Wednesday, March 4, 2009

Resorts Take the Big Vacation into Chapter 11

Resorts and luxury entertainment are now feeling the same pain as retailers and mortgage lenders, with MGM Mirage saying in
 today's news that it might default on its debt. But, as with the retail and financial industries, it may be risky to attempt to catch a falling knife. Japan's "Lost Decade" offers a valuable lesson for investors; Goldman Sachs made a fortune investing in Japanese golf clubs during the 2000s, which you can read about here and here. But Goldman began buying a full decade after the real estate market crashed in Japan. Caveat emptor

From The Deal:

One thing you can be sure of in an economic downturn is that industries that thrive on extreme material excess will go through their own market correction. The resort and destination club sector is a case in point.

We're not talking about the summer resorts in the mountains or down at the beach, but the high-end stuff. Places you have to fly to, places where you are part of a big-bucks set. What's so incredible is how many of these resorts and destination clubs exist, which really speaks to just how decadent the spending on vacations and pleasure had become.

And now those resorts and destination clubs are failing as fast as the economy is tanking. The trend may have started innocently enough on July 18 with the bankruptcy filing of Rothbury, Mich.-based Double JJ Ranch Inc., a resort operator founded in 1937 that attracted blue-collar families with its indoor water park and horseback riding activities. But since then, tonier resorts have started visiting the bankruptcy court.

For example, there was the Nov. 11 filing of Yellowstone Mountain Club, which reportedly counts billionaire Bill Gates among its clientele. Established by Edra and Tim Blixseth in 2000, Big Sky, Mont.-based Yellowstone owns a high-class private ski and golf community on 13,600 acres of land located about 20 miles from Yellowstone National Park (the couple is now divorced, with Edra owning Yellowstone). The property includes ski trails, a golf course, lodges, residences, restaurants and other resort facilities.

Others have tumbled every month since. On Dec. 9, Minnetonka, Minn.-based VREP LLP, which operates an international destination club under the name Lusso Collection, entered bankruptcy, claiming its wealthy clientele evaporated "almost overnight." Denver-based High Country Club, a luxury destination resort company, filed for Chapter 7 liquidation on Jan. 27.

On Monday, March 2, came the latest victim: Sedona, Ariz.-based ILX Resorts Inc., an operator of timeshare resorts. ILX owns and operates eight resorts in Arizona, Indiana and Colorado, as well as in Mexico. It also owns additional undeveloped land in Arizona and Mexico that it had acquired to build additional resorts. The company blamed its need to file bankruptcy on unstable credit markets.

The credit markets have become the convenient excuse for bankruptcy filings these days. But for resorts and destination clubs, the inference is that it's the folks who once worked in those credit markets moving the money around that have disappeared. They aren't throwing the bucks around to sip cocktails on the veranda. Or maybe corporations finally got embarrassed by the American International Group Inc. (NYSE:AIG) executives who, fresh off receiving an $85 billion government bailout, were found to be attending a conference at a posh resort.

How many of these resorts are there? We'll likely find out soon when they trudge into Chapter 11 or Chapter 7. So many sprung up when everyone this decade really believed that they could live the life of the rich and the famous. Problem is, even the rich and the famous have maxed out their credit cards, so you can only imagine what kind of shape the pretenders are in.

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This work by Nicholas E. Radice is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.