MARRIOTT VACATIONS WORLDWIDE Corp quarterly report, Q3 FY2022

Marriott Vacations Worldwide Corporation — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2022. The interim financial statements are unaudited and should be read with the 2021 Form 10-K. MVW operates Vacation Ownership and Exchange & Third-Party Management segments.

Business Context and Reporting Period

Vacation Ownership includes development, sales, financing, management and rental of vacation ownership interests under Marriott, Sheraton, Westin, Hyatt, Ritz-Carlton and related brands.
MVW launched Abound by Marriott Vacations in the third quarter, aligning Marriott-, Sheraton- and Westin-branded products and owner benefits.
The Company disposed of VRI Americas on April 29, 2022, and sold a Puerto Vallarta hotel business on June 28, 2022.
Results remain exposed to travel demand, inflation, rising interest rates, economic conditions, currency movements and lingering COVID-19 uncertainty.

Key Financial Metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Total revenues	$1,252 million	$1,052 million	$3,468 million	$2,790 million
Net income attributable to common shareholders	$109 million	$10 million	$303 million	$(12) million
Diluted EPS	$2.53	$0.23	$6.68	$(0.28)
Adjusted EBITDA	$284 million	$205 million	$727 million	$438 million
Adjusted EBITDA margin	22.7%	19.5%	21.0%	15.7%
Operating cash flow	Not separately provided	Not separately provided	$380 million	$303 million

Q3 revenue increased 19%; nine-month revenue increased 24%.
Q3 net margin was approximately 8.7%, compared with approximately 1.0% in the prior-year quarter. Nine-month net margin was approximately 8.7%, compared with a prior-year loss margin.
Vacation Ownership contract sales increased 26% in Q3 to $492 million and 42% for the first nine months to $1.411 billion. Volume per guest increased 1% in Q3 and 4% year to date.
Vacation Ownership segment revenue increased 21% in Q3 and 28% year to date. Exchange & Third-Party Management revenue declined 7% in Q3 and 8% year to date, partly reflecting the VRI Americas disposition.
Development profit margin increased to 36.1% in Q3 from 28.0% and to 30.5% year to date from 21.8%.
Rental profit was $24 million in Q3 and $94 million year to date. Q3 resort occupancy was 88.9%, compared with 85.0% in the prior-year quarter.

Balance Sheet, Debt and Liquidity

Cash and cash equivalents were $294 million at September 30, 2022, compared with $342 million at December 31, 2021. Cash, restricted cash and cash equivalents totaled $543 million.
Vacation ownership notes receivable, net, were $2.142 billion, up from $2.045 billion at year-end. The weighted-average FICO score of the consolidated portfolio was 720, and estimated average remaining default rates were 11.66%.
Total debt, net, was $2.749 billion; gross debt was approximately $4.6 billion, including $1.8 billion of non-recourse securitized debt. Corporate debt, net of cash, to Adjusted EBITDA was 2.8x excluding the impact of the Alignment, within management’s targeted 2.5x–3.0x range.
Corporate debt had a weighted-average interest rate of 3.9%, with 83% accruing at fixed rates. No material corporate debt maturities are scheduled before 2025.
The Corporate Credit Facility includes a $900 million term loan and a revolving facility with capacity of $750 million through March 31, 2027. $230 million was outstanding on the revolver at September 30, 2022.
The Warehouse Credit Facility was increased to $425 million and extended through July 28, 2024. The facility now references SOFR rather than LIBOR.
Financing activities used $685 million of cash in the first nine months, including $528 million for share repurchases and $75 million for dividends. The Company had approximately $444 million remaining under its repurchase authorization.

Material Changes Versus the Prior Comparable Period

The Abound-related Contract alignment accelerated recognition of certain Marriott-branded vacation ownership revenue and increased Q3 net income by $29 million and Adjusted EBITDA by $39 million. The related Reserve alignment increased Q3 net income by $4 million and Adjusted EBITDA by $5 million.
Management states that the Alignment contributed $33 million of additional nine-month net income and $44 million of additional nine-month Adjusted EBITDA. Excluding the Alignment, Q3 vacation ownership product revenue increased 26% and development profit margin was 32.6%.
Financing profit increased 47% in Q3 and 28% year to date, partly because the Reserve alignment reduced expense for acquired notes receivable.
Interest expense declined 29% year to date, primarily because of lower costs from debt redemptions and the adoption of convertible-debt accounting guidance.
The $230 million 2022 Convertible Notes matured and were repaid in cash on September 15, 2022, funded in part by revolver borrowings. The 2026 Convertible Notes had a $575 million principal balance at quarter-end.
Transaction and integration costs increased to $99 million year to date from $75 million, largely related to ILG and Welk integration.
Gains and other income included $33 million from the Puerto Vallarta disposition and $17 million from the VRI Americas disposition.
MVW adopted ASU 2020-06 in the first quarter, increasing reported debt by $107 million and changing diluted EPS accounting for convertible notes.

Guidance, Outlook, Risks and Unusual Items

Management expected contract sales, resort management, resort occupancy and interest income to remain strong through the remainder of 2022. It also expected inventory spending to remain below cost of sales in the fourth quarter.
Management expected high resort occupancy but stated that rental operations would not fully recover to pre-pandemic levels in 2022 because of reduced rental inventory availability and higher carrying costs.
Financing propensity was 58.7% in Q3 and 54.3% for the first nine months. Management expected financing incentive programs to continue through Q4 2022 and into 2023.
Key risks include renewed pandemic or travel restrictions, weaker consumer demand, inflation, labor and supply-chain pressures, rising interest rates, credit-market volatility, foreign exchange movements, competition, availability of financing and the Russia-Ukraine conflict.
Pending litigation includes claims involving the St. Regis Residence Club, New York and Ritz-Carlton Clubs in the U.S. Virgin Islands. No accrual was recorded for these matters, and the Company cannot estimate a potential loss range.
Known commitments include approximately $6.1 billion of contractual obligations, $129 million of surety bonds, a potential Waikiki property purchase requiring estimated payments of $112 million in 2024, $81 million in 2025 and $41 million in 2026, and a future headquarters finance lease with total payments of $137 million.

Important Facts for Investors to Verify

Assess the sustainability of reported growth after separating the one-time or timing-related effects of the Abound Contract and Reserve alignments.
Reconcile Adjusted EBITDA and segment results to GAAP earnings, particularly the $99 million of year-to-date transaction and integration costs and the $50 million of disclosed disposition gains.
Monitor default rates, reserve adequacy, non-accrual notes receivable and securitization triggers; a 0.5 percentage-point increase in estimated default rates would have increased reserves by approximately $12 million.
Evaluate refinancing and interest-rate exposure as the 2025 Notes and Term Loan mature in 2025 and the $575 million 2026 Convertible Notes mature in 2026.
Consider liquidity after $528 million of share repurchases and $75 million of dividends, alongside continuing loan originations, inventory commitments and planned Waikiki payments.
Verify the effect of the VRI Americas disposition on year-over-year segment comparisons and recurring revenue and profit.