Equity Estates Plans For The Future

By: Destination Club News
Date: June 24, 2009

"Appreciating Luxury Residences"

While Equity Estates' portfolio of luxury residences aren't appreciating right now due to global real estate downturn, a growing number of members are appreciating the company's luxury residences. "Thankfully we did not acquire the bulk of our homes between 2003 and 2006, so we have maintained our value and are net buyers in a down market. We are happy with the current environment from a long term investment perspective," commented CEO Philip Mekelburg along with Vice President of Investor Relations Rob Vaka, who met with The Veras Group to discuss the Luxury Residence Fund's success and properties on the horizon.

"We have grown by 50% since December 1, 2008," began Mekelburg. "We are seeing the benefit of the model we designed in 2006 where we addressed answering the tough questions people are finally asking. A couple of years ago, they didn't necessarily ask those questions. Now that some destination clubs have increased fees and levied unreasonable assessments, with no equity component for the members to validate why they should help out in that manner, and clubs that have filed bankruptcy, prospects need to find out what is really behind the curtain and how things look in best and worse case scenarios."

Mekelburg is referring to leading clubs such as the Solstice Collection, High Country Club, and the Lusso Collection who have all filed for bankruptcy over the past eight months, and while the overall health of the destination club industry has slumped, Equity Estates has posted record growth due in large part to their business model. With this demonstrated success, we asked Mekelburg if he believed that Equity Estates was better positioned to succeed during periods like today when some destination clubs were faltering or if they would do better in an up market when everyone was succeeding.

"The second home alternative industry has experienced the effects of some poor business models that didn't work out even when the economy was working well, for example Tanner & Haley. Now that the economy has shifted and some destination clubs have fewer or no sales causing them to restructure or go bankrupt as is the case of the Lusso Collection," Mekelburg continued. "The need for a sound business model is vital, so Equity Estates and companies structured like ours get to shine. Our model now is the smart and sound method to own and enjoy a portfolio of luxury vacation homes. I think similar models are going to be the trend. For those who aren't looking at an equity play, they should understand the financial side of the business and how the club they are considering can be self sustaining without new sales. I think the market for families who want to enjoy, and own, a diversified portfolio of vacation homes is still largely untapped."

"What's interesting to note," Vaka noted, "We are hearing from people on resignation lists from multiple destination clubs. They are telling us they wish they heard about Equity Estates two years ago or even six months ago, before they put their money in with other clubs, and want to learn how they can participate in Equity Estates right now?"

Vaka went on to explain that the club is finalizing a solution for these individuals "...that will address their unique and frustrating experiences being on a resignation list. The specialized offer will take risk away from them, enable them to continue to enjoy the types of travel experiences they've come to require, and allow them to restore trust with a new company along the way."

With the evidence that Equity Estates has continued to grow despite some of the harshest market conditions that the destination club industry has seen, Mekelburg also believed that the future could include other clubs mirroring the equity model that Equity Estates has implemented and some may even partner with Equity Estates to do it.

"I wouldn't be surprised if there are some friends or corporations that form an LLC and plan to share the usage of one or more homes. We have become experts at it and can help them achieve that objective," said Mekelburg.

Vaka and Mekelburg both believe one of the other reasons the company continues to post solid gains is the organic growth model they have implemented. "Equity Estates has grown organically through direct sales. Abercrombie & Kent Residence Club promotes an equity play, but they started by gobbling up two other destination clubs. Ultimate Escapes is a conglomerate of a bunch of other clubs. There is strength in growing organically."

Abercrombie & Kent announced their new destination club in April of 2008, acquiring the assets of leading equity clubs BelleHavens and Crescendo Residences to form the foundation of their membership base and real estate assets. Ultimate Escapes is the fusion of Private Escapes and Ultimate Resort who announced their merger in September of 2007, bringing two different growth models to form their new club.

As evidence to support Mekelburg, Exclusive Resorts, undeniably the largest destination club in the industry, also has adopted a similar stance regarding their growth. "Our focus has obviously been organic growth," said Exclusive Resorts' CEO Jeff Potter in an interview with The Veras Group in November of 2008. "It allows you to enhance the service you provide and we've been fortunate to see this growth. Right now we are focused on our current member base and I think that is what we take the most pride in. During these financial times, you have to step back and make sure you do what you promised to do."

This organic growth has served Equity Estates well and has made them one of the few companies that are currently acquiring properties in the very soft real estate market, allowing for substantial savings and increased potential for long term appreciation. According to Equity Estates President Adam Capes, the club was seeing discounts of 30% to 40%, during an interview in September of 2008. We asked Mekelburg if the club was seeing similar pricing today.

"When I look closely, there are properties that are discounted 40%+, but they are not the best properties in the market. They are in the middle and lower ends of the market. At Equity Estates, we want to find a great home at a good price, as opposed to an average or poor home at a great price. If you just want to be in a certain area with a dog property, you can get the 40% discounts, but we haven't seen it that dramatic in the properties we want, but we are still seeing great value. Our Hilton Head home, when it was built, the investors/seller specified and built to a $6 million sale price, and we got it for just under $4 million. In another economy, that property probably would have been out of our reach. It's a spectacular ocean front home."

Included in these new property acquisitions is a new home in La Jolla. The four bedroom, four-and-one-half bath home spans nearly 5,000 square feet and is in a prime location for everyone in the family. "One of the most famous surf beaches is just a two minute walk. It is called Wind and Sea. "The home is also a great gateway to play golf with Torrey Pines just eight miles north and family friendly venues like Sea World, Legoland, the Zoo, and Disney are all within a short drive. When you look at the whole package this makes for a sensational whole family getaway," said Mekelburg.

"It effectively pulls off three critical areas for us," said Vaka. "One, the home is spectacular. Two, it is very close, about five homes, not five blocks, down to the beach. And third, it is within walking distance for a couple to go down to La Jolla Cove and enjoy the town."

"We have had more and more interest from West Coast families and have been intent on adding a West Coast presence in three different areas," continued Vaka. "One would be the San Francisco and Napa region, the second would be Southern California, which the La Jolla property addresses, and Hawaii to name a few on the short list."

For those with a sharp eye, the new La Jolla home is in fact a former Lusso Collection property. When talking about acquiring the property, Vaka stated, "The reality is that an opportunity arose through the Lusso Collection transition that made sense to us and is a great opportunity economically."

The La Jolla, California acquisition isn't the end of the company's real estate announcements as several more are on the list. "We have things in the works but until it is finally signed, it is never a done deal," Mekelburg said. "We pride ourselves on making smart financial decisions and won't add a home to the portfolio unless it makes sense."

It only makes sense. After all, Equity Estates is looking for appreciating luxury residences.