LODGING: BETTER TIMESHARE ACCOUNTING

FASB 166 & 167 go into effect on January 2, 2010.  Income will increase but cash flow will not change.  Here's why

 

 

Under the current accounting rules, companies underwrite timeshare loans and collect interest on those loans at an average rate of 13-14%. Periodically, around 2x per year, that company will sell bonds that are backed by those loans. Typically some sort of over-collateralization is required, meaning that if I have $200MM of loans, I can only sell $150MM of bonds; the difference is the "over-collateralization" amount. The over-colleratization pool is meant to absorb any losses that occur in the loan pool that backs the bonds.  The bonds that are backed by the timeshare loans pay a much lower interest rate than the rate paid by the loan holder.  For example, MAR's on Oct 21st pays interest of 4.809%.  The underwriter of the loans and residual holder (i.e. MAR/ HOT), book a gain that consists of the present value of the spread between what they collect on the loans (14%) and what they pay the bond holders (let's say 4.809%) over the duration of the loan pool (2.5 - 3 years on average).  Once the securitization is done, the loans come off the balance sheet (they're typically in receivables), MAR/HOT books a gain on their residual interest, and they receive the cash proceeds from the bond sale.

 

Under the new accounting rules, those receivables (loans) come back on the books, as do the bonds that are backed by those receivables and non-recourse to MAR/HOT.  MAR & HOT will no longer book a gain that is the PV of the interest spread but rather recognize interest they collect on the loan pools and report interest expense associated with what they pay to the bond holders.  So actually, income statement accounting will more accurately reflect cash flow on timeshare loans.  This is why they will recognize more earnings from timeshare in 2010 versus booking gains and then amortizing those gains over time. The the securitized receivables will come back on the balance sheet, so there will be new line item titled as such.  The securitized debt will also come back on the balance sheet but it will not effect covenant calculations or the way ratings agencies treat this debt - since it remains non-recourse. There will also be a small increase in shareholder's equity, since the receivables exceed the securitized debt amount (due to the over-collateralization issue we already discussed).

 

We like the new accounting rules since earnings better reflect cash flow and big gains on timeshare note sales are eliminated.  Hope this helps.

 

 

 


Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more