Starwood Sells $125 Million in Timeshare loans to a private party

[nodge]

Hi Gang,

Here is an article that appears to be written in English, yet seems Greek to me. Are there any financial gurus out there that can explain what this all means?

When SVO does something involving $181 million that includes a statement that "[t]he notes have not been and will not be registered under the Securities Act of 1933, as amended, or any state securities laws," I tend to raise an eyebrow or two.

-nodge

 

[esk444]

Hi Gang,

Here is an article that appears to be written in English, yet seems Greek to me. Are there any financial gurus out there that can explain what this all means?

When SVO does something involving $181 million that includes a statement that "[t]he notes have not been and will not be registered under the Securities Act of 1933, as amended, or any state securities laws," I tend to raise an eyebrow or two.

-nodge

It's a private placement debt agreement. Basically, Starwood is trying to raise money by issuing debt to investors instead of getting a loan from a bank, probably because the credit markets are still too tight.

Anyways, it looks like the debt is backed up with timeshare loans. When the timeshares buyers repay their loans to Starwood, Starwood is obligated to forward that cash to the debt holders to a certain point.

As for it not being registered under the 33 Act, it's no big deal. It just means that the debt is probably ONLY being sold to insitutional investors who have already done their due diligence on the deal. If they want to sell the debt to regular investors (i.e. retail investors or the general public), they have to register it with the SEC and it could delay the deal for months. Since the institutional investors have already done their research, there is really no reason to protect them by having the SEC spend months looking at the agreement since regular investors can't buy the debt.

Anyways, the institutional investors (probably hedge funds) are still protected from fraud by the securities laws, it just doesn't have a SEC person scrutinize every little thing in the document to make sure a lay person understands it.

 

[BocaBum99]

if this is what I think it is, it's really good for the industry that someone is buying timeshare loans. That frees up cash for developers so that they can sell more and build more resorts.

 

[nodge]

Thanks for the financial lesson!

So let’s see if I got it straight . . . . “Starwood Hotels and Resorts,” [HOT] the parent company of SVO, basically got some up-front money from an institutional investor in exchange for agreeing to give all future cash generated from SVO’s timeshare loans to that investor for a limited time?

Well, I guess I have three questions then:

1. If HOT gets credited with the revenue from this deal, won’t SVO’s balance sheet be even worse during the time when all SVO loan payments are forwarded to the investor, thereby making SVO even more of a financial dog to the HOT higher-ups?;

2. How much of the up-front money received by HOT from the institutional investor will be going to SVO? If it’s secured by SVO’s resources, shouldn’t SVO get at least a little of the bounty? Maybe even just enough to pay for a long promised on-line reservation system?; and,

3. Could this be viewed as a big step toward HOT “cashing out” its timeshare business? With no new projects on the horizon, SVO’s top dog jumping to the HOT mothership last Fall, and now HOT essentially selling SVO’s outstanding timeshare loans to a third party for quick up-front cash, what’s keeping HOT in the long term timeshare game?

If "option 3" is the ultimate goal of HOT (a publically traded corporation), shouldn't all major transactions (you know like . . . say . . . . anything over $100 million give-or-take) leading to that goal be subject to SEC scrutiny too?

-nodge

 

[duke]

if this is what I think it is, it's really good for the industry that someone is buying timeshare loans. That frees up cash for developers so that they can sell more and build more resorts.

These loans are most likely sold at a "discount". That is, SVO would receive a percentage (50%, 80%, etc.) of the loans face value. SVO would also probably get a small percentage fee for collecting and processing the loan payments. However, the total loan payment received would go to the new owner of the loan.

These loans are "Assets" of SVO so by selling them at a discount it would hurt their balance sheet as well as reduce the income they would receive each month on their income statement.

But, it is possible, since these loans carry very high interest rates, that the loans were actually sold for a gain. Since interest rates are so low now ... as long as the historical defaults are low ... it is actually possible that they were sold for a gain and this improves the SVO Balance Sheet.

Either way, SVO turns an asset into cash that can be used to develop more timeshare properties!

 

[nodge]

Either way, SVO turns an asset into cash that can be used to develop more timeshare properties!

According to the article, HOT sold the loans, not SVO. With the VP bonus season only a few months away, all those private jet service bills piling up, and the hotel portion of the company bleeding cash, can we really be optimistic that this new found cash will lead to any new timeshare developments?

I'm thinking SVO won't even see enough of that cash to afford another round of luggage tags for some of us.

-nodge

 

[esk444]

That's not an article, it's a company press release. A very poorly drafted press release I might add. After reading it more carefully, it looks the issuer of the notes in not Starwood, but rather "SVO 2009-A VOI Mortgage Corporation."

SVO 2009 looks like its an entity set up to hold the timeshare mortgages written by Starwood. Starwood dumped $181M worth of timeshare mortgages into SVO 2009, of which 69% of them are used as collateral for the $125M 8% or so loan to the private investors.

If SVO 2009 is Starwood's mortgage arm, I would assume that SVO 2009 would use that cash either to issue more timeshare loans to buyers of timeshares.

I would add that many buyers of mortgage-backed securities no longer are willing to buy 100% of loans from anyone. They want the people issuing the loans to have some skin in the game, which will hopefully make them more cautious with their underwriting standards. Hence, Starwood is required to retain 31% of the timeshare loans, plus I'm guessing the 8%+ interest rate is probably above what banks normally charged back when they were giving out loans.

Anyways, I don't necessarily see anything nefarious or unusual with this transaction. Real estate developers always try to unload their consumer loans that they write to sell property to outside investors. It frees up cash and lets them concentrate on what they do best, real estate development.

 

[nodge]

Could be. I guess it all depends on which Starwood entity actually received the proceeds from the sale.

I guess we'll just have to wait for a new video that explains it all to us to appear on MSC.

-nodge

 

[Captron]

If I am reading the details right:

HOT got $125 million for security of $181M of loans. HOT maintains a 31% interest in the $181M. The new owner takes all payments for 12-24 months and then it converts to a 8% fixed rate for the remainder. Starwood then gets whatever interest exceeds 8% (ie. a LOT for their timeshare loans) By getting all of the payments for the first 12-24mos, the owner reduces exposure significantly in a short period of time. This assumes that the conversion to the 8% fixed rate takes place after the first 12-24 months which is not explicitly stated but seems to be implied.

The new owner, if kept to maturation, would get the $125 M (minus defaults)+ all interest for 12-24 months + 8% fixed rate for the remainder of the term.

HOT gets $125 million now + interest in excess of 8% after 2 yrs. They lose all the first 12-24 months worth of interest and the 8% paid after the 2 yr mark.

This gives HOT some immediate cash in exchange for losing some long term earnings. A common practice in tight financial times. This will likely go into keeping things afloat until the economy turns around. Nodge, bonuses come under those costs this will likely go to, yes, you are right on.

 

[jarta]

This selling of loans is not a new tactic by Starwood. The only thing different about selling these timeshare loans/mortgages is that it is through a private placement financing arrangement. That and the fact that the money will probably be used to reduce Starwood debt rather than being used as "seed money" for the next development.

Starwood has always maintained that timeshare mortgages are different than sub-prime home mortgages because of how the loans are documented. IMO, maybe; maybe not!

The plan Starwood put out a few months ago as to what it was going to do to make the company survive and thrive in this lousy economy said that more loans would be sold off. That it actually happened should be no surprise. ... eom

 

[malyons]

The plan Starwood put out a few months ago as to what it was going to do to make the company survive and thrive in this lousy economy said that more loans would be sold off. That it actually happened should be no surprise. ... eom

not only no surprise, but it's actually good news. unfortunate that they won't use this money as the so called seed money, but it's a step in the right direction. this is very normal in the real estate development world, and a necessary move for a company who is not really in the business of servicing mortgages.

 

[komosatp]

There are two other important motivations for Starwood which haven't been mentioned.

1. Mark-to-market accounting: each quarter recently Starwood had to take a hit to earnings because of assets like this on their books. Even though people were still paying everything on time, Starwood had to take a paper loss on its financials just because the market has decided that these types of loans are no longer attractive investments. Getting these off the books allows them to have more steady earnings and a healthier financial position.

2. A security like this might be eligible for sale into one one of the many government bailout programs that have been created. But Starwood might not have been eligible for the one that would buy these loans, so if it packages them up and sells the to an entity that CAN sell into one of these programs, it has an way to take advantage of the program, by getting a buyer to take it off its hands at a fair price.

 

[skim118]

nodge is always suspicious of Starwood & rightfully so !

This deal illustrates is a legal transaction that allows Starwood(HOT) to pretend that it's $181 mil timeshare portfolio is worth $181 mil on it's books, brought you by "structured finance specialists" !

The reality is that they had to discount their loan portfolio by giving up the first 8% annual interest($29 mil) to this newly created entity, but this accounting fiction avoids immediate impact to Starwood's balance sheet.

It's true that Starwood gets $125 mil upfront, but given the huge debt that needs to be refinanced in coming years this cash is not going to go far.

As many Starwood properties head into foreclosure like W San Diego, St Regis Monarch, their future management fee stream is also going to be affected.

The biggest albatross on Starwood currenly is the St Regis Bal Harbor; they destroyed a beautiful Sheraton Hotel and built a Vacation residence property that they are choking with inventory and will have a hard time selling at the the prices they originally envisioned.

 

[philyphan]

This is why the country is so messed up right now. Everyone is a financial genius. Folks, a loan document is a asset that has some value. If i lend you $100 and you agree to pay me back $110. I can sell that loan to someone else for $105 to get my profit quicker and the new owner assumes the risk. This is called a secondary market. Some of you might have heard of Freddie Mac, same thing with mortgages.

 

[clsmit]

As others have mentioned, Starwood gets the spread between the 8% and what they loan out the money for. When you finance from Starwood you pay about 14% (that was what we were offered on our last 2 developer purchases that got us to 5*). Starwood had said in their last quarter report that they were planning on selling these loans.

They need the cash to pay day to day stuff. They need a lot of cash to keep things running when no one rents rooms or buys timeshares. See this article for more info:http://www.cfo.com/article.cfm/13720407/3/c_2984789?f=pull_quote_tout

They don't own the Starwood-flagged properties that have defaulted, like the one in San Diego, so they won't use these proceeds to pay for them. (Huh? I can hear some of you say.)

CLSMIT'S Layperson Guide to Hotel Ownership and Management
There are up to 3 entities involved in a typical US hotel

• The owner of the property. This is a company that owns the physical space -- the real estate. It can be a private company, a REIT, or even just a person. Example: Host Hotels and Resorts (HST).

• The company managing the property. This can be the same company that owns it, but doesn't have to be. The company managing the property is responsible for housekeeping, front desk managment, etc.

• The company who's name is on the sign. Example: W, Sheraton, Westin. This company can own and/or manage the property, but doesn't have to. The companies that own and manage the property, in order to have the name, have to agree to adhere to the standards set by the flag. That's why you may see a hotel start as a Holiday Inn and later become a DoubleTree. The building doesn't change (they might change the decor), just the name on the outside. In Starwood's case, they have spent the last few years selling their properties and focusing on management and keeping the standards consistent for each brand. See page 15 of this presentation http://phx.corporate-ir.net/Externa...9MzM3NzA5fENoaWxkSUQ9MzIyOTkyfFR5cGU9MQ==&t=1 for more details.

 

[skim118]

This is why the country is so messed up right now. Everyone is a financial genius. Folks, a loan document is a asset that has some value. If i lend you $100 and you agree to pay me back $110. I can sell that loan to someone else for $105 to get my profit quicker and the new owner assumes the risk. This is called a secondary market. Some of you might have heard of Freddie Mac, same thing with mortgages.

I may not be a financial genius, but I do work in the financial field & let me explain my issue with the Starwood deal again.

If $100 loan you are talking about is being sold at $84, then accounting rules will cause you to report $16 loss on the asset sale immediately.

Starwood sold $181 mil of their timeshare loans that are defaulting at a higher rate than their loan-loss reserves at a discount; but creating this new entity lets them pretend everything is fine and lets them avoid a instant hit to their income statement & spread the pain over the next two years.

I always wondered who are these people that were crazy enough to finance a Westin/Sheraton developer purchase at 14% ? I am also quite sure that they are going to default at a much higher rate than the 8% default rate factored by Starwood(source 10-K) in the coming years.

 

[jarta]

skim, ... "I am also quite sure that they are going to default at a much higher rate than the 8% default rate factored by Starwood(source 10-K) in the coming years."

So, being Starwood, having cash flow problems and owning the loans, what should you do? Keep them or sell them off and take the loss now? Seems like an easy decision for me.

But, Starwood has always sold off its timeshare loans (really, merely a revenue stream) to obtain money for its next development. Now, Starwood has put new developments on hold because it needs operating cash. Same type of sale, but a different use of the proceeds from the sale. I just don't see the big deal here. ... eom

 

[LisaRex]

But, Starwood has always sold off its timeshare loans (really, merely a revenue stream) to obtain money for its next development. Now, Starwood has put new developments on hold because it needs operating cash. Same type of sale, but a different use of the proceeds from the sale. I just don't see the big deal here. ... eom

I guess the obvious question is that if they are selling off their only asset, what are they going to use for seed money for future developments? I don't see the banks loosening up on credit for luxury timeshare developments any time in the near future. The TS division was very profitable at one time. No longer. And if they're no longer receiving revenues from outstanding loans, why would Starwood keep that division?

 

[abdibile]

This sounds like a typical ABS securitization to me.

Starwood was never in the busines sof giving out loans to buyers but was in the business to sell timeshare units.

Thi is the same as GM and GMAC or Ford and their financing arm. GMAC just helped to sell more cars by providing loans to buyers.

In recent years they always securitized the timeshare loans instead of keeping them on their balance sheet. Same with auto loans.

The problem was, that since the financial crisis was started (yes, mainly by ABS that had subprime loans in it) no company was able to securitize loans anymore because there were no buyers.

This transaction is very positive for the economy (loans are available again) and Starwood (they can provice timeshare loans again and have more cash to build new resorts).

The deal works like this:

Investors bought a senior interest of 69% of the timeshare loans and receive 8% interest on it.

All cashflows (14-16% interst plus repayment) of the timeshare loans in first 2 years go to these investors for these 8% plus some repayment of the loan amount.

After two years a portion of the cashflows from the loans goes to Starwood (not specified how much).

Starwood still owns the 31% Junior part of the loans.

So all defaults and other credit problems of the timeshare buyers hit Starwood in the first place.

Only if more than 31% of the total loan amount is lost due to defaults, the investors in the note lose money. Starwood owns the first loss piece in the loans.

But Starwood also receives the differnce between what they charge the buyers (14-16%) and the 8% they pay to the investors.

Starwood was probably unable to get rid of more than 69% of the loans due to financial crisis/market conditions.

But it is a first positive sign of securitization market (and hopefully economy) coming back to life

 

[philyphan]

The 181 million is the total amount if paid over the term (principal and interest) of the loan not what is invested (loan amount - profit). Starwood is a developer not a mortgage co. Just as GM set up a finance co to sell cars and toll brothers, kb etc have mort co to sell homes. Starwood offers financing to sell units. They receive no money until the loans are paid off or sold. they can do either but most companies sell the paper to recapitalize themselves. it is a loss in the long run but a profit and capitalization short term which can be put into other investments and developments. This is what the congress was calling the credit freeze. not that people couldnt get loans, but the secondary market wasnt buying them. This a great sign that the economy is improving. these are good loans with a good payoff and private investors are again willing to spend money on them.

 

[skim118]

The 181 million is the total amount if paid over the term (principal and interest) of the loan not what is invested (loan amount - profit).

Are you a Starwood employee or do you have an inside connection in Starwood to have more details than SEC filings ?

The reason I am asking is because Starwood in their 8-K SEC filing dated 6/8/2009 clearly indicate that they sold $181 mil in face value aka principal amount, contrary to what you wrote.

 

[rocky]

All of this is just painful to read and think about. Wait until Starwood decides SVO is no longer part of their core business strategy and sells the whole thing to someone else -- hopefully everyone bought where they want to go, because in the end that's all you really have. Elite status, starpoints -- that stuff could disappear.

 

[bizaro86]

The reason I am asking is because Starwood in their 8-K SEC filing dated 6/8/2009 clearly indicate that they sold $181 mil in face value aka principal amount, contrary to what you wrote.

Starwood did sell 181 million worth to a third party. However, they own 31% of the third party, so some of the 181 million is going from Starwood, to the third party, and back to Starwood. That is why the net proceeds to Starwood are less than the total consideration received for the loans.

Michael

 

[Captron]

I read that to say that they maintained 31% interest in the loans.

I believe the initial 31% of forfeiture is theirs to bear as is common in these transactions so the risk to the investors is actually quite minimal as losses would have to exceed 31%.

 

[nodge]

Starwood 2Q 2009 Results Posted Yesterday

Hey gang,

Starwood announced its 2Q 2009 numbers yesterday and managed to call it a 28% increase ($134 million “profit”) over the same period last year despite, near as I can tell, apparently losing about $111 million more than it took in from its day-to-day hotel operations over the quarter.

How did it do this you ask? Well, from my limited understanding of corporate shell game book keeping, marketing speak, and this report, Starwood appears to have offset that $111 million loss with the $125 million one-time sale of timeshare loans AND a $120 million one-time tax break that just happened to fall in this same quarter.

$125 million (timeshare loan sale) + $120 million (tax break) – $111 million (operating loss) = $134 million (“earnings”) Sound right?

If so, that $125 million sale of timeshare loans appears to have been used simply to keep Starwood’s lights running another quarter.

According to the transcript of the 2Q announcement, Good Ol’ Fritz is quick to report that it renewed Starwood’s AM EX deal to bring $250 million into the pot (presumably to keep the lights on for another quarter), and the $90 million sale of the W San Francisco can probably pay for another quarter, but what happens when the one time tax breaks, discounted timeshare loan sales, and hotel fire sales run out?

With Starwood apparently burning more cash then it brings in from its day-to-day operations to the tune of over $100 million a quarter, how long can it keep paying Fritz $2 million A MONTH and giving away free and heavily discounted rooms?

As a Starwood timeshare owner, I’m all for maintaining brand loyalty, but not when that brand is robbing Peter (timeshare owners) to pay Paul (pouring that money into the hotel business to hide a $100 million+/quarter loss from investors). Is Starwood really doing that you ask? Well let’s see what Starwood CEO Fritz told investors about that yesterday . . ..

“[W]e reduced SVO’s overhead by 45% and our sales force by 35%. This resizing will continue as we adapt the business to the new reality. And we continue to pull cash out of the business by monetizing existing inventory. With our recent securitization , we expect to generate over $150 million in cash from vacation ownership this year.” (emphasis added).

Would our timeshare beds be any less heavenly if Starwood wasn’t cutting corners and squeezing every available penny out of them to prop-up its hotel business and instead we had an organization limited to sustaining our timeshare operations runing the show? I think if that new organization issued statements like "we continue to pull cash out of the business," its managers would find themselves in jail instead of cashing their monthly $2 million paychecks.

-nodge

Oh yeah . . . How big of a vat of Starpoints do you think AM EX gets for $250 million? Aren’t those starpoints eventually going to be used for non-revenue generating hotel rooms? Shouldn’t that be factored into the long-term survivability calculation too Fritz?

Also, we need to add the phrases "near-term accute liquidity risk" and "sector-unique headwinds" to the creative new buzzwords for 2009 list. Ah . . . . remember the good ol’ days way back in 2007 when "surprise and delight" was all the rage? -n