Disney’s time-share business took a hit from credit turmoil in 2009

Featured, Jason Garcia, News — By Jason Garcia on December 4, 2009 at 2:55 pm

The Walt Disney Co.’s year-end financial filing reveals how significantly Disney Vacation Club was affected by tight credit conditions during the year.

Early on in Disney’s 2009 fiscal year, in December 2008, banker Citigroup stopped buying time-share mortgages from Vacation Club, cutting off a process the unit, like other time-share developers, had used in recent years to boost profits.

As a result, according to the filing, Disney Vacation Club was able to securitize only $17 million worth of mortgages during the year that ended Oct. 3. That was 88 percent less than the $147 million worth of mortgages it sold in fiscal 2008.

Disney said the securitization resulted in a gain of $4 million in fiscal 2009. That was also down 88 percent from a year ago, when it gained $32 million.

The drop was one of the big headwinds buffeting Disney’s overall theme-parks division in 2009, when overall operating profit shrank 25 percent.

Below is a pair of stories from earlier this year about the issue:

Orlando Sentinel (Florida)

February 12, 2009 Thursday

FINAL

Credit crunch nips at Disney profits

BYLINE: Jason Garcia, Sentinel Staff Writer

SECTION: BUSINESS & MONEY; FLORIDA; Pg. C1

LENGTH: 740 words

The lending turmoil racking the nation’s time-share industry is squeezing even the Walt Disney Co.

The company recently disclosed that its Celebration-based time-share arm, Disney Vacation Club, lost access to a long-standing line of credit it had been tapping to raise cash by selling bundles of the time-share mortgages it issues to individual buyers.

Although Disney said time-share sales rose during its fiscal first quarter, which ended Dec. 27, the subsequent sales of “mortgage receivables” plummeted: According to a recent regulatory filing, the company sold $17 million in receivables during the quarter, down from $41 million a year ago.

Packaging time-share mortgages together and selling them off to investors — “securitizing” them — has been a valuable profit center for Disney Vacation Club in recent years. Disney Co. Chief Financial Officer Tom Staggs said during a December conference with analysts that the practice generated about $40 million in operating profit last year for Vacation Club.

That’s about 2 percent of the $1.9 billion in operating profit rung up by Disney’s worldwide parks-and-resorts division in fiscal 2008.

Staggs warned at the time that the nation’s frozen credit markets would likely make lending terms so unfavorable that Disney would do “less or no” securitization in 2009. He also acknowledged that being forced to carry the time-share mortgages, rather than cash them out immediately, could slow Disney Vacation Club’s earnings growth.

“There is profit that we don’t make,” Staggs said. “We’ll make it over time, as opposed to realizing it in the current year when we do the securitization.”

Disney has historically helped about 75 percent of its time-share buyers finance their purchases, according to research by Morgan Stanley. Sales prices typically range between $20,000 and $30,000 for the equivalent of a one-week share in a two-bedroom unit.

Disney’s credit facility, which it initially secured in December 1999, expired Dec. 4, according to company filings.

Similar problems are buffeting the rest of the time-share industry, as the market for all manner of mortgage-backed securities has fizzled. Some developers — dependent on the capital raised from reselling time-share notes to continue growing — have been forced to lay off hundreds of employees and slow or halt construction.

Analysts say there is little chance that Disney could be forced to take similar steps. The sprawling media-and-entertainment conglomerate is large enough that it can likely self-finance mortgages and hold the notes as long as needed without jeopardizing its construction plans.

“It probably makes the time-share division less profitable than it would have otherwise been,” said Robert LaFleur, a lodging analyst with Susquehanna Financial Group. “But from a practical matter about Disney’s ability to build and sell time shares, it shouldn’t have an effect.”

Disney plans to open three new time-share properties in Orlando this year and one in Anaheim, Calif. It is also pressing ahead with plans for 830-room resort in Hawaii, in which 480 units are to be Vacation Club villas. Construction on that resort, which is to open in 2011, began in January.

Any slip at Disney Vacation Club could have broader implications for Disney’s parks-and-resorts division, where the time-share unit has become an important growth engine. The theme-park division accounts for more than a quarter of Disney Co.’s total revenue.

Morgan Stanley estimates that Vacation Club accounted for as much as 20 percent of the profit growth for Disney Parks and Resorts in fiscal 2008. Disney itself credited higher time-share sales with helping offset declines elsewhere in its parks unit during the first quarter of fiscal 2009; total revenue for Parks and Resorts fell about 4 percent during the quarter from a year earlier, less than many analysts had expected.

Vacation Club contributes about 10 percent of the parks-and-resorts unit’s total profit, Staggs said during the December analyst conference.

Disney’s time-share unit is a “swing factor” for the parks division overall in 2009, Morgan Stanley analyst Benjamin Swinburne wrote in a research note last month. He has forecast a “small increase” for Vacation Club in 2009, compared with an estimated 18 percent growth rate last year.

CONTACT: Jason Garcia can be reached at jrgarcia@orlandosentinel.com or 407-420-5414.

Orlando Sentinel (Florida)

August 6, 2009 Thursday

FINAL

Times have changed

Disney takes more of the burden of troubled time-share mortgages from Citigroup

BYLINE: Jason Garcia, Sentinel Staff Writer

SECTION: BUSINESS & MONEY; FLORIDA; Pg. B6

LENGTH: 642 words

With a growing number of time-share buyers defaulting on their loans, the Walt Disney Co. recently assumed more than $200 million in additional liability to preserve a credit agreement between its time-share subsidiary and banking giant Citigroup.

The maneuvering involves a 1999 agreement in which Celebration-based Disney Vacation Club would bundle together time-share mortgages it issued to individual buyers and sell them to Citi. The process, known as securitization, became a lucrative source of income at Vacation Club in recent years, generating an estimated $40 million in operating profit for the unit during Disney’s 2008 fiscal year.

Citi stopped buying the mortgages from Disney in December, when the two sides were unable to agree to new terms amid tight credit-market conditions. But the bank still owns about $422 million worth of Vacation Club loans, excluding interest, according to regulatory filings.

Under the original deal, Disney remained responsible for some of the losses if buyers defaulted on loans that had already been sold to Citi. Earlier terms called for Disney to cover up to 18 percent of the outstanding principal amount in the event of losses, or about $76 million of the current value.

But under new terms negotiated sometime between April and June, Disney agreed to backstop losses of as much as 70 percent of the outstanding principal on the loans. That equates to approximately $295 million — or about $219 million in extra liability.

The decision to take on the extra liability apparently centered on Disney’s ability to reacquire troubled Vacation Club loans from Citi.

Disney has for years opted to take back defaulting loans from Citi and replace them with sounder ones. Doing so ensures Disney, rather than the bank, will handle foreclosure proceedings.

That’s important because Disney does not want a nasty foreclosure process to alienate Vacation Club members, even if they are currently in financial distress. The people who buy Disney time shares, after all, are intensely loyal customers who also spend money on Mickey Mouse plushes, Pixar movies and Hannah Montana makeover kits.

Further, Disney prefers to reacquire Vacation Club time-share interests itself. That prevents a third party — such as a bank with no interest in owning a piece of a time share — from dumping cheap resales onto the market and potentially undercutting Disney’s own sales.

But Disney’s ability to continue swapping loans out of the credit agreement with Citi was in jeopardy. Although the company did not disclose precisely why, one potential reason is that the number of loan defaults had risen so sharply that it threatened to violate thresholds set in the original credit pact.

The entire time-share industry is grappling with rising defaults. The industry-wide default rate was 7.9 percent in 2008, up 30 percent from 2007, according to the American Resort Development Association. It has continued to grow in 2009, rising 31 percent during the first quarter of the year from the first quarter of 2008.

Disney says the default rate at Vacation Club is lower than the industry average, though it would not provide specific figures. It has also said it is pleased with the pace of sales at the unit, which this week opened the long-awaited Bay Lake Tower next to Disney’s Contemporary Resort, even though sales overall have slowed amid the challenging economic environment.

A spokeswoman for Citi would not comment on the bank’s dealings with Disney. A spokesman for Disney characterized the decision to take on extra liability as one designed to protect Vacation Club customers.

“This is an adjustment that assures Disney can continue providing the top-quality service our DVC members have come to expect,” Disney spokesman Jonathan Friedland said.

CONTACT: Jason Garcia can be reached at jrgarcia@orlandosentinel.com or 407-420-5414.

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