The Numbers on High Country Club
I finally found the time to post the High Country Club (HCC) business plan. The following is information on their business model based upon information they sent me, my discussions with them, and information I’ve gathered from Destination Club (DC) industry sources.
Here’s my disclaimer – I have assembled the following information for my own decision making and have posted it here for review only. I cannot be sure of its accuracy and you should contact High Country Club directly to confirm this information before taking any action based upon it.
The current HCC statistics:
Time in business: 10+ months.
Members: 160+ (Includes all member types)
Rank of DC in terms of members: 4
Total properties available: 17
Additional properties under contract: 8
Properties leased: 2 (1 in Beaver Creek which does not allow DC ownership)
Average property cost: $775,000 (including furnishing & closing costs)
Reservation days per member: 36 annually
Member to property ratio: 8:1 average
Membership fee: $55,000 average (“Affiliate” membership fee is $30,000)
Annual Dues: $9,000 average (“Affiliate” annual dues are $4,800)
Note: “Affiliate” members have half the reservation days of other members and are considered ½ member for property usage, membership fee and annual dues purposes.
The BIG Question:
The BIG question for the newbie DC business is ……
are DCs a business model that allow for long term profitability and growth or are they a pyramid type business that will inevitably collapse and cause financial loss to their members?
The bankruptcy of Tanner & Haley (T&H) and the loss suffered by its 874 members has been discussed on this forum before so I won’t go into it in depth. I’ve done due diligence on several of the more affordable DCs and they do not have the two issues that doomed T&H; a majority of leased properties and unlimited usage by members. The DCs that I’ve talked to are open, frank, professional and seem to care about the current and future state of the DC industry (very un-timeshare like of them!).
The HCC business model:
The HCC biz model is based upon a county club type organization that provides the use of travel properties to its members for a fee. Some other DCs seem to primarily use their members as the resource for the capitalization of its assets (properties) with the benefit for members being the use of travel properties. HCC is also based on a cash flow business model that stresses efficiency of its operations and value oriented purchases of luxury properties that have great potential for appreciation. The HCC investors make their profit primarily by the appreciation of the properties instead of the fees of the members. HCC also keeps its fees low by leveraging appreciated properties for cash instead of getting cash from the members. In this way, members actually participate in the equity appreciation of the properties without spending the exorbitant fees charged by the few DCs that offer so-called asset appreciation participation. (Leveraged cash from appreciated properties = cash for HCC = lower fess and dues for members). Simply put, the difference may be that HCC sees its cash as cash flow while some other DCs see their cash as equity.
The HCC numbers:
Following are business numbers that I’ve summarized from the HCC projections and my discussions with their CFO. You can contact them directly for their unabridged 10 year projections and other financial information.
Property Purchase Costs:
Purchase
Property cost ................. $ 750,000
Property furnishing costs .... $ 25,000
Property down payment ...
($ 225,000 )
Mortgage balance ............ $ 550,000
Property cost includes appliances, built-ins & closing costs
Down payment now @ 30%; will increase as club grows
Mortgage Payment
Total payment ................. $ 46,148 per year / per property
Mortgage @ 30 year term, interest @ 7.5% (actually lower now)
Property Maintenance
Direct property costs ........ $ 25,740 per year / per property
Includes taxes, HOA, utilities, insurance, maintenance, cleaning, etc.
The properties are valued at an average of $850,000 even though many do not cost HCC that amount. They save substantial costs on property purchases by buying some properties @ a preconstruction discount of 20%. Preconstruction properties also appreciate in value by the time the property is constructed and mortgage payments are due. Additional savings on property purchases are due to the commercial real estate background of the company and the multiple purchases they are able to make due to the fast growth of the company.
Property Use by Members:
Members per property: ................ 8
Property use per member: .......... 36 days average
Member usage %: .................... 79%
HCCs financial model is based on an 8 to 1 member to property ratio but that number can be pushed lower in busy travel times and higher in slower times which helps availability (this is achieved by planning to bring new properties online for use during peak usage periods). They constantly monitor the reservation system to ensure that members have availability all of the time. In their short time of operation they have found that people are using about 80% of their available days which even at an 8 to 1 ratio provides a 79% occupancy rate.
Note that the 36 days of use per member is higher than the other DCs that I talked to which averaged closer to 30 days per member. I suspect that is because of HCCs “Affiliate” plan which is really a half-priced, half-use membership where members are more likely to use most of their 21 days as opposed to the standard HCC and other DC membership which averages about 40-45 days of use.
Membership Fees and Dues Allocation:
Membership Fees
Members per property ............................ 8
Membership fee ........................... $ 55,000 average
Membership fee per property ........ $ 440,000
The membership fee will increase to a max of $80,000 as the club grows.
Membership Fee Allocation
Property down payment ............... $ 225,000
Property furnishing costs ............... $
25,000
Property allocation of member fee .. $ 250,000
Operating cost allocation of fee ..... $ 190,000 per property
Annual Dues
Members per property ............................. 8
Annual dues .................................. $ 9,000 average
Annual dues per property ............... $ 72,000
The annual dues will increase to $10.200. Current annual dues are restricted to CPI + 2% per year
Annual Dues Allocation
Property mortgage payment ........... $ 46,148
Direct property costs ....................
$ 25,740
Property allocation of annual dues ... $ 71,888
Operating cost allocation of dues ........ $ 112 per property
This is actually very conservative projection as the projected mortgage rate is 7.5% while it is currently closer to 6.5%
Allocation to Operating Expense
Member fee allocation per property .. $ 190,000
Members per property ............................... 8
New Members for Operating Expense .......... 88
Yearly new member requirement to meet operating expenses. Operating expenses are estimated by me based on my conversations with the HCC CFO and a review of their projections.
This allocation of member fees and dues is different than what some of the other DCs claim. HCC takes a portion of the membership fee and uses it as cash for operations instead of using it all as down payment on property. The mortgages are then supported by the annual fees as payments are due. This allows them to use cash efficiently for cash flow instead of charging higher fees to allow a greater down payment from the initial membership fee. Note that HCC disputes the claims of other DCs on the amount of membership fees that other DCs use for down payments. Also note that HCC will pay a larger percentage of down payment on new properties as the club grows and cash flow increases.
The need for sales:
I believe that HCC and most DC’s need to keep selling memberships to stay in business with maybe the exception of Exclusive Resorts (membership fee of $425,000!). Because of HCCs strategy of outsourcing property management functions and the efficiencies mentioned above, they can sell for much less. When HCC levels out its pricing at approximately $80,000, it would need to sell approximately 6 memberships per month to generate enough cash to pay property mortgages and fund operations. Through the first 10 months of operations HCC is averaging about 15 memberships per month. The best sales tool is member referrals so as HCC is able to build its customer base it also increases its ability to build its sales pipeline.
The destination club exit strategy:
Another concern for DC club members is what is in the future of DCs as these clubs mature. Here are some of the exit strategies that have been mentioned to me by the DCs:
- Continue the status quo with the DC generating profits for investors as properties become paid off.
- Sell or merge with another DC for greater efficiency of operations and economy of scale for property developments.
- Sell to a large travel related conglomerate (ex: Hyatt, Hilton, etc.) which will allow a top tier of destinations for them.
Property equity vs. no-equity:
There has been some conversation on these forums about investment in equity based travel properties including DCs with memberships participating in the appreciation of the properties or shared ownership of the properties. For the record, I make my living by investment in commercial properties and equities (stocks) and have total control over all of them. I personally don’t consider travel an “investment” that I want to participate in. I just want to travel without having to worry about my R.O.I. and the ownership associated headaches of a travel property. I’d rather pay the low membership fee and low annual fees of a DC like HCC instead of paying 3 or 4 times as much in an equity sharing DC. I’ll invest the saved money into the investment vehicle of my choice instead of having some DC investment manager tell me how much I made on a shared property. (IMHO)
Consumer protection for DC members:
To protect consumers and make sure that DC’s are operating responsibly, the largest 7 DC’s have gotten together to form the Destination Club Association (“DCA”). While the DCA best practices are still being developed, the rules will focus on financial management, to make sure DC’s can fulfill their commitments to consumers, and consumer disclosures, so consumers understand exactly what they are buying and the inherent risks. The DCA regulations would have uncovered the Tanner and Haley situation years ago. HCC is actively participating in the organization of the DCA.
The security of membership fees:
Upon termination of membership, HCC members get an 80% refund of their membership fee on a two-in one-out basis so the cash doesn’t really need to be on hand to pay it since they money coming in for the 2 new memberships (at what should be a higher price than the refunded membership) will more than cover the refund. This actually gives the DC the advantage of buying back a low cost membership at 80% of the selling price and then reselling the same membership at 100% of the new, higher price. This creates a win/win situation for both the DC and member requesting the termination of membership.
Even without the need for cash on-hand for the reimbursement of membership terminations, the HCC 10 year projections show a ratio of assets to refundable membership fees at 145% at the end of the first year due to the initial capital investment. A ratio of 100% or higher would mean that HCC should be able to refund all members 80% of their membership fees in the event of total failure of the business. This ratio never dips below 100% thereafter. This sounds great for security purposes, but I believe this ratio is somewhat unimportant as long as HCC can refund the routine membership terminations and has sufficient cash flow to sustain and grow the business. I don’t believe that many businesses, let alone DCs, would survive a catastrophic event where all its customers/members asked for refunds and/or stopped doing business with it. (What would happen to your timeshare if everyone stopped buying, paying their dues and tried to sell?)
In addition to this, the 80% refund will be addressed more as the Destination Club Association finalizes the regulations for the industry but there will be a financial assurance provision that will hold DC’s to a net asset calculation to give comfort to members that they will get their money back. Note that many other DCs have a three-in one-out refund policy.
Final analysis:
IMHO, All businesses have certain assumptions in their business plan in order for them to be successful. HCC appears to have assumptions that are in line with typical business operating standards. Those business assumptions are:
- HCC relies on strategies of efficiency in both property purchase and operations to keep costs low.
- HCC utilizes its property availability to maximum potential without inconveniencing its members.
- HCC generates sufficient cash flow to allow it to continue to purchase desirable properties as membership increases.
- HCC must continue to make sales at a reasonable rate.
- HCC uses membership fees AND annual dues to make property payments.
- HCC should be able to refund routine membership terminations without jeopardizing cash flow.
- HCC has a sufficient asset to refundable membership fee ratio to protect members in case of the failure of the business.
- HCC, like most DCs, has good exit options that should potentially benefit its members.
HCC pricing is based on growing the company quickly so they can charge a premium for their product. The value of their product is between $75 and $100K and right now they are offering it to people for half of that.
I still haven’t pulled the trigger on a HCC purchase. Any thoughts?
F.Y.I. - HCC contact information is at
www.highcountryclub.com .
