SpinCo's annual results

[GregT]

All,

Excerpts from today's press release -- lost in all the spin is the fact that 4th quarter contract sales of [GT edit: $192M] were flat to down from the first three quarters sales -- but point sales are only responsible for 40% of total revenues, which is positive for their viability.

They have more inventory than I expected, however -- which is interesting.

Best,

Greg

_____________________________________________



Marriott Vacations Worldwide Corporation (NYSE: VAC) today reported full year and fourth quarter 2011 financial results and the company’s outlook for 2012.

Highlights include:

• Marriott Vacations Worldwide Corporation launched as the leading global pure-play vacation ownership company through a spin-off from Marriott International, Inc. on November 21, 2011.

• 2011 total revenues were $1.6 billion, including $648 million from rentals, resort management, financing and other sources.

• Revenues from the sale of vacation ownership products totaled $634 million. Total gross contract sales for 2011 were $676 million.

• Volume per guest (VPG) in the North America segment increased 4 percent to $2,504 over 2010.

• During 2011, total cash balances increased $84 million, reaching $110 million at the end of 2011, while total debt declined by $172 million.

• In line with the company’s goal to improve return on investment, the company generated $18 million of cash proceeds from the disposal of excess land previously held for development and completed inventory in the Luxury segment.

• On a pro forma basis, Adjusted EBITDA (earnings before interest expense, taxes, and depreciation) totaled $96 million in 2011. Adjusted net income on a pro forma basis was $20 million in 2011.

• Adjusted EBITDA in 2012 is expected to total $115 million to $125 million.

• Net income for 2012 is expected to total $37 million to $43 million.


Balance Sheet and Liquidity

At December 30, 2011, cash and cash equivalents totaled $110 million. Inventory totaled approximately $1 billion at the end of 2011, including $448 million of finished goods, $215 million of work-in-process, and $290 million of land and infrastructure. The company had approximately $850 million in corporate level debt outstanding at year-end, including $729 million in non-recourse securitized notes receivable and $118 million drawn on its $300 million warehouse credit facility. In addition, the company had $200 million in available capacity under its revolving credit facility.

Outlook

For the full year 2012, the company is providing the following guidance:

• Total gross contract sales growth of 4 percent to 8 percent

• Adjusted EBITDA of $115 million to $125 million

• Net income of $37 million to $43 million

• Fully diluted earnings per share of $1.03 to $1.17

• Adjusted Free Cash Flow of $85 million to $100 million

 

[sparty]

All,

Excerpts from today's press release -- lost in all the spin is the fact that 4th quarter contract sales of $137M were flat to down from the first three quarters sales -- but point sales are only responsible for 40% of total revenues, which is positive for their viability.

They have more inventory than I expected, however -- which is interesting.

Best,

Greg

_____________________________________________

VAC stock is doing well. I think VAC must be fairly happy with how the spin-off has gone. I wonder if this will result favorably for owners?

 

[dioxide45]

$448 million of finished goods, $215 million work in progress

Based on this, it would seem that they only have about a year of inventory to sell if they continue to sell on the pace they did in the prior year. That would mean in about a year they will be looking to acquire inventory. My guess is that they will follow HGVC lead and begin much more active ROFR.

The $215MM work in progress is primarily at Oceana Palms since the new tower is set for occupancy beginning March 2013. I am not aware of any other resorts where they are actively building at this time?

 

[GregT]

My guess is that they will follow HGVC lead and begin much more active ROFR.

The $215MM work in progress is primarily at Oceana Palms since the new tower is set for occupancy beginning March 2013. I am not aware of any other resorts where they are actively building at this time?

I agree with you and definitely believe they will begin to follow HGVC's lead and begin to acquire more inventory.

I should have been more clear -- I still think their inventory ($663M of FG and WIP) comprises a couple years of inventory at current sales pace (they are selling $200M - $250M annually of inventory -- that's their cost -- and they earn $600M - $650M when selling that stuff).

I do believe they would be planning where the next slug of inventory will come from and I still believe it will come from ROFR.

The Oceana Palms comment is interesting -- I also can't think of what else is under development that will provide the quantity of inventory that they will need down the road.

It will be interesting to see!

Best,

Greg

 

[BocaBoy]

The $215MM work in progress is primarily at Oceana Palms since the new tower is set for occupancy beginning March 2013. I am not aware of any other resorts where they are actively building at this time?

And at Ko Olina, where the second half of Naia Tower is scheduled to open soon. Maybe also Grand Chateau, where work is supposed to start this spring on a third tower.

 

[gblotter]

I am not aware of any other resorts where they are actively building at this time

Ko Olina has active construction going on with the Naia tower scheduled for completion in June 2012.

(oops - BocaBoy beat me too it)

 

[dioxide45]

And at Ko Olina, where the second half of Naia Tower is scheduled to open soon. Maybe also Grand Chateau, where work is supposed to start this spring on a third tower.

Didn't think of the second half of Naia at Ko'Olina. Not sure if they would consider Grand Château as work in progress yet, but rather land and infrastructure?

 

[dioxide45]

I agree with you and definitely believe they will begin to follow HGVC's lead and begin to acquire more inventory.

I should have been more clear -- I still think their inventory ($663M of FG and WIP) comprises a couple years of inventory at current sales pace (they are selling $200M - $250M annually of inventory -- that's their cost -- and they earn $600M - $650M when selling that stuff).

I do believe they would be planning where the next slug of inventory will come from and I still believe it will come from ROFR.

The Oceana Palms comment is interesting -- I also can't think of what else is under development that will provide the quantity of inventory that they will need down the road.

It will be interesting to see!

Best,

Greg

You are right, I hadn't taken in to account the cost of inventory vs what it sells for retail. So back when they said they had about 5 years inventory to sell, they were right and it doesn't seem like they have burned through it faster than expected.

 

[SpikeMauler]

The $215MM work in progress is primarily at Oceana Palms since the new tower is set for occupancy beginning March 2013. I am not aware of any other resorts where they are actively building at this time?

Almost half of Frenchman's Cove still needs to be completed. I don't think they've resumed building yet.

 

[kjd]

In order to buy more inventory they have to sell what they have available. Some of it will not sell as well as the premium weeks so the way to get platinum weeks is to either buy it or build it. When Marriott-VAC can buy platinum weeks at resorts they need, they of course would ROFR them. At today's resale prices they can't build them for what they can ROFR them for.

However, Marriott-VAC may not be able to meet the demand through ROFR if sales really pick up. That's why this report is encouraging for existing owners. We need a tighter supply of inventory in order for the resale market to rebound. Part of that rebound will be due to increased ROFR activity.

But, that may be a false hope for sellers trying to get out and get some of their money back. The fact that resale buyers on ebay and such are barred from access to the point system will create an artificially low resale market. Like a crowd of vultures Marriott-VAC will hover waiting to ROFR the poor saps who think they have gotten a bargain. It's almost a license to steal.

 

[m61376]

Except that there are those resorts that people buy primarily to use, and I think those weeks would have increasing value despite being ineligible to enroll n the DC. Not to et on a ROFR debate, I'd like to say it will be interesting to see what (if any) impact it has on prices if Marriott decides to actively exercise ROFR for prime inventory.

The "beauty" of the points system for Marriott is every point sells as a Platinum week, so there are no undesirable or less desirable weeks that that lag far behind in selling out. Every point is as good as a 3BR OF, or whatever week happens to be in shortest supply at the resort(s) people are interested in.

 

[Lawlar]

Points vs Weeks

Do any of you have an opinion on whether sales have increased or decreased since Marriott changed to the point system? Is the new concept working for them or is it falling flat?

One thing seems apparent to me - I see fewer tours taking place at MOC since they changed the system (partly due to the recession, I'm sure). A few years ago there was a steady procession of sales reps leading guests on tours, no so today.

 

[GregT]

Do any of you have an opinion on whether sales have increased or decreased since Marriott changed to the point system? Is the new concept working for them or is it falling flat?

I believe the concept is working to maintain current levels of sales. Sales in general are down significantly from 2007/2008, but were flat for 2010 and 2011.

Product Sales (most quarters are 12 weeks, some are 16 weeks):

Q1 2010....$148M (12 weeks) --> selling weeks at the time
Q2 2010....$150M (12 weeks)
Q3 2010....$138M (12 weeks) --> now selling points
Q4 2010....$199M (16 weeks)
Q1 2011....$143M (12 weeks)
Q2 2011....$152M (12 weeks)
Q3 2011....$147M (12 weeks)
Q4 2011....$192M (16 weeks) (note: I had this as $137M in the first post -- now corrected)

They are averaging $12M in sales per week going back two years (either points or weeks) -- very flat to modestly down. I can't believe the Q4 2011 result is encouraging to Marriott because they've now had a full year to refine their sales tactics.

But in their defense, they were still understanding their own product and working out the (many) kinks, and we may start to see growth in sales.

Overall revenues are also flat $1.6B in 2011, $1.6B in 2010 and $1.6B in 2009.

Where will SpinCo's value creation come from? It's hard at this point to see it coming from growth in sales of points?

Acquisitions of other systems to leverage their existing OpEx? Could they consolidate the HVGC, Starwood, or Hyatt brands so they have more management fees? Not sure....but perhaps. Blackstone has been rumored to want to sell off the Hilton business (or take it public) perhaps they will sell the rights to manage HGVC to Marriott.

Who knows. But to answer your question, I think it has been successful in the sense that it allowed them to monetize the remaining inventory (junk weeks too) that didn't sell during the "25th anniversary sale" when the good Platinums were selling well.

I agree with other posters that they will take advantage of depressed resale values (partially because of inability to enroll in DClub) to ROFR or direct purchase to add to the Trust.

Interesting stuff....

Best,

Greg

 

[Docklander]

The fact that newly resold weeks aren't eligible to join in the points system may have a knock on effect for rentals as well. If the resale market gets depressed by this rule, some owners who may have otherwise sold their units may be more inclined to hold on to them rather than sell at a big loss and rent them out instead. More rental availability = cheaper rentals. Not saying this will happen, just saying it's a possibility IMO.

 

[FractionalTraveler]

GregT nice analysis!

My predictions (12-24 months out):

I expect small to modest growth for MVW in USA as economy is definitely rebounding slowly.

BTW, The market thinks the VAC stock price is currently over-valued.

I also expect them to announce an Asian points overlay program soon, so that Asian customers can have better access to USA product. An expansion of the existing Asian footprint is definitely going to give MVW double digit growth in that market segment for years to come.

Adding this option for USA customers is also beneficial as more and more business is being performed in this region of the world.

I also expect in the next 24 months that the remaining european resorts will be added either as points overlay or something else.

In my opinion, if MVW want to drive larger growth in the USA, then they will need to add urban locations to attract more paying customers on the high end of the scale. That would really not require large capital outlays. For example, I can envision several floors at a Marriott Hotel in New York dedicated as 2-bedroom units and made available to Premier-Plus points owners for usage.

That would be a great addition to the program as I would love to have additional options in New York, Boston, Miami, Los Angeles, Seattle, Dallas, and others.

Of course, it would need to be done as to not directly compete with existing brands such as Ritz Carlton, AC Hotels, Marriott Executive Apartments, ExecuStay, etc.

I would gladly purchase another 5-7K Trust Points to hace access to these urban locations.

 

[jimf41]

Almost half of Frenchman's Cove still needs to be completed. I don't think they've resumed building yet.

About a third actually Spike. They have 154 units open out of a planned 224. According to the GM construction of the of the last two bldg's and the 2nd pool and children's play area has been put off to 2016. It was originally scheduled for completion in 2012.

 

[sparty]

I believe the concept is working to maintain current levels of sales. Sales in general are down significantly from 2007/2008, but were flat for 2010 and 2011.

Best,

Greg

What is a real surprise is that VAC is saying a 4 to 8% increase in contract sales for 2012.. That is a pretty significant increase..

Where is this coming from? I don't see it as earlier posters have said there's low sales visibility/activity at the resorts.

 

[dioxide45]

Almost half of Frenchman's Cove still needs to be completed. I don't think they've resumed building yet.

True, but my guess is that this would be considered existing land and infrastructure.

 

[Asia2000]

What is a real surprise is that VAC is saying a 4 to 8% increase in contract sales for 2012.. That is a pretty significant increase..

Where is this coming from? I don't see it as earlier posters have said there's low sales visibility/activity at the resorts.

From the last earnings report in May of 2012, it appears that most of the increases in revenue came from #1 - Rental rate revenue (Marriott.com and other sources). #2 - Maintenance Fee increases from owners (up 6% across the board).

The contract sales increases from North America were offset by Europe and Asia. In the current environment and using the current strategy, it seems unlikely that any significant gains will be made in contract sales. Rentals, MFs and finding cost efficiencies certainly cannot carry the company long-term. Any thoughts?

 

[cbdmvci]

From the last earnings report in May of 2012, it appears that most of the increases in revenue came from #1 - Rental rate revenue (Marriott.com and other sources). #2 - Maintenance Fee increases from owners (up 6% across the board).

Just curious. Does anyone have any idea how rental income is split.

Say, someone goes on Marriott.com and rents a week at the Aruba Ocean Club for $X on their regular or MOD rate. (Assume this is a week owned by SpinCo, not yet conveyed to the trust.)


How much does SpinCo get?
How much does the hotel owner (Host Hotels?) who "lost" the possible hotel room rental to Spinco get?
How much does Marriott (the resort management company ) get?

Of course, this begs the related question. If Spinco sells enough Trust Points that theoretically one could reserve that week, Spinco need not necessarily convey that week to the trust. The could choose to convey instead a few winter weeks at Seaview, right? Keeping the more rentable weeks for their own bottom line, right?

 

[thickey]

Is Marriott exercising ROFR currently?

I am in the market to acquire another resale week. A broker is telling me that I must offer top-dollar because they are agressively using ROFR. I am currently looking at for a week at either Branson Willow Ridge, Monarch at Sea Pines, or Grand Vista 3BR.

Is this a ploy for more commission or is the broker correct?

Also, if ROFR isn't going on now, but is expected in the near future, would now be the best time to purchase something? I was sort of thinking of waiting until the end of prime season, for the best deals...

Thanks!

 

[GregT]

I am in the market to acquire another resale week. A broker is telling me that I must offer top-dollar because they are agressively using ROFR. I am currently looking at for a week at either Branson Willow Ridge, Monarch at Sea Pines, or Grand Vista 3BR.

Is this a ploy for more commission or is the broker correct?

Also, if ROFR isn't going on now, but is expected in the near future, would now be the best time to purchase something? I was sort of thinking of waiting until the end of prime season, for the best deals...

Thanks!

We've been hearing from brokers that ROFR is being exercised, and we've seen more activity from Marriott than we've been seeing over the last several years -- but ackowledging that, we still have not seen enough activity to make us feel that ROFR is being actively exercised, only selectively exercised.

That being said -- some of us (like me) do believe much more active ROFR exercising will be coming and believe that 2012 may be our last opportunity to pick up cheapo Platinums and high quality Golds.

We will see.....good luck and let us know what you decide to do!

Best,

Greg

 

[FlyerBobcat]

Monarch does not even have ROFR rights!

I am in the market to acquire another resale week. A broker is telling me that I must offer top-dollar because they are agressively using ROFR. I am currently looking at for a week at either Branson Willow Ridge, Monarch at Sea Pines, or Grand Vista 3BR.

Is this a ploy for more commission or is the broker correct?

Also, if ROFR isn't going on now, but is expected in the near future, would now be the best time to purchase something? I was sort of thinking of waiting until the end of prime season, for the best deals...

Thanks!

 

[Michigan Czar]

As far as I know Spinco didn't offer "gift of time" weeks last year, that is probably one key reason why Spinco's rental income has increased.

 

[timeos2]

I am in the market to acquire another resale week. A broker is telling me that I must offer top-dollar because they are agressively using ROFR. I am currently looking at for a week at either Branson Willow Ridge, Monarch at Sea Pines, or Grand Vista 3BR.

Is this a ploy for more commission or is the broker correct?

Also, if ROFR isn't going on now, but is expected in the near future, would now be the best time to purchase something? I was sort of thinking of waiting until the end of prime season, for the best deals...

Thanks!

The best plan is to avoid any resort or system with ROFR as it is nothing but a friend to the developer. It hurts owners. However, if you MUST have resort XXX and it is a ROFR one don't play the overpay game. You offer what its worth to you - don't worry about ROFR. If it's taken by ROFR so what - go to the next seller. If not you get your price & your deal. And you don't have to worry about ROFR again until you try to sell.

Good luck if you decide to deal with a ROFR resort (on both ends).