Marci For WorldMark

HATRACK'S ORIGINAL EXPLANATION OF CREDIT DILUTION
by Steve Kranker

A Coastal Oregon resort at Depoe Bay is one of WorldMark’s more popular, high demand resorts in summer. Pretend that an early WorldMark Club consisted of 50 condos in that resort with 50 owners, each with one week. There are thus 2500 timeshare owners, each with a 1/50th ownership in a Depoe Bay condo.

Now suppose that another developer has built “Mugwamp Swamps Resort” (maybe in South Dakota), with 50 condos and 2500 owners. What if Trendwest recommends ‘merging’ WorldMark Depoe Bay with the Mugwamp Swamps Resort? If the merger is approved, the expanded Club will now have 5000 owners of 100 condos in 2 locations. Each owner still owns 1/50th of a condo. Except that now, they truly own a half week in Depoe Bay and a half week in Mugwamp Swamps. Owners should get to vote on the approval of this merger, as they are effectively “selling” half of a week in Depoe Bay and buying half of a week in Mugwamp Swamps in exchange. They will be in favor of this if they feel the real estate value of a condo in Mugwamp Swamps is roughly equivalent to a condo in coastal Oregon. They’ll be adamantly opposed to the merger and will vote against it, if they judge that Mugwamp Swamps is an inferior, less desirable location.

But what if the bylaws of the Club don’t require a vote by all owners; perhaps the elected 5-member Board of Directors has power to approve this merger? The merger is approved, and it should be no surprise, that when the original Depoe Bay owner goes to make his reservation, on a 1st come, 1st served basis, that all the Mugwamp Swamps owners want to go to Depoe Bay and there’s twice as much competition for the desirable weeks there. Of course, it naturally follows that Mugwamp Swamps is easy to get….no demand for those weeks.

Admittedly, I used an undesirable Mugwamp Swamps example to exaggerate my point. If the proposed merger is equal or better than the original Depoe Bay, the pre-existing WorldMark owners will be thrilled to merge with the expansion resort proposed (maybe beachfront in Maui?)

I want to establish that each WorldMark resort expansion is truly a “merger”. Initially, a one-resort Club became a two-resort Club, then three-resort Club and then in 2004, the 53-resort Club became a 57-resort Club via expansion. There are no ‘free gifts’. In each expansion, the Club owners “sold” a share of their pre-existing portfolio of resorts and exchanged it or “bought” a fraction of the new resort. About 1999, WorldMark was a Club with 2,000 condos in 30 resorts. Unfortunately, the pre-1999 owners don’t ask themselves, “do I like the new 2000 condos added since 1999 as much as I like the original 2000 condos?” They truly “sold” 50% interest in the mid-1999 Club to the new owners added since then, and they truly “bought” 50% interest in the newer 30 resorts added since mid-1999.

Continuing the hypothetical story, the lack of a vote to approve these mergers becomes even more outrageous when you realize that there weren’t really 2500 happy owners of the Mugwamp Swamps that joined our expanded Club, and the two-resort flexibility ‘added value’ to both halves of the Club by allowing them to enjoy variety. The way it really works is that Trendwest themselves owned 50 empty condos in Mugwamp Swamps and had ZERO owners who really wanted to go there. Back on the west coast, they had huge demand for WorldMark Credits that represent the right to a week in popular Depoe Bay condos but they were “sold out” of Oregon inventory. By acquiring a piece of cheap real estate in Mugwamp Swamps (maybe it’s a $120,000 condo instead of a $200,000 coastal OR condo), forcing the merger on the 2500 WorldMark owners at the time (after all, Trendwest controls the WorldMark Board….the “fox is guarding the henhouse”), Trendwest is allowed to “deem” a 2br/red week in either place is still 10,000 WorldMark Credits. Thus, they get a half million credits per condo independent of what the underlying real estate is worth (be it $120k or $200k). They sell the credits to new owners for $1.70 each; in fact, it’s very likely that the sales office in Oregon sells 95% of the new owners, and the newly opened Trendwest sales office in Mugwamp Swamps sells only 5% of the new members. So, Trendwest can continue to “sell” Oregon vacationers new credits with the promise of going to Oregon, when in reality, the real vacancy lies in Mugwamp Swamps. Theoretically any owner can aspire to go to Oregon, but only half of them in reality can get there on the 1st come, 1st served reservation basis.

Thus, if the developer is allowed to add over-valued (but less desirable resorts) to the portfolio, eventually, the Club is “diluted” in value to where there are an disproportionate number of new owners competing for the original popular destinations, and rampant vacancy in all the lowly new resorts. In WorldMark, we have some of that. I’m not alleging that Cendant has “totally wrecked” WorldMark over night, but the dilution is getting noticeable if you know where to look.

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