Presentation by SVO Leadership at Merrill Lynch Event

[clsmit]

Presentation was 3 Nov 08. Some of the slides are similar to those we have previously seen.

List of Presenters:
Sergio Rivera, Chief Executive Officer, Starwood Vacation Ownership

Michelle Frymire, Senior Vice President and Chief Financial Officer, Starwood Vacation Ownership

Jason Koval, Vice President, Investor Relations

Exerpts from Slides, which are at: http://library.corporate-ir.net/library/78/786/78669/items/313698/HOT1108.pdf

They are focusing on US locations
"Continuing to focus on successful core strategies in proven markets in the US where the vast majority of the timeshare industry business takes place", but later they mention that they also will have profitable segments in the Caribbean and Mexico.

They will continue to combine hotel and timeshare properties and they want to "create a valuable customer base of brand loyal, highly satisfied owners"
% Sales and price ranges (excluding Harborside, St Regis is last 5%):
Sheraton Westin
% Total 08YTD Developer Sales 35% 60%
Price Range 8-120K/wk 14-125K/wk
Average contract 07 $16,400 $32,400
(note that this is not average 08 contract price)

They claim over 200K unique owners, 16% have more than 1 week. That would imply nearly 32,000 3* owners if you assume that most multiweek owners are developer purchases and that 2 weeks gets your enough options to 3*.

More later after I read the rest and get back from meetings.

 

[Denise L]

Thanks for posting! I enjoy reading these presentations.

Is Sheraton Steamboat really opening in Late 2008?! I didn't even know that was built yet, or for sale...

 

[mitchandjeanette]

Did you see there is nothing about Cabos San Lucas in the "under development" section of their presentation. In our "owners update" they certainly implied there will be a new resort there, but gave no time line.

 

[SDKath]

NOthing about Cabo but Sheraton Kauai seems to be on there again. The rest are expansions at current resorts. :zzz:

Katherine

 

[calgarygary]

katherine, I wouldn't snooze just yet, there was confirmation that our HOA's subsidize hotels when facilities are shared but no reciprocal agreement for when hotel guests use the timeshare system (SPG).

 

[nodge]

The most interesting thing in this pitch to me appears to be the “financial performance” charts on page 11.

Please correct me if I’m wrong, but isn’t an “operating margin” the percentage of money leftover as “profit” after a company pays for everything needed to run the business? If so, doesn’t this chart tell us owners that SVO keeps 20% of every dollar it collects from us (in addition to us paying for all of those useless VPs' salaries and related boondoggles which are probably considered company "expenses"), while Wyndam and Marriott only keep 12% and 9%, respectively, of the money they collect from their owners? No wonder we don’t have online booking, etc.

I find it interesting that if you multiply Marriott’s 2008 “Total Revenue” by its 9% “operating margin” you get $119.34 million in profits for Marriott so far this year, and given SVO’s $613 Million in revenues this year, SVO would need to have at least a 19.47% “operating margin” for SVO’s profits to equal Marriott’s this year.

This is a shocker, but SVO’s reported “operating margin” turned out to be 20%. As a result, the chart shows that SVO is doing ever so slightly better than Marriott from a profits to date point of view.

Coincidence? Maybe. But I doubt it. I think SVO manipulates its costs and expenses to close loop on whatever “Operating Margin” it needs to appear to remain competitive with Marriott. As a result, we owners bear the burden of it in reduced services and the like.

SVO needs to stop acting like the weak sister of Marriott and run its business like Starwood runs its hotels (and coincidently the way we were all promised they would be run when we bought our SVO timeshares). The goodwill, revenue and related investors will follow.

-nodge

Regarding SVO’s “goals” set forth on the “conclusions” page (page 21), it seems to me that SVO’s stated goal of “generat[ing] premium margins” is directly in conflict with its stated goal of “generat[ing] highly satisfied customers.” Hmmmm. Anyone want to guess how SVO plans to resolve this conflict?

 

[stevens397]

My guess is the answer to your question, nodge, is looking at a resort like Kierland - which may be old news.

Kierland was always more expensive than Canyon Villas. But the timeshares were simply much nicer. So I guess their hope was they would offer better properties and be able to charge more thus generating larger profit margins.

Of course, I really have no idea!

 

[clsmit]

I'm back from my day at work. Don't ask how it went. :annoyed: This might affect my comments.

SVO is trying to show investors that things aren't as bad as they look on paper-- the huge drops in SVO income are just part of the cycle. That's why the appendix is there, to show that the income peaks in year 6. They have a number of properties in that phase of the cycle.

• They want to minimize cyclicality, but their pipeline is pretty thin.

• "Loyalize" is now a word (slide 21).

• 
  As others have mentioned, Sheraton Kauai is back on the list. I've only been on this board since March and I'd never heard of it. Guess they're pulling stuff out of the past to make the pipeline look better. When I googled it this press release from 2006 is the last thing I found on it. http://www.hotel-online.com/News/PR2006_3rd/Jul06_StarwoodVillas.html

• 
  Cabo is not on the list. This does not bode well. But then again, neither is Aruba.

• 
  About 19% of owners finance their loan ($19,300 average loan, add together the total financing portfolio, divide to get the number of loans, divide that into 200K owners). Wow. What are those people thinking?

• 
  The average FICO score is 706. About half the population has a FICO score lower than that number and half higher (http://www.nasfaa.org/subhomes/annu...uts2006/s065privateloansandcreditscores2.pdf). Without knowing the standard deviation around the range, I'm not feeling to good about those people's ability to pay the loans back. We might be seeing more than the 6% default rate in the future.

More on a related topic in another post.

 

[clsmit]

Compare 2006 and 2008

On the Starwood website is the 2006 Investor Day presentation. Let's compare and contrast, shall we?

http://media.corporate-ir.net/media_files/nys/hot/presentations/investorday2006.pdf

2006: 185K owners
2008: 200K owners (8% growth)

2006: 15% more than 1 week
2008: 16% more than 1 week (not much multiple ownership growth)

2006: 4107 units (excluding St Regis)
2008: 4969 units (~21% growth)
Both include units in presales. 21% growth in 2 years is really good, however, provided the pipeline continues. This, however, is SVO's problem. No pipeline.

Price ranges for the properties have changed substantially, mostly up. They have put higher value properties on the market and have sold out the lower end stuff.

The overall strategy and concepts haven't changed over the past 2 years, which is good. It's the execution we have problems with.

More thoughts, all you analysts out there?

 

[SDKath]

Very nice report? Can I ask how come you are there? Is this part of your job? My curiosity is peaked!

As for the pipeline, it is singularly unimpressive. Other than Riverfront and perhaps Sheraton Poipu, everything else is just an add on to what is already built and overbuilt. More at SBP?? More at SVR?? More in Palm Springs?? More at WKORV?? Nothing new at all. To keep people's interests, they need to give us some better locations too. Not just expansions at the same old places that are already relatively overbuilt. Of course, for those of us who own at these existing locations, building more units there means even more drops in their value. So really, they are doing current owners no favors to build WKORV III or SBP III or SVR XIV.


Katherine

 

[LisaRex]

No surprises. If I were a poor schlep who bought into Cabo years ago, I'd be asking my money back, with interest, the slideshow as proof that Starwood has stalled on the development.

 

[clsmit]

Very nice report? Can I ask how come you are there? Is this part of your job? My curiosity is peaked!
Katherine

Thanks, Katherine! No, I wasn't at the presentation. My DH works for a different investment bank so I don't think they'd let me in. I understand the audience since the DH runs meetings like this at least once a year. And I just read stuff like this for my day job, so doing this for SVO is "fun" in a geeky kind of way! (I work for a different financial services firm, not an investment bank.)

 

[clsmit]

A Comment from the Q3 08 Earnings Call

Vasant Prabhu, CFO Starwood (emphasis mine) "...a default on the time share is not at all like a default on a mortgage where the rational decision when your house is worth less than your mortgage you walk away. Here you are walking away from quite a bit of equity given how these things work. You put in 20%, plus you keep paying every month. You are walking away from something’s that has real economic value which we have the ability if we take it back to you know, historically we have always sold it at a higher price than we sold it the first time around. So, it is an unusual kind of thing where it is a fairly irrational decision to walk away from a time share payment and which is why these default rates at least historically, you know, have not moved that much."

Vasant, I have some timeshares I'd like to sell you! It has real economic value!