Business Context and Reporting Period
Marriott Vacations Worldwide Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company operates through Vacation Ownership and Exchange & Third-Party Management segments, providing vacation ownership sales, resort management, exchange, rental, financing and related services.
Results include Welk Hospitality Group from its April 1, 2021 acquisition. COVID-19 continued to affect travel demand and operating comparisons, although most sales centers, resorts and properties had reopened and management reported sequential improvement.
Financial Performance and Liquidity
- Revenue: Second-quarter revenue was $979 million, up 104% from $480 million; first-half revenue was $1.738 billion, up 17% from $1.490 billion. Second-quarter Vacation Ownership revenue increased 118% to $883 million, while Exchange & Third-Party Management revenue increased 51% to $86 million.
- Profitability: Second-quarter net income attributable to common shareholders was $6 million, or $0.15 diluted earnings per share, compared with a $70 million loss, or $1.68 loss per share, in the prior-year quarter. First-half net loss attributable to common shareholders was $22 million, or $0.52 per share, versus a $176 million loss, or $4.25 per share.
- Margins: Vacation Ownership development profit was $65 million in the second quarter, representing an approximately 22% development profit margin, compared with a $19 million loss in the prior-year quarter. Resort management and other services profit margin was 62.4% in the quarter and 62.7% for the first half. Consolidated net margin was approximately 0.6% for the quarter and negative 1.0% for the first half.
- Adjusted EBITDA: Second-quarter Adjusted EBITDA was $164 million versus negative $10 million; first-half Adjusted EBITDA was $233 million versus $128 million. Segment Adjusted EBITDA was $219 million in the quarter and $328 million for the first half. Adjusted EBITDA is a non-GAAP measure and includes management-defined adjustments.
- Cash flow: Operating activities generated $148 million in the first half, compared with $73 million used in the prior-year period. Investing cash use was $176 million, including $157 million for the Welk acquisition. Financing activities provided $716 million. Cash, cash equivalents and restricted cash increased to $1.680 billion from $992 million at December 31, 2020; unrestricted cash and cash equivalents were $1.312 billion.
- Debt: Debt, net of discounts and issuance costs, was $3.528 billion, including $1.775 billion of securitized debt. Management reported $5.5 billion of total gross debt, including $1.8 billion of non-recourse securitized debt. The company issued $500 million of 4.5% notes due 2029, $575 million of 2026 convertible notes and repaid $100 million of its term loan during the first half.
- Liquidity: The Revolving Corporate Credit Facility had $600 million of borrowing capacity and no borrowings outstanding at June 30, 2021. The company was required to maintain minimum monthly liquidity of $300 million while its leverage-covenant waiver remained in effect, currently through the end of 2021 unless terminated earlier.
- Receivables and inventory: Vacation ownership notes receivable, net, increased to $1.991 billion from $1.840 billion at year-end, while inventory increased to $833 million from $759 million. No additional COVID-19-related increase to vacation ownership notes receivable reserves was recorded in the first half.
Material Changes Versus the Prior Comparable Period
- Total contract sales increased 75% to $604 million in the first half; second-quarter total contract sales were $372 million versus $30 million in the prior-year quarter.
- Rental revenue increased to $121 million in the second quarter from $18 million, and Vacation Ownership rental profit improved to $15 million from a $75 million loss. Resort occupancy increased to 85.0% from 24.5% in the quarter.
- Financing revenue declined 9% in the first half to $127 million because the existing notes receivable portfolio continued to pay down faster than new originations increased. Second-quarter financing propensity rose to 52% from 37%, but first-half propensity declined to 49% from 54%.
- General and administrative expense increased 26% in the first half to $112 million, reflecting higher salaries, bonuses and operating costs as the business resumed activity, partly offset by lower furlough-related costs.
- Interest expense increased 16% in the first half to $87 million, primarily due to the 2025 Notes and 2026 Convertible Notes.
- Transaction and integration costs were $48 million in the first half, including $42 million related to the ILG acquisition and $5 million related to Welk.
- The prior-year period included $96 million of impairment charges, including $91 million related to goodwill and trademarks. No asset impairment charges were recorded in the first half of 2021, although a $5 million impairment charge related to an equity-method investment was recorded in the second quarter.
- The company temporarily suspended cash dividends and share repurchases remained restricted under the debt waiver.
Guidance, Outlook, Risks and Unusual Items
- Management expects contract sales, resort occupancy and rental activity to continue improving through the remainder of 2021 as travel restrictions ease and operations ramp up. Management also expects financing propensity to move toward 60% or higher as the company increases its focus on first-time buyers.
- Management expects new vacation ownership loan originations eventually to outpace principal collections, supporting a recovery in interest income; the filing does not provide formal full-year revenue or earnings guidance.
- COVID-19 remains a significant uncertainty, including potential effects from variants such as Delta, vaccine effectiveness and distribution, travel restrictions, consumer confidence, worker absenteeism and the pace of recovery in travel demand.
- On July 7, 2021, after quarter-end, the company redeemed $500 million of 2026 Notes. It expects approximately $26 million of redemption premium and debt issuance cost write-off charges in the third quarter.
- The Welk acquisition had total consideration of $405 million, including $248 million of company stock and $157 million of cash, and created $299 million of preliminary goodwill. Acquired Welk operations contributed $48 million of revenue and $5 million of net income from April 1 through June 30.
- Pending litigation includes the Ritz-Carlton Club Aspen Highlands matter, for which a trial was scheduled for January 2022, and other lawsuits involving club affiliations, management practices and vacation ownership structures. The company has not accrued for the specifically described matters and cannot estimate potential losses.
- Other commitments include $88 million of information-technology contracts, $23 million of remaining payments for 88 Bali vacation ownership units, potential property purchases in San Francisco and Waikiki, and $121 million of surety bonds. The company also has a future headquarters finance lease expected to commence when the Orlando building is completed, currently expected in 2023.
Facts Investors Should Verify
- Whether the post-pandemic recovery in contract sales, occupancy and rental rates continues without a material increase in customer defaults or rescissions.
- The timing and terms of any replacement or modification of the leverage-covenant waiver after 2021, including compliance with the $300 million minimum-liquidity requirement.
- The third-quarter accounting impact of the $500 million 2026 Notes redemption and the final purchase-accounting valuations for Welk.
- Credit performance of the $1.991 billion vacation ownership notes receivable portfolio, including estimated default rates, reserves and securitization eligibility.
- Execution of the Welk integration and planned transition of Welk resorts to Hyatt branding, including related costs and required approvals.
- Potential exposure from pending litigation, property purchase commitments, guarantees and other contractual obligations totaling $7.083 billion on an undiscounted basis.
- Future dividend policy and any restrictions imposed by the credit facility, senior notes and other debt agreements.