GREENWICH, Conn., Oct. 21, 2015 /PRNewswire/ -- FrontFour Capital
Group LLC and ADW Capital Partners L.P., significant shareholders
of Diamond Resorts International, Inc. (NYSE: DRII), announced
today that they have delivered a letter to the President and CEO of
Diamond Resorts International to express their frustrations with
the Company's underperformance, despite commendable execution by
the management team, and to request that the Board of Directors
explore available strategic alternatives, including a sale of the
Company, in order to unlock shareholder value.
The full text of the letter follows.
October 21, 2015
Mr. David F. Palmer
President and CEO
Diamond Resorts International, Inc.
10600 West Charleston Boulevard
Las Vegas, NV 89135
cc: The Board of Directors, Diamond Resorts International,
Inc.
Dear David,
FrontFour Capital Group LLC ("FrontFour") and ADW Capital
Partners L.P. ("ADW") have been significant and long-term
shareholders of Diamond Resorts International, Inc. (NYSE: DRII)
("Diamond" or the "Company") since shortly after the Company's
July 2013 IPO. Each firm
decided to invest in Diamond after conducting significant due
diligence based on the following criteria:
(i) Diamond's highly attractive recurring
management fees within the Hospitality and Management
Services segment;
(ii) Diamond's robust free cash flow generation
throughout the economic cycle and its lack of
capital intensity;
(iii) the significant roll-up opportunity available
to Diamond given the fragmented nature of the
timeshare industry and the
opportunity for a "public/private arbitrage"; and
(iv) the significant equity ownership stakes
held by the insiders and their prior track record of
navigating and growing
the Company through the credit crisis.
As you are aware, Diamond's shares currently trade at a material
discount to both the comparable publicly traded timeshare companies
as well as our near-term view of fair value of approximately
$50 – $55 per share, which is roughly 11 – 12x our
forecasted 2016E FCF of $4.72 per
share inclusive of the recent Gold Key acquisition. We could
argue that an even larger multiple should be awarded given
Diamond's unique platform and ability to grow through
acquisition(s) without channel/hotel banner conflicts that afflict
its peers. Simply put, despite commendable execution by
the management team, the Company's shares trade at their lowest
valuation since being public. We are aware of other
Diamond shareholders who share similar frustrations and as a result
we request that the Board explore strategic alternatives in order
to maximize shareholder value.
Since the Company's IPO, the management team has
successfully:
(i) integrated the highly accretive acquisitions of
Island One and Pacific Monarch Resorts;
(ii) eliminated the external management structure
with Hospitality Management and Consulting Service;
(iii) successfully redeemed the Company's
12.00% Senior Secured Notes and entered into a new credit
facility yielding significant interest expense savings and balance
sheet flexibility;
(iv) reduced Corporate Debt / EBITDA from 2.8x to
0.6x as of June 30, 2015;
(v) grown LTM EBITDA from $145mm to $336mm
through June 30, 2015;
(vi) announced and recently closed the
acquisition of Gold Key Resorts at a highly accretive 4x Enterprise
Value / EBITDA multiple exclusive of revenue synergies;
(vii) entered into an agreement to develop a 144-room
resort in Kona, Hawaii with
Och-Ziff Real Estate on an asset-light basis;
(viii) used downtime from recent hurricane to expand
its most highly demanded luxury resort in the system – Cabo Azul; and
(ix) announced a $100
million stock repurchase plan in October 2014 and an additional $100 million repurchase plan in July 2015.
Despite these stellar accomplishments, Diamond's shares continue
to trade at a material discount to its peer group, which includes
Marriott Vacations and Wyndham Worldwide, as well as sell-side
analyst price targets of over $40 per
share – predicated on numbers we believe to be "light" and do not
add in the value of the recent Gold Key deal. We estimate
Diamond trades at a 2016 estimated FCF yield, including the
acquisition of Gold Key Resorts, of 21% compared to the average of
the peer group of approximately 7.5%. Given the present
interest rate environment, the Company's attractive growth
prospects and over-capitalized balance sheet, we reiterate our
belief that Diamond's shares are materially undervalued.
Over the past few months, sentiment has begun to shift within
the broader lodging space due to global growth concerns, RevPAR
growth deceleration and fears of potential negative impact to the
industry by Airbnb. Diamond specifically has seen a
significant increase in its short interest to approximately 30% of
the outstanding float as short-sellers have continued to question
the Company's inventory recapture and asset-light model. In
addition, short-sellers have raised concerns surrounding the
lending practices of the time share industry. Our significant
diligence leads us to believe that these concerns are
unfounded. These broader industry concerns and attacks from
shorts have led to a significant public vs. private market
opportunity.
Given the robust demand for exposure to the attractive
timeshare industry among institutional investors (e.g.,
securitization, asset-light development, equity ownership) and
Diamond's current over-capitalized balance sheet, we believe the
Board has a broad array of strategic options to unlock value for
shareholders. We have spoken with numerous industry
participants and are confident there are a number of private
timeshare operators, including those owned by private equity firms,
who would also be highly interested in a potential combination with
Diamond. Furthermore, the prior successful history of
Diamond Resorts being formed as a leveraged transaction with
Sunterra Resorts as the original platform Company in 2007, we view
a leveraged buyout as the most attractive option as it would also
allow Diamond insiders to rollover part/all of their stakes into
the transaction. We would also encourage the Board to
consider a rollover option that would also allow current
shareholders to participate in the take-private
transaction. The Company could continue to execute on
bolt-on acquisitions via access to the debt capital markets as it
successfully did during the 2008 – 2013 period when it was
private.
For all of the aforementioned reasons, and based on our
discussions with numerous Diamond investors, we believe
shareholders would be highly supportive of a sale of Diamond at an
appropriate valuation. For purposes of this analysis, we
assume the Company would be purchased in a leveraged buyout
scenario at a price of $40 per share
(or approximately 8.0x EV/EBITDA multiple on our 2015 projections
pro forma for the Gold Key transaction). Over a 5-year
investment horizon and assuming no multiple expansion, dividend
recapitalization or incremental bolt-on acquisitions, this would
result in an internal rate of return ("IRR") for equity holders of
approximately 30%.
Our key assumptions are listed below:
- 15% organic EBITDA growth in 2016, 12% in 2017 and 7% growth
thereafter;
- exit multiple of 8.0x; assumes no multiple expansion;
- 5.0x leverage with weighted average cost of debt of 8.00%; free
cash flow generation used towards debt repayment;
- 3% of revenues towards capex; and
- annual inventory repurchases of $50
million
In summary, we believe that a significant opportunity exists to
unlock value for all shareholders. We look forward to further
discussions with you and your fellow board members.
Sincerely,
FrontFour Capital Group
LLC
ADW Capital Partners L.P.
About FrontFour Capital:
FrontFour Capital is an investment adviser with offices in
Greenwich, CT and Toronto, ON. FrontFour focuses on
value-oriented investments in North American companies.
About ADW Capital:
ADW Capital Partners L.P. is a value-driven investment fund
founded in January 2011 that utilizes
a concentrated, long-term, and tax-sensitive strategy focused on
capital preservation.
Investor Contact:
Stephen Loukas
FrontFour Capital Group LLC
35 Mason Street, 4th Floor
Greenwich, CT 06830
203-274-9050
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SOURCE FrontFour Capital Group LLC