Why is Marriott Vacations struggling?

[timsi]

They seemed to pin a lot of their late 2023 troubles on the Maui fires. We will have to see what they report later this month. I suspect sales numbers won't be pretty. They will probably tout big revenue increases in resort management.

It was a lot more than the Maui fires:

“Jason Marino: Thanks, John. Today, I am going to review our third quarter results, the strength of our balance sheet and liquidity, our updated 2023 guidance, and some early thoughts about 2024. In addition, as Neal mentioned, to facilitate a conversation this morning about our business, all of my comments will exclude the estimated impact of the Maui wildfires, except where noted. Starting with our Vacation Ownership segment. Contract sales declined 4%, excluding the estimated $28 million impact of the Maui fires. At over $4,100, VPG was only down 5% year over-year in the third quarter versus a 14% decline in the second quarter, illustrating the benefits of our sales training and sharing of best practices across the organization, as well as the continued owner education about the benefits of Abound. Another encouraging sign is that our package pipeline continues to be robust and grew 10% compared to a year ago, which is a key driver of future sales. As you saw in our release last night, we recorded an additional $59 million loan loss charge in the quarter on our $2.8 billion gross notes receivables portfolio. As we discussed last quarter, we saw delinquency trends improve earlier in the year, but they still remain above the prior year and our expectations. Based on this, and the mixed macroeconomic data we have observed in 2023, we expect this to continue in the near-to-medium-term and we adjusted our estimate for the loan loss provision taking these factors into account. With this adjustment, we believe our consumer loan portfolio is adequately reserved. After the partial offset of approximately $10 million in cost of vacation ownership, the impact to adjusted EBITDA was $49 million, which we have not added back in our calculation of adjusted EBITDA. Rental profit declined $13 million on a year-over-year basis, primarily due to lower RevPAK in Orlando and our mountain locations, as well as higher inventory holding costs. Finally, financing profit increased 3% year-over-year and resort management profit grew 8%, reflecting the recurring nature of these high margin revenue streams. As a result, adjusted EBITDA on our Vacation Ownership segment would have decreased 24% year-over-year to $195 million in the third quarter, excluding the estimated impact of Maui. Moving to our Exchange and Third-party Management business, adjusted EBITDA declined $8 million compared to the prior year, driven by fewer exchange transactions at Interval International and lower RevPAR at Aqua Aston, while margin was just over 50% for the quarter. As a result, total company adjusted EBITDA would have declined to $174 million in the quarter.”


It's interesting to note that their "package pipeline" grew by 10%. They have mentioned on various occasions their want to continue expanding the pipeline, while also expressing the intention to reduce inventory. How do they plan to reconcile these goals? Where will the additional inventory come from?

 

[JIMinNC]

It's also important to recognize that corporate earnings calls - like the one that generated the quote above posted by @timsi - are part regulated financial disclosure and part PR spin. Management is required to present accurate results, but in their comments, they will do their best to spin them in the best way reasonably possible without misleading the analysts on the call. You can get a somewhat more objective take by reading research reports from Wall Street firms.

Bank of America Securities is one of the firms that covers VAC, and in their November post-Q3 earnings research report, they had the following to say while lowering their rating on VAC stock to "Underperform":

Marriott Vacations disappointed in Q3 and faces pressure across every business segment: 1) cut core vacation ownership (ex-Maui) and was already struggling to drive tour flow, 2) called out credit delinquencies and looks under-reserved vs. peers which weighs on margins, 3) rentals face higher costs from double digit HOA fee increases, 4) management/exchange has pressure from higher costs and structural headwinds, and 5) financing has a lower spread due to higher rates. We see these issues continuing into 2024 and move our estimates 10% below the Street for 2024E/2025E, while lowering our PO and rating to $65 ($125 prior) and Underperform (Neutral prior), respectively.

Lowering VAC to Underperform
Marriott Vacations shares have already underperformed during earnings (-9% since reporting vs. the S&P500’s +6%) and year-to-date. However, we see multiple risks from here:

1. Margin pressure across all ancillary lines of business. This includes financing (higher interest rates/lower spread) rental (higher maintenance fees on inventory), resort management (higher costs of goods sold for operated outlets), and exchange (structural usage issues of points relative to fixed weeks).
2. Rising delinquencies. This was a unique and idiosyncratic call out relative to peers who are both have both higher loan loss provisions 8.4%/16.9% for HGV and TNL vs. 8.2% for VAC and/or a higher allowance at 30.1% for HGV and 18.6% for TNL vs. 17.8% for VAC. We think the issue is, in part, lower credit quality of acquired customers (Sheraton/Vistana in particular) but it also seems like a new behavior relative to expectation and we haven’t experienced any real consumer stress (yet).
3. Elevated VOI margins. VOI margins are still well above peers and above pre- COVID. This is largely to VAC’s high inventory cushioning its development margin, but we also think benefits from a lower sales reserve and existing vs. new owner mix. Higher sales mix to either new owners or to drive tours could pressure these margins. We estimate full normalization to pre-COVID VOI margins would equate to an incremental $157M of EBITDA hit versus our current below Street EBITDA.

While some of these risks may be understood and sentiment is clearly low, our estimates and bridge are meaningfully below even recently downward revised consensus, while Consensus is well above 2019 levels of earnings. If either 1) the consumer were to actually falter in a pullback or recession or 2) VOI margins were to normalize, there could potentially be another $50-150M of EBITDA risk we are not including in our below-Street forecast.

 

[1Kflyerguy]

It's interesting to note that their "package pipeline" grew by 10%. They have mentioned on various occasions their want to continue expanding the pipeline, while also expressing the intention to reduce inventory. How do they plan to reconcile these goals? Where will the additional inventory come from?

Most businesses try to optimize their inventory to their sales levels. If there sales are slowing they won't need to hold as much inventory. New inventory comes from adding resorts or from buy backs. My guess is they will slow their ROFR until sales pick back up. They may not stop entirely but will be more selective in what they take back.

 

[Retired2025 aka AlmostRetired]

My guess is they will slow their ROFR until sales pick back up. They may not stop entirely but will be more selective in what they take back.

I think Marriott has always been selective in what they buy back and the ROFR will continue to get needed desirable weeks using ROFR on the weeks they can get at a good price.

I am sure Marriott has a business strategy in place while I have no clue what it is nor do I care. My interest is in the Timeshare Management business. On the sales side, they could put all of their sales people on non commission plans and lower costs so they can sell points at 9 a point. They can still collect the the fee for resale of points and have a steady profitable business. The conversation below was Nov 2023 and was driven by the increase in MF at the Resort and and a possible increase in foreclosures turned on the 2024 significant increase in the Trust MF. I was not given permission to post this so I am not identifying the resort and likely applies to all of them.

Background.
I have admin a number of II and Marriott FB Groups and a number of HOA members are on it that I have come to know. a small subset of them will answer questions I ask of them. Here was a Facebook Messenger Conversation. My question was on what happens to foreclosures and doesn't it hurt the MF of the trust. Keep in mind, it is still one persons opinion in what these "buys" does to the trust MF and this is a HOA view not a Marriott view.

"As for the foreclosures, yes, as of right now, Marriott buys those weeks back and issues them to the trust. They stopped this briefly during the pandemic, but have since restarted. When I asked this question, the Marriott director stated that Marriott is desperate for additional inventory. As more people buy points, more points usages need to be available for them to use. It is one reason why they have been acquiring other groups like Westin. They need the inventory, since they can't build fast enough to meet the demand. Yes, this does burden the trust, but the trust makes up for it in volume at the moment, and is the primary driver in the rise in MF costs for the Trust. Hope that helps "

My follow on question
"They actually buy it or just take it over"

Answer
Take it over. The ‘buy’ is that they pay the association for the owed MF.



A funny side note to Yes, this does burden the trust, but the trust makes up for it in volume at the moment. I was a salesman at IBM and managed sales teams on a number of levels. Before we sold the PC business, it was difficult to make a profit on the PC business because the SG&A. Sales people where measure on revenue and not profit so no one cared. We use to lose money on selling PC's. We used to joke, "yes we lose money but we will make it up on volume". We sold the business.

 

[BAT]

Below is one analysts take - reminds me of what I said 1 year ago

Shares of Marriott Vacations Worldwide (NYSE:VAC) have been hit hard thus far in 2023, falling 44%. Shares have suffered for a number of reasons, including:

• Significant reduction in full year guidance
• Fears that a pullback in consumer spending could further dampen results going forward
• Relatively high financial leverage with net debt at ~3.6x 2023e EBITDA
• Lowered guidance/tougher outlook coupled with financial leverage could lead to reduced capital returns (buybacks) going forward
• General lack of enthusiasm for the timeshare industry
• I also suspect year end (tax loss) selling has driven shares down

Just check out what is going on at the Hyatt Codonut Plantation. No 2024 budget, lawsuits, claims of improper charges and fees by the management company MVW.

 

[timsi]

" They need the inventory, since they can't build fast enough to meet the demand"

This person does not understand Marriott's business model. Marriott acquires existing inventory almost for free instead of constructing new resorts, as it is a lot less capital intensive. The company essentially resells inventory that is equivalent to 4-5 resorts annually.

 

[Retired2025 aka AlmostRetired]

This person does not understand Marriott's business model. Marriott acquires existing inventory almost for free instead of constructing new resorts, as it is a lot less capital intensive. The company essentially resells inventory that is equivalent to 4-5 resorts annually.

Some poor person is answering my question on Foreclosure and impact to trust and you attack what he/she knows about Marriott's business strategy. If you are right, do you think this invalidates the answer to my questions? If so, since you know the business strategy, can you answer my questions based on first hand information. The board member knows they are acquiring weeks because he sees it at his resort. It is not for free nor almost for free. It is for back MF. The back MF, if just one year in the lowest season is more than the market value at that resort. If it is two years, the MF is greater then the second lowest season. BTW, the MF using points for both those seasons is less than $900 and the MF is twice that. This alone shows it comes with a cost. The cost might be from another line item in MVCI business, but a cost just the same. Once again you can't see the forests for the tress.

Marriott is building a new resort in Charleston on 23 acres, I believe this is bigger than the property size of the Grand Ocean. The whole pulse collection strategy is based on acquiring new units in existing hotels in expensive areas and renovating it to add points and locations. This sounds capital intensive to me. Is this what was meant? I do not know what he/she knows about Marriott's current or future business strategy and unlike him who had access to a GM and Director, I have no access at Marriott. I guess I could speculate what he knows but this doesn't impact acquiring foreclosure weeks or the cost to the MF of the trust.

I asked about foreclosures and MF. The board member knows they are acquiring weeks because he sees it at his resort. It is not for free nor almost for free. It is for back MF. The back MF, if just one year in the lowest season is more than the market value at that resort. If it is two years, the MF is greater then the second lowest season. BTW, the MF using points for both those seasons is less than $900 and the MF is twice that. This alone shows it comes with a cost. The cost might be from another line item in MVCI business, but a cost just the same.

 

[pchung6]

VAC is in death spiral now. Missed earning -> let's raise HOA -> owners walking away -> less sales -> missing earning.

They need to find a way to control HOA. I don't understand why it is necessary to renovate the swimming pool at Ko Olina and Nanea at this moment.

 

[jmhpsu93]

First of all Marriott is building a new resort in Charleston on 23 acres,

I thought it was a boutique hotel (like 50 units) downtown? How is that 23 acres?

 

[jme]

The parcel that Marriott purchased for the new Charleston property is only 0.23 acre.

 

[Retired2025 aka AlmostRetired]

I thought it was a boutique hotel (like 50 units) downtown? How is that 23 acres?

This is what happens when you get old. You are correct .23 acres. So it is the size of the lazy river. I also left out A new hotel project is in the works in south Orange County. Orlando-based Intram Investments Inc. paid $96 million for the land in January. A Marriott Vacations-branded project is in the works on the south side of Orange County near Walt Disney World.

 

[timsi]

It is not for free nor almost for free. It is for back MF. The back MF, if just one year in the lowest season is more than the market value at that resort. If it is two years, the MF is greater then the second lowest season.

Your comment implies that the developer is doing us a favor by acquiring these units at or above market value. However, the contracts owing money to the HOA cannot be utilized. If these units remain unused, the developer could incorporate them into their rental business, generating significant profits. Additionally, it's important to acknowledge that the developer is aware in advance that these units will not be booked. They can potentially allocate them well ahead of the 60 days before check-in, when they claim to be allowed to book them for free.

Between high and low seasons, the potential rental income surpasses maintenance fees. If the rental value exceeds the maintenance fees, the acquisition cost becomes negative, diverging significantly from the market value. When these units are utilized for sales tours, the developer can also free up their own inventory for high-profit rentals. Time also works in the developer's favor, as they pay back the maintenance fees at a later date when they acquire the units, without interest and without tying up capital.

Alternatively, if my assumptions are wrong and the HOA associations rent these units above maintenance fees, the resorts are the ones profiting from these delinquencies. Which scenario is more likely in your opinion?

 

[dioxide45]

This is what happens when you get old. You are correct .23 acres. So it is the size of the lazy river. I also left out A new hotel project is in the works in south Orange County. Orlando-based Intram Investments Inc. paid $96 million for the land in January. A Marriott Vacations-branded project is in the works on the south side of Orange County near Walt Disney World.

We're still not sure that is a MVC branded property in Orlando. The article that mentions it doesn't really cite a source and MVW hasn't mentioned anything about it in any earnings call or SEC filings. At least none that I am aware of.

 

[JIMinNC]

Marriott is building a new resort in Charleston on 23 acres, I believe this is bigger than the property size of the Grand Ocean. The whole pulse collection strategy is based on acquiring new units in existing hotels in expensive areas and renovating it to add points and locations. This sounds capital intensive to me.

Marriott Vacations tends to prefer what they call "Capital Light" development for new locations. Under those arrangements, they will contract with a third party to build or renovate the buildings to MVW specs. The third party secures any financing and utilizes their capital to complete the build. Once complete, Marriott will buy units from the third party in phases as they need inventory, until they completely take out the third party. During the phased acquisition, complete inventory still held by the third party is rented by Marriott with an agreed upon revenue split between the third party and MVW.

Not all development projects are handled this way, but that is what MVW says they prefer. There have been situations where an immediate opportunity presented itself to acquire a desirable property and no third party was immediately available to do a deal, so MVW has, in those cases, used their own capital to buy and renovate the property.

I'm not sure which category the new Charleston and Savannah locations fall into - capital light or self-funded. That will likely be disclosed in their 2023 10-K which should be out later this month when they announce earnings.

 

[Retired2025 aka AlmostRetired]

Your comment implies that the developer is doing us a favor by acquiring these units at or above market value. However, the contracts owing money to the HOA cannot be utilized. If these units remain unused, the developer could incorporate them into their rental business, generating significant profits.

You comments are a real head scratcher to me. You need to reread what I wrote. I am imply nothing about the developer but please quote the words if I did. It was not my intent. Also, who is the 'us" you are referring to? This 100% benefits the HOA at the expense of point owners.
Did you not read that lowest two seasons are 1/2 of what the MF fees are? Is this the profit.

Between high and low seasons, the potential rental income surpasses maintenance fees. If the rental value exceeds the maintenance fees, the acquisition cost becomes negative, diverging significantly from the market value.

I apologize to everyone for not adding nothing new by going back and forth. TIMSI we can continue this via conversation. I am not worrying about MVCI and their stock price. I am 100% confident that they are going remain a viable company well after I am out of my timeshares. I am very good at reading a tea leaf. My investments in Lehman and MCI is what provides me this confidence.

 

[Retired2025 aka AlmostRetired]

We're still not sure that is a MVC branded property in Orlando. The article that mentions it doesn't really cite a source and MVW hasn't mentioned anything about it in any earnings call or SEC filings. At least none that I am aware of.

I am 100% certain it is not. The property is in Orange County California near Disney World. I am going to do everyone a favor and just be a silent participant on this thread. I am not concerned about the viability of MVCI as a company and if/when I do, I will run for the hills.

 

[timsi]

Marriott Vacations tends to prefer what they call "Capital Light" development for new locations. Under those arrangements, they will contract with a third party to build or renovate the buildings to MVW specs. The third party secures any financing and utilizes their capital to complete the build. Once complete, Marriott will buy units from the third party in phases as they need inventory, until they completely take out the third party. During the phased acquisition, complete inventory still held by the third party is rented by Marriott with an agreed upon revenue split between the third party and MVW.

Not all development projects are handled this way, but that is what MVW says they prefer. There have been situations where an immediate opportunity presented itself to acquire a desirable property and no third party was immediately available to do a deal, so MVW has, in those cases, used their own capital to buy and renovate the property.

I'm not sure which category the new Charleston and Savannah locations fall into - capital light or self-funded. That will likely be disclosed in their 2023 10-K which should be out later this month when they announce earnings.

We are probably in agreement that on a 5 year cycle, the number of units at the newly built resorts is likely only a tiny fraction of the old inventory acquired through ROFR, foreclosures and from the HOAs.

 

[dioxide45]

I am 100% certain it is not. The property is in Orange County California near Disney World. I am going to do everyone a favor and just be a silent participant on this thread. I am not concerned about the viability of MVCI as a company and if/when I do, I will run for the hills.

I think you mean Orange County Florida.

 

[JIMinNC]

We are probably in agreement that on a 5 year cycle, the number of units at the newly built resorts is likely only a tiny fraction of the old inventory acquired through ROFR, foreclosures and from the HOAs.

They actually have sort of addressed the mix between development vs. repurchases in their last two Investor Day presentations in 2019 and 2022. So we don't have to speculate. The mix seemed to change significantly between the two presentations.

In 2019, they noted they were targeting 67% of inventory supplied by new development and 33% from repurchases (ROFR, deed back, foreclosure, etc). That was probably due to the fact they had about $330 million in new inventory commitments scheduled for 2019-2021. This presentation only represented Legacy MVC - not Westin/Sheraton/Hyatt/Welk.

They didn't present the info in the exact same way in 2022, but they acquired a lot of unsold inventory with the Vistana acquisition and the addition of Hyatt/Welk. As a result, they wound up with a lot of excess inventory (5 years of sales) that they have been trying to sell through. As a result, new development took a backseat to repurchases. They said in the 2022 presentation that their target was to be back to their 1.5 to 2 years of inventory on hand by 2025, and to achieve that, they would combine $595-$640 million of repurchases with only $175 million of new development commitments (mainly Waikiki, I think). That implied the mix had flipped to 21%-22% new developed and 78%-79% repurchased.

I suspect this is why they have now announced two new development projects - Charleston and Savannah - neither of which will likely come online before later in 2025 or more likely, in 2026 or after. Once those are completed, I suspect the new development will shift back to a higher proportion of inventory - maybe not back to 67% yet, but moving more in that direction.

 

[timsi]

They actually have sort of addressed the mix between development vs. repurchases in their last two Investor Day presentations in 2019 and 2022. So we don't have to speculate. The mix seemed to change significantly between the two presentations.

In 2019, they noted they were targeting 67% of inventory supplied by new development and 33% from repurchases (ROFR, deed back, foreclosure, etc). That was probably due to the fact they had about $330 million in new inventory commitments scheduled for 2019-2021. This presentation only represented Legacy MVC - not Westin/Sheraton/Hyatt/Welk.

View attachment 88542

They didn't present the info in the exact same way in 2022, but they acquired a lot of unsold inventory with the Vistana acquisition and the addition of Hyatt/Welk. As a result, they wound up with a lot of excess inventory (5 years of sales) that they have been trying to sell through. As a result, new development took a backseat to repurchases. They said in the 2022 presentation that their target was to be back to their 1.5 to 2 years of inventory on hand by 2025, and to achieve that, they would combine $595-$640 million of repurchases with only $175 million of new development commitments (mainly Waikiki, I think). That implied the mix had flipped to 21%-22% new developed and 78%-79% repurchased.

View attachment 88543

I suspect this is why they have now announced two new development projects - Charleston and Savannah - neither of which will likely come online before later in 2025 or more likely, in 2026 or after. Once those are completed, I suspect the new development will shift back to a higher proportion of inventory - maybe not back to 67% yet, but moving more in that direction.

If you revisit my comment, I was actually referring to the number of UNITS, not the dollar amount. Due to the low cost of acquiring existing inventory, anything they build new may seem like a significant $ amount in relative terms, but the actual number of new units should be quite small.

By aggregating the delinquent accounts for the 4 trusts and each of the 125 resorts and factoring in ROFR, it appears as though they acquire EXISTING inventory equivalent to 3-5 large resorts annually. Contrast to the relatively small number of new units they develop—perhaps only one new (smallish) resort every few years.

 

[Retired2025 aka AlmostRetired]

I think you mean Orange County Florida.

This is why I am going to stop responding on this thread. I am not only not contributing to the actual reason why the thread was created, Worse, I am contributing fake information. I will not cross the line in the sand.


Stop contributing to this thread
================================================== Line in sand
Thinking I am contributing to the thread and not really.

 

[jwalk03]

I am 100% certain it is not. The property is in Orange County California near Disney World. I am going to do everyone a favor and just be a silent participant on this thread. I am not concerned about the viability of MVCI as a company and if/when I do, I will run for the hills.

Disney World is in Florida. Disney LAND is in Southern California.

 

[JIMinNC]

If you revisit my comment, I was actually referring to the number of UNITS, not the dollar amount. Due to the low cost of acquiring existing inventory, anything they build new may seem like a significant $ amount in relative terms, but the actual number of new units should be quite small.

By aggregating the delinquent accounts for the 4 trusts and each of the 125 resorts and factoring in ROFR, it appears as though they acquire EXISTING inventory equivalent to 3-5 large resorts annually. Contrast to the relatively small number of new units they develop—perhaps only one new (smallish) resort every few years.

That's why I said they "sort of addressed" your question in their presentations. Clearly, units percentage mix is going to be different than dollar mix. They do almost certainly repurchase far more units each year than they build, but putting any realistic numbers to it is basically "spit-balling" a guess unless we have some idea what the average cost to develop a unit is and their average cost of repurchased units. Given they haven't disclosed (or even hinted at) those numbers, I prefer to avoid pure conjecture without any facts to guide an educated guess.

 

[1Kflyerguy]

Disney World is in Florida. Disney LAND is in Southern California.

Though there is an Orange County in both California and Florida just to add to the confusion.... Personally neither location is that exciting to me, but due to the many MVC and HGV resorts in Florida i would prefer Orange County Ca,... But pretty sure my preference won't change the actual location.

 

[jwalk03]

Though there is an Orange County in both California and Florida just to add to the confusion.... Personally neither location is that exciting to me, but due to the many MVC and HGV resorts in Florida i would prefer Orange County Ca,... But pretty sure my preference won't change the actual location.

Yes another California resort would definitely be preferable to more Orlando inventory! (Even though I’m a lot closer to Florida!)