Timeshare developers fare better among lenders.

A 32 percent increase in the size of portfolios since 1994, coupled with a 34 percent decrease in bad debt since 1991 has helped U.S. timeshare developers receive favorable financing terms and develop a stable relationship with lenders, according to a new industry study.

The study revealed a clear trend in the quality of receivables. Actual bad debt as a percentage of net sales (which represents gross sales less rescissions) has steadily declined, from 5.33 percent in 1991 to 3.5 percent in 1995, with the largest movement occurring in the last two years. Over 85 percent of timeshare developers consider the majority of their portfolio to be current.

Since 1994, bad debt expenses as a percentage of the receivable portfolio has remained constant. Relative to 1991 and 1993, survey respondents are more likely to reserve for uncollectible accounts, however, they are tending to reserve less as a percentage of receivables. This highlights the growing sophistication in financial management occurring in the industry's developer community. Sixteen percent indicated that they have completed a securitization since inception, and access to Wall Street capital sources is expected to become an increasingly common trend.

According to Jon Simon, national director of KPMG's vacation ownership practice, "Wall Street and other sophisticated corporate entities are increasingly focused on the timeshare industry. This study highlights the growing sophistication in financial management occurring in the industry's developer community.

Consumer Financing Trends Mirror Shift Towards Affluent Consumers

The study revealed a trend towards more cash or cash-out sales, which indicates that purchasers have the cash on hand and do not require the same level of developer financing as they had in the past. As noted in the study, "This tread can be expected to continue as timeshares move up-market and attract a more sophisticated consumer and one who has the disposable income to avoid high interest rates." Survey participants indicated that the primary reason they service their own paper is to facilitate their sales, although the servicing of receivables can be extremely profitable for developers.

The terms of contract financing packages have primarily remained the stone since 1994, with average terms of six to seven years. Most of the consumer receivables are fixed rate with no prepayment penalties and with rates greater than 13 percent. Coupled with the low default rates previously mentioned, the receivable paper of the industry is looking increasingly attractive to financial investors, as indicated by the study's findings.

New Product Options, Pricing Shifts

The fee simple legal structure, utilized by 67 percent of survey respondents, remains the most common form of vacation ownership. However, the survey revealed a trend away from fee simple and right-to-use towards more creative, less traditional legal structures of ownership. It also showed a clear trend since 1991 away from offering solely a fixed week product towards offering a more flexible floating week product. According to the study, some consumers place value on their ability to fix a week and are willing to pay a premium for doing so, during certain peak periods of the year. A purchase of one interval week remains the most common amount of time purchased at each closing.

Since 1994, asking prices for studios, one-bedroom, and two-bedroom units have remained relatively stable, and have increased for three-bedroom units. The average selling price for all unit sizes increased by seven percent, with studios experiencing the greatest overall percentage increase of 15 percent.

The average net sales volume per qualified tour experienced an overall increase in 1995. In addition, the cost of incentives/premiums has decreased from $78 to $71 per tour. The average net closing percentage has decreased slightly since 1993, and most recently remains constant at 11 percent. Rescissions (i.e. new buyers who reconsider their purchase) dropped to 15.8 percent in 1995 from 16.36 percent in 1994, highlighting significant improvements in consumer acceptance and improved marketing and sales techniques by developers.

Since 1994, developers have experienced slight increases in their general and administrative costs (10.05 percent to 10.20 percent), selling and marketing costs (39.78 percent to 40.01 percent), and selling commission and overrides (17.67 percent to 18.55 percent) as a percentage of net sales volume.