than the total consideration received for the loans.

Michael


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## Captron (Jul 13, 2009)

I read that to say that they maintained 31% interest in the loans.

I believe the initial 31% of forfeiture is theirs to bear as is common in these transactions so the risk to the investors is actually quite minimal as losses would have to exceed 31%.


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## nodge (Jul 24, 2009)

*Starwood 2Q 2009 Results Posted Yesterday*

Hey gang, 

Starwood announced its 2Q 2009 numbers yesterday and managed to call it a 28% increase ($134 million “profit”) over the same period last year despite, near as I can tell, apparently losing about $111 million more than it took in from its day-to-day hotel operations over the quarter.  

How did it do this you ask?  Well, from my limited understanding of corporate shell game book keeping, marketing speak, and this report, Starwood appears to have offset that $111 million loss with the $125 million one-time sale of timeshare loans AND a $120 million one-time tax break that just happened to fall in this same quarter.  

$125 million (timeshare loan sale) + $120 million (tax break) – $111 million (operating loss)  =  $134 million (“earnings”)  Sound right?

If so, that $125 million sale of timeshare loans appears to have been used simply to keep Starwood’s lights running another quarter. 

According to the transcript of the 2Q announcement, Good Ol’ Fritz is quick to report that it renewed Starwood’s AM EX deal to bring $250 million into the pot (presumably to keep the lights on for another quarter), and the $90 million sale of the W San Francisco can probably pay for another quarter, but what happens when the one time tax breaks, discounted timeshare loan sales, and hotel fire sales run out?

With Starwood apparently burning more cash then it brings in from its day-to-day operations to the tune of over $100 million a quarter, how long can it keep paying Fritz $2 million A MONTH and giving away free and heavily discounted rooms? 

As a Starwood timeshare owner, I’m all for maintaining brand loyalty, but not when that brand is robbing Peter (timeshare owners) to pay Paul (pouring that money into the hotel business to hide a $100 million+/quarter loss from investors).  Is Starwood really doing that you ask?  Well let’s see what Starwood CEO Fritz told investors about that yesterday . . ..

_“[W]e reduced SVO’s overhead by 45% and our sales force by 35%.  This resizing will continue as we adapt the business to the new reality.  And *we continue to pull cash out of the business *by monetizing existing inventory.  With our recent securitization , *we expect to generate over $150 million in cash from vacation ownership *this year.” _ (emphasis added).

Would our timeshare beds be any less heavenly if Starwood wasn’t cutting corners and squeezing every available penny out of them to prop-up its hotel business and instead we had an organization limited to sustaining our timeshare operations runing the show?  I think if that new organization issued statements like "we continue to pull cash out of the business," its managers would find themselves in jail instead of cashing their monthly $2 million paychecks.

-nodge

Oh yeah . . . How big of a vat of Starpoints do you think AM EX gets for $250 million?  Aren’t those starpoints eventually going to be used for non-revenue generating hotel rooms?  Shouldn’t that be factored into the long-term survivability calculation too Fritz?

Also, we need to add the phrases "near-term accute liquidity risk" and "sector-unique headwinds" to the creative new buzzwords for 2009 list.  Ah  . . . . remember the good ol’ days way back in 2007 when "surprise and delight" was all the rage?   -n


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## Twinkstarr (Jul 24, 2009)

I think it maybe awhile before "surprise and delight" are used again by any CEO/CFO in the lodging sector.

Disney Visa just offered free dining codes from early Oct-Dec 17. The general public will probably get this offer next week when "traditional" free dining promo ends.


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## DavidnRobin (Jul 24, 2009)

I may do some short selling of HOT - that may be a good way to recoup some of the ever increasing SVO MFs also being used directly and indirectly to prop up Starwood.


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## nodge (Jul 24, 2009)

DavidnRobin said:


> I may do some short selling of HOT



Look at HOT's jump (about 9% yesterday) in price after Fritz' announcement.  Good thing the tax break and timeshare loan sale just happened to be in the same quarter as Starwood's overwhelming losses associated with actually running the business.  Funny how those things just happen like that.

-nodge


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## gregb (Jul 24, 2009)

Reading  the various SVO documents, it occurs to me that one way Starwood can "take cash out" of the timeshares business is to find a reason for special assessments.  According to the documents, SVO gets to keep 10% of all assessments, regular or special.  That in addition to any management fees they get to manage the construction work.  So scheduling refurbishment of units actually may help SVO's bottom line, as well as make the units better.

Greg


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## Ken555 (Jul 24, 2009)

*


gregb said:



SVO gets to keep 10% of all assessments, regular or special

Click to expand...

* 

I'm in shock.


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## rocky (Jul 25, 2009)

I am so happy to be done with Starwood.  Cashed my check on Thursday.  Hope the new owners enjoy their new lock-off unit and the delightful, ever growing annual maintenance fees.......  when there is no more cash to be harvested from SVO, what do you think Starwood will do then??


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## nodge (Oct 1, 2009)

Here are a couple of recent articles about Starwood's financial picture.

Not much of a positive spin I can put on this one.

This one at least uses the words "Starwood" and "management is proactively exploring ways to go on the offense . . . ." in the same article, just not necessarily in the same sentence.

-nodge


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## pianodinosaur (Oct 1, 2009)

*Thank You, Nodge*

The articles Nodge has posted are very interesting.  Although I do not own a Starwood TS, I frequently stay in Starwood hotels and participate in SPG.  As Starwood is offering all kinds of discounts on hotel reservations I think Starwood is looking to increase MFs so they can rob Peter to pay Paul. This is the only way I can understand Starwood selling loans to a company where they have a large ownership.


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## Fredm (Oct 1, 2009)

Folks, this is nothing new, and is not in the least irregular.

Starwood, Marriott and other timeshare developers finance 60%+ of all sales. They have never kept the paper. 

In past years the loans were bundled (securitized) and sold in the credit markets. A portion of the income stream was retained and was a source of profits.

The credit market dislocations of last year made it impossible to sell these timeshare loans. No money available.

This is precisely the reason that development of timeshare resorts has stopped. Developers would go broke providing the capital to actually fully fund the loans of all the financed timeshare sales. 

Of course, demand also slowed. But, the reason for consolidation of operations, sales, and marketing were a direct result of the collapse of the credit markets.

For the last 4 months private capital has become available as a source for monetizing the loans. Terms are not as good as with a healthy credit market, so these private placements will not return an income stream as in the past. But, they do dramatically reduce the the amount of capital required to sell a timeshare.

Marriott just concluded a 500 mm placement similar to this. 
It is routine business.


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## nodge (Oct 1, 2009)

Fredm said:


> Folks, this is nothing new, and is not in the least irregular. [. . .] It is routine business.



Really?!?   

It is routine for a major lender like Wells Fargo to cut Starwood's rating to "underperform" while at the same time increasing Marriott's rating to "outperform?"  If this were all "the economy" doing this, wouldn't both Starwood and Marriott's ratings rise and fall together?

Moreover, I think we all agree that Starwood selling its timeshare loans isn't really that big of a deal.  What is a big deal, at least in my mind, is what it did with the proceeds from that sale.  In SVO's case, it appears to have plowed that cash into propping up the hotel division numbers for a quarter.  

Is THAT practice routine too?  If so, how long can Starwood sustain itself long-term doing that, especially now that one lender has gone on record to negatively distinguish Starwood from the rest of the pack as an "underperform[er]?" 

In light of Starwood's credit crunch, poor bank rating, $2 million/month CEO payment, $100 million/quater loss from its hotel business, and oh yeah, "the economy," shouldn't we, the captive cash cow timeshare owners that we are, expect a "routine" massive increase in our "maintenance" fees then too? 

-nodge

Thank God General Motors didn't sell any timeshares.


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## Fredm (Oct 1, 2009)

nodge said:


> Really?!?
> 
> It is routine for a major lender like Well Fargo to cut Starwood's rating to "underperform" while at the same time increasing Marriott's rating to "outperform."  If this were all "the economy" doing this, wouldn't both Starwood and Marriott's ratings raise and fall together?
> 
> ...



nodge,

I am not making a case for or against Starwood's management of its business. Its their business to do with as they see fit.
If managed poorly their stock price suffers. 
Sooner or later the Board of Directors will weigh in on that.

My use of the word "routine" is in relation to the selling of timeshare notes. All timeshare companies do it. It is how they get the cash from the sale. 

I am not defending how Starwood manages its VO business. Simply explaining the matter of notes sale. The topic of this thread, which some seem confused about.

As for maintenance fees, they are too high. Can you expect them to go higher? Yep.

As for the Starwood VO business model in general, it is not as owner friendly as some. Not as bad as others.

What I do not understand is why you are hoping on me over it.
For that matter, why you are doing here.

I do have a constructive suggestion. And I sincerely mean this.
Take a look at the Starwood Management poll.
64% of owners are hopping mad at Starwood. 
You know what else? That 64% represents a whopping total of 51 owners. Trust me, you are preaching to the wrong audience. There are 100's of 1000's of Starwood timeshare owners. 51 of them know why they are upset. 

The way you can affect change is to organize. That is hard, very hard and frustrating work. But, it can be done. I salute those willing to put forth the effort.

I have my beefs with how Starwood VO runs its operation. 
How they spend their money is not one of them. I don't own the stock.
How they get it is. But, THAT is another issue entirely. They are not going to give it back. You can trust me on that one also.


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## LisaRex (Oct 2, 2009)

This is the part that intrigues me:

"(Chief Financial Officer Vasant Prabhu) added the company does not plan to invest "a lot of money" in its vacation ownership business, a segment that saw a 35 percent drop in revenue in the second quarter.

"I think we need to be very convinced why it's a good business relative to our fee business, which delivers an extraordinary return," Prabhu said."

Uh huh.  What have I been opining for months?:  If it isn't producing results, it's going to be sold off. 

http://www.reuters.com/article/companyNews/idUKN0129056220091001


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## komosatp (Oct 2, 2009)

nodge said:


> It is routine for a major lender like Wells Fargo to cut Starwood's rating to "underperform" while at the same time increasing Marriott's rating to "outperform?"  If this were all "the economy" doing this, wouldn't both Starwood and Marriott's ratings rise and fall together?


You've mistaken stock price performance for a company's fundamental performance.  

And Wells Fargo the 'lender' did not issue these ratings abouth each companies' ability to pay back debt, Wells Fargo, f.k.a. Wachovia Securities, f.k.a. Fist Union securities, issued this about its opinion of these companies' future stock prices. The article notes that this was based on valuations, not fundamentals.

Marriot and Starwood could have exactly the same operating occupancy and room rates, but have wildly different financial performance because of things unrelated to operating hotels.  Like having a big timeshare business, or having chosen to borrow money from a bank, rather than issue preferred or common stock.


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## komosatp (Oct 2, 2009)

nodge said:


> In light of Starwood's credit crunch, poor bank rating, $2 million/month CEO payment, $100 million/quater loss from its hotel business, and oh yeah, "the economy," shouldn't we, the captive cash cow timeshare owners that we are, expect a "routine" massive increase in our "maintenance" fees then too?



Hit submit to soon.....

Anyway: aren't all of our associations run as non-profits to maintain our resorts?  Therefore the only way that Starwood could directly put our money in its pockets is by jacking up the management fee, right?   And isn't that just one of the many (though one of the largest) line items in the overall operating budget of each resort?

If we suddenly had >10% MF increase due to Starwood changing all our subcontractors to Starwood owned services, I'm sure there's be many a class-action lawyer out there eager to take the on matter on contingency.  Our board members could have their indemnification revoked if they didn't try to stop this, and we'd be able to personally sue them for breach of their fiduciary duty.  I doubt any of them are rich enough to handle those kind of damages.


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## nodge (Oct 2, 2009)

OK, OK I’m not trying to make this personal, I’m just trying to figure out if Starwood (a cash strapped corporation desperate for money, not unlike a heroin addict) would take more money than is needed from us SVO owners (captive cash cows not unlike an unguarded mother’s purse left on the kitchen counter) to make its numbers look better and keep their jobs.

Let’s try looking at this situation from a purely math perspective.

From the available data it appears that Starwood hotels needs to bring in about $100 million/quarter more than it currently takes in to pay everyone, including Fritz, and keep the lights on.  This translates into about $400 million a year.

It also appears that Starwood is pretty good at finding things to sell ($125 million timeshare loans, A W hotel here and there, left over timeshare inventory) to make up about $200 million of that difference.  This leaves a shortfall of about $200 million/year.

So how much would our maintenance fees have to go up to make up that shortfall?

Well, last time I checked, there were about 250,000 SVO timeshare owners (give or take).  So . . . . . 

$200,000,000 divided by 250,000 owners =  $800/year per villa

Now the powers that be at SVO would have a hard time implementing a blanket across the board $800/year maintenance fee increase.  But if it cut costs to maintain our properties and pocketed the difference, and it cut the cost of operating its hotels too, then the maintenance fee increase needed to balance the hotel books may just appear “reasonable” enough to timeshare owners.

Now, Fritz has reported that SVO has cut its operating costs by 30%, and it has cut its hotel operating costs by 30%.  Applying those “savings” to the calculation you get.

$140,000,000 (needed by the hotels to balance the books with a 30% cost savings) divided by 250,000 owners =  $560/year per villa needed.

Assuming the average maintenance fee for an SVO property is $1000/year.  The 30% savings in reduced overhead costs at SVO translates into $300 in SVO’s pocket.

So,   applying that savings to the money needed for the hotels means . . . . $560/year less $300 savings in reducing SVO overhead by cutting services we’re paying for  = $260/year increase in maintenance fees.  (This amount could be easily spread around the various line items – “management, “ “operating costs,” etc., to hide it even more).

In other words, using my rough estimates, if SVO increases, on average, our maintenance fees by $260/year per villa and cut its hotel and SVO operating costs by 30% (as it claims to have done), it could balance its hotel operating books (and even keep giving away all those hotel rooms and paying Frtiz top dollar like its currently doing).

The only problem is that our “maintenance fees” would no longer be (if they ever actually were) rationally related to the actual costs associated with maintaining our properties.  We would be paying, on average, $1260/year per villa, but SVO would be spending only about $700/year per villa (including its already over-inflated “management fee” and other mark-ups and profits) to actually maintain our properties.

Sooooo, these rough calculations suggest that Starwood is configuring itself to take about $140,000,000 out of our collective “maintenance fee” purse on the counter, in exchange for a big ol’ pile of nothin’, except the privilege of us continuing to use the Starwood brand names (Sheraton, Westin, Vistana) on our timeshares because the corresponding hotel chains stay in business with the help of our forced “donations.”

Does anyone have any better data or analysis of this situation?  If not, I anticipate that our 2010 maintenance fees will increase, on average, about $260/villa, but the maintenance and service quality of our villas will decrease, on average, about 30% under SVO’s continued "care."

As for “why” I’m reporting this information here on TUG, I figure owners and potential owners of SVO properties would be interested to know where their money goes, or would go if they bought an SVO property.  That way they can make informed decisions as to whether to buy or sell an SVO property separate from the smoke and mirrors information provided by SVO and even some resales agents.

-nodge
my website


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## komosatp (Oct 2, 2009)

I question your premise of HOT being in such financial straights.  *They've been profitable throughout The Great Recession....that's very admirable*.  

Where does your estimate of "about $100 million/quarter more than it currently takes in to pay everyone, including Fritz, and keep the lights on" come from?  Airlines are sometimes lucky when they don't LOSE $100 MM in a quarter...and HOT's been reporting profits (though I see cash diminishing).


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## nodge (Oct 2, 2009)

komosatp said:


> I question your premise of HOT being in such financial straights.  *They've been profitable throughout The Great Recession....that's very admirable*.



Look what HOT had to do to make that statement true last quarter.   Is that strategy sustainable every quarter?

-nodge


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## komosatp (Oct 2, 2009)

nodge said:


> Look what HOT had to do to make that statement true last quarter.   Is that strategy sustainable every quarter?
> 
> -nodge


Your analysis of Q2 earnings has some fundamental flaws.

The sale of the loans did not add to the bottom line...it only menaingfully  impacted the balance sheet.  The difference between what they sold the loans for, and how much they had previously valued them at is the impact on profit.  And that looks to be all of $3 million.

There are two other things that make me much less concerned than you.  Operating Earnings were $100 million for Q2.  That's before all of those things you assert are cooked up.  And the cash flow statement shows that operations generated $224 Million in cash in the first half of 2009.  Which means this paragraph from your earlier post is just plan wrong:



> With Starwood apparently burning more cash then it brings in from its day-to-day operations to the tune of over $100 million a quarter, how long can it keep paying Fritz $2 million A MONTH and giving away free and heavily discounted rooms?



It is not burning through...it is generating cash through operations.  Look at an airline statement of cash flows and see what I mean.

All of this adds up to a company that has been impacted by the worst recession since the great depression, but not one that is on the brink of failure or in a death spiral, or one that is going to scuttle a very profitable business by sticking it to its timeshare owners.


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## nodge (Oct 2, 2009)

komosatp said:


> All of this adds up to a company that has been impacted by the worst recession since the great depression, but not one that is on the brink of failure or in a death spiral, or one that is going to scuttle a very profitable business by sticking it to its timeshare owners.



I agree with you in theory if we were talking about a normal, publically traded, US company.  But this is Starwood and its subsidiary SVO, so the best I can say is "we shall see."  

So how many shares of HOT do you plan on buying?

-nodge


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## komosatp (Oct 2, 2009)

nodge said:


> I agree with you in theory if we were talking about a normal, publically traded, US company.  But this is Starwood and its subsidiary SVO, so the best I can say is "we shall see."
> 
> So how many shares of HOT do you plan on buying?
> 
> -nodge


One of the enduring lessons I took out of business school was that valuation of a company is a bear (for me at least).  And companies that are in multiple lines of business are a den of bears.

So I have no idea if HOT is over or under priced.  There are too many moving parts in its business.  And then you have to factor in the relative attractiveness of hotels stocks, compared to every other industry.   So I have no idea where the stock is going.

But I can read financial statements pretty well and HOT is not that bad looking right now, relatively.  But that does not preclude your worries...just makes them less likely...and I really think it would be a bad business decision.  Developing timeshares is a profitable business, as is managing them, and I'm sure HOT does not want to ruin that potential future income stream by burning all of its existing customers.


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## nodge (Oct 2, 2009)

komosatp said:


> . . . I'm sure HOT does not want to ruin that potential future income stream by burning all of its existing customers.



That certainly makes sense.  If this is a goal of most companies, maybe you can help us understand why SVO made these decisions over the past few years and it recently made  this decision.

SVO drums to its own beat.

-nodge


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## komosatp (Oct 2, 2009)

nodge said:


> That certainly makes sense.  If this is a goal of most companies, maybe you can help us understand why SVO made these decisions over the past few years and it recently made  this decision.
> 
> SVO drums to its own beat.
> 
> -nodge


Here's my perspective:

The vast majority of people only care about MFs.  Here at TUG we're a bit more informed, so we see the little things SVO has to do to keep things running smoothly...and maximize profit where they can tweak.  so the things in that post are details where they'll never satisfy the uber-user.

But most importantly, the complaints are about the fringe of owning timeshares....and SVO knows it....and serves the average owner the most.  A timeshare is fundamentally the right to use a specific resort during a specific period.  Anything other than that and you are subject to the vicissitudes of randomness and volatility.  One year everyone wants to go to Harborside...the next, Hawaii.  Expecting to use your ownership for anything other than exactly what you bought puts you in place where games can be played.  

Only but what you want for when you want.  Otherwise you're trying to game a system, where the rules can change over time.  SVO will always be selling the flexibility, but unless it coverts to a pure points based system, the constraints will remain and they'll always be tweaking and people will have thought they bought one thing (a flexible system) that is really something else (a defined week or season system).


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## Troopers (Oct 4, 2009)

komosatp said:


> Here's my perspective:
> 
> The vast majority of people only care about MFs.  Here at TUG we're a bit more informed, so we see the little things SVO has to do to keep things running smoothly...and maximize profit where they can tweak.  so the things in that post are details where they'll never satisfy the uber-user.
> 
> ...


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## nodge (Oct 5, 2009)

komosatp said:


> Here's my perspective:
> so the things in that post are details where they'll never satisfy the uber-user.



Fair enough.  Let's test the "only uber-users are unhappy with SVO" theory on a specific case, like, I dunno this one.

Here is a poor sap who is trying to sell his Westin Princeville Villas 2 BR/LO on ebay for $25,000.  He erroneously thinks that the sale includes "[a]ccess to any of Starwoods family of timeshare resorts through StarOptions (148,100)."  Why does he think that?  Because no one at SVO told him it didn't, or more probably, his salesperson specifically told him that it did.  SVO also didn't tell him that if he had bought at WKORV-N (which was still on sale when WPORV first went on the market) for about the same price, those StarOptions WOULD have transferred to a resale buyer.  Here is how we "uber-users" on TUG were able to figure this out.  As you can see from that thread, unlike SVO, we Tuggers even also tried to warn him (and others) of this danger. 

When this owner, or his buyer, eventually find out that those StarOptions don't transfer with the sale, do you think he (or his buyer) will still be happy with SVO?  If not, could they really be considered "disgruntled uber-users?"  Wouldn't they more accurately be considered just more victims of SVO who finally found out how they had been screwed?

The only difference between disgruntled and "gruntled" SVO owners, uber-users or not, is the gruntled ones haven't been screwed (or at least don't know they've been screwed) by SVO . . . . yet.  

-nodge


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## komosatp (Oct 5, 2009)

Was in no way trying to defend SVO...though I don't think they are all that different than other management companies.  I think its just very important to understand that SVO does everything possible to prevent them being arbitraged.  And having signed up with a class action lawyer to work on my beef, I've learned how one sided (in SVO's favor) our original contracts are.  And SVO has many conflicts of interest.

But you're post reiterates one of my main point: a person buys a specific unit a a specific resort.  That's what our contracts say (and my floating week even has as specific week associated with it in the contract).

Which is to say you have to be super-uber-summa-careful when dealing with anything other than a a timeshare's designed purpose.  That's my bigger point.


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## Fredm (Oct 5, 2009)

nodge said:


> OK, OK I’m not trying to make this personal, I’m just trying to figure out if Starwood (a cash strapped corporation desperate for money, not unlike a heroin addict) would take more money than is needed from us SVO owners (captive cash cows not unlike an unguarded mother’s purse left on the kitchen counter) to make its numbers look better and keep their jobs.
> 
> Let’s try looking at this situation from a purely math perspective.
> 
> ...



Whew!

Nodge, this took a left turn somewhere.

This thread was about the sale of $125mm in timeshare notes.

Now it's smoke and mirrors by "some resales agents". 

Give it a break.


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## Troopers (Oct 6, 2009)

nodge said:


> OK, OK I’m not trying to make this personal, I’m just trying to figure out if Starwood (a cash strapped corporation desperate for money, not unlike a heroin addict) would take more money than is needed from us SVO owners (captive cash cows not unlike an unguarded mother’s purse left on the kitchen counter) to make its numbers look better and keep their jobs.



Nodge, good luck on your quest.  I don't think the answers lie in financial articles/press releases.


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## nodge (Oct 6, 2009)

Troopers said:


> Nodge, good luck on your quest.  I don't think the answers lie in financial articles/press releases.



Funny thing is if Starwood were stealing from our collective purse on the counter, it probably wouldn’t go out of its way to tell anyone about it.  In fact, it would probably just maintain a code of stoic silence about EVERYTHING it did, thereby preventing an employee from inadvertently spilling the beans.  Hmmmm.

Fortunately, I’ve learned two things from my lifetime of watching cop shows on TV.  First, the “jump the shark” moments for these shows usually involve the main character showing his bare butt in a highly-hyped episode to drum up ratings (eg. Dennis Franz/NYPD Blue – sheesh); and 2) criminals and other folks who do wrong always leave ever so small clues, that at first appear irrelevant, but over the course of the next hour, less commercials, grow and build into an iron-clad case.

Let’s review the evidence collected against Starwood so far . . . .

!)  The above-noted articles report that Starwood was able to report a profit to its shareholders last quarter, but only after taking advantage of a massive tax break AND selling $125 million in timeshare loans.  Of course I may be reading that article wrong, but it appears at least me that but for those two one-time transactions, Starwood hotels would have been in the red last quarter to the tune of over $100 million.

2)  The CEO of Starwood has said on record that Starwood “continue to pull cash out of [its timeshare] business."

3)  In preparation of reporting the 3Q results later this month, Starwood’s $2 million/month man has stated in this report that “[w]e have an enormous amount of assets we can sell at the right time for a great price to generate cash."  He also stated that Starwood is "dialing down" its vacation-ownership business.               

4)  The HOB of WKORV, the group that enters into contracts with SVO on behalf of WKORV is comprised of 5 members, a controlling majority of whom are top level Starwood employees living and working in Orlando.  All evidence to date suggests that every other HOB for every other SVO resort has a similar controlling majority of Starwood employees thereby rendering actual owner input and involvement irrelevant.

5)  The recent MASSIVE “special assessments” at Vistana Resort were all approved by the HOB’s of each phase without any vote or prior notice to the owners. Moreover, there was no disclosure to owners as to how the bidding process for this work was conducted or how the contractors were selected.  They only thing Owners were told is that these costs of refurbishment, (a large project presumably with large economies of scale and in the mainland US with a Home Depot just down the street)  would be about $ 83/square foot.  For comparison purposes, the refurbishments at WSJ (a relatively small project on a remote island) were only about $55/square foot. 

The amount of these VR special assessments are so disproportionately above the actual costs incurred, one of us Tuggers has even speculated that the excess proceeds collected were used to buy someone a yacht.

6)  A simple math exercise (see thread No. 40 above) indicates that if Starwood tags us owners $250-$300/villa more than it actually costs to run our resorts (in addition to us paying the already over inflated Starwood “management” fees), it can accumulate hundreds of millions of dollars to throw anywhere it wants, including keeping its hotel business’ lights on.

So, putting on my cop show lawyer tweed jacket, I ask, are we ever going to find a smoking gun that PROVES Starwood controlled HOB’s have overstated operating costs to benefit Starwood corporate at us owners’ expense?  Probably not (unless one of the recently laid off Starwood employees comes forward with it).

But this circumstantial evidence reveals that Starwood certainly has the MOTIVE, ACCESS, and OPPORTUNITY to pull it off.  It really comes down to a matter of trust, and to date, Starwood has done absolutely nothing to earn that from us.

-nodge
my website


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## Troopers (Oct 6, 2009)

Nodge, since you enjoy news articles, here's one for you.

Have fun with it.


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## nodge (Oct 7, 2009)

Troopers said:


> Nodge, since you enjoy news articles, here's one for you.
> 
> Have fun with it.



Let me finish handing out all these updated "buzzword bingo - recession version" playing cards and I'll see what I can do.

-nodge


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## Troopers (Oct 10, 2009)

Nodge, the hits keep coming.  This link provides more detail.

$800 gets you a discussion of their [Starwood] key business strategies.  Section 8.3 must be juicy.

Enough google for me...those guys are good over there.


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## nodge (Oct 23, 2009)

*Starwood's 3Q 2009 Earnings Call*

Fritz didn’t even mention SVO in his 3Q earnings conference call yesterday.  Here is a transcript of the call.  He delegated the SVO dirty work to Vasant Prabhu, Starwood’s CFO.

Below are a few of the relevant quotes about SVO from Vasant:

_“In our vacation ownership business . . . [w]e generated significant cash this year from securitization and operations and this is our intent to do the same next year.”  Capital deployed will be the minimum necessary to finish projects that are in Sello[Sales?].”  “Cash flow from Vacation Ownership will largely fund Ball[sic] Harbor in 2010.”


On other item on the Vacation Ownership front, as we did in the fourth quarter last year, we will be undertaking a full review of all Vacation Ownership projects to determine if there are any changes we want to make.  We made[may?] decide after this review to abundant[abandon?] specific project[s?] as we did last year, the two projects [actually three Aruba, Los Cabos, and Maui III?] or to stop development on future phases on other projects or reset pricing in some locations.  These decisions may result in asset write-offs as well as potential impairment of the good well[will?] associated with the Vacation Ownership business.  We will complete this review and take the required actions in the fourth quarter of this year.”_

Transcript Source:  www.seekingalpha.com   Vasant's full transcript starts here.

Vasant has given us two more clues  into Starwood's intentions and actions towards us owners.

-nodge


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## nodge (May 5, 2010)

*Another Clue*



nodge said:


> Funny thing is if Starwood were stealing from our collective purse on the counter, it probably wouldn’t go out of its way to tell anyone about it.  In fact, it would probably just maintain a code of stoic silence about EVERYTHING it did, thereby preventing an employee from inadvertently spilling the beans.  Hmmmm.
> 
> Fortunately, I’ve learned two things from my lifetime of watching cop shows on TV.  First, the “jump the shark” moments for these shows usually involve the main character showing his bare butt in a highly-hyped episode to drum up ratings (eg. Dennis Franz/NYPD Blue – sheesh); and 2) criminals and other folks who do wrong always leave ever so small clues, that at first appear irrelevant, but over the course of the next hour, less commercials, grow and build into an iron-clad case.
> 
> Let’s review the evidence collected against Starwood so far . . . .



Hey there fellow Gumshoes!

Here is another clue.  This one is from the transcript of Starwood's Q1 2010 earnings call (Courtesy of www.SeekingAlpha.com).


_Operator:  And the next question comes from Smedes Rose from Keefe, Bruyette.

Unidentified Analyst:  I'm just wondering what caused the joint venture debt to decline $124 million sequentially.  And then also do you have a sense of what the proceeds would be from a [sic], I think you'd expected to do a timeshare securitization later in the year?

[Vice Chairman, Executive Vice President, and CFO of Starwood] Visant Prabhu:  The timeshare securitization I believe we said would be somewhere in the $100 million range.  It's not a large one.  We'll have to see how big it is depending on how much receivable are accumulated through the year.  The reduction in joint venture debt, we'd have to get back to you on that. I can't think of something off the top of my head that would explain that.

[CEO, President and Director of Starwood] Frits van Paasschen:  I can give you a ring back afterwards.  It did reduce by about $125 million.  So I'll call you back._



Hmmm. Starwood execs ramble on and on during that call here about beating expectations by $30 million, but can't quite recall where $125 million came from? 

I bet if we put our heads together, we could figure out where Starwood found that extra $125 million laying around . . . ..  But, in true cop show fashion, I think we should first send our lovely, young, blonde, former model, designer clothes wearing, Harvard law grad,  assistant DA up to the south Bronx by herself on the A train at night to interview a random prostitute and that prostitute's pimp just to make sure they don’t know anything about what went down. 

-nodge
My Website
My Other Website


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## glypnirsgirl (May 5, 2010)

Great detective work, Nodge!

elaine


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