HGV 2Q Earnings Call/New Locations & Possible Trust Product

[terces]

The same thing occurred to me about ROFR, although I interpreted that statement as being more about new out of the ground type development. I think they tend to use ROFR to fuel sales at places where there is no/less new inventory.

No mention of Barbados. I think there was some mention of the Quin as it related to rental revenue, but it wasn't something that struck me as particularly relevant. Once they put the transcript online, it will be easier to comb back through it. Now it means listening to the 45 minute call again. There was a LOT of stuff I didn't include. Just tried to hit the most relevant things that I thought would be meaningful to this audience.

 

[terces]

In reading through the management agreements for the Boulevard it appears the HGVC also has been appointed, or has the right to handle foreclosures, so that would be another source of inventory for them to sell. The Boulevard is fully sold out of the original inventory but they continue to have a time share selling function there.

 

[JIMinNC]

In reading through the management agreements for the Boulevard it appears the HGVC also has been appointed, or has the right to handle foreclosures, so that would be another source of inventory for them to sell. The Boulevard is fully sold out of the original inventory but they continue to have a time share selling function there.

Yes. ROFR, foreclosures, and buybacks/trade-ins are all a source of inventory at sold out locations.

 

[1Kflyerguy]

A trust product could help out with some of challenges people have upgrading to a larger ownership. Many people have reported that some resorts are not eligible for trade-in. With a trust you don't have to trade in your previous purchase, just add more points.

Depending how the trust is setup, HVC might even buy back existing deeds for people wanting to bump up their points.

 

[CalGalTraveler]

If HGVC could set up a trust to rent points and rent out your points,that might have some value if the trust had decent properties.

 

[dayooper]

How did MVC deal with the transition from weeks to trust points? I know the two systems were different to start from, but what was the mechanism from turning weeks into points?

 

[Tamaradarann]

I understand what you are saying, during home season only book what is deeded in the trust but then open it up to all inventory at 9 months the way points work now. I’m just not sure it is legal to do that, mix trust with deeded inventory. In the other systems I don’t think its allowed.


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I went to a Diamond Resorts Presentation in May and it seemed to me that what they have done is linked together resorts in very sort after locations like Maui, and Kauai with less sort after locations like Las Vegas and Arizona in a trust. Therefore, they could sell inventory that comes from any one of those locations as trust inventory while they may have very limited inventory to sell in the Hawaiian Islands. The question of the inventory they allow you to book in a good one that I can't answer. However, one could argue in any of these timeshare systems that once the exclusive home week period ends all inventory is part of the CLUB. They make the trust part of "THE CLUB".

 

[Tamaradarann]

"As a result, they have no inclination to purchase any inventory in 2019, 2020, and 2021 beyond what they have already committed to. If any comes in 2021, it will be in the back half of that year."

Hmmm...does this mean that they will have limited ROFR budget?

Did they mention anything about The Quin or Crane Barbados inventory coming online?

What effect would HGVC not purchasing any inventory until late 2021 have on the resale market if you wanted to sell your HGVC timeshares?

 

[GregT]

What effect would HGVC not purchasing any inventory until late 2021 have on the resale market if you wanted to sell your HGVC timeshares?

I was just thinking the same thing from the other angle -- is this a good time to buy HGVC timeshares?

If they are not going to be as active on ROFR, don't prices typically settle a bit? I think this has been a controversial topic on TUG, but my own experience is that softer ROFR activity has allowed me to get weeks at lower prices....

I don't need any more timeshares (for sure) but I always wonder when there are (perceived) buying opportunities. Hmmmm....

Best,

Greg

 

[JIMinNC]

What effect would HGVC not purchasing any inventory until late 2021 have on the resale market if you wanted to sell your HGVC timeshares?

I was just thinking the same thing from the other angle -- is this a good time to buy HGVC timeshares?

If they are not going to be as active on ROFR, don't prices typically settle a bit? I think this has been a controversial topic on TUG, but my own experience is that softer ROFR activity has allowed me to get weeks at lower prices....

I don't need any more timeshares (for sure) but I always wonder when there are (perceived) buying opportunities. Hmmmm....

Best,

Greg

As I said earlier in this thread, I'm not sure we can absolutely conclude that the statement that they are not going to be making significant inventory investment over the next 18-24 months is indicative of lower ROFR activity. Those statements were made in the context of a discussion about cash usage - should they return that capital to shareholders with stock buybacks or use it to develop new inventory. Their point was, given the amount of new inventory they have coming online next year, they have minimal interest in developing more properties in the short run, so they may be more likely to use any excess cash for stock buybacks. It was also discussed in the context of the specific high-cost inventory in New York, Maui, Waikiki, and Waikoloa that their customers are apparently wanting and which will drive up average transaction price. ROFR seems to be a more tactical way to acquire mid-tier inventory to sell in their core high volume markets like Vegas, Orlando, etc.

 

[SmithOp]

It sure would be nice to peek into their sales inventory pipeline, like insider trading on the stock market. The resale agents speculate on rofr prices as if they have insider info. We speculate on the $1/point rule of thumb. Be nice to know which units were soft rofr targets.

I’ve often wondered about the resort availability vs account points owned pool, how do they track how many bonus points can be awarded. At least I hope they track it and its not just willy-nilly and pity the fool with a bunch of points and no units left to book, like a musical chairs game.

When I purchased developer I got a pre-construction deal, was not allowed to book home resort the following year and given a ton of bonus points, it ended up being 3 years before I stayed there. I don’t see why they can’t start selling these new Hawaii units now if the demand is so great.


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[JIMinNC]

When I purchased developer I got a pre-construction deal, was not allowed to book home resort the following year and given a ton of bonus points, it ended up being 3 years before I stayed there. I don’t see why they can’t start selling these new Hawaii units now if the demand is so great.


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I may be wrong, but I got the impression that each project has to get to a certain point before they can do all of the legal registrations and approvals they need to begin sales - CCRs need to be drafted and registered with the local regulators, etc. These are mostly deals that are being developed by third parties for HGVC, so all of the contracts and legalities have to be in place before they can sell.

 

[CalGalTraveler]

IMO the CEO doesn't sound positive about a trust points product because of limitations with fee-for-service model (which MVC doesn't have). Sounds like complications with lack of control relative to the property developer/owner in terms of managing it in a trust with properties they fully control. He mentioned regional possibilities too.

I wonder what the following means?

"Not only a trust product - for certain markets - but also other prepaid vacation forms. We want to figure out how to capture even more buyers to bring into our system."

Do you think they may offer an RTU type of vacation trust for the next 10 - 20 years with certain properties in a points package to mitigate exit fear and lower the entry cost?

 

[GT75]

The reason they would do it would not be to benefit owners,

I also thank you for giving us a summary. I started to read the fillings but got lost after a few sentences (this isn't my background because I come from a completely different field). Please feel free to continue to provide us with summaries in the future. I know that some of what you reported, I certainly wouldn't like HGV to head in that direction. But, I still believe this provides us with the best look at what HGV upper management is considering for the future (much better than any reports from sales).

 

[bizaro86]

IMO the CEO doesn't sound positive about a trust points product because of limitations with fee-for-service model (which MVC doesn't have). Sounds like complications with lack of control relative to the property developer/owner in terms of managing it in a trust with properties they fully control. He mentioned regional possibilities too.

Wonder what this means?

Not only a trust product - for certain markets - but also other prepaid vacation forms. We want to figure out how to capture even more buyers to bring into our system.

Do you think they may offer an RTU type of vacation trust for the next 10 - 20 years with certain properties in a points package to mitigate exit fear and lower the entry cost?

I would guess they probably don't want to do a rtu - the Hilton Club in NYC originally had that form, but they had to book the gains over the term of the lease which made it unattractive from an earnings standpoint. Although I think there have been some changes to lease accounting, so who knows.

I would guess some sort of vacation club. Maybe something with a lower price point that can only book off season

 

[Jason245]

My personal read on this is as follows:

1. Japanese owners seem to prefer the fixed week over the flexibility.

2. I think the whole upgradable inventory problem is bs. They could be more aggressive on rofr if this was a real issue.

3. They are not doing a trust.

4. They are having challenges finding/targeting the wealthier millenials especially since the economic headwinds have caused this generation to suffer wage stagnation. At the same time the generation with most of the wealth (baby boomers) are all in process of retiring and have more or less set their retirement plans in place.



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[terces]

Is the transcript of the Earnings Webcast available now? I could not access it on their web page and don't have the time to listen to the entire 45 minute presentation.

 

[JIMinNC]

Is the transcript of the Earnings Webcast available now? I could not access it on their web page and don't have the time to listen to the entire 45 minute presentation.

They have not posted the transcript yet.

 

[1Kflyerguy]

They have not posted the transcript yet.

The transcript is now available on Seeking Alpha.

I see the discussion on a possible Trust was in the Q&A. Sounds like something they are looking at, but not imminent. Lots of challenges with all the various development partners.

 

[1Kflyerguy]

I may be wrong, but I got the impression that each project has to get to a certain point before they can do all of the legal registrations and approvals they need to begin sales - CCRs need to be drafted and registered with the local regulators, etc. These are mostly deals that are being developed by third parties for HGVC, so all of the contracts and legalities have to be in place before they can sell.

I agree with your assessment. You don't have to look very hard to find real estate or resort projects that got started but never completed. Just imagine if HGV had started selling Maui when it was first announced...

 

[JIMinNC]

My personal read on this is as follows:

1. Japanese owners seem to prefer the fixed week over the flexibility.

2. I think the whole upgradable inventory problem is bs. They could be more aggressive on rofr if this was a real issue.

3. They are not doing a trust.

4. They are having challenges finding/targeting the wealthier millenials especially since the economic headwinds have caused this generation to suffer wage stagnation. At the same time the generation with most of the wealth (baby boomers) are all in process of retiring and have more or less set their retirement plans in place.

I disagree with your conclusions in #2 and #4.

This whole issue of inventory availability first reared its head in the 1Q 2019 earnings, when they also missed targets. In that call, Mark Wang said where they have inventory, they are getting good results. In that call back in early May, an analyst basically asked about the topics you allude to in #2 & #4 - that could there be other "macro issues" impacting the results? Here is the Q&A:

Analyst Stephen Grambling: So one last one. Just given that, you know, the availability could be important, how can you get comfortable that the trend that you saw in March wasn’t just because of the availability versus something going on in the macro? Do you see that in the conversion rates, or is there something else from a tour standpoint?

CEO Mark Wang: Well, it’s interesting, from a consumer standpoint, our consumers are behaving very good in markets where we have inventory. A great example, we just launched Central toward the middle of March. That’s our new property in New York. Consumers are behaving really good. We’re exceeding expectations there. Orlando, where we have ample inventory, again, another really strong market, and we’re starting to see this pick up in Myrtle Beach as we will be opening the Enclave there, and so in markets where we have inventory, the consumer is behaving better. In markets where in APAC in particular, where we’ve exhausted most of Ocean Tower and we don’t have that high-end upgrade inventory, that’s a market that we’re struggling with.

And so it’s hard for me to really quantify and judge the consumer based on that, so I guess what I’m saying is where we have ample inventory, we’re good. Where we don’t, we’re seeing lower commitment levels.

They have said repeatedly that what their customers are demanding - in Hawaii and New York particularly - is higher-end inventory to fuel upgrades. If you look at some of their other investor presentations that are on their web site, you can see upgrades are a big part of their sales strategy. I suspect there is less of that higher-end stuff coming in via ROFR than the more mid-tier stuff in Vegas and Orlando. In any event, if development delivers a new phase of Ocean Tower with - just guessing here - 30 new units, then that's over 1500 intervals available to sell. Might be hard to find 1500 high-end Hawaii intervals via ROFR in a short period of time.

Here are two charts from a May 2019 investor road show that talk about the importance of upgrades and discusses their demographic targets. It's still not a heavily Millennial target market - only 22%. And there are many Millennials who are doing very well. Our son is making six figures less than two years out of undergraduate college.

 

[GregT]

If I was an investor, I would be very unhappy that they didn't have the inventory available -- how could they miss that? They are paid alot of money to make sure they have product available to sell.

Can't they start new phases at Kings Land? Why couldn't they start the next Ocean Tower phase when they saw Phase 1 moving faster than expected (had to have been faster, otherwise they would have adequate inventory?) Are they now stuck with too much Kings Land? If so, why not adjust the upgrade program?

Again, it just sounds like they were slow to see trends and got caught short -- and investors lost money. This is the kind of thing that will hurt the credibility of management. Interesting.

Best,

Greg

 

[CalGalTraveler]

Interesting to compare MVC demographics to HGVC:

HGVC
56 avg. Owner age
20% Japan


MVC
59 avg. Owner age
52 first time buyer

Clearly the industry is not attracting Millennials.

 

[JIMinNC]

If I was an investor, I would be very unhappy that they didn't have the inventory available -- how could they miss that? They are paid alot of money to make sure they have product available to sell.

Can't they start new phases at Kings Land? Why couldn't they start the next Ocean Tower phase when they saw Phase 1 moving faster than expected (had to have been faster, otherwise they would have adequate inventory?) Are they now stuck with too much Kings Land? If so, why not adjust the upgrade program?

Again, it just sounds like they were slow to see trends and got caught short -- and investors lost money. This is the kind of thing that will hurt the credibility of management. Interesting.

Best,

Greg

I agree that management needs to answer to these issues. A lot of shareholder value has been wiped out since May 1. If you look at where the stock was on May 1 before their 1Q earnings, it was $32/share. After the 1Q miss and now the 2Q miss they are at about $26.50 - a 17% drop. By all accounts, it's because of the lack of high end inventory, mainly in Hawaii, so someone in management should have to answer to that.

The clear impression I got was that Ocean Tower sold out a lot faster than they had expected. Given the lead time on these kinds of projects - legal approvals, registration of each phase, etc. - maybe they couldn't accelerate it much, or maybe the 2020 target for Phase 2 is accelerated. I'm not sure what the original phasing plan was and if the current 2020 schedule was what was originally planned or an acceleration of the original plan.

Any idea how far along they are on selling-out Kings Land Phase III? Could that be already sold out? Or maybe that's the "mid-tier inventory" they spoke of trying to shift buyers into, but they didn't bite. Since a big part of their Hawaii sales is targeted to Japan, perhaps the Japanese are attracted to the hotel-like project at Ocean Tower as opposed to the more condo-like Kings Land.

 

[SmithOp]

Phase 3 at KL was only 3 buildings so very little to sell. The problem with expanding KL is the site prep, it took them a long time to pulverize the lava for a stable base.

You are right on about OT, the asian buyers are more attracted to the location and smaller units with high point values.


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