By Amy Hinote
At the same time Airbnb, Expedia, TripAdvisor and Priceline battle for market share in the vacation rental online marketplace, the industry itself is experiencing a transformation among its professionally managed vacation rental companies. Currently several existing companies are emerging, consolidating and competing. Their common goal: building a national brand in vacation rental management.
TurnKey Vacation Rentals, Vacasa, Vacation Rental Pros and Wyndham Vacation Rentals are a few of the U.S. companies striving to create a sustainable national brand in vacation rental management. To attain the goal, each of these companies has a different strategic approach and is employing a variety of methods.
As we look to the future of professionally managed vacation rentals, it can be a valuable exercise to take time to examine the history of the industry, to discover potential pitfalls and to identify lessons that can be learned and applied as we step into the next generation of vacation rental management.
Last year VRM Intel conducted an in-depth study into the rise and fall of ResortQuest International, Inc. Our objective was twofold. We sought a thorough documentation of the company’s journey, and we were eager to learn more about the obstacles and market environment facing the professionally managed vacation rental industry today.
The resulting study is detailed. Thanks to required reporting of a publicly traded company, much of the history has been preserved. In addition, the majority of ResortQuest’s original board members, and many of its executives, remain active in the industry. They were able to provide insight and color into the challenges faced by the company. The whitepaper in its entirety can be found on VRM Intel at www.vrmintel.com, but in this article we summarize the study and many of our findings.
ResortQuest International, Inc. was formed in 1998 through the acquisition of 13 companies, including 12 vacation rental management companies and one software company, representing approximately 10,000 vacation rental units and creating the first national brand in the U.S. vacation rental industry.
After going public in May of 1998, ResortQuest International grew quickly with 28 subsequent acquisitions adding approximately 10,000 vacation rental units between 1998 and 2001. The company’s inventory peaked in mid-2001 with over 20,000 reported units before hitting its decline. In 2002, with falling stock prices, management discord and the aftermath of 9/11, ResortQuest International began to lose revenue and investor confidence.
In 2003, ResortQuest (15,784 units) sold to Gaylord Entertainment on hopes of bringing new management, more customers and necessary resources to the company. Unfortunately, the challenges also proved to be insurmountable for Gaylord. In the end of 2004, Gaylord sold First Resort Software to Instant Software. By 2007, Gaylord split ResortQuest International in two and sold the Hawaii property management (4,500 units) to Interval Leisure Group, Inc. (NASDAQ: IILG) and the remaining ResortQuest Mainland management to Leucadia National (NYSE: LUK) (9,300 units).
After Leucadia’s attempts to change management, attract and retain owners and reduce expenses, ResortQuest was still operating at a loss. Leucadia found a buyer for ResortQuest Mainland in Wyndham Worldwide Corp. (NYSE: WYN). In September 2010, Wyndham purchased ResortQuest Mainland, whose inventory had decreased to 6,000 units.
To further punctuate the decline of ResortQuest, Interval retired the ResortQuest name of the Hawaii properties and returned to the original Aston brand in 2009, and Wyndham began rebranding the ResortQuest trade name to the Wyndham Vacation Rentals brand in 2012.
All predictors pointed to success in building a national brand for the fast-growing vacation rental segment, so why did ResortQuest fail? And is the idea of building a national brand still achievable in the vacation rental industry?
The study examined the history of ResortQuest in the following sections:
- May 1998-December 1999 (David Sullivan, CEO)
- December 1999-October 2002 (David Levine, CEO)
- October 2002-August 2003, (Jim Olin, CEO)
- August 2003-July 2007, Gaylord Entertainment
- July 2007-September 2010, Leucadia
- September 2010-2014, Wyndham Worldwide
Throughout the history of ResortQuest and its varied management, ten identifiable key factors contributed to the ongoing struggles.
- Hotel-based executive leadership
Both the founding leadership of ResortQuest and the management team at Gaylord approached building the company with a hotel-based archetype.
“The main paradigm difference was that successful hotel industry managers are more authoritarian and ‘take ownership’ of their properties,” said Jim Olin. “It works for that industry. Hotel managers control the interior, the marketing, and the overall operations. Vacation rental operators have to persuade, convince and work with homeowner associations, homeowners, and others to get everything accomplished. Many of the initial marketing efforts, interior unit grading and other initiatives were from a ‘top down’ approach, where corporate dictated what the field was doing.”
The friction between the hotel leadership and the vacation rental operators led to crippling discord at the board level. Tom Leddy, co-founder at First Resort Software said, “This attitude led to a sometimes subtle, sometimes not subtle, pushing out of the founders of each acquired company and did not encourage any kind of ‘best practice’ concept across some really sharp people.”
Balancing hotel-like standardization and local-operator relational needs was a challenge the hotel leadership inevitably could not overcome.
- Financial and reporting requirements associated with being a publicly traded company
As a new publicly traded company, ResortQuest had a critical need to accurately forecast earnings and provide transparent reporting, and in its infancy, the company was hit with additional corporate accounting regulations and requirements.
“ResortQuest was a relatively small public company in the midst of the nation’s reactions to the Enron debacle,” said Olin. “All of the new laws, Sarbanes Oxley for example, caused our ‘little’ company to have to comply with very difficult and expensive new accounting procedures. Additional expensive resources were required, which shifted much of our top-tier management focus inward instead of outward.”
The investment community had been historically uncomfortable with seasonal revenues, but the lack of being able to accurately project earnings was notably detrimental when earnings were erroneously calculated in 1999, resulting in ResortQuest’s failed secondary offering, a stock price free-fall and an unconstructive shift in management.
“The transition of these acquired companies was much more extensive and complicated than what was first thought, causing a great deal more time and expense and lessening the ability to clearly project both cash flow and growth metrics,” said Olin.
- High acquisition costs and the need to accumulate and restructure debt
Pressures from Wall Street drove ResortQuest to close many acquisitions at high multiples in order to boost short term earnings. The excessive cost of acquisitions coupled with the increasing costs of integrating new companies into the ResortQuest system proved to be a contributing factor in its downfall.
“It was seen as easier to impact EBITDA through acquisition than by operations, except 48 hours before quarter-end when major pressure was put on local teams to bring the numbers in,” said Leddy. “New companies were left to their own devices until the quarter-end financial crunch hit.”
The high costs of acquisition resulted in the need to assume substantial debt which further increased the net cost per unit, in some cases significantly.
- Difficult centralization of vacation rental management operations
With the initial roll-up of 12 vacation rental companies along with the addition of 18 companies within 18 months, ResortQuest had a pressing need to quickly and efficiently integrate these companies under centralized management, which proved to be more difficult and expensive than expected.
Each company had its own marketing initiatives, housekeeping and maintenance operations (both local and outsourced), accounting systems, government regulations, owner-based communications and commission structures. The centralization of operations across destinations was a complex undertaking which was alien to a hotel-based leadership team.
- Distracted with attempts to be a marketing technology company
The initial purchase of First Resort Software along with the urgent need to centralize operations, accounting and marketing led to an unbalanced focus on technology and a subsequent desire to be the number one online marketing portal for vacation rentals in the world, especially under Levine’s leadership.
The need to utilize centralized technology was crucial in accurately projecting earnings, onboarding new operators under the ResortQuest umbrella and creating a one-stop marketing website with real-time online booking and remarketing tools.
However, once the idea took hold Levine became fixated on building a global web portal for vacation rentals, partnering with AOL and CompuServe who proved to be unfortunate allies.
- Insufficient management experience
Although the founding management team had meaningful experience in the hotel space, most of the leaders had never previously held the positions to which they named themselves.
David C. Sullivan had not served as a CEO, CFO Jeff Jarvis had previously been a controller, CIO Fred Farmer had never been a CIO and so forth.
The lack of management skills at the top was compounded by extremely difficult and complex management challenges, along with the unprecedented attempt to bring vacation rental operators under one umbrella.
- Vacation rental guests did not associate with a national brand
Throughout the ResortQuest history, management believed consumers would eventually associate positively with the brand, which would lead to profitable synergy between destinations. In the vacation rental industry, critical mass was both necessary and unachievable based on the cost of acquiring inventory under the existing model.
Also, Gaylord had performed extensive marketing research and was quantifiably convinced that, with their Country Lifestyle demographic along with synergy from the brand equity in Grand Ole Opry and Bass Pro Shops, they could be successful in creating a viable national brand.
The complete abandonment of their focus on this target market demonstrated their failure to capitalize on brand identification.
- Organic growth in inventory
Building successful, ongoing relationships with homeowners is a key component in any vacation rental business, and ResortQuest’s hotel-based leadership struggled to successfully manage this piece.
Being a part of a corporate entity did not hold perceived value or appeal for homeowners, who base their choices about property management on trust, accountability, relationships and ethics, as much as the stability of rental income. Owners were not properly incentivized to connect with the ResortQuest culture. Increased corporate attention to standardization and multi-destination marketing, along with decreased owner buy-in, created a lack of loyalty to the ResortQuest brand.
- Rent-by-owner movement
Before online marketing channels became common, vacation rental owners relied on professional property managers to reach consumers through signage, brick and mortar locations, direct mail and rental catalogs. The emergence of online marketing channels, in addition to increased self-management education, precipitated a movement towards owner management.
By 2006, HomeAway bought VRBO.com making it possible to easily access renters, and within two years, a recession made it necessary for owners to look for ways to cut costs. The self-management trend spread quickly, and many property managers experienced debilitating losses in inventory as a result. ResortQuest was no exception.
- External Factors
In each stage of ownership, external forces contributed to ResortQuest’s demise.
- 2001: September 11
The events associated with the 9/11 attacks negatively affected the entire travel industry. In mid-2001 ResortQuest was already suffering with yet another adjustment to earnings resulting from decentralized accounting, and with the events of 9/11, the stock price fell to an all-time low of $3.95 per share resulting in wage freezes and layoffs.
- 2003-2006: Disease and weather and related incidents
In 2003, the SARS outbreak stalled international air travel which damaged the Hawaii operation, one of the two “bookends” of the company. For Florida, (the other “bookend”), from 2004-2006, a series of hurricanes resulted in decreased occupancy, cancellations and the need to adjust advance deposit and travel insurance policies.
- 2007-2012: Real estate market meltdown and recession
While Gaylord’s shareholders were relieved to have unloaded the ResortQuest division before the real estate market collapsed, new owner Leucadia and ResortQuest President Park Brady were left to experience the fallout.
Is Building a National Brand Possible?
Is the idea of building a national brand viable in the U.S.? Industry insiders unanimously say “yes.”
With advancement in technology, the ability to mass market, improved abilities to centralize operations and a more thorough understanding of the vacation rental industry, several innovative business models have recently sprouted with the goal of being a leading national multi-destination vacation rental provider.
By examining the lessons learned from ResortQuest’s history, there are key strategic considerations for achieving a successful national brand in the vacation rental management industry.
- Pitfalls of a publicly traded environment
The need to accurately project earnings, successfully manage debt and effectively communicate seasonal volatility makes working in a publicly traded environment challenging.
A company looking to build a profitable national brand will likely find it beneficial to:
- Avoid being publicly traded until all systems and operations are fully centralized, accounting procedures are accurate and seasonal gains and losses are properly communicated, or
- Be a part of a publicly traded company who can bury volatility within divisions which are less likely to cause alarm among the investment community.
- Demonstrated organic growth
In several cases, companies which were acquired at high multiples also had a recent, relevant history of losing inventory and market share.
With all of the existing challenges involved in rolling up vacation rental operators under one umbrella, attempting to roll up and grow companies which are already underperforming exponentially increases the difficulty and burden on the company.
Demonstrated organic growth is a factor to consider in expanding in new markets.
- Owner buy-in
Communicating the value proposition to homeowners while simultaneously preserving personalized, consistent relationships at the local level helps to ensure success in developing a national multi-destination presence.
This includes incentivizing owners in a post-acquisition environment, demonstrating the advantages of being a part of a larger company in acquiring new homeowners, having consistent local on-the-ground relationships, setting clear expectations and over-delivering on services.
- Effective marketing to new and past guests
A competitive advantage a national company has is the ability to utilize customer data on a large scale to more effectively attract, retain and intelligently cross-promote to guests.
Lifecycle analysis, customer relationship management, behavioral marketing and a centralized database structure allow a national company to better target and incentivize guests than local competitors.
Wyndham’s recent appointed of Marriott’s Mary Lynn Clark, who has substantial experience in points programs with Marriott Vacation Club, as president of North American Vacation Rentals indicates a strong strategic focus towards creating guest rewards programs to support cross-destination marketing efforts.
- Centralization of operations and technology
Not all departments in a vacation rental business can be fully scaled immediately, but reservations, accounting, marketing, IT and human resources are areas of methodical consideration.
A solid strategy in how to merge these functions without losing the quality of owner relations and guest services provides exponential dividends from economies of scale in a multi-destination company.
ResortQuest leadership aptly recognized early the need to create standardization to manage brand-related customer expectations. By establishing a rating system, they intended to create more consistency in inventory.
However, they failed to implement and communicate this effectively at the local level. A national company in today’s consumer environment has the opportunity to manage standardization through regulating laundry and linens, certifying housekeepers and inspectors and conforming to recognized, non-prohibitive lodging standards.
- Management who focuses on a relational, service-based culture
The vacation rental industry is built on personal relationships with both homeowners and guests, and consequently a successful national company’s management team will be laser-focused on providing the best relationships and service in the market.
Building a company culture with a high-quality service mindset, a national brand can build solid brand equity and circumvent objections at the local level.
- Cost of acquisition and onboarding operators
ResortQuest accomplished many acquisitions at high multiples and incurred excessive debt in the process.
Strategic determination of an acquisition model will include cost of acquisition, cost of debt, inventory analysis, varied commission structures, the competitive landscape, the onboarding/transition process, communications and a clear vision on how an acquired company fits into the overall structure.
- External Factors
In each stage of ResortQuest management, external factors negatively influenced their ability to grow.
Whether it is weather-related, political, economic or disease-related, the vacation rental industry is characterized by volatility. Managing and planning for inevitable downturns are necessary in building a stable national company.
In its history, ResortQuest International operated under very different strategic paradigms, all of which proved to be ineffective in accomplishing their ultimate goal.
Based on these case studies, the building of a successful national brand will continue to be out of reach for entrants who do not understand and overcome the unique obstacles inherent in the vacation rental industry along with the obstacles faced on the destination level.
Interestingly, among the companies seeking to build a multi-destination management company, each approaches the objective using very different strategies in financing, pricing, growth strategy (acquisition vs. organic), in-market team structure, property standards, marketing, technology, company culture and guest/owner service levels.
Which of these strategies will prove to be the winner? There are many types of vacation rentals, many types of property owners, many types of guests, and many differences between destinations. If we have learned anything in the last five years, it is that the vacation rental industry isn’t a zero-sum game.
However, long term success in vacation rental management will continue to require the ability to elicit trust and create lasting relationships, both with property owners and guests, a factor that is difficult to scale and standardize across multiple destinations. The company that can cost-effectively create in-market trust with a centralized structure will gain a major advantage in the race to the top.