What is "Bad debt expense"?

[BobInNH]

Just got the DRI invoice and looking at the budget there is a line item for bad debt expense, AND IT'S $23 MILLION! (Just shy of 10% of the operating budget) It also have an offset against this of exactly the same amount. The bad debt expense was about $7.5 million two years ago.

So, what are these two line items? How does the accounting work? Why is this expense increasing so much and so fast?

I looked at the board minutes and don't see any mention of bad debts. It would seem to me that if 10% of my revenue was offset by bad debts that I'd be discussing it in board meetings.

Bob

 

[DeniseM]

Bad Debt Expense is owners who aren't paying their maintenance fees.

 

[WalnutBaron]

And the implication, of course, is that because it's a real cost of doing business, the expense gets passed on to the members like you who faithfully pay their maintenance fees every year. At nearly 10% of the operating budget, I'd be very concerned. What that financial report is really telling you is that your resort is quickly reaching an untenable financial position. DRI essentially has to increase your maintenance fees by a corresponding amount just in order to properly maintain the facility. Either that, or they don't--in which case the maintenance on the facility begins to suffer. Either way, it's not at all good.

 

[nuwermj]

The $23 million in bad debt is for the US Collection trust fund. It is not a single resort. In the budget this expense is offset by a developer's payment of an equal amount. Diamond has an agreement with the Members Association (or Collection) to pay this line item in exchange for the ownership rights of the delinquent points. Diamond doesn't build inventory. This recovery program is their primary source of points for the sales division.

Nevertheless, it is true that the size of the bad debt line has been increasing. This, in addition to declining global membership in their Club, points to some underling problems at this company.

 

[Passepartout]

I'm not looking at the annual report, but at one of mine, Bad Debt is larger than wages, or refurbishment, or any other line item.

 

[WalnutBaron]

I'm not looking at the annual report, but at one of mine, Bad Debt is larger than wages, or refurbishment, or any other line item.

For me, alarm bells would be going off.

 

[artringwald]

I looked at my MF statement for the Point at Poipu and in 2017 the bad debt was 2.90% of the total expenses. It peaked in 2013 when it was 9.41%, probably due to the water intrusion assessment. In 2018, they're forecasting 1.94%.

When DRI pays the bad debt and takes over ownership (so they can sell it again), they pay the same fees to the HOA that the rest of the owners pay. The bad debt doesn't cause the MF rates to increase.

 

[youppi]

The $23 million in bad debt is for the US Collection trust fund. It is not a single resort. In the budget this expense is offset by a developer's payment of an equal amount. Diamond has an agreement with the Members Association (or Collection) to pay this line item in exchange for the ownership rights of the delinquent points. Diamond doesn't build inventory. This recovery program is their primary source of points for the sales division.

Nevertheless, it is true that the size of the bad debt line has been increasing. This, in addition to declining global membership in their Club, points to some underling problems at this company.

View attachment 5212

FYI, your data are coming from the annual meeting presentation which takes place in September/October of each year and they are projected values to December 31 of each year and not real values as shown in the annual financial report.

Also, the payment is not 100% all the time. From the financial report of 2016 where the bad depth was $11,679,325 (lowered than the projected value of $13,703643 shown in your table) the US Collection recovered $6,337,840 from DRI. You can find all the data since 2007 for US and HI Collection and links to the real reports in the following spreadsheet (section financial report) : https://docs.google.com/spreadsheets/d/1jo0_ti3h8ZWy41VCCeaFLfpHqZKe38zADMPFQ9lDfg8/pubhtml#

Explanation of the agreement from the financial report note 4:
Effective December 30, 2016, the U.S. Collection entered into the IRAA with the Developer for the recovery of delinquent member assessments. Under the agreement, the Developer has agreed to pay 50 percent of the cost of recovery on the assessment receivables from January 2016 through August 2016, and 100 percent of the cost of recovery on the assessment receivables from September 2016 through December 2016, from delinquent owners in exchange for the assignment of ownership rights of the recovered intervals. Upon recovery of the assessment receivables, the U.S. Collection shall assign to the Developer the rights, title and interest in the assessment receivables, under the terms of the agreement. The IRAA agreement is automatically renewed for successive periods of one year unless terminated under provisions of the agreement. The current term expired on December 31, 2016 and was renewed through December 31, 2017. During the year ended December 31, 2016, the U.S. Collection recovered $6,337,840 from the Developer.

 

[b2bailey]

Just paid M.F. for another 'solo' timeshare I own.
Revenue for Assessments= $1,975M
Bad debt expense = 372 M

Tells me there is potential for trouble.
However, they have $1.6 million of
"Other Income" -- which I am guessing comes from renting those units with unpaid Maintenance Fees.

 

[nuwermj]

FYI, your data are coming from the annual meeting presentation which takes place in September/October of each year and they are projected values to December 31 of each year and not real values as shown in the annual financial report.

Here is some updated data. I don't think it changes much. DRI has stated in their financial reports that bad debt at the HOAs is a problem for their business model and they must take-on some of the cost of keeping the Associations financially sound. Unlike the old days when a developer would sell-out and move on, I think it is true that DRI needs solvent HOAs. In this instance I believe they are committed to do whatever is needed to maintain that solvency.

 

[pedro47]

Is DRI buying back this bad debt and can they rent those weeks out to rentals?

 

[artringwald]

Is DRI buying back this bad debt and can they rent those weeks out to rentals?

They pay off the bad debt and assume ownership, which means it goes into their pool of units available for sales or rentals.

 

[WalnutBaron]

I'm anything but a forensic accountant, but if you look at the two charts posted in Posts 8 and 10, a few rather alarming questions can be raised:

1. Total bad debt for 2016 was $13.7 million, compared to DRI's budget estimate of $7.4 million. In other words, DRI missed the actual number by 85%--and this in the midst of the strongest year for the U.S. economy since the start of the financial crisis back in 2008. Question: Does DRI really have a handle on its own business if it can't manage to budget and forecast better than that?
2. Bad debt expense was 6.4% of revenues in 2016--a quite significant drag on the company's performance. In fact, the chart on Post 10 shows that DRI had to contribute $6.3 million to make up for the delinquent maintenance fees not paid by DRI members.
3. The developer delinquency contribution for 2017 is shown as a whopping $31 million. Wow! While it is still too early to know what percentage of revenues that represents (as there are still three weeks remaining in 2017), it's reasonable to assume that the bad debt expense will eat up perhaps as much as 20% of revenues.

Unless DRI has an exceptionally strong balance sheet (which I doubt), any CPA would probably declare a company like this to be teetering on bankruptcy, if not technically bankrupt already. If this company were publicly traded (which it isn't), I'd be looking at it as a short sale opportunity.

 

[pedro47]

Is this why Apollo purchase DRI to short sale?

 

[WalnutBaron]

Is this why Apollo purchase DRI to short sale?

No. By definition, a short sale is just that--a sale, not a purchase. When one shorts a company, it means selling shares one does not own in order to buy back at a later time, hopefully as the stock price has dropped. It's a strong signal of an investor's sense that a company is currently overvalued. Why Apollo bought DRI, I cannot speculate. But the bad debt expense is very likely much higher than they had originally assumed when they reviewed DRI's financial statements.

 

[youppi]

I'm anything but a forensic accountant, but if you look at the two charts posted in Posts 8 and 10, a few rather alarming questions can be raised:

1. Total bad debt for 2016 was $13.7 million, compared to DRI's budget estimate of $7.4 million. In other words, DRI missed the actual number by 85%--and this in the midst of the strongest year for the U.S. economy since the start of the financial crisis back in 2008. Question: Does DRI really have a handle on its own business if it can't manage to budget and forecast better than that?
2. Bad debt expense was 6.4% of revenues in 2016--a quite significant drag on the company's performance. In fact, the chart on Post 10 shows that DRI had to contribute $6.3 million to make up for the delinquent maintenance fees not paid by DRI members.
3. The developer delinquency contribution for 2017 is shown as a whopping $31 million. Wow! While it is still too early to know what percentage of revenues that represents (as there are still three weeks remaining in 2017), it's reasonable to assume that the bad debt expense will eat up perhaps as much as 20% of revenues.

Unless DRI has an exceptionally strong balance sheet (which I doubt), any CPA would probably declare a company like this to be teetering on bankruptcy, if not technically bankrupt already. If this company were publicly traded (which it isn't), I'd be looking at it as a short sale opportunity.

This may help you (the management fees is the pure profit).
It is strange that the Delinquency Contribution is higher than the Bad Debt Expense for US Collection. May be there is a mistake in those data.
Those data come from the annual meeting (September/October)
US Collection

Hawaii Collection

 

[bizaro86]

If DRI is selling those points, Apollo will be thrilled with this development, because inventory take backs are the cheapest kind of points for them to sell.

If they are accumulating on their balance sheet it will eventually be a problem, but if that happens they'll stop taking them back.