SPINCO's 9-30-2011 SEC filing

[dioxide45]

Okay, so I've been thinking about this for most of the day and it's quite possible that I have the process and/or the structure wrong. But in its simplest form, the thought I have is that Spinco's name IS Marriott; it's going to be "Marriott Vacations Worldwide." So if a resort somehow ends up without the Marriott name attached to it, wouldn't that mean that the Management Contract between MAR and the resort or the Affiliation Agreement between VAC and the resort has been severed? Or will VAC operate in a similar fashion as Host Hotels does, meaning not all VAC resorts will necessarily have any connection to Marriott? (I know VAC encompasses Ritz Carlton as well, so it's for certain that not all VAC properties will have Marriott actually spelled out in their names. But some will have no connection at all?)

Marriott Rewards will for certain disappear if a resort does not remain affiliated with Spinco, and not just the exchange-for-MRP benefit. There is also the Elite Night Status credit for stays, the bonus points for any Marriott VISA transactions at a Marriott resort, the MVC-owner 5-night Travel Packages, the MOD-discount for cash stays at marriott.com properties, etc ... (Of course the governing docs for both Weeks and DC Points pretty much give Marriott the right to change or cease the MRP program at any time for any reason, anyway.)

I'd guess that II would remove the Marriott priority and internal exchange benefits from any resort which severs its relationship with Marriott, whether it's MVCI or VAC. Isn't that what happened in the past when formerly-named-Marriott resorts continued with new II contracts when they came under new names and management?

Now if VAC is able to keep formerly-Marriott-affiliated resorts under its umbrella, will those resorts be required to pay towards the naming rights fee? For what - what exactly are they paying for? Same thing with a DC-Enrolled Member if his/her Marriott resort severs the Marriott affiliation - even if they can still somehow remain in the DC without taking its name, why would they be required to pay a naming rights fee? Trust Members, too - if any Trust Properties un-affiliate with Marriott but remain in the Trust and/or extend DC exchange benefits to their newly-named program, what exactly would their portion of the naming rights fee be paying for?

This is too confusing with all the different documents that now exist, nevermind we don't know if Marriott Vacations Worldwide will draw up new Management Agreements and/or Affiliations upon inception that will be materially the same except for name changes as the ones which already exist in the MVCI governing docs of each resort, or if they're entitled to change certain terms, blah blah blah ...

I'm a little bit sorry that I took this thread off track to XYZ's. But only a little bit, because with those I am completely certain that it's as unfair a program for members as ever existed. No doubt about it. All this other stuff gives me a gigantic headache. (Has anyone ever had success with deciding one day to just forget about the legalities forever? I'd love to know if there's a program for that. )

Perhaps my vision of Spinco is mixed up, but ...

I believe that Spinco will be the owner of unsold inventory and the administrator of the Destinations Club (reserving weeks, points-based trades, selling points, etc). Spinco will contract with Marriott International for management of the resorts, so it will be MI who profits from the management contracts - not Spinco. Am I missing something here?

That raises a question in my mind: Will HOA boards contract with Spinco or directly with Marriott International for resort management?

My understanding based on the press releases, earnings calls, and disclosures, is that Spinco would be the company that sells and manages the resorts.

Here is my understanding of the structure.

Spinco (Marriott Vacations Worldwide MVW) is a franchisee. They pay Marriott International (MI) a franchise fee. That fee is currently 2% of all sales and $50MM. MI doesn't have any ownership in the resorts, Spinco still owns unsold units and perhaps some other areas that are used for concessions.

The HOAs are contracted with Spinco to manage the resorts. Spinco has a franchise agreement with MI to use their name on the company and to attached the Marriott name to the resorts it manages. The fee also allows the DC exchange company to have Marriott in the name.

The HOAs pay Spinco to manage the resorts. Spinco pays the franchise fee to MI.

MI has no skin in the game. They earn money off of their name and brand. If Spinco or MI were to sever the franchise agreement all of our resorts would lose the "Marriott" from their name and Marriott Vacations Worldwide would become Vacations Worldwide.

MVW is free to begin managing other resorts and if it chooses to do so, they can attach the Marriott name to them. Though I am sure MI will have their hand held out for more money. If individual HOAs sever ties with Spinco, they lose the Marriott name.

Spinco has a contract with II, the preference would remain for internal trades as long as the HOA and Spinco maintain that agreement. If the Marriott name is gone, the II preference remains, just under a different name.

Without a franchise agreement it is unlikely that the trade for Marriott Reward points would remain. Remember that MI no longer owns real estate and doesn't take on that risk with Spinco. Spinco must now rent out those weeks traded for Marriott Reward points. My guess that Spinco must now buy Marriott Reward points is likely the case once everything is sorted out. MI doesn't want to take on the risk of that unit sitting empty on their dime. They pass that risk to Spinco in this transaction.

Just like McDonald's, franchisees own and manage their restaurants, with help from McDonald's. McDonald's doesn't send in their managers. The managers work for the owners.

At some Marriott hotels, the employees work for Marriott International, at others they work for the local franchisee. Similar here, the employees at the resort will work for Spinco.

This is just my understanding of how all this is going to work.

 

[gblotter]

My understanding based on the press releases, earnings calls, and disclosures, is that Spinco would be the company that sells and manages the resorts.

Interesting. If Spinco intends to become a resort management enterprise, then that would put them in direct competition with Marriott International - no? I thought the whole reason for the spinoff is that Marriott International wants to focus on its core strength of resort management shed itself of the unprofitable real estate ownership/development component.

 

[gblotter]

Without a franchise agreement it is unlikely that the trade for Marriott Reward points would remain. Remember that MI no longer owns real estate and doesn't take on that risk with Spinco. Spinco must now rent out those weeks traded for Marriott Reward points. My guess that Spinco must now buy Marriott Reward points is likely the case once everything is sorted out. MI doesn't want to take on the risk of that unit sitting empty on their dime. They pass that risk to Spinco in this transaction.

Just like McDonald's, franchisees own and manage their restaurants, with help from McDonald's. McDonald's doesn't send in their managers. The managers work for the owners.

At some Marriott hotels, the employees work for Marriott International, at others they work for the local franchisee. Similar here, the employees at the resort will work for Spinco.

I claim no particular expertise in such things, but ... aren't franchise agreements and management contracts completely different?

Under a franchise agreement, the owner pays the mothership a fee for use of the brand/label. The employees work for the owner - not the mothership. The owner must run the operation in accordance with the standards of the mothership, and the mothership provides direction and advice to the owner. In a franchise scenario, the owner has significant expertise in running the operation.

Under a management contract, the owner contracts with the mothership to actually run the operation. The employees work for the mothership - not the owner. The mothership then passes profits and losses along to the owner under the terms of the contract. In a management contract scenario, the owners are mainly investors without necessarily having any particular expertise in running the operation.

Are you telling me that for resort management, the Spinco/Marriott relationship will operate like a franchise agreement - not a management contract?

 

[SueDonJ]

Interesting. If Spinco intends to become a resort management enterprise, then that would put them in direct competition with Marriott International - no? I thought the whole reason for the spinoff is that Marriott International wants to focus on its core strength of resort management shed itself of the unprofitable real estate ownership/development component.

My understanding of Spinco is very similar to dioxide's, which is that the intent of Marriott Int'l is to spin off every facet of what is now MVCI to a new company - Marriott Vacations Worldwide - which will take over every aspect of the timeshare business resulting in MAR being paid only (only?!) the $50M naming rights fee and 2% sales commission from all future timeshare business.

(Dioxide, are you also thinking that all of the common area-related fees that Marriott currently pays towards the individual resort HOA's, will now be assumed by Spinco? Remember the thread where we talked about Marriott paying for Barony's pool and grill/bar updates and MGV's common area updates? That's what I'm thinking, that Spinco will assume those and similar expenses that until the spinoff would have been paid by Marriott.)

What I can't seem to figure out is how a currently-named-Marriott resort will be able to sever the current Management Agreement (with either MAR or VAC, whichever is in play at the time) and still expect to be under the Marriott Vacations Worldwide umbrella, and thus be one of the resorts which will be required to pay the naming rights fee to MAR.

Consider an MVCI resort whose ownership votes in sufficient numbers to sever its relationship with the Management Company - either MAR currently or VAC after the spinoff is complete. I know that's a difficult vote to put in play and pass, but if owners don't want to be under any Marriott umbrella and successfully vote for that change, won't the resort then be a non-Marriott-affiliate, and won't the ownership have to then contract with a different Management Company? If that's the case, wouldn't that be the point when "Poof!" there would go all of the associated benefits (MRP, Marriott priority in II, DC enrollment, etc) of being an owner at a Marriott resort?

This track started with the thought of what benefits are attached to the $50M naming rights fee that Spinco will have to pay Marriott. I can't imagine a situation where an existing Marriott-named resort could elect to remove the name from the resort so as to become exempt from the naming rights fee requirement, yet still be eligible for the associated benefits. I just can't understand how that could happen.

 

[gblotter]

What I can't seem to figure out is how a currently-named-Marriott resort will be able to sever the current Management Agreement (with either MAR or VAC, whichever is in play at the time) and still expect to be under the Marriott Vacations Worldwide umbrella, and thus be one of the resorts which will be required to pay the naming rights fee to MAR.

Consider an MVCI resort whose ownership votes in sufficient numbers to sever its relationship with the Management Company - either MAR currently or VAC after the spinoff is complete. I know that's a difficult vote to put in play and pass, but if owners don't want to be under any Marriott umbrella and successfully vote for that change, won't the resort then be a non-Marriott-affiliate, and won't the ownership have to then contract with a different Management Company? If that's the case, wouldn't that be the point when "Poof!" there would go all of the associated benefits (MRP, Marriott priority in II, DC enrollment, etc) of being an owner at a Marriott resort?

This track started with the thought of what benefits are attached to the $50M naming rights fee that Spinco will have to pay Marriott. I can't imagine a situation where an existing Marriott-named resort could elect to remove the name from the resort so as to become exempt from the naming rights fee requirement, yet still be eligible for the associated benefits. I just can't understand how that could happen.

How about this scenario?

Suppose an HOA board votes to sever the relationship with Spinco, and then they contract independently with Marriott International for resort management? Owners would lose the DC trading benefits, but would still retain the Marriott name and still have access to other Marriott perks such as MRP.

Too many complexities to consider.

 

[SueDonJ]

I claim no particular expertise in such things, but ... aren't franchise agreements and management contracts completely different?

Under a franchise agreement, the owner pays the mothership a fee for use of the brand/label. The employees work for the owner - not the mothership. The owner must run the operation in accordance with the standards of the mothership, and the mothership provides direction and advice to the owner. In a franchise scenario, the owner has significant expertise in running the operation.

Under a management contract, the owner contracts with the mothership to actually run the operation. The employees work for the mothership - not the owner. The mothership then passes profits and losses along to the owner under the terms of the contract. In a management contract scenario, the owners are mainly investors without necessarily having any particular expertise in running the operation.

Are you telling me that for resort management, the Spinco/Marriott relationship will operate like a franchise agreement - not a management contract?

What I'm thinking is that the Management Agreements currently in place between the individual resorts and MVCI will change upon the implementation of the spinoff so that Marriott Vacations Worldwide will take the place of MVCI. Where MVCI was under the Marriott International umbrella, MVW will not be but the franchise agreement between MAR and MVW will allow the resorts to continue using the Marriott name and the owners to keep the associated benefits of MVCI ownership.

I think.

 

[SueDonJ]

How about this scenario?

Suppose an HOA board votes to sever the relationship with Spinco, and then they contract independently with Marriott International for resort management? Owners would lose the DC trading benefits, but would still retain the Marriott name and still have access to other Marriott perks such as MRP.

It's simple yet creative, but it won't work because Marriott International's intent is to get out of the resort management business.

Too many complexities to consider.

You can say that again.

 

[gblotter]

It's simple yet creative, but it won't work because Marriott International's intent is to get out of the resort management business.

Huh? I thought the intent of Marriott International is to focus ~MORE~ on their strength in resort management, and to get out of the real estate ownership/development business.

 

[SueDonJ]

Huh? I thought the intent of Marriott International is to focus ~MORE~ on their strength in resort management, and to get out of the real estate ownership/development business.

I dunno. I thought the intent was for them to spin off the timeshare business so that they could concentrate on the lodging/hotel side of the business, and so that the timeshare business wouldn't affect the MAR bottom line and its stockholders. But the affiliation between MAR and MVW would allow the resorts to keep the Marriott name if MVW pays the fees and keeps the Marriott brand standard in place.

from 2/15/11 WSJ article:

... Under the plan announced Monday, Marriott's existing shareholders will own the new company, receiving shares when it is spun out, which is expected to happen by the end of this year. The new company, which has yet to be named, will control the management and planning of the timeshare properties, as well as unsold and under-construction properties. ...

 

[dioxide45]

My understanding of Spinco is very similar to dioxide's, which is that the intent of Marriott Int'l is to spin off every facet of what is now MVCI to a new company - Marriott Vacations Worldwide - which will take over every aspect of the timeshare business resulting in MAR being paid only (only?!) the $50M naming rights fee and 2% sales commission from all future timeshare business.

(Dioxide, are you also thinking that all of the common area-related fees that Marriott currently pays towards the individual resort HOA's, will now be assumed by Spinco? Remember the thread where we talked about Marriott paying for Barony's pool and grill/bar updates and MGV's common area updates? That's what I'm thinking, that Spinco will assume those and similar expenses that until the spinoff would have been paid by Marriott.)

What I can't seem to figure out is how a currently-named-Marriott resort will be able to sever the current Management Agreement (with either MAR or VAC, whichever is in play at the time) and still expect to be under the Marriott Vacations Worldwide umbrella, and thus be one of the resorts which will be required to pay the naming rights fee to MAR.

Consider an MVCI resort whose ownership votes in sufficient numbers to sever its relationship with the Management Company - either MAR currently or VAC after the spinoff is complete. I know that's a difficult vote to put in play and pass, but if owners don't want to be under any Marriott umbrella and successfully vote for that change, won't the resort then be a non-Marriott-affiliate, and won't the ownership have to then contract with a different Management Company? If that's the case, wouldn't that be the point when "Poof!" there would go all of the associated benefits (MRP, Marriott priority in II, DC enrollment, etc) of being an owner at a Marriott resort?

This track started with the thought of what benefits are attached to the $50M naming rights fee that Spinco will have to pay Marriott. I can't imagine a situation where an existing Marriott-named resort could elect to remove the name from the resort so as to become exempt from the naming rights fee requirement, yet still be eligible for the associated benefits. I just can't understand how that could happen.

If Spinco or the HOAs sever the management agreement, the Marriott name is lost along with any benefits that exist by being affiliated with Spinco. This is no different than those resorts in the past that severed the relationship. They can no longer exchange for Marriott Reward Points, no II preference, no DC enrollment.

What I'm thinking is that the Management Agreements currently in place between the individual resorts and MVCI will change upon the implementation of the spinoff so that Marriott Vacations Worldwide will take the place of MVCI. Where MVCI was under the Marriott International umbrella, MVW will not be but the franchise agreement between MAR and MVW will allow the resorts to continue using the Marriott name and the owners to keep the associated benefits of MVCI ownership.

I think.

I agree

 

[dioxide45]

It's simple yet creative, but it won't work because Marriott International's intent is to get out of the resort management business.



You can say that again.

Huh? I thought the intent of Marriott International is to focus ~MORE~ on their strength in resort management, and to get out of the real estate ownership/development business.

I dunno. I thought the intent was for them to spin off the timeshare business so that they could concentrate on the lodging/hotel side of the business, and so that the timeshare business wouldn't affect the MAR bottom line and its stockholders. But the affiliation between MAR and MVW would allow the resorts to keep the Marriott name if MVW pays the fees and keeps the Marriott brand standard in place.

from 2/15/11 WSJ article:

I was initially surprised when the spinoff was announced that management rights would stay with Spinco. I expected MI to continue to manage the resorts while Spinco handled the real estate transactions and development. I think however that if MI were to continue to manage the resorts, Spinco would have been doomed. The management fee is what will continue to keep Spinco afloat. Relying on contract sales only would not have been wise in the current economic environment.

 

[GregT]

All,

Something further to think about, as we debate SpinCo's prospects.

Let's look at its Income Statement (from page 242 of the link, or page F-53 in the financial statements).

This is for the six month period ended June 2011 -- the most recent available. These are not numbers for a full year, and annualized numbers would be 2X these amounts.

Revenues (all numbers are in millions):

Sales of points...................$295
Resort management.............108
Financing..............................80
Rental...................................90
Other....................................15
Cost reimbursements............158

Total revenues.....................751

This becomes more interesting (to me -- a finance guy) when I think about the related Costs from each income statement line item -- generating the net profit needed to sustain the business (and cover G&A costs, etc).

Sales of Points: $295M
Cost of Points ($116M)
Sales and Marketing: ($154M)

Net profit from selling points: $25M

SpinCo had $25M of profit from the sales of its points, after considering the related Sales and Marketing Expenses. Important to remember however, the Cost of Points of $116M comes from the $1.4B of inventory contributed by Marriott -- ie, the related cash to acquire it was spent years ago and SpinCo is loaded with inventory, therefore they don't have to run out and buy more (and use their cash to do it). So in selling $295M in Points, they really clear a lot more in cash then it appears. On their Cash Flow Statement, it shows they generated $61M in cash from not having to replace the inventory sold. In a sense, this is where the famous $50M in franchise fee belongs (and $50M is an annual number, whereas $61M is for six months) -- Marriott has invested $1.5 billion into SpinCo (that's now inventory) and will slowly get their money back via the royalty.

Resort management revenue: $108M
Resort managment costs: ($95M)

Net profit from managing resorts: $13M

They make $13M from managing resorts (on revenues of $108M -- a pretty tight margin). They're never going to get rich managing resorts until they manage 500 timeshare properties, but at least this is a very stable source of revenue.

Financing revenue: $80M
Financing expense: ($17M)
Interest expense: ($22M)

Net profit from offering financing: $41M

They make money from the interest income and the sales of the underlying notes. This appears to be an important part of the Marriott business -- getting points owners to finance the purchases and then securitizing and selling the notes.

Rental revenue: $95M
Rental costs: ($94M)

Net profit from renting units: $1M

Renting units is not a profitable adventure for Marriott. They are just recovering their costs. I do not know how they determing the Rental Costs -- if its MFs, or if there is some other variable included

Other: $15M

I have no idea what this is -- and I won't talk about cost reimbursements revenue of $158M because its offset by the costs (there is an offsetting $158 of Cost reinbursements in the Operating Expenses).

When you look at the two primary sources of profit -- they are clearly Sales of Points and the related Financing income. These are the volatile components of revenue. Resort management and Rental income, while more stable, aren't that profitable. SpinCo has G&A expense of $38M, which needs to be covered from these profitable revenues sources.

To me at least, this shows the dependence on SpinCo of selling points. It needs to sell points to generate the profit needed to cover its costs, but it has the home field advantage of all of its inventory has been pre-paid by Marriott, and it doesn't have to use its cash to go buy new inventory for awhile. It is true that it has to pay Marriott $50M+ annually.

I don't know if this posts adds much to the discussion, but I thought it was interesting seeing how profitable (and cash generating) the point sales were, versus how modestly profitable resort management is, and how unprofitable renting units its.

Best,

Greg

 

[kjd]

"Important to remember however, the Cost of Points of $116M comes from the $1.4B of inventory contributed by Marriott -- ie, the related cash to acquire it was spent years ago and SpinCo is loaded with inventory, therefore they don't have to run out and buy more (and use their cash to do it). So in selling $295M in Points, they really clear a lot more in cash then it appears."

With the above analysis by Greg T, what is the future of ROFR going forward with Spinco in charge? It would appear that the present ROFR inaction would continue.

 

[SueDonJ]

"Important to remember however, the Cost of Points of $116M comes from the $1.4B of inventory contributed by Marriott -- ie, the related cash to acquire it was spent years ago and SpinCo is loaded with inventory, therefore they don't have to run out and buy more (and use their cash to do it). So in selling $295M in Points, they really clear a lot more in cash then it appears."

With the above analysis by Greg T, what is the future of ROFR going forward with Spinco in charge? It would appear that the present ROFR inaction would continue.

I agree. It occurs to me, though, that at some point it may become beneficial for Spinco/MVW to enact ROFR and not for purely financial reasons. If things progress with MVW to the point where owners are fearful of their timeshare values becoming actually worthless (in both financial investment and usage,) the probability of ownership majorities voting to sever their resorts' relationship with MAR/MWV will increase. (I know, I know, it would be a long difficult process with only a slight chance of success, but it is possible.) ROFR will be a way for Spinco to pick up the important voting rights attached to every interval.

 

[SueDonJ]

... I don't know if this posts adds much to the discussion, but I thought it was interesting seeing how profitable (and cash generating) the point sales were, versus how modestly profitable resort management is, and how unprofitable renting units its.

Best,

Greg

Every post adds value to the discussion. I really do appreciate when TUGgers apply their expertise in an effort to educate those of us who don't share the expertise. Thank you.

But, nobody warned us that there would be Math today. Grrrrrrrr.

 

[OldPantry]

All,
Let's look at its Income Statement (from page 242 of the link, or page F-53 in the financial statements).


Sales of Points: $295M
Cost of Points ($116M)
Sales and Marketing: ($154M)

Net profit from selling points: $25M

SpinCo had $25M of profit from the sales of its points, after considering the related Sales and Marketing Expenses. Important to remember however, the Cost of Points of $116M comes from the $1.4B of inventory contributed by Marriott -- ie, the related cash to acquire it was spent years ago and SpinCo is loaded with inventory, therefore they don't have to run out and buy more (and use their cash to do it). So in selling $295M in Points, they really clear a lot more in cash then it appears. On their Cash Flow Statement, it shows they generated $61M in cash from not having to replace the inventory sold. In a sense, this is where the famous $50M in franchise fee belongs (and $50M is an annual number, whereas $61M is for six months) -- Marriott has invested $1.5 billion into SpinCo (that's now inventory) and will slowly get their money back via the royalty.

Financing revenue: $80M
Financing expense: ($17M)
Interest expense: ($22M)

Net profit from offering financing: $41M

They make money from the interest income and the sales of the underlying notes. This appears to be an important part of the Marriott business -- getting points owners to finance the purchases and then securitizing and selling the notes.

When you look at the two primary sources of profit -- they are clearly Sales of Points and the related Financing income. These are the volatile components of revenue. Resort management and Rental income, while more stable, aren't that profitable. SpinCo has G&A expense of $38M, which needs to be covered from these profitable revenues sources.

To me at least, this shows the dependence on SpinCo of selling points. It needs to sell points to generate the profit needed to cover its costs, but it has the home field advantage of all of its inventory has been pre-paid by Marriott, and it doesn't have to use its cash to go buy new inventory for awhile. It is true that it has to pay Marriott $50M+ annually.

Greg

Greg; fascinating what you can get from reading the public information. One thing you've demonstrated neatly: Spinco is overwhelmingly dependent upon points sales, both primarily and via financing revenue. So, how sustainable is this flow? To date, it seems likely that most of the revenue has come from the base: existing timeshare owners who either seek the "flexibility" of DC points, or who fear losing out on availability over time. I would suggest that this is a sales pool likely to shrink hugely over time, and not very much time at that. If Spinco is to generate serious replacement revenue going forward, it's going to have to come from new points sales to non-vacation club folks. Those guys will have to be convinced that putting out roughly $40,000 (reflecting the minimum number of points to to snag prime weeks at prime resorts) and paying $1600 a year in maintenance fees is a whopping opportunity. This with NO guarantee of availability at any given time at any given resort. Since traditional timeshare sales have imploded over the last few years, I'm wondering just how many of these starry-eyed newbies are out there. If they don't turn up in droves, then (again) it sounds like a big "glub glub" for Spinco (as their preliminary financial ratings seem to forecast). So, just for kicks: what will a post Spinco bankruptcy world look like for us folks?

 

[dioxide45]

Resort management revenue: $108M
Resort managment costs: ($95M)

Net profit from managing resorts: $13M

They make $13M from managing resorts (on revenues of $108M -- a pretty tight margin). They're never going to get rich managing resorts until they manage 500 timeshare properties, but at least this is a very stable source of revenue.

I am surprised with the high overhead on resort management. It isn't like Spinco has to pay the salaries or any other costs for the resort staff. Those are paid by the owners though the MFs. Spinco makes a flat 10% off the top of all MF payments. Sure there is some accounting and payroll overhead, but I am surprised the margin is to tight.

I would also be curious as to the profit margin that Marriott makes when it acts as the contractor on resort refurbishments. Perhaps that is part of the management revenue?

 

[cruisin]

I am guessing all of the trust units would stay a part of the DC even if the HOA of a resort severed ties? What a mess all of this would be, You would think that Marriott does not foresee severing to occur.

 

[Fredm]

All,

Something further to think about, as we debate SpinCo's prospects.

Let's look at its Income Statement (from page 242 of the link, or page F-53 in the financial statements).

This is for the six month period ended June 2011 -- the most recent available. These are not numbers for a full year, and annualized numbers would be 2X these amounts.

Revenues (all numbers are in millions):

Sales of points...................$295
Resort management.............108
Financing..............................80
Rental...................................90
Other....................................15
Cost reimbursements............158

Total revenues.....................751

This becomes more interesting (to me -- a finance guy) when I think about the related Costs from each income statement line item -- generating the net profit needed to sustain the business (and cover G&A costs, etc).

Sales of Points: $295M
Cost of Points ($116M)
Sales and Marketing: ($154M)

Net profit from selling points: $25M

SpinCo had $25M of profit from the sales of its points, after considering the related Sales and Marketing Expenses. Important to remember however, the Cost of Points of $116M comes from the $1.4B of inventory contributed by Marriott -- ie, the related cash to acquire it was spent years ago and SpinCo is loaded with inventory, therefore they don't have to run out and buy more (and use their cash to do it). So in selling $295M in Points, they really clear a lot more in cash then it appears. On their Cash Flow Statement, it shows they generated $61M in cash from not having to replace the inventory sold. In a sense, this is where the famous $50M in franchise fee belongs (and $50M is an annual number, whereas $61M is for six months) -- Marriott has invested $1.5 billion into SpinCo (that's now inventory) and will slowly get their money back via the royalty.

Resort management revenue: $108M
Resort managment costs: ($95M)

Net profit from managing resorts: $13M

They make $13M from managing resorts (on revenues of $108M -- a pretty tight margin). They're never going to get rich managing resorts until they manage 500 timeshare properties, but at least this is a very stable source of revenue.

Financing revenue: $80M
Financing expense: ($17M)
Interest expense: ($22M)

Net profit from offering financing: $41M

They make money from the interest income and the sales of the underlying notes. This appears to be an important part of the Marriott business -- getting points owners to finance the purchases and then securitizing and selling the notes.

Rental revenue: $95M
Rental costs: ($94M)

Net profit from renting units: $1M

Renting units is not a profitable adventure for Marriott. They are just recovering their costs. I do not know how they determing the Rental Costs -- if its MFs, or if there is some other variable included

Other: $15M

I have no idea what this is -- and I won't talk about cost reimbursements revenue of $158M because its offset by the costs (there is an offsetting $158 of Cost reinbursements in the Operating Expenses).

When you look at the two primary sources of profit -- they are clearly Sales of Points and the related Financing income. These are the volatile components of revenue. Resort management and Rental income, while more stable, aren't that profitable. SpinCo has G&A expense of $38M, which needs to be covered from these profitable revenues sources.

To me at least, this shows the dependence on SpinCo of selling points. It needs to sell points to generate the profit needed to cover its costs, but it has the home field advantage of all of its inventory has been pre-paid by Marriott, and it doesn't have to use its cash to go buy new inventory for awhile. It is true that it has to pay Marriott $50M+ annually.

I don't know if this posts adds much to the discussion, but I thought it was interesting seeing how profitable (and cash generating) the point sales were, versus how modestly profitable resort management is, and how unprofitable renting units its.

Best,

Greg

Greg,

I believe Resort Management Costs (95mm) is returned as Cost Reimbursement Revenue(included in the 158mm).
I suspect some of the rental expense is also reimbursed in the 158mm.


Footnotes:
2 — Timeshare sales and services includes total timeshare revenue except for base management fees and cost reimbursements.

3 — Cost reimbursements include reimbursements from properties for Marriott-funded operating expenses.

 

[windje2000]

I am guessing all of the trust units would stay a part of the DC even if the HOA of a resort severed ties? What a mess all of this would be, You would think that Marriott does not foresee severing to occur.

I think you may have hit on the reason MAR wanted the voting power from DC legacy enrollees.

 

[funtime]

"One thing you've demonstrated neatly: Spinco is overwhelmingly dependent upon points sales, both primarily and via financing revenue. So, how sustainable is this flow? To date, it seems likely that most of the revenue has come from the base: existing timeshare owners who either seek the "flexibility" of DC points, or who fear losing out on availability over time. I would suggest that this is a sales pool likely to shrink hugely over time, and not very much time at that. If Spinco is to generate serious replacement revenue going forward, it's going to have to come from new points sales to non-vacation club folks. "

It is a lot easier to sell 1,000 point upgrades to existing Marriott owners which is why I think that they are bound to open up the points program again once things settle down - perhaps in 18 months to a year. As it is they are missing out on 80% or more of their customer base who did not convert (yet) to points. It is a lot easier to sell more points to Marriott owners than to bring in new folks for a whopping big purchase. Sales economics will dictate opening up the points program to existing Marriott owners again. Funtime

 

[dioxide45]

It is a lot easier to sell 1,000 point upgrades to existing Marriott owners which is why I think that they are bound to open up the points program again once things settle down - perhaps in 18 months to a year. As it is they are missing out on 80% or more of their customer base who did not convert (yet) to points. It is a lot easier to sell more points to Marriott owners than to bring in new folks for a whopping big purchase. Sales economics will dictate opening up the points program to existing Marriott owners again. Funtime

I am confused by this statement and one you made in another thread. You seem to be under the impression that weeks owners can no longer enroll in the DC program? Did something from a recent sales presentation lead you to this? Am I wrong in my assumption?

 

[funtime]

I thought that there was a grandfather time period that you could change out your weeks for points and that that time period has now expired. That is what I meant - am I wrong in that assumption? Funtimne

 

[dioxide45]

I thought that there was a grandfather time period that you could change out your weeks for points and that that time period has now expired. That is what I meant - am I wrong in that assumption? Funtimne

The only deadline that has recently expired was the ability to convert 2012 weeks in to DC points. That happened on 9/30. Enrolled owners can still enroll, at least through November 30th. Enrolled owners can still book with points and convert 2013 weeks to DC points.

 

[pwrshift]

Luck of the draw I guess. I bought MAR stock as a hedge with the same amount as each of my direct TS purchases many years back. Then bought more at the end of the recession. Sold it all about 6 months after they announced the DC program and made a very nice capital gain. Spinco just confirms to me the slippery slope Marriott is on. JMHO.