Wyndham’s Development and the Cost of Credits

On Monday, October 6, 2008, Associated Press announced “Shares of Wyndham Worldwide, Corp. plunged with the broader market on Monday after the hotel company announced changes to its timeshare business and restructuring charges. Wyndham shares dropped 87 cents, or 6.9%, to $11.83 in afternoon trading. They hit an all-time low of $11.05 earlier in the session. Wyndham plans to refocus its timeshare business beginning in the fourth quarter. The Parsippany, N.J.-based company will shift its sales and marketing efforts to consumers with higher credit quality…AND CUTBACK ON TIMESHARE DEVELOPMENT.”

I’ve addressed the value of credits before in this column. As a general rule, timeshares of ANY type represent poor collateral value. That is, they are not generally pledged as security for a loan due to the difficulty and cost associated with selling them. Despite this fact, I’m fascinated by the role reversal of WorldMark vacation credits and financial instruments which have (historically) served as a store of wealth. Consider:

October 20, 2007
Dow Jones Industrial Average: 13,806
Standard and Poors 500: 1535
Nasdaq Composit: 2804
WorldMark Credits: Based on TLS “adjusted value” index: 54 cents per credit

October 20, 2008
Dow Jones Industrial Average: 9,033 (Down 35%)
Standard and Poors 500: 955 (Down 38%)
Nasdaq Composit: 1696 (Down 40%)
WorldMark Credits: Based on TLS “adjusted value” index: 47 cents per credit (Down 13%)

That’s right. An investment in credits, while worth 13% less than if purchased one year ago, lost SUBSTANTIALLY less value than the 3 main gauges of financial health noted above. This data, along with the news from AP that Wyndham is curtailing development goes to the heart of the issue. NOW IS THE BEST TIME EVER TO INVEST IN WORLDMARK CREDITS.

Holding cash is a comfort for many of us in challenging economic times, but staying on the sidelines can be very costly if you miss a substantial move in the markets. A combination of factors suggests to me that after-market pricing for WM credits has hit the bottom:
1. Restricted supply of new credits (see AP quote above) means Wyndham retail sales units may get squeezed for inventory…and reselling credits which might otherwise have entered the secondary market would be one way Wyndham can keep its sales lines open.
2. TLS margins are getting squeezed as we must pay more to sellers for credits than we’ve had to historically.
3. If brokers don’t pay more, they can’t find sellers willing to sell, which means less inventory of credits on the aftermarket.
4. Financial data suggests credits, previously considered poor collateral, are holding up well against non-cash alternatives such as stocks, bonds and mutual funds.
5. Due to many factors, including softening in the broader economy and the introduction of “Travel Share,” the market for WorldMark credits is as soft as I’ve seen in my 14 years of making a market for WorldMark credits. The prices sellers receive, net of sales expenses, are approximately the cost to Wyndham of development. This factor, along with the planned reduction in development of new resorts, suggests a future shortage of used credits.

If you and your family have considered more credits, I sincerely believe this is the best time in 14 years to make the investment. Plus, have you ever enjoyed a stock, bond, or mutual funds as much as your vacation with WorldMark by Wyndham?