# Diamond Resorts and Its Perpetual Mortgage Machine



## artringwald (Apr 12, 2016)

This link to the article has been posted on TripAdviser and Facebook, but belongs here as well.

Diamond Resorts and Its Perpetual Mortgage Machine, March 7, By Roddy Boyd Southern Investigative Reporting Foundation



> Since 2007 the website of Diamond Resorts International has made people think their personal six-night stay in heaven is only a few clicks away. Online the company’s resorts, full of beaches and golf courses, still beckon. But Diamond is a 21st-century time-share operation and investors ought to be wary of any company using the controversial vacation concept that has provided decades of fodder for comedy writers while troubling state and federal regulators. Indeed what Las Vegas-based Diamond is selling is a sleeker, more expensive iteration called a vacation-ownership interest or VOI.
> 
> Customers can expect to pay about $26,000 for a VOI for one week a year and about $1,460 in annual maintenance fees. And a VOI is a so-called perpetual use product with a lifetime contract that’s difficult for a member to be extricated from — and there’s no resale market that he or she could tap for cash. The mandatory five- to 10-day cooling off period after a member first signs up is the only chance a customer has for canceling the contract before entering a lasting financial commitment to Diamond.


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## clifffaith (Apr 12, 2016)

Really great article, thanks for posting.  The following paragraphs are what I found most interesting:

After weeks of investigation, the Southern Investigative Reporting Foundation came across an obscure accounting rule called Accounting Standards Codification Topic 978, which went into effect in December 2004, that allows Diamond — or any time-share company — to recognize revenue from upgraded sales even if the member doesn’t put any money down. New-member sales, in contrast, are accounted for only when at least 10 percent of the VOI’s (Vacation Ownership Interest's) value has been received.

If ASC 978’s logic is counterintuitive to outsiders, for Diamond’s management it is surely heaven sent. On the view that a time-share purchase is a real estate transaction, an upgrade to a vacation ownership interest is considered a “modification and continuation” of the existing sales contract.

How does this work in real life? Say a new member purchases his or her VOI for $20,000 and puts $4,000 down, a 20 percent equity stake. If six months later that member seeks to upgrade to an expanded membership level that costs $20,000 and signs a sales contract to that effect, Diamond could account for this as a sale even if no money is put down.

That 20 percent equity stake, which is really now 10 percent given the $20,000 additional financed, is all the legal cover the Diamond accountants need since the upgrade is considered a modification and continuation of the initial time-share purchases contract. Diamond’s computers can now record a new $36,000 loan to pay off the initial $16,000 loan and book $20,000 in new revenue. This appears to be why Diamond has such high prepayment of its loans.

If the whole things seems circular, that’s because it is. A lending facility that Diamond controls loans an existing member $20,000 and it goes on the books as revenue but not a penny of cash has gone into the coffers — yet. Plus, that initial $20,000 loan is now accounted for as fully repaid even if it is not: The member still owes $36,000 plus the hefty interest rate. And it’s completely legal.

So who is responsible for this accounting stroke of genius? None other than the senior accounting staff from the time-share industry’s leading companies who proposed this new rule in 2003.

At the very minimum, ASC 978 should give investors pause about Diamond’s quality of earnings.

When asked if the new accounting rule had spurred the high prepayment speeds of its loans, Diamond pointed to its customers’ creditworthiness as the cause.


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## Jason245 (Apr 12, 2016)

Asc isn't obscure. .the rules about revenue recognition are still applicable.

If investors are concerned they need only look at the statement of cash flows..

Sent from my SAMSUNG-SM-N910A using Tapatalk


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## nuwermj (Apr 12, 2016)

Diamond responded to this article in a conference call with SunTrust.

*
Q: Patrick Scholes*
 "Okay. Let’s move on here. Next question is, there’s also  been some confusion about the way Diamond accounts for finance sales  for people who already own timeshare with Diamond or a predecessor  entity. Do these customers make a cash down payment? Can they meet their  down payment requirements with equity in a previously purchased  timeshare? And how common is that?"


*A: Al Bentley (CFO for DRI)
*
 "Yes, the first answer to that which is, Diamond requires  a cash down payment on every transaction. And the part what I want to  make sure too, Patrick, that people understand is that when we record a  sale, and there is a trade-in. Like where someone owns a fixed week from  years gone by, is that the trade-in of that fixed week is not recorded,  right, it’s just a transfer of a point – of a fixed week product into a  points based product. What we record on that transaction is the  incremental sale of points.


"And so to the extent that a customer merely trades in a  fixed week in exchange for points, that does not – there is no payment  that is required, we do that in conjunction with an upgrade sale. But I  know there’s been some references to ASC 978 and just to be clear, what  that does is it allows a customer, again from a fixed and floating  perspective when they trade that in, for a company to include that as  part of the equity.
 Now keep in mind what I just said is, that is not what  we do, right. So even though the accounting literature would tell you  that on a fixed float week that you could count that as down payment,  Diamond does not do that. As we require a cash down payment on every  transaction. And just the same as if a customer buys additional points  from us that already have a loan outstanding, then that existing equity  that they have in that product is not counted towards the purchase. It  is always cash down payment.


"Now the other thing is, is that when we provide  information in our 10-K, for example, you’ll see that our average down  payment approximates 20%. From a GAAP reporting perspective, we have to  have a minimum down payment of at least 10%. But again, ours averages in  fact just a little over 20%. And we also provided additional disclosure  that in the 10-K where we do note that when you count both the cash  down payment and the equity that is rolled, is that those transactions  on average are slightly above 50% in total equity and in an upgrade  transaction."


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The full transcript with much more on this article is at this link:


http://seekingalpha.com/article/395...r-suntrust-robinson-humphrey-host?part=single


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## nuwermj (Apr 13, 2016)

Here is another article that some might find valuable. ...

Diamond Resorts: High-Interest Loan Business With Significant Downside
by Matus Kubala, CFA

"Summary

"The company uses questionable sales practices to push high-interest loans on customers.

"Secondary market for timeshares is growing, and a simple Google search can get you deeply discounted VOIs.

"Rising interest rates increase cost of funding and customer defaults in the long term."

http://seekingalpha.com/article/382...h-interest-loan-business-significant-downside


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