Marriott Vacations Worldwide Corporation — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three months ended March 31, 2022, compared with the three months ended March 31, 2021. MVW operates through Vacation Ownership and Exchange & Third-Party Management. The period includes a full quarter of Welk operations following its April 1, 2021 acquisition. In April 2022, the Company introduced Hyatt Vacation Club and rebranded the Legacy-Welk program as the Hyatt Vacation Club Platinum Program.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $1,052 million | $759 million | 39% |
| Net income attributable to common shareholders | $58 million | $(28) million | $86 million improvement |
| Diluted EPS | $1.23 | $(0.68) | Improved |
| Adjusted EBITDA | $188 million | $69 million | $119 million improvement |
| Adjusted EBITDA margin | 17.9% | 9.1% | +8.8 points |
| Operating cash flow | $129 million | $(60) million | $189 million improvement |
| Interest expense | $27 million | $43 million | Down $16 million |
| Cash, cash equivalents and restricted cash at period-end | $650 million | $1,178 million | Down $528 million year over year |
Revenue growth was led by sale of vacation ownership products of $310 million, up 90%; rental revenue of $133 million, up 49%; management and exchange revenue of $222 million, up 15%; financing revenue of $71 million, up 20%; and cost reimbursements of $316 million, up 24%.
Vacation Ownership revenue increased 45% to $956 million and segment Adjusted EBITDA increased to $199 million from $68 million. Exchange & Third-Party Management revenue declined 1% to $84 million, while segment Adjusted EBITDA increased 4% to $43 million.
Total contract sales increased 74% to $403 million, including $24 million attributable to Welk. Consolidated contract sales increased 75% to $394 million, and volume per guest increased 1% to $4,706. Financing propensity increased to 50.3% from 46.0%. Resort occupancy increased to 87.6% from 66.7%, transient keys rented increased 40% to 539,559, and the average transient key rate increased 20% to $275.49.
Development profit was $68 million versus $14 million, implying a margin of approximately 21.9% versus 8.6%. Resort management and other services profit increased to $72 million, although its margin declined to 57.5% from 63.0%. Vacation Ownership rental profit improved to $32 million from a $19 million loss.
Liquidity, Debt and Capital Allocation
- Gross debt was approximately $4.6 billion, including $1.8 billion of non-recourse securitized debt, $1.1 billion of senior notes, $0.8 billion of convertible notes, $0.8 billion under the Corporate Credit Facility, $84 million of finance lease obligations and an $11 million Bali-related note payable.
- Balance-sheet debt, net of discounts and issuance costs, was $2.751 billion; securitized debt, net, was $1.779 billion.
- The Revolving Corporate Credit Facility was increased from $600 million to $750 million and maturity was extended to March 31, 2027. No revolving borrowings were outstanding at March 31, 2022, apart from $2 million of letters of credit.
- The Company securitized vacation ownership notes receivable under its $350 million Warehouse Credit Facility, generating $101 million of net proceeds.
- Scheduled principal maturities include $230 million of 2022 Convertible Notes in the remainder of 2022, $1.034 billion in 2025, and $575 million in 2026. Contractual cash requirements totaled $5.888 billion, including $748 million payable during the remainder of 2022.
- The Company repurchased 764,824 shares for $119 million at an average price of $156.50 and paid $49 million of dividends during the quarter. The quarterly dividend was $0.62 per share. Approximately $353 million remained available under the repurchase authorization at March 31, 2022.
Material Changes Versus the Prior Comparable Period
- Results benefited from the continued recovery in travel and hospitality activity after the initial COVID-19 disruption and from the Welk acquisition.
- Operating cash flow shifted from a $60 million use to $129 million of cash generation, primarily reflecting higher net income, lower inventory spending, stronger collections and higher operating deposits.
- Marketing and sales expense increased to $182 million from $109 million, consistent with higher sales volumes. General and administrative expense increased 33% to $61 million, primarily because of higher salaries, bonuses and lower CARES Act credits.
- Transaction and integration costs increased to $28 million from $19 million, including $25 million of ILG-related costs and $3 million of Welk-related costs.
- Income taxes changed from an $11 million benefit to a $32 million provision, reflecting higher pretax income and an increased reserve for uncertain tax benefits. The interim effective tax rate was 35.6%.
- Adoption of ASU 2020-06 increased debt by $107 million, reduced additional paid-in capital by $111 million, reduced deferred taxes by $27 million and increased opening retained earnings by $31 million. The change also reduced reported diluted EPS through the if-converted method.
Outlook, Commentary, Risks and Unusual Items
Management expected contract sales, resort management activity, rental occupancy and interest income to remain strong or improve during 2022. The Company planned to increase its focus on first-time buyers, who generally have higher financing propensity, and expected new loan originations to outpace scheduled paydown of the existing notes receivable portfolio.
Management expected rental occupancy to remain strong but did not expect the rental business to fully recover to pre-pandemic levels in 2022 because of reduced rental inventory availability and higher inventory carrying costs. Exchange Getaways transactions declined 12% as owners used more of their accommodations directly, while average fees increased 15%.
Principal risks include renewed or continuing COVID-19 effects, travel restrictions, consumer confidence, economic and credit-market volatility, availability of financing, competition, interest-rate exposure, loan defaults, securitization performance, legal proceedings and integration of acquired businesses. The Company estimated historical default rates at 1.1% for Q1 2022 versus 1.3% in Q1 2021; total vacation ownership notes receivable were $2.030 billion net of reserves.
Unusual items included $28 million of transaction and integration costs, $3 million of purchase accounting adjustments, $3 million of litigation charges and $3 million of business-interruption insurance proceeds. The Company reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Subsequent to quarter-end, MVW disposed of the VRI and TPI businesses for approximately $60 million of net proceeds. Also subsequent to quarter-end, the Company extended a $47 million loan to a Hawaii property VIE and amended its purchase commitment; absent a capital-efficient inventory arrangement or another sale, MVW may be required to purchase the property for $80 million in the fourth quarter of 2022.
Important Facts for Investors to Verify
- Verify the Company’s ability to refinance or repay the $230 million 2022 Convertible Notes and manage the 2025 and 2026 maturities.
- Assess whether post-pandemic contract sales, occupancy, rental rates and financing propensity remain durable after the Welk contribution and recovery comparisons normalize.
- Monitor vacation ownership note defaults, reserve adequacy, securitization triggers and the $2.030 billion notes receivable portfolio.
- Evaluate the cash impact of share repurchases, dividends, acquisition and integration spending, inventory commitments and total contractual obligations.
- Review the financial and strategic effects of the VRI/TPI disposal and the amended Hawaii property commitment.
- Review pending litigation, tax audits and $28 million of unrecognized tax benefits, plus accrued interest and penalties of $45 million.