January 14 will mark the conclusion of the 180 day lockup period that has followed the July 18 IPO of membership-based hospitality and vacation ownership firm Diamond Resorts International (NYSE:DRII), allowing outstanding shares held by major pre-IPO shareholders to be sold. The unlocking will also allow DRII executives and directors to sell their own shares.
This sudden increase in the supply of DRII shares will likely lead to at least a brief dip in the price of shares, and could present a short opportunity for aggressive investors. DRII has seen steady but unspectacular market performance since its IPO; shares initially priced at $14.00, below the expected $16.00-$18.00 range, and have since risen as high as $19.42 per share. The firm closed at $18.22 per share on January 6.
The expiration of the lockup period on January 14 will apply to the approximately 60 million shares of DRII not offered in the 15.5 million share IPO. Some 10.9 million of these shares are held by Wellington Management Company LLP, which may sell at least some of its shares in order to raise capital. DRP Holdco LLC and Cloobeck Diamond Parent LLC are the respective owners of 11.3 million and 16.9 million shares, but are under less pressure to sell; nonetheless, they may unload some shares in the interest of diversification. Similarly, DRII directors and executives may choose to sell some of their shares, having had no opportunity to do so in the past six months.
DRII is a hospitality and vacation ownership firm that offers 296 vacation destinations spread across 32 countries and six continents, including 79 Diamond Resorts properties managed by the firm and 213 affiliated resorts and four cruise itineraries not managed by the firm. Members receive an allotment of points each year depending on the number of vacation ownership interests "VOIs" that they have acquired, and can use those points to stay at any destination within the network of resort properties. In essence, the firm functions as a massive, flexible, multi-destination timeshare. DRII boasts an ownership base of over 490,000 owner-families.
Like other vacation-based stocks, DRII is extremely sensitive to changing conditions in the economy, and while the American economy has been recovering over the past year, it remains in a precarious position. In the event of the economy regressing, DRII could quickly lose the ground that it has gained over the past six months on the market.
The 2008 downturn, for instance, had catastrophic effects on the sales of VOIs; the ARDA International Foundation reported that aggregate U.S. VOI sales declined $0.9 billion, or 8.5%, to $9.7 billion in 2008 from $10.6 billion in 2007, and aggregate U.S. VOI sales then declined $3.4 billion, or 35.0%, to $6.3 billion in 2009.
DRII must compete with a potent set of established lodging and hospitality firms that now offer similar VOI programs. These competitors include heavyweights like Four Seasons Resorts, Hilton Hotels (NYSE:HLT), Hyatt Corporation (NYSE:H), Marriott Vacations Worldwide (NYSE:VAC), Starwood Hotels and Resorts (HOT), The Walt Disney Company (NYSE:DIS), and Wyndham WorldWide (NYSE:WYN).
The firm also competes with smaller lodging firms and with emerging alternative lodging firms such as Home Away (NASDAQ:AWAY) and Airbnb, which allow vacationers to book furnished, privately-owned residential properties for short stays.
The unlocking of so many shares may provide aggressive investors a nice short trading opportunity.
Disclosure: I am short DRII, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.