MARRIOTT VACATIONS WORLDWIDE Corp annual report, FY2022

Marriott Vacations Worldwide Corporation — FY2022 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2022. Marriott Vacations Worldwide (“MVW”) operates two reportable segments: Vacation Ownership, which develops, sells, finances, rents and manages vacation ownership products; and Exchange & Third-Party Management, which includes Interval International and Aqua-Aston hospitality and property-management services.

Vacation Ownership generated $4.342 billion of revenue, or approximately 93% of consolidated revenue. The portfolio included more than 120 resorts, approximately 700,000 owner families and more than 22,000 vacation ownership villas. Exchange & Third-Party Management generated $291 million of revenue and served more than 1.6 million members across more than 3,200 affiliated resorts.

Key financial metrics

Metric	2022	2021	Change
Total revenue	$4.656 billion	$3.890 billion	+20%
Income before taxes	$582 million	$127 million	+358%
Net income attributable to common shareholders	$391 million	$49 million	+$342 million
Basic EPS	$9.69	$1.15	Higher
Diluted EPS	$8.77	$1.13	Higher
Adjusted EBITDA	$966 million	$657 million	+47%
Adjusted EBITDA margin	29%	24%	+5 percentage points
Net cash provided by operating activities	$522 million	$343 million	+$179 million

Revenue growth was led by sale of vacation ownership products of $1.618 billion, up 40%; rental revenue of $551 million, up 13%; financing revenue of $293 million, up 9%; and cost reimbursements of $1.367 billion, up 21%. Management and exchange revenue declined 3% to $827 million.

Vacation Ownership contract sales increased 33% to $1.874 billion, while consolidated contract sales increased 34% to $1.837 billion. Volume per guest increased 1% to $4,421. Resort occupancy improved to 89.3% from 81.6%, and rental occupancy increased to 70.3% from 55.1%.

Development profit increased to $522 million from $286 million, and the development profit margin improved to 32.2% from 24.8%. Financing profit increased 22% to $218 million, with a 74.5% margin versus 67.1% in 2021. The financing propensity was 54%, compared with 53% in 2021.

At December 31, 2022, cash and cash equivalents were $524 million, compared with $342 million at year-end 2021. Vacation ownership notes receivable, net, were $2.198 billion, and inventory was $660 million. Total liabilities were $7.141 billion and total equity was $2.498 billion.

Debt, liquidity and capital allocation

Corporate debt, excluding finance leases, was approximately $3.0 billion of principal at year-end, while total corporate indebtedness was disclosed as approximately $3.1 billion. Securitized debt was $1.938 billion net.
Corporate debt, net of cash and excluding the later redemption of the 2025 Notes, was 2.8 times Adjusted EBITDA, within management’s targeted 2.5x–3.0x range.
Corporate debt had a weighted average interest rate of 3.7%, with 92% accruing at fixed rates.
The Revolving Corporate Credit Facility provided $750 million of capacity, with no borrowings outstanding at year-end and $1 million of letters of credit outstanding.
The Warehouse Credit Facility provided up to $425 million of capacity through July 28, 2024; $162 million was outstanding at year-end.
Two term securitizations generated net proceeds of $621 million. All 14 securitized loan pools were in compliance with their performance requirements at year-end.
MVW repurchased 5.1 million shares for $701 million during 2022. Approximately $270 million remained available under the repurchase authorization at year-end.
The company paid $99 million of dividends in 2022 and declared dividends of $2.58 per share. Future dividends remain subject to board approval, debt restrictions and applicable law.

Material changes versus the prior comparable period

Results benefited from continued recovery in travel and hospitality demand following the COVID-19 disruption. Management stated that the pandemic’s negative impact significantly decreased during 2022, although future effects remain uncertain.
In August 2022, MVW launched Abound by Marriott Vacations, combining Marriott, Sheraton and Westin vacation ownership benefits under a common currency and allowing broader use of Marriott Vacation Club Destinations products.
MVW introduced Hyatt Vacation Club and rebranded the Legacy-Welk vacation ownership program as the Hyatt Vacation Club Platinum Program. Legacy-Welk contributed $240 million of revenue and $49 million of net income in 2022.
In April 2022, MVW sold VRI Americas for $56 million of net proceeds and recorded a $17 million gain. It also sold a Puerto Vallarta hotel for $38 million of net proceeds and recorded a $33 million gain.
A 2022 contract alignment changed the timing of revenue recognition for newly executed Marriott-branded vacation ownership contracts from closing to expiration of the statutory rescission period, consistent with Sheraton and Westin practices. Management reported that this increased 2022 net income by $34 million and Adjusted EBITDA by $46 million.
A related reserve methodology alignment increased 2022 net income by $4 million and Adjusted EBITDA by $5 million. Excluding the combined alignment effects, management stated that development profit margin was 31.0% and Adjusted EBITDA growth was lower than reported.
MVW adopted ASU 2020-06 for convertible debt accounting, increasing reported debt by $107 million, decreasing additional paid-in capital by $111 million and reducing opening retained earnings by $31 million. The new “if-converted” method also affected diluted EPS.

Guidance, outlook, commentary, risks and unusual items

Management expects contract sales, resort management, resort occupancy and interest income to remain strong in 2023. It expects inventory spending to remain below cost of sales in 2023.
Management expects development profit margins to remain above pre-pandemic levels and generally consistent with recent results.
Financing profit margins are expected to decline in 2023 because higher-rate securitizations will replace older, lower-rate debt while consumer financing rates are not adjusted in lockstep with market rates.
Management expects ancillary profit margins to remain generally consistent with recent results.
Major ongoing risks include travel disruption, renewed health crises, inflation, higher interest rates, labor shortages, recessionary conditions, severe weather, climate-related events, cybersecurity incidents, regulatory compliance, competition and the loss or impairment of Marriott or Hyatt licensing relationships.
Consumer credit performance remains important. The historical default rate was 4.5% in 2022 versus 4.3% in 2021 and 6.3% in 2020. Net vacation ownership notes receivable increased to $2.198 billion, and a 0.5 percentage-point increase in the estimated default rate would have increased the related reserve by approximately $12 million.
Material unusual items included $33 million of gain on the Puerto Vallarta hotel disposition, $17 million of gain on the VRI Americas disposition, $125 million of transaction and integration costs, $11 million of litigation charges, and the $46 million combined 2022 Adjusted EBITDA benefit from the contract and reserve alignments.
Legal proceedings include claims involving the St. Regis Residence Club, New York and other ordinary-course matters. The filing states that no material accrual was recorded for the described pending matters and that a potential loss range could not be estimated.
Spanish timeshare litigation, regulatory changes, tax audits and potential indemnification obligations remain contingencies. The company also has a commitment to acquire a Waikiki property, with expected payments of $112 million in 2024, $81 million in 2025 and $41 million in 2026.
The 2025 Notes were redeemed after year-end using proceeds from the 2027 Convertible Notes; MVW expects approximately $10 million of related redemption and debt-cost charges in the first quarter of 2023.

Important facts for investors to verify

Reconcile reported revenue and Adjusted EBITDA growth for the effects of the Welk acquisition, the 2022 contract and reserve alignments, and the VRI Americas and hotel dispositions.
Review the maturity schedule and refinancing plan for the 2025 Notes, the $784 million Term Loan due in 2025, the $575 million 2026 Convertible Notes and the $575 million 2027 Convertible Notes.
Monitor vacation ownership note defaults, delinquencies, reserve adequacy, securitization triggers and the availability and cost of ABS and warehouse financing.
Assess whether the company’s $701 million of 2022 share repurchases and dividend payments are consistent with leverage, liquidity and upcoming capital commitments.
Evaluate the sustainability of resort occupancy, contract sales, development margins and financing margins as travel demand normalizes and interest rates remain elevated.
Track the execution and financial effects of the Abound by Marriott Vacations and Hyatt Vacation Club integrations, including technology and customer-service performance.
Review legal, regulatory and tax contingencies, particularly Spanish timeshare claims, consumer-protection requirements and potential indemnification obligations.