Business Context and Reporting Period
Marriott Vacations Worldwide Corporation filed its Form 10-K for the 52-week fiscal year ended December 30, 2016. The company develops, markets, sells, finances, manages and rents vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands, with reportable segments in North America, Europe and Asia Pacific. The portfolio comprised more than 60 properties, 13,318 vacation ownership villas and approximately 400,000 owners.
2016 included a 16-week fourth quarter. Beginning in fiscal 2017, the company changed to a calendar-year reporting cycle; the 2017 fiscal year began December 31, 2016 and ends December 31, 2017.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $1.811 billion | $1.814 billion | Flat |
| Income before taxes | $222.9 million | $206.5 million | Up 8% |
| Net income | $137.3 million | $122.8 million | Up 12% |
| Diluted EPS | $4.83 | $3.82 | Up 26% |
| Adjusted EBITDA | $261.4 million | $250.1 million | Up 5% |
| Cash flow from operations | $140.2 million | $109.0 million | Up 29% |
| Cash and cash equivalents | $147.1 million | $177.1 million | Down $30.0 million |
| Total debt, net | $737.2 million | $678.8 million | Up $58.4 million |
- Revenue composition included vacation ownership sales of $637.5 million, resort management and other services of $303.6 million, financing of $126.1 million, rental revenue of $312.1 million and cost reimbursements of $432.0 million.
- Total contract sales were $723.6 million, down 1% from $728.3 million. Vacation ownership contract sales increased 3% to $723.6 million, while 2015 included $28.4 million of residential contract sales that did not recur.
- Development margin declined 8% to $129.1 million, and development margin percentage decreased from 20.8% to 20.3%.
- Resort management and other services margin increased 12% to $129.3 million, with margin expanding from 39.1% to 42.6%.
- Financing margin increased 8% to $81.1 million. Financing propensity rose to 60.1% from 49.9%, while historical default rates increased to 3.8% from 3.5%.
- Rental margin decreased 4% to $51.3 million, with margin declining from 17.0% to 16.4%. Resort occupancy was 89.1%, compared with 89.0%.
- The effective tax rate declined to 38.39% from 40.53%.
- Real estate inventory was $708.2 million at year-end, including $337.9 million of finished goods, $39.5 million of work-in-progress and $330.7 million of land and infrastructure.
Liquidity, Debt and Capital Allocation
- Gross debt was $746.4 million, including $738.4 million of non-recourse debt related to vacation ownership receivable securitizations. The weighted average rate on securitization debt was approximately 2.5%.
- No cash borrowings were outstanding under the $200 million Revolving Corporate Credit Facility at year-end; $3.3 million of letters of credit were outstanding.
- No borrowings were outstanding under the $250 million Warehouse Credit Facility, which terminated on November 22, 2017 unless renewed. The company had $103.4 million of gross vacation ownership notes receivable eligible for securitization.
- The company completed a $250 million securitization in August 2016 at a weighted average interest rate of 2.28%.
- Investing activities provided $39.0 million, primarily reflecting property dispositions. Capital expenditures excluding inventory were $34.8 million.
- The company repurchased 2.8 million shares for $177.8 million and paid $34.2 million of dividends in 2016. Dividends declared totaled $1.25 per share.
- On October 26, 2016, the company redeemed $40 million of mandatorily redeemable preferred stock of a consolidated subsidiary.
- Management stated that cash on hand, operating cash flow, securitizations and available credit facilities were expected to satisfy liquidity needs, debt service, growth plans and shareholder returns.
Material Changes Versus the Prior Comparable Period
- Net income improved despite essentially flat total revenue, supported by lower product costs, stronger resort management margins, lower interest expense and a lower effective tax rate.
- Vacation ownership product revenue fell 6% to $637.5 million, primarily because of more unfavorable revenue reportability, higher sales reserves and increased use of plus points as sales incentives.
- North America vacation ownership contract sales increased 2% to $645.3 million. On-site sales benefited from a 2.3% increase in tours and a 2.2% increase in volume per guest to $3,462.
- Europe contract sales declined 9% to $31.2 million, and the segment’s development margin turned negative at $0.5 million.
- Asia Pacific vacation ownership contract sales increased 38% to $47.2 million, but total contract sales declined 25% because the prior year included the $28.4 million Macau residential-unit sale. Asia Pacific development margin fell to $3.0 million from $12.4 million.
- New sales locations generated $12.0 million of company-wide pre-opening and startup costs, including five North America locations and one Asia Pacific location.
- Hurricane Matthew reduced estimated fourth-quarter North America contract sales by $8.1 million and adjusted EBITDA by approximately $3.6 million.
- Gains and other income included a $10.5 million gain from the disposition of excess San Francisco inventory and a $0.9 million loss on the sale of part of the Surfers Paradise, Australia property.
- The company repurchased substantially more stock than it issued, reducing weighted-average basic shares to 27.9 million from 31.5 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2017 financing propensity to remain near 2016 levels and interest income to increase as new loan originations outpaced principal runoff.
- The company intends to expand selectively in North America and Asia Pacific, add inventory through capital-efficient arrangements, develop new sales locations and continue using points-based programs to align inventory investment with sales pace.
- Material future commitments included $158.5 million to purchase the Marriott Vacation Club Pulse property in New York, $137.1 million for Marco Island inventory, $91.1 million for Big Island of Hawaii inventory and additional Bali purchase commitments.
- Key risks include consumer discretionary spending and credit availability, purchaser defaults, reliance on ABS securitization markets, potential non-renewal of the Warehouse Credit Facility, inventory availability and third-party development execution.
- The company is heavily regulated across real estate, timeshare sales, consumer lending, telemarketing, privacy, anti-corruption and resort management activities.
- The Marriott and Ritz-Carlton license and loyalty-program relationships are strategically important; termination, unfavorable amendments or failure to maintain brand standards could materially harm sales, rental revenue and profitability.
- Several lawsuits involving Kapalua Bay, Ritz-Carlton San Francisco, Ritz-Carlton Aspen Highlands and the MVCD points-based program remained unresolved. Management could not estimate potential losses for these matters.
- The company adopted certain accounting updates in 2016 without material impact and expected to adopt the new revenue recognition standard beginning in 2018. The filing does not provide a quantified expected impact.
- Management and Ernst & Young reported effective internal control over financial reporting and issued unqualified audit opinions.
Investor Verification Checklist
- Verify the sustainability of earnings growth given flat revenue, lower development margin and reliance on favorable product-cost true-ups and property gains.
- Review loan-loss assumptions, the 7.09% estimated average remaining default rate and the increase in financing propensity.
- Assess refinancing and securitization risk, particularly the November 2017 Warehouse Credit Facility termination and continued ABS-market access.
- Evaluate the economics, timing and funding requirements of the New York, Marco Island, Hawaii and Bali inventory commitments.
- Assess exposure to the Marriott and Ritz-Carlton license agreements, royalty fees and potential changes following Marriott International’s Starwood acquisition.
- Review pending litigation, guarantees, surety bonds and contractual obligations totaling $1.392 billion, including debt, leases and purchase commitments.
- Reconcile GAAP earnings with Adjusted EBITDA and identify the effect of Hurricane Matthew, transaction costs, property gains and other excluded items.