Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Forward-Looking Statements
We make
forward-looking statements in Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q based on our managements beliefs and assumptions and on information
currently available to our management. Forward-looking statements include, among other things, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential
growth opportunities, potential operating performance improvements, and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such
as the words believe, expect, plan, intend, anticipate, estimate, predict, potential, continue, may, might,
should, could or the negative of these terms or similar expressions.
Forward-looking statements involve risks,
uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements in this Quarterly Report. We do not have any intention
or obligation to update forward-looking statements after the date of this Quarterly Report on Form 10-Q, except as required by law.
The
risk factors discussed in Risk Factors in our most recent Annual Report on Form 10-K could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we
cannot predict at this time or that we currently do not expect will have a material adverse effect on our financial position, results of operations or cash flows. Any such risks could cause our results to differ materially from those we express in
forward-looking statements.
Our Financial Statements (as defined below), which we discuss below, reflect our historical financial
condition, results of operations and cash flows. The financial information discussed below and included in this Quarterly Report on Form 10-Q may not necessarily reflect what our financial condition, results of operations or cash flows may be in the
future. In order to make this report easier to read, we refer to (i) our Interim Consolidated Financial Statements as our Financial Statements, (ii) our Interim Consolidated Statements of Income as our Statements of
Income, (iii) our Interim Consolidated Balance Sheets as our Balance Sheets, and (iv) our Interim Consolidated Statements of Cash Flows as our Cash Flows. In addition, references throughout to numbered
Footnotes refer to the numbered Notes to our Financial Statements that we include in the Financial Statements section of this Quarterly Report on
Form 10-Q.
Business Overview
We are one of the
worlds largest companies whose business is focused almost entirely on vacation ownership, based on number of owners, number of resorts and revenues. We are the exclusive worldwide developer, marketer, seller and manager of vacation ownership
and related products under the Marriott Vacation Club and Grand Residences by Marriott brands. We are also the exclusive worldwide developer, marketer and seller of vacation ownership and related products under The Ritz-Carlton Destination Club
brand, and we have the non-exclusive right to develop, market and sell whole ownership residential products under The Ritz-Carlton Residences brand.
Our business is grouped into three reportable segments: North America, Europe and Asia Pacific. As of March 25, 2016, our portfolio consisted
of over 60 properties in the United States and eight other countries and territories. We generate most of our revenues from four primary sources: selling vacation ownership products; managing our resorts; financing consumer purchases of vacation
ownership products; and renting vacation ownership inventory.
Below is a summary of significant accounting policies used in our business
that will be used in describing our results of operations.
Sale of Vacation Ownership Products
We recognize revenues from the sale of vacation ownership products when all of the following conditions exist: a binding sales contract has
been executed; the statutory rescission period has expired; the receivable is deemed collectible; and the remainder of our obligations are substantially completed.
Sales of vacation ownership products may be made for cash or we may provide financing. For sales where we provide financing, we defer revenue
recognition until we receive a minimum down payment equal to ten percent of the purchase price plus the fair value of certain sales incentives provided to the purchaser. These sales incentives typically include Marriott Rewards Points or an
alternative sales incentive that we refer to as plus points. These plus points are redeemable for stays at our resorts, generally up to two years from the date of issuance. Sales incentives are only awarded if the sale is closed.
As a result of the down payment requirements with respect to financed sales and the statutory rescission periods, we often defer revenues
associated with the sale of vacation ownership products from the date of the purchase agreement to a future period. When comparing results year-over-year, this deferral frequently generates significant variances, which we refer to as the impact of
revenue reportability.
23
Finally, as more fully described in the Financing section below, we record an
estimate of expected uncollectibility on all vacation ownership notes receivable (also known as a vacation ownership notes receivable reserve or a sales reserve) as a reduction of revenues from the sale of vacation ownership products at the time we
recognize revenues from a sale.
We report, on a supplemental basis, contract sales for each of our three segments. Contract sales
represent the total amount of vacation ownership product sales under purchase agreements signed during the period where we have received a down payment of at least ten percent of the contract price, reduced by actual rescissions during the period.
Contract sales differ from revenues from the sale of vacation ownership products that we report on our Statements of Income due to the requirements for revenue recognition described above. We consider contract sales to be an important operating
measure because it reflects the pace of sales in our business.
Cost of vacation ownership products includes costs to develop and
construct our projects (also known as real estate inventory costs) as well as other non-capitalizable costs associated with the overall project development process. For each project, we expense real estate inventory costs in the same proportion as
the revenue recognized. Consistent with the applicable accounting guidance, to the extent there is a change in the estimated sales revenues or real estate inventory costs for the project in a period, a non-cash adjustment is recorded on our
Statements of Income to true-up costs in that period to those that would have been recorded historically if the revised estimates had been used. These true-ups, which we refer to as product cost true-ups, will have a positive or negative impact on
our Statements of Income.
We refer to revenues from the sale of vacation ownership products less the cost of vacation ownership products
and marketing and sales costs as development margin. Development margin percentage is calculated by dividing development margin by revenues from the sale of vacation ownership products.
Resort Management and Other Services
Our resort management and other services revenues include revenues generated from fees we earn for managing each of our resorts. In addition,
we earn revenue for providing ancillary offerings, including food and beverage, retail, and golf and spa offerings at our resorts. We also receive annual fees, club dues, settlement fees from the sale of vacation ownership products and certain
transaction-based fees from owners and other third parties, including external exchange service providers with which we are associated.
We provide day-to-day management services, including housekeeping services, operation of reservation systems, maintenance, and certain
accounting and administrative services for property owners associations. We receive compensation for these management services; this compensation is generally based on either a percentage of budgeted costs to operate the resorts or a fixed fee
arrangement. We earn these fees regardless of usage or occupancy.
Resort management and other services expenses include costs to operate
the food and beverage and other ancillary operations and overall customer support services, including reservations, certain transaction-based expenses relating to external exchange service providers and settlement expenses from the sale of vacation
ownership products.
Financing
We offer financing to qualified customers for the purchase of most types of our vacation ownership products. The average FICO score of
customers who were U.S. citizens or residents who financed a vacation ownership purchase was as follows:
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
March 25, 2016
|
|
March 27, 2015
|
Average FICO score
|
|
744
|
|
728
|
The typical financing agreement provides for monthly payments of principal and interest with the principal
balance of the loan fully amortizing over the term of the related vacation ownership note receivable, which is generally ten years. The interest income earned from the financing arrangements is earned on an accrual basis on the principal balance
outstanding over the life of the arrangement and is recorded as Financing revenues on our Statements of Income.
Financing revenues
include interest income earned on vacation ownership notes receivable as well as fees earned from servicing the existing vacation ownership notes receivable portfolio. Financing expenses include costs in support of the financing, servicing and
securitization processes. The amount of interest income earned in a period depends on the amount of outstanding vacation ownership notes receivable, which is impacted positively by the origination of new vacation ownership notes receivable and
negatively by principal collections. Due to weakened economic conditions and our elimination of historical financing incentive programs, the percentage of customers choosing to finance their vacation ownership purchase with us (which we refer to as
financing propensity) declined significantly through 2009 and then remained stable at 40 to 45 percent through early 2015. In the first half of 2015, we implemented new programs to help increase financing propensity. We expect that
interest income will continue to increase as new originations of vacation ownership notes receivable from growth in the business as well as the impact of higher financing propensity levels begin to outpace the decline in principal of our existing
vacation ownership notes receivable portfolio.
24
In the event of a default, we generally have the right to foreclose on or revoke the mortgaged
vacation ownership interest. We return vacation ownership interests that we reacquire through foreclosure or revocation back to real estate inventory. As discussed above, we record a vacation ownership notes receivable reserve at the time of sale
and classify the reserve as a reduction to revenues from the sale of vacation ownership products on our Statements of Income. Historical default rates, which represent defaults as a percentage of each years beginning gross vacation ownership
notes receivable balance, were as follows:
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
March 25, 2016
|
|
March 27, 2015
|
Historical default rates
|
|
0.9%
|
|
0.9%
|
Rental
We operate a rental business to provide owner flexibility and to help mitigate carrying costs associated with our inventory. We obtain rental
inventory from unsold inventory and inventory we control because owners have elected alternative usage options offered through our vacation ownership programs.
Rental revenues are primarily the revenues we earn from renting this inventory. We also recognize rental revenue from the utilization of plus
points under the Marriott Vacation Club Destinations
TM
(MVCD) program when those points are redeemed for rental stays at one of our resorts or upon expiration of the points.
Rental expenses include:
|
|
|
Maintenance fees on unsold inventory;
|
|
|
|
Costs to provide alternative usage options, including Marriott Rewards Points and offerings available as part of the Explorer Collection, for owners who elect to exchange their inventory;
|
|
|
|
Marketing costs and direct operating and related expenses in connection with the rental business (such as housekeeping, credit card expenses and reservation services); and
|
|
|
|
Costs associated with the banking and borrowing usage option that is available under the MVCD program.
|
Rental metrics, including the average daily transient rate or the number of transient keys rented, may not be comparable between periods given
fluctuation in available occupancy by location, unit size (such as two bedroom, one bedroom or studio unit), and owner use and exchange behavior. Further, as our ability to rent certain luxury inventory and inventory in our Asia Pacific segment is
often limited on a site-by-site basis, rental operations may not generate adequate rental revenues to cover associated costs. Our vacation units are either full villas or lock-off villas. Lock-off villas are units that can be
separated into a master unit and a guest room. Full villas are non-lock-off villas because they cannot be separated. A key is the lowest increment for reporting occupancy statistics based upon the mix of non-lock-off and
lock-off villas. Lock-off villas represent two keys and non-lock-off villas represent one key. The transient keys metric represents the blended mix of inventory available for rent and includes all of the combined inventory configurations
available in our resort system.
Cost Reimbursements
Cost reimbursements include direct and indirect costs that property owners associations reimburse to us. In accordance with the
accounting guidance for gross versus net presentation, we record these revenues and expenses on a gross basis. We recognize cost reimbursements when we incur the related reimbursable costs. These costs primarily consist of payroll and
payroll related expenses for management of the property owners associations and other services we provide where we are the employer. Cost reimbursements consist of actual expenses with no added margin.
Consumer Financing Interest Expense
Consumer financing interest expense represents interest expense associated with the debt from our non-recourse warehouse credit facility (the
Warehouse Credit Facility) and from the securitization of our vacation ownership notes receivable. We distinguish consumer financing interest expense from all other interest expense because the debt associated with the consumer financing
interest expense is secured by vacation ownership notes receivable that have been sold to bankruptcy remote special purpose entities and that is generally non-recourse to us.
Interest Expense
Interest expense consists of all interest expense other than consumer financing interest expense.
25
Other Items
We measure operating performance using the following key metrics:
|
|
|
Contract sales from the sale of vacation ownership products;
|
|
|
|
Development margin percentage; and
|
|
|
|
Volume per guest (VPG), which we calculate by dividing contract sales, excluding fractional and residential sales, telesales and other sales that are not attributed to a tour at a sales location, by the
number of tours at sales locations in a given period. We believe that this operating metric is valuable in evaluating the effectiveness of the sales process as it combines the impact of average contract price with the number of touring guests who
make a purchase.
|
Rounding
Percentage changes presented in our public filings are calculated using whole dollars.
Consolidated Results
The following
discussion presents an analysis of our results of operations for the twelve weeks ended March 25, 2016, compared to the twelve weeks ended March 27, 2015.
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
Sale of vacation ownership products
|
|
$
|
138,369
|
|
|
$
|
183,906
|
|
Resort management and other services
|
|
|
69,629
|
|
|
|
64,417
|
|
Financing
|
|
|
29,224
|
|
|
|
29,052
|
|
Rental
|
|
|
80,288
|
|
|
|
76,199
|
|
Cost reimbursements
|
|
|
107,533
|
|
|
|
101,306
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
425,043
|
|
|
|
454,880
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of vacation ownership products
|
|
|
35,617
|
|
|
|
64,962
|
|
Marketing and sales
|
|
|
78,412
|
|
|
|
79,995
|
|
Resort management and other services
|
|
|
45,797
|
|
|
|
42,409
|
|
Financing
|
|
|
4,629
|
|
|
|
4,905
|
|
Rental
|
|
|
64,660
|
|
|
|
60,158
|
|
General and administrative
|
|
|
25,297
|
|
|
|
22,777
|
|
Reversal of litigation expense
|
|
|
(303)
|
|
|
|
(262)
|
|
Organizational and separation related
|
|
|
|
|
|
|
192
|
|
Consumer financing interest
|
|
|
5,362
|
|
|
|
6,021
|
|
Royalty fee
|
|
|
13,357
|
|
|
|
13,000
|
|
Cost reimbursements
|
|
|
107,533
|
|
|
|
101,306
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
380,361
|
|
|
|
395,463
|
|
|
|
|
|
|
|
|
|
|
Gains and other income
|
|
|
7
|
|
|
|
887
|
|
Interest expense
|
|
|
(1,982)
|
|
|
|
(2,974)
|
|
Other
|
|
|
(2,542)
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
40,165
|
|
|
|
57,343
|
|
Provision for income taxes
|
|
|
(15,757)
|
|
|
|
(23,289)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,408
|
|
|
$
|
34,054
|
|
|
|
|
|
|
|
|
|
|
26
Contract Sales
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Contract Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
139,650
|
|
|
$
|
155,993
|
|
|
$
|
(16,343)
|
|
|
(10%)
|
Europe
|
|
|
4,418
|
|
|
|
5,298
|
|
|
|
(880)
|
|
|
(17%)
|
Asia Pacific
|
|
|
9,426
|
|
|
|
8,659
|
|
|
|
767
|
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,494
|
|
|
|
169,950
|
|
|
|
(16,456)
|
|
|
(10%)
|
|
|
|
|
|
Residential Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
|
|
|
|
28,420
|
|
|
|
(28,420)
|
|
|
(100%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contract sales
|
|
$
|
153,494
|
|
|
$
|
198,370
|
|
|
$
|
(44,876)
|
|
|
(23%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in contract sales reflected a $16.3 million decrease in vacation ownership sales in our North
America segment, a $0.9 million decrease in vacation ownership sales in our Europe segment and a $0.7 million increase in vacation ownership sales in our Asia Pacific segment. These decreases, as well as the decrease in residential sales, are
described within the discussions of our segment results below.
Sale of Vacation Ownership Products
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Contract sales
|
|
$
|
153,494
|
|
|
$
|
198,370
|
|
|
$
|
(44,876)
|
|
|
(23%)
|
Revenue recognition adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportability
|
|
|
786
|
|
|
|
(1,513)
|
|
|
|
2,299
|
|
|
|
Sales reserve
|
|
|
(8,223)
|
|
|
|
(8,367)
|
|
|
|
144
|
|
|
|
Other
(1)
|
|
|
(7,688)
|
|
|
|
(4,584)
|
|
|
|
(3,104)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of vacation ownership products
|
|
$
|
138,369
|
|
|
$
|
183,906
|
|
|
$
|
(45,537)
|
|
|
(25%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
|
Revenue reportability had a $0.8 million positive impact in the current period, compared to a $1.5 million negative impact in the prior year
comparable period, due to fewer sales being in the rescission period as of the end of the current period and an increase in the amount of sales meeting the down payment requirement for revenue reportability prior to the end of the current period.
The increase in the amount of sales meeting the down payment requirement for revenue reportability was due to an increase in the down payment requirements in our North America segment compared to the prior year comparable period. The increase in
down payment requirements occurred while achieving a 14.8 percentage point increase in financing propensity in the first quarter of 2016 compared to the prior year comparable period.
The lower sales reserve reflects the lower vacation ownership contract sales volume and higher reserves required in our Europe and Asia
Pacific segments in the prior year comparable period, partially offset by an increase in our North America segment due to the increase in financing propensity.
The increase in other adjustments for sales incentives that will not be recognized as sale of vacation ownership products revenue is driven by
an increase in the utilization of plus points as a sales incentive in our North America segment in the first quarter of 2016.
27
Development Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Sale of vacation ownership products
|
|
$
|
138,369
|
|
|
$
|
183,906
|
|
|
$
|
(45,537)
|
|
|
(25%)
|
Cost of vacation ownership products
|
|
|
(35,617)
|
|
|
|
(64,962)
|
|
|
|
29,345
|
|
|
45%
|
Marketing and sales
|
|
|
(78,412)
|
|
|
|
(79,995)
|
|
|
|
1,583
|
|
|
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development margin
|
|
$
|
24,340
|
|
|
$
|
38,949
|
|
|
$
|
(14,609)
|
|
|
(38%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development margin percentage
|
|
|
17.6%
|
|
|
|
21.2%
|
|
|
|
(3.6 pts)
|
|
|
|
The decrease in development margin reflected the following:
|
|
|
$9.5 million from lower vacation ownership contract sales volume net of direct variable expenses (i.e., cost of vacation ownership products and marketing and sales), including $7.0 million from lower vacation ownership
contract sales, $2.4 million from higher marketing and sales costs due to investment in new programs to help generate future incremental tour volumes, and $2.3 million from higher usage of plus points as a sales incentive in our North America
segment, which resulted in more revenue being deferred that will be recognized as rental revenue when those points are redeemed for rental stays at one of our resorts or upon expiration of the points, partially offset by $2.2 million from a
favorable mix of lower cost real estate inventory being sold;
|
|
|
|
$5.9 million from lower residential contract sales (no residential sales in the twelve weeks ended March 25, 2016 compared to $5.9 million from the sale of residential inventory in our Asia Pacific segment in the prior
year comparable period); and
|
|
|
|
$1.1 million of pre-opening and startup expenses in our Asia Pacific and North America segments in advance of the opening of new sales locations later in 2016.
|
These decreases were partially offset by $1.4 million from higher revenue reportability compared to the prior year comparable period and $0.5
million from higher favorable product cost true-ups ($3.2 million in the twelve weeks ended March 25, 2016 compared to $2.7 million in the prior year comparable period).
The 3.6 percentage point decline in the development margin percentage reflected a 2.6 percentage point decline due to an inability to leverage
fixed costs on lower vacation ownership contract sales, a 2.2 percentage point decline due to higher marketing and sales spending (including a 0.7 percentage point impact from the pre-opening and startup expenses in advance of opening new sales
locations), and a 1.1 percentage point decline from the higher usage of plus points as a sales incentive. These declines were partially offset by a 1.4 percentage point increase due to a favorable mix of lower cost vacation ownership real estate
inventory being sold in the twelve weeks ended March 25, 2016, a 0.6 percentage point increase due to the favorable revenue reportability year-over-year and a 0.3 percentage point increase due to the higher favorable product cost true-up activity
year-over-year.
Resort Management and Other Services Revenues, Expenses and Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Management fee revenues
|
|
$
|
18,440
|
|
|
$
|
17,580
|
|
|
$
|
860
|
|
|
5%
|
Other services revenues
|
|
|
51,189
|
|
|
|
46,837
|
|
|
|
4,352
|
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort management and other services revenues
|
|
|
69,629
|
|
|
|
64,417
|
|
|
|
5,212
|
|
|
8%
|
Resort management and other services expenses
|
|
|
(45,797)
|
|
|
|
(42,409)
|
|
|
|
(3,388)
|
|
|
(8%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort management and other services margin
|
|
$
|
23,832
|
|
|
$
|
22,008
|
|
|
$
|
1,824
|
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort management and other services margin percentage
|
|
|
34.2%
|
|
|
|
34.2%
|
|
|
|
0.0 pts
|
|
|
|
The increase in resort management and other services revenues reflected $3.5 million of higher ancillary
revenues, $1.0 million of additional annual club dues earned in connection with the MVCD program due to the cumulative increase in owners enrolled in the program, $0.9 million of higher management fees (net of $0.1 million negative foreign exchange
impact in our Europe
28
segment) and $0.4 million of higher resales commission and other revenues. These increases were partially offset by $0.4 million of lower brand fees due to fewer closings and $0.2 million of
lower settlement fees due to a decrease in the number of contracts closed, in each case, compared to the first quarter of 2015. The increase in ancillary revenues included $2.7 million of ancillary revenues at our operating property in Australia,
$0.5 million of ancillary revenues at the property we manage in New York and a $0.3 million increase in ancillary revenues from food and beverage and golf offerings at our existing resorts.
The improvement in the resort management and other services margin reflected the changes in revenue, partially offset by $3.4 million of
higher expenses, including $2.4 million from the operation of the ancillary businesses at the operating property in Australia, $0.7 million from the operation of the ancillary businesses at the property we manage in New York and $0.3 million
increase in other expenses in the twelve weeks ended March 25, 2016.
Financing Revenues, Expenses and Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Interest income
|
|
$
|
27,774
|
|
|
$
|
27,567
|
|
|
$
|
207
|
|
|
1%
|
Other financing revenues
|
|
|
1,450
|
|
|
|
1,485
|
|
|
|
(35)
|
|
|
(2%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing revenues
|
|
|
29,224
|
|
|
|
29,052
|
|
|
|
172
|
|
|
1%
|
Financing expenses
|
|
|
(4,629)
|
|
|
|
(4,905)
|
|
|
|
276
|
|
|
6%
|
Consumer financing interest expense
|
|
|
(5,362)
|
|
|
|
(6,021)
|
|
|
|
659
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing margin
|
|
$
|
19,233
|
|
|
$
|
18,126
|
|
|
$
|
1,107
|
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing propensity
|
|
|
58.5%
|
|
|
|
43.7%
|
|
|
|
|
|
|
|
The increase in financing revenues was due to a slight increase in the weighted average coupon rate of our
vacation ownership notes receivable, partially offset by a $0.8 million decline in the average gross vacation ownership notes receivable balance.
The increase in financing margin reflects the higher financing revenues, as well as lower consumer financing interest expense and lower other
expenses. The lower consumer financing interest expense was due to a lower average interest rate on the outstanding debt balances, partially offset by a higher average outstanding debt balance. The lower average interest rate reflected the continued
pay-down of older securitization transactions that carried higher overall interest rates and the benefit of lower interest rates applicable to our more recently completed securitizations of vacation ownership notes receivable.
The increase in financing propensity resulted from new programs implemented in the first half of 2015 to help increase financing propensity
above the 40 to 45 percent rate that the company has averaged in recent years. As a result of these programs, we expect that interest income will continue to increase as new originations of vacation ownership notes receivable outpace the decline in
principal of existing vacation ownership notes receivables. We are targeting higher financing propensity for our fiscal year 2016.
Rental Revenues,
Expenses and Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Rental revenues
|
|
$
|
80,288
|
|
|
$
|
76,199
|
|
|
$
|
4,089
|
|
|
5%
|
Unsold maintenance fees upscale
|
|
|
(13,982)
|
|
|
|
(12,043)
|
|
|
|
(1,939)
|
|
|
(16%)
|
Unsold maintenance fees luxury
|
|
|
(511)
|
|
|
|
(2,410)
|
|
|
|
1,899
|
|
|
79%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsold maintenance fees
|
|
|
(14,493)
|
|
|
|
(14,453)
|
|
|
|
(40)
|
|
|
0%
|
Other rental expenses
|
|
|
(50,167)
|
|
|
|
(45,705)
|
|
|
|
(4,462)
|
|
|
(10%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental margin
|
|
$
|
15,628
|
|
|
$
|
16,041
|
|
|
$
|
(413)
|
|
|
(3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental margin percentage
|
|
|
19.5%
|
|
|
|
21.1%
|
|
|
|
(1.6 pts)
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Transient keys rented
(1)
|
|
|
292,649
|
|
|
|
296,710
|
|
|
|
(4,061)
|
|
|
(1%)
|
Average transient key rate
|
|
$
|
228.80
|
|
|
$
|
226.15
|
|
|
$
|
2.65
|
|
|
1%
|
Resort occupancy
|
|
|
88.9%
|
|
|
|
87.7%
|
|
|
|
1.2 pts
|
|
|
|
(1)
|
Transient keys rented exclude those obtained through the use of plus points.
|
29
The increase in rental revenues was due to $3.1 million of revenue from the operation of the
property in Australia acquired during the third quarter of 2015, a company-wide 1 percent increase in average transient rate ($0.8 million), $0.4 million of additional revenue from the operation of the property in San Diego acquired in the first
quarter of 2015, $0.4 million of higher plus points revenue (which is recognized upon utilization of plus points for stays at our resorts or upon expiration of the points) and a $0.3 million increase in preview keys and other revenue, partially
offset by a company-wide 1 percent decrease in transient keys rented ($0.9 million) primarily due to a 3 percent decrease in available keys as well as the increase in preview keys.
The decrease in rental margin reflected $0.8 million of lower rental revenues net of direct variable expenses (such as housekeeping), expenses
incurred due to owners choosing alternative usage options, and unsold maintenance fees, partially offset by the $0.4 million increase in plus points revenue. The results of our operating property in Australia were break-even in the first quarter of
2016 and there was no impact on rental margin from the operation of the property in San Diego compared to the prior year comparable period.
Cost
Reimbursements
Twelve Weeks Ended March 25, 2016
Cost reimbursements increased $6.2 million, or 6 percent, over the prior year comparable period, reflecting an increase of $5.6 million due to
higher costs and $1.2 million due to additional managed unit weeks in the twelve weeks ended March 25, 2016, partially offset by a $0.6 million negative impact from foreign exchange rates in our Europe segment.
General and Administrative
Twelve
Weeks Ended March 25, 2016
General and administrative expenses increased $2.5 million (from $22.8 million to $25.3 million) and were
driven by higher information technology project costs and inflationary cost increases.
Royalty Fee
Twelve Weeks Ended March 25, 2016
Royalty fee expense increased $0.4 million in the twelve weeks ended March 25, 2016 (from $13.0 million to $13.4 million) due to an increase
in initial sales of our real estate inventory, which carry a higher royalty fee as compared to sales of pre-owned inventory (two percent versus one percent).
Interest Expense
Twelve Weeks Ended
March 25, 2016
Interest expense decreased $1.0 million (from $3.0 million to $2.0 million) due to the decline in expense associated
with our liability for the Marriott Rewards customer loyalty program under our Marriott Rewards Affiliation Agreement with Marriott International, Inc. (Marriott International). Due to the payoff of the liability associated with the
Marriott Rewards customer loyalty program at the end of 2015, we will not incur further interest expense associated with this liability in the future.
Other
Twelve Weeks Ended March 25,
2016
During the first quarter of 2016, we incurred $2.3 million of costs associated with the acquisition of an operating property in
the South Beach area of Miami Beach and the anticipated future acquisition of an operating property in New York, and $0.2 million of transaction related costs associated with the anticipated sale of the portion of the operating property located in
Surfers Paradise, Australia that we do not intend to convert to timeshare. See Footnote No. 5, Acquisitions and Dispositions and Footnote No. 8, Contingencies and Commitments, to our Financial Statements for further
information related to these transactions.
Income Tax
Twelve Weeks Ended March 25, 2016
Our provision for income taxes decreased $7.5 million (from $23.3 million to $15.8 million) from the prior year comparable period. The
decrease was primarily due to a decline in U.S. income in the twelve weeks ended March 25, 2016.
30
Earnings Before Interest Expense, Taxes, Depreciation and Amortization (EBITDA) and Adjusted
EBITDA
EBITDA, a financial measure that is not prescribed or authorized by GAAP, is defined as earnings, or net income, before
interest expense (excluding consumer financing interest expense), provision for income taxes, depreciation and amortization. For purposes of our EBITDA calculation, we do not adjust for consumer financing interest expense because the associated debt
is secured by vacation ownership notes receivable that have been sold to bankruptcy remote special purpose entities and is generally non-recourse to us. Further, we consider consumer financing interest expense to be an operating expense of our
business.
We consider EBITDA to be an indicator of operating performance, and we use it to measure our ability to service debt, fund
capital expenditures and expand our business. We also use it, as do analysts, lenders, investors and others, because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example,
interest expense can be dependent on a companys capital structure, debt levels and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary
because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies.
EBITDA also excludes depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability
in the relative costs of productive assets and the depreciation and amortization expense among companies.
We also evaluate Adjusted
EBITDA, which is EBITDA as defined above, with additional adjustments for certain items described below, such as acquisition-related costs, organizational and separation related costs and gain from the sale of excess inventory, and which
excludes non-cash share-based compensation expense to address considerable variability among companies in recording compensation expense because companies use share-based payment awards differently, both in the type and quantity of awards granted.
We evaluate Adjusted EBITDA as an indicator of operating performance because it allows for period-over-period comparisons of our on-going core operations before the impact of the excluded items. Together, EBITDA and Adjusted EBITDA facilitate our
comparison of results from our on-going core operations before the impact of these items with results from other vacation ownership companies.
EBITDA and Adjusted EBITDA have limitations and should not be considered in isolation or as a substitute for performance measures calculated
in accordance with GAAP. In addition, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do or may not calculate them at all, limiting their usefulness as comparative measures. The table below shows our
EBITDA and Adjusted EBITDA calculation and reconciles these measures with Net income, which is the most directly comparable GAAP financial measure.
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Net income
|
|
$
|
24,408
|
|
|
$
|
34,054
|
|
Interest expense
|
|
|
1,982
|
|
|
|
2,974
|
|
Tax provision
|
|
|
15,757
|
|
|
|
23,289
|
|
Depreciation and amortization
|
|
|
5,125
|
|
|
|
4,065
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
47,272
|
|
|
|
64,382
|
|
|
|
|
|
|
|
|
|
|
Non-cash share-based compensation
|
|
|
2,524
|
|
|
|
2,643
|
|
Certain items
|
|
|
1,795
|
|
|
|
(6,872)
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
51,591
|
|
|
$
|
60,153
|
|
|
|
|
|
|
|
|
|
|
The certain items for the twelve weeks ended March 25, 2016 consisted of $2.6 million of transaction costs
associated with acquisitions, $0.5 million in profit from the operations of the property we acquired in Australia in 2015 that we intend to sell and a $0.3 million reversal of litigation expense. These exclusions increased EBITDA by $1.8 million.
The certain items for the twelve weeks ended March 27, 2015 consisted of $5.9 million of development profit from the disposition of units
in Macau as whole ownership residential units rather than through our Marriott Vacation Club, Asia Pacific points program, a $0.9 million gain associated with the sale of a golf course and adjacent undeveloped land, and a $0.3 million reversal of
litigation expense, and $0.2 million of organizational and separation related costs. These exclusions decreased EBITDA by $6.9 million.
Business
Segments
Our business is grouped into three reportable business segments: North America, Europe and Asia Pacific. See Footnote
No. 14, Business Segments, to our Financial Statements for further information on our segments.
31
North America
The following discussion presents an analysis of our results of operations for the North America segment for the twelve weeks ended March 25,
2016, compared to the twelve weeks ended March 27, 2015.
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
Sale of vacation ownership products
|
|
$
|
124,684
|
|
|
$
|
141,728
|
|
Resort management and other services
|
|
|
61,665
|
|
|
|
58,575
|
|
Financing
|
|
|
27,408
|
|
|
|
27,056
|
|
Rental
|
|
|
72,508
|
|
|
|
71,715
|
|
Cost reimbursements
|
|
|
99,182
|
|
|
|
92,854
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
385,447
|
|
|
|
391,928
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of vacation ownership products
|
|
|
30,662
|
|
|
|
40,501
|
|
Marketing and sales
|
|
|
68,315
|
|
|
|
69,017
|
|
Resort management and other services
|
|
|
38,152
|
|
|
|
36,968
|
|
Rental
|
|
|
55,956
|
|
|
|
54,611
|
|
Reversal of litigation expense
|
|
|
(303)
|
|
|
|
(262)
|
|
Organizational and separation related
|
|
|
|
|
|
|
139
|
|
Royalty fee
|
|
|
1,686
|
|
|
|
1,260
|
|
Cost reimbursements
|
|
|
99,182
|
|
|
|
92,854
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
293,650
|
|
|
|
295,088
|
|
|
|
|
|
|
|
|
|
|
Gains and other income
|
|
|
7
|
|
|
|
880
|
|
Other
|
|
|
(2,280)
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Segment financial results
|
|
$
|
89,524
|
|
|
$
|
97,736
|
|
|
|
|
|
|
|
|
|
|
Contract Sales
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Contract Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation ownership
|
|
$
|
139,650
|
|
|
$
|
155,993
|
|
|
$
|
(16,343)
|
|
|
(10%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contract sales
|
|
$
|
139,650
|
|
|
$
|
155,993
|
|
|
$
|
(16,343)
|
|
|
(10%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in North America vacation ownership contract sales reflected a $12.0 million decrease in sales
at on-site sales locations, a $2.8 million decrease in sales at off-site (non tour-based) sales locations and a $1.5 million decrease in fractional sales as we continue to sell through remaining luxury inventory.
The decrease in sales at North America on-site locations is primarily driven by an increase in sales in the prior year comparable period as a
result of enhancements during that period to our owner recognition levels that created a near-term incentive for existing owners to purchase additional points at that time. The decrease in sales at on-site sales locations reflected a 4.0 percent
decrease in the number of tours and a 3.9 percent decrease in VPG to $3,496 in the twelve weeks ended March 25, 2016 from $3,640 in the prior year comparable period. The decrease in VPG resulted from a 2.0 percentage point decrease in closing
efficiency, partially offset by an increase in the number of points sold per contract due to a shift in the mix of sales towards more first time buyers who, on average, purchase more points per contract than existing owners, and higher pricing. The
decrease in the number of tours was driven by fewer existing owner tours, which was also due to enhancements in the prior period to our owner recognition levels that created a near-term incentive for existing owners to take a tour in the prior year
comparable period. The sales at North America off-site locations were negatively impacted in part by the strength of the U.S. dollar, primarily in Latin America, a trend that has been impacting our results since the third quarter of 2015.
32
Sale of Vacation Ownership Products
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Contract sales
|
|
$
|
139,650
|
|
|
$
|
155,993
|
|
|
$
|
(16,343)
|
|
|
(10%)
|
Revenue recognition adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportability
|
|
|
88
|
|
|
|
(3,444)
|
|
|
|
3,532
|
|
|
|
Sales reserve
|
|
|
(7,406)
|
|
|
|
(6,334)
|
|
|
|
(1,072)
|
|
|
|
Other
(1)
|
|
|
(7,648)
|
|
|
|
(4,487)
|
|
|
|
(3,161)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of vacation ownership products
|
|
$
|
124,684
|
|
|
$
|
141,728
|
|
|
$
|
(17,044)
|
|
|
(12%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
|
Revenue reportability improved due to fewer sales being in the rescission period as of the end of the current period and an increase in the
amount of sales meeting the down payment requirement for revenue reportability prior to the end of the current period. The increase in the amount of sales meeting the down payment requirement for revenue reportability was due to an increase in the
down payment requirements compared to the prior year comparable period. The increase in down payment requirements occurred while achieving a 15.4 percentage point increase in financing propensity in the first quarter of 2016 compared to the prior
year comparable period.
The higher sales reserve reflects an increase in the rate due to the increase in financing propensity, partially
offset by the lower vacation ownership contract sales volume.
The increase in other adjustments for sales incentives that will not be
recognized as sale of vacation ownership products revenue is driven by an increase in the utilization of plus points as a sales incentive in our North America segment in the first quarter of 2016.
Development Margin
Twelve Weeks
Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Sale of vacation ownership products
|
|
$
|
124,684
|
|
|
$
|
141,728
|
|
|
$
|
(17,044)
|
|
|
(12%)
|
Cost of vacation ownership products
|
|
|
(30,662)
|
|
|
|
(40,501)
|
|
|
|
9,839
|
|
|
24%
|
Marketing and sales
|
|
|
(68,315)
|
|
|
|
(69,017)
|
|
|
|
702
|
|
|
1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development margin
|
|
$
|
25,707
|
|
|
$
|
32,210
|
|
|
$
|
(6,503)
|
|
|
(20%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development margin percentage
|
|
|
20.6%
|
|
|
|
22.7%
|
|
|
|
(2.1 pts)
|
|
|
|
The decrease in development margin reflected the following:
|
|
|
$9.9 million from lower vacation ownership contract sales volume net of direct variable expenses (i.e., cost of vacation ownership products and marketing and sales), including $7.1 million from lower vacation ownership
contract sales, $2.8 million from higher marketing and sales costs due to investment in new programs to help generate future incremental tour volumes, and $2.3 million from higher usage of plus points as a sales incentive which resulted in more
revenue being deferred that will be recognized as rental revenue when those points are redeemed for rental stays at one of our resorts or upon expiration of the points, partially offset by $2.3 million from a favorable mix of lower cost real estate
inventory being sold;
|
|
|
|
$1.2 million from higher sales reserve activity in the current period due to the increase in financing propensity; and
|
|
|
|
$0.3 million of pre-opening and startup expenses incurred for new sales locations scheduled to open later in 2016.
|
These decreases were partially offset by $2.3 million from higher favorable product cost true-ups ($3.3 million in the twelve weeks ended
March 25, 2016 compared to $1.0 million in the prior year comparable period), $2.2 million from higher revenue reportability compared to the prior year comparable period and $0.4 million from lower other development expenses.
The 2.1 percentage point decline in the development margin percentage reflected a 2.8 percentage point decline due to an inability to leverage
fixed costs on lower vacation ownership contract sales, a 2.1 percentage point decline due to the higher marketing
33
and sales spending (including a 0.2 percentage point impact from the pre-opening and startup expenses in advance of opening new sales locations), a 1.1 percentage point decline from the higher
usage of plus points as a sales incentive, and a 0.6 percentage point decline from the higher sales reserve rate. These declines were partially offset by a 1.6 percentage point increase due to a favorable mix of lower cost vacation ownership real
estate inventory being sold in the twelve weeks ended March 25, 2016, a 1.6 percentage point increase due to the higher favorable product cost true-up activity year-over-year and a 1.0 percentage point increase due to the favorable revenue
reportability year-over-year and a 0.3 percentage point increase from lower other development expenses.
Resort Management and Other Services Revenues,
Expenses and Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Management fee revenues
|
|
$
|
16,463
|
|
|
$
|
15,568
|
|
|
$
|
895
|
|
|
6%
|
Other services revenues
|
|
|
45,202
|
|
|
|
43,007
|
|
|
|
2,195
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort management and other services revenues
|
|
|
61,665
|
|
|
|
58,575
|
|
|
|
3,090
|
|
|
5%
|
Resort management and other services expenses
|
|
|
(38,152)
|
|
|
|
(36,968)
|
|
|
|
(1,184)
|
|
|
(3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort management and other services margin
|
|
$
|
23,513
|
|
|
$
|
21,607
|
|
|
$
|
1,906
|
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort management and other services margin
percentage
|
|
|
38.1%
|
|
|
|
36.9%
|
|
|
|
1.2 pts
|
|
|
|
The increase in resort management and other services revenues reflected $1.3 million of higher ancillary
revenues, $1.0 million of additional annual club dues earned in connection with the MVCD program due to the cumulative increase in owners enrolled in the program, $0.9 million of higher management fees and $0.5 million of higher resales commission
and other revenues. These increases were partially offset by $0.4 million of lower brand fees due to fewer closings and $0.2 million of lower settlement fees due to a decrease in the number of contracts closed. The increase in ancillary revenues
included a $0.8 million increase in ancillary revenues from food and beverage and golf offerings at our existing resorts and $0.5 million of ancillary revenues at the property which we manage in New York.
The improvement in the resort management and other services margin reflected the changes in revenue, partially offset by $1.2 million of
higher expenses, including $0.7 million from the operation of the ancillary businesses at the property we manage in New York and $0.5 million of higher other expenses in the twelve weeks ended March 25, 2016.
Financing Revenues, Expenses and Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Interest income
|
|
$
|
25,993
|
|
|
$
|
25,609
|
|
|
$
|
384
|
|
|
1%
|
Other financing revenues
|
|
|
1,415
|
|
|
|
1,447
|
|
|
|
(32)
|
|
|
(2%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing revenues
|
|
$
|
27,408
|
|
|
$
|
27,056
|
|
|
$
|
352
|
|
|
1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing propensity
|
|
|
56.9%
|
|
|
|
41.5%
|
|
|
|
|
|
|
|
The increase in financing revenues was due to a slight increase in the average gross vacation ownership notes
receivable balance. The increase in financing propensity resulted from new programs implemented in the first half of 2015 to help increase financing propensity above the 40 to 45 percent rate that the company has averaged in recent years. As a
result of these programs, we expect that interest income will continue to increase as new originations of vacation ownership notes receivable outpace the decline in principal of existing vacation ownership notes receivables. We are targeting higher
financing propensity for our fiscal year 2016.
34
Rental Revenues, Expenses and Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Rental revenues
|
|
$
|
72,508
|
|
|
$
|
71,715
|
|
|
$
|
793
|
|
|
1%
|
Unsold maintenance fees upscale
|
|
|
(13,016)
|
|
|
|
(10,936)
|
|
|
|
(2,080)
|
|
|
(19%)
|
Unsold maintenance fees luxury
|
|
|
(511)
|
|
|
|
(2,410)
|
|
|
|
1,899
|
|
|
79%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsold maintenance fees
|
|
|
(13,527)
|
|
|
|
(13,346)
|
|
|
|
(181)
|
|
|
(1%)
|
Other rental expenses
|
|
|
(42,429)
|
|
|
|
(41,265)
|
|
|
|
(1,164)
|
|
|
(3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental margin
|
|
$
|
16,552
|
|
|
$
|
17,104
|
|
|
$
|
(552)
|
|
|
(3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental margin percentage
|
|
|
22.8%
|
|
|
|
23.8%
|
|
|
|
(1.0 pts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Transient keys rented
(1)
|
|
|
274,371
|
|
|
|
279,761
|
|
|
|
(5,390)
|
|
|
(2%)
|
Average transient key rate
|
|
$
|
229.83
|
|
|
$
|
226.03
|
|
|
$
|
3.80
|
|
|
2%
|
Resort occupancy
|
|
|
90.4%
|
|
|
|
89.7%
|
|
|
|
0.7 pts
|
|
|
|
(1)
|
Transient keys rented exclude those obtained through the use of plus points.
|
The increase in
rental revenues was due to a 2 percent increase in average transient rate ($1.0 million), $0.4 million of additional revenue from the operation of the property in San Diego acquired in the first quarter of 2015, $0.4 million of higher plus points
revenue (which is recognized upon utilization of plus points for stays at our resorts or upon expiration of the points) and a $0.2 million increase in preview keys and other revenue, partially offset by a 2 percent decrease in transient keys rented
($1.2 million) primarily due to a 2 percent decrease in available keys as well as the increase in preview keys.
The decrease in rental
margin reflected $1.0 million of lower rental revenues net of direct variable expenses (such as housekeeping), expenses incurred due to owners choosing alternative usage options, and unsold maintenance fees, partially offset by the $0.4 million
increase in plus points revenue. There was no impact on rental margin from the operation of the property in San Diego compared to the prior year comparable period.
35
Europe
The following discussion presents an analysis of our results of operations for the Europe segment for the twelve weeks ended March 25, 2016,
compared to the twelve weeks ended March 27, 2015.
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
Sale of vacation ownership products
|
|
$
|
5,160
|
|
|
$
|
5,900
|
|
Resort management and other services
|
|
|
4,467
|
|
|
|
4,979
|
|
Financing
|
|
|
835
|
|
|
|
990
|
|
Rental
|
|
|
2,159
|
|
|
|
2,132
|
|
Cost reimbursements
|
|
|
7,478
|
|
|
|
7,586
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
20,099
|
|
|
|
21,587
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of vacation ownership products
|
|
|
1,291
|
|
|
|
852
|
|
Marketing and sales
|
|
|
3,886
|
|
|
|
5,421
|
|
Resort management and other services
|
|
|
4,093
|
|
|
|
4,591
|
|
Rental
|
|
|
2,916
|
|
|
|
3,051
|
|
Royalty fee
|
|
|
49
|
|
|
|
76
|
|
Cost reimbursements
|
|
|
7,478
|
|
|
|
7,586
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
19,713
|
|
|
|
21,577
|
|
|
|
|
|
|
|
|
|
|
Gains and other income
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Segment financial results
|
|
$
|
386
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
Overview
In our Europe segment, we are focused on selling our existing projects and managing existing resorts. We do not have any current plans for new
development in this segment.
Contract Sales
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Contract Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation ownership
|
|
$
|
4,418
|
|
|
$
|
5,298
|
|
|
$
|
(880)
|
|
|
(17%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contract sales
|
|
$
|
4,418
|
|
|
$
|
5,298
|
|
|
$
|
(880)
|
|
|
(17%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in Europe vacation ownership contract sales was due to $1.4 million of lower fractional sales
due to the near sell-out of developer inventory in 2015 and a decrease of $0.2 million due to the changes in foreign exchange rates, partially offset by $0.5 million of higher sales, primarily from our Middle East locations.
36
Sale of Vacation Ownership Products
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Contract sales
|
|
$
|
4,418
|
|
|
$
|
5,298
|
|
|
$
|
(880)
|
|
|
(17%)
|
Revenue recognition adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportability
|
|
|
965
|
|
|
|
1,768
|
|
|
|
(803)
|
|
|
|
Sales reserve
|
|
|
(198)
|
|
|
|
(1,080)
|
|
|
|
882
|
|
|
|
Other
(1)
|
|
|
(25)
|
|
|
|
(86)
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of vacation ownership products
|
|
$
|
5,160
|
|
|
$
|
5,900
|
|
|
$
|
(740)
|
|
|
(13%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
|
Revenue reportability had a smaller favorable impact in the current period compared to the prior year comparable period because fewer sales
met the down payment requirement for revenue recognition purposes prior to the end of the current period compared to the prior year comparable period. The decrease in the sales reserve is due to an unfavorable adjustment to the reserve in the prior
year comparable period, along with a favorable adjustment to the reserve in the current period, as well as the lower contract sales volume in the current period.
Development Margin
Twelve Weeks
Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Sale of vacation ownership products
|
|
$
|
5,160
|
|
|
$
|
5,900
|
|
|
$
|
(740)
|
|
|
(13%)
|
Cost of vacation ownership products
|
|
|
(1,291)
|
|
|
|
(852)
|
|
|
|
(439)
|
|
|
(52%)
|
Marketing and sales
|
|
|
(3,886)
|
|
|
|
(5,421)
|
|
|
|
1,535
|
|
|
28%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development margin
|
|
$
|
(17)
|
|
|
$
|
(373)
|
|
|
$
|
356
|
|
|
95%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development margin percentage
|
|
|
(0.3%)
|
|
|
|
(6.3%)
|
|
|
|
6.0 pts
|
|
|
|
The increase in development margin reflected $1.0 million from the lower vacation ownership contract sales
volume net of lower direct variable expenses (i.e., cost of vacation ownership products and marketing and sales) due to lower marketing and sales costs and a favorable mix of lower cost vacation ownership real estate inventory being sold, as well as
$0.6 million from the year over year change in the sales reserve, partially offset by $0.7 million from lower product cost true-ups ($0.5 million unfavorable true-up in the twelve weeks ended March 25, 2016 compared to a $0.2 million favorable
true-up in the prior year comparable period) and $0.5 million from the lower revenue reportability year-over-year.
37
Asia Pacific
The following discussion presents an analysis of our results of operations for the Asia Pacific segment for the twelve weeks ended March 25,
2016, compared to the twelve weeks ended March 27, 2015.
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
Sale of vacation ownership products
|
|
$
|
8,525
|
|
|
$
|
36,278
|
|
Resort management and other services
|
|
|
3,497
|
|
|
|
863
|
|
Financing
|
|
|
981
|
|
|
|
1,006
|
|
Rental
|
|
|
5,621
|
|
|
|
2,352
|
|
Cost reimbursements
|
|
|
873
|
|
|
|
866
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
19,497
|
|
|
|
41,365
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of vacation ownership products
|
|
|
1,709
|
|
|
|
21,996
|
|
Marketing and sales
|
|
|
6,211
|
|
|
|
5,557
|
|
Resort management and other services
|
|
|
3,552
|
|
|
|
850
|
|
Rental
|
|
|
5,788
|
|
|
|
2,496
|
|
Royalty fee
|
|
|
146
|
|
|
|
157
|
|
Cost reimbursements
|
|
|
873
|
|
|
|
866
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
18,279
|
|
|
|
31,922
|
|
|
|
|
|
|
|
|
|
|
Gains and other income
|
|
|
|
|
|
|
3
|
|
Other
|
|
|
(208)
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
Segment financial results
|
|
$
|
1,010
|
|
|
$
|
9,443
|
|
|
|
|
|
|
|
|
|
|
Overview
In our Asia Pacific segment, we continue to identify opportunities for development margin improvement. Our on-site sales locations are more
efficient sales channels than our off-site sales locations and we plan to focus on future inventory acquisitions with strong on-site sales locations. Due to operational constraints, regulatory conditions and certain other conditions related to our
18 units in Macau, we decided not to sell these units through our Marriott Vacation Club, Asia Pacific points program, and instead disposed of the units as whole ownership residential units during the first quarter of 2015. In the third quarter of
2015, we reinvested the proceeds from this disposition into the purchase of an operating property located in Surfers Paradise, Australia. We have commenced conversion of a portion of this property into vacation ownership inventory, the completed
portion of which has been contributed to our new Marriott Vacation Club Destinations, Australia program. We intend to sell the portion of this operating property that we do not intend to convert to timeshare to a third party. We began selling from
this new location at the end of the first quarter of 2016.
Contract Sales
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Contract Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation ownership
|
|
$
|
9,426
|
|
|
$
|
8,659
|
|
|
$
|
767
|
|
|
9%
|
Residential products
|
|
|
|
|
|
|
28,420
|
|
|
$
|
(28,420)
|
|
|
(100%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contract sales
|
|
$
|
9,426
|
|
|
$
|
37,079
|
|
|
$
|
(27,653)
|
|
|
(75%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in Asia Pacific vacation ownership contract sales was driven by a 6 percent increase in VPG and
a 3 percent increase in tours. These increases were both driven by an increase in sales to existing owners. The decrease in Asia Pacific residential sales is due to the bulk sale of 18 whole ownership residential units in Macau during the first
quarter of 2015 for $28.4 million, following which no residential inventory remained in this segment.
38
Sale of Vacation Ownership Products
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
|
|
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
Change
|
|
|
% Change
|
Contract sales
|
|
$
|
9,426
|
|
|
$
|
37,079
|
|
|
$
|
(27,653)
|
|
|
(75%)
|
Revenue recognition adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportability
|
|
|
(267)
|
|
|
|
163
|
|
|
|
(430)
|
|
|
|
Sales reserve
|
|
|
(619)
|
|
|
|
(953)
|
|
|
|
334
|
|
|
|
Other
(1)
|
|
|
(15)
|
|
|
|
(11)
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of vacation ownership products
|
|
$
|
8,525
|
|
|
$
|
36,278
|
|
|
$
|
(27,753)
|
|
|
(77%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
|
The decrease in the sales reserve is due to an unfavorable adjustment to the reserve in the prior year comparable period, partially offset by
the higher vacation ownership contract sales volume in the current period.
Development Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Change
|
|
|
% Change
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
|
Sale of vacation ownership products
|
|
$
|
8,525
|
|
|
$
|
36,278
|
|
|
|
$ (27,753)
|
|
|
(77%)
|
Cost of vacation ownership products
|
|
|
(1,709)
|
|
|
|
(21,996)
|
|
|
|
20,287
|
|
|
92%
|
Marketing and sales
|
|
|
(6,211)
|
|
|
|
(5,557)
|
|
|
|
(654)
|
|
|
(12%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development margin
|
|
$
|
605
|
|
|
$
|
8,725
|
|
|
|
$ (8,120)
|
|
|
(93%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development margin percentage
|
|
|
7.1%
|
|
|
|
24.1%
|
|
|
|
(17.0 pts)
|
|
|
|
The decrease in development margin reflected the following:
|
|
|
$5.9 million from lower residential contract sales (no residential sales in the twelve weeks ended March 25, 2016 compared to $5.9 million from the sale of residential inventory in the prior year comparable period);
|
|
|
|
$1.1 million from lower favorable product cost true-ups ($0.4 million in the twelve weeks ended March 25, 2016 compared to $1.5 million in the prior year comparable period);
|
|
|
|
$0.8 million of pre-opening and startup expenses in advance of opening the new sales location in Australia at the end of the first quarter of 2016;
|
|
|
|
$0.3 million from the higher sales volume net of higher direct variable expenses (i.e., cost of vacation ownership products and marketing and sales) due to an increase in marketing and sales costs and a higher average
cost of real estate inventory being sold; and
|
|
|
|
$0.3 million from lower revenue reportability compared to the prior year comparable period.
|
The decreases were partially offset by $0.3 million from the lower sales reserve activity compared to the prior year comparable period.
39
Resort Management and Other Services Revenues, Expenses and Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
|
|
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
Change
|
|
|
% Change
|
Management fee revenues
|
|
$
|
544
|
|
|
$
|
559
|
|
|
$
|
(15)
|
|
|
(3%)
|
Other services revenues
|
|
|
2,953
|
|
|
|
304
|
|
|
|
2,649
|
|
|
871%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort management and other services revenues
|
|
|
3,497
|
|
|
|
863
|
|
|
|
2,634
|
|
|
305%
|
Resort management and other services expenses
|
|
|
(3,552)
|
|
|
|
(850)
|
|
|
|
(2,702)
|
|
|
(318%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort management and other services margin
|
|
$
|
(55)
|
|
|
$
|
13
|
|
|
$
|
(68)
|
|
|
(523%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort management and other services margin
percentage
|
|
|
(1.6%)
|
|
|
|
1.5%
|
|
|
|
(3.1 pts)
|
|
|
|
The increase in resort management and other services revenues reflected $2.7 million of ancillary revenues at
the operating property in Australia acquired in the third quarter of 2015.
The decline in the resort management and other services margin
reflected spending in support of future growth in the business, partially offset by $0.3 million of profit at our operating property in Australia.
Rental Revenues, Expenses and Margin
Twelve Weeks Ended March 25, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
|
|
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
|
Change
|
|
|
% Change
|
Rental revenues
|
|
$
|
5,621
|
|
|
$
|
2,352
|
|
|
$
|
3,269
|
|
|
139%
|
Rental expenses
|
|
|
(5,788)
|
|
|
|
(2,496)
|
|
|
|
(3,292)
|
|
|
132%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental margin
|
|
$
|
(167)
|
|
|
$
|
(144)
|
|
|
$
|
(23)
|
|
|
(16%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental margin percentage
|
|
|
(3.0%)
|
|
|
|
(6.1%)
|
|
|
|
3.1 pts
|
|
|
|
The increase in rental revenues and rental expenses was due to the operation of the property in Australia
acquired in the third quarter of 2015. The rental margin was unchanged from the prior year comparable period. The results of our operating property in Australia were break-even in the first quarter of 2016.
Corporate and Other
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of vacation ownership products
|
|
$
|
1,955
|
|
|
$
|
1,613
|
|
Financing
|
|
|
4,629
|
|
|
|
4,905
|
|
General and administrative
|
|
|
25,297
|
|
|
|
22,777
|
|
Organizational and separation related
|
|
|
|
|
|
|
53
|
|
Consumer financing interest
|
|
|
5,362
|
|
|
|
6,021
|
|
Royalty fee
|
|
|
11,476
|
|
|
|
11,507
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
48,719
|
|
|
|
46,876
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,982)
|
|
|
|
(2,974)
|
|
Other
|
|
|
(54)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial results
|
|
$
|
(50,755)
|
|
|
$
|
(49,850)
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other consists of results not specifically attributable to an individual segment, including
expenses in support of our financing operations, non-capitalizable development expenses incurred to support overall company development, company-wide general and administrative costs, corporate interest expense, consumer financing interest expense
and the fixed royalty fee payable under the license agreements that we entered into with Marriott International in connection with our spin-off from Marriott International.
40
Total Expenses
Twelve Weeks Ended March 25, 2016
Total expenses increased $1.8 million from the prior year comparable period. The $1.8 million increase resulted from $2.5 million of higher
general and administrative expenses and $0.3 million of higher cost of vacation ownership products expenses due to higher non-capitalizable project expenses, partially offset by $0.7 million of lower consumer financing interest expense, $0.3 million
of lower financing expenses and $0.1 million of prior year organizational and separation related expenses.
General and administrative
expenses increased $2.5 million and were driven by higher information technology project costs and inflationary cost increases.
The $0.7
million decline in consumer financing interest expense was due to a lower average interest rate on the outstanding debt balances, partially offset by a higher average outstanding debt balance. The lower average interest rate reflected the continued
pay-down of older securitization transactions that carried higher overall interest rates and the benefit of lower interest rates applicable to our more recently completed securitizations of vacation ownership notes receivable.
Recent Accounting Pronouncements
See
Footnote No. 1, Summary of Significant Accounting Policies, to our Financial Statements for a discussion of recently issued accounting pronouncements, including information on new accounting standards and the future adoption of such
standards.
Liquidity and Capital Resources
Our capital needs are supported by cash on hand ($106.6 million at the end of the first quarter of 2016), cash generated from operations, our
ability to raise capital through securitizations in the ABS market and, to the extent necessary, funds available under the Warehouse Credit Facility and the Revolving Corporate Credit Facility. We believe these sources of capital will be adequate to
meet our short-term and long-term liquidity requirements, finance our long-term growth plans, satisfy debt service requirements, and fulfill other cash requirements. At the end of the first quarter of 2016, $688.0 million of the $699.3 million of
total gross debt outstanding was non-recourse debt associated with vacation ownership notes receivable securitizations. In addition, we have $40.0 million of gross mandatorily redeemable preferred stock of a consolidated subsidiary that we are not
required to redeem until October 2021. However, we expect to exercise our option to redeem the preferred stock at par in October 2016.
At
the end of the first quarter of 2016, we had $709.9 million of real estate inventory on hand, comprised of $317.8 million of finished goods, $30.0 million of work-in-progress and $362.1 million of land and infrastructure. We expect to continue to
sell excess Ritz-Carlton branded inventory through the MVCD program or bulk sale transactions in order to generate incremental cash and reduce related carrying costs.
Our vacation ownership product offerings allow us to utilize our real estate inventory efficiently. The majority of our sales are of a
points-based product, which permits us to sell vacation ownership products at most of our sales locations, including those where little or no weeks-based inventory remains available for sale. Because we no longer need specific resort-based inventory
at each sales location, we need to have only a few resorts under construction at any given time and can leverage successful sales locations at completed resorts. This allows us to maintain long-term sales locations and reduces the need to develop
and staff on-site sales locations at smaller projects in the future. We believe our points-based programs enable us to align our real estate inventory acquisitions with the pace of sales of vacation ownership products.
We are selectively pursuing growth opportunities in North America and Asia by targeting high-quality inventory that would allow us to add
desirable new destinations to our system with new on-site sales locations through transactions that limit our up-front capital investment and allow us to purchase finished inventory closer to the time it is needed for sale. These capital efficient
deals may consist of the development of new inventory, or the conversion of previously built units by third parties, just prior to sale.
We intend for our capital allocation strategy to strike a balance between enhancing our operations and using our capital to provide returns to
our shareholders through programs such as share repurchase programs and payment of dividends.
41
During the twelve weeks ended March 25, 2016, we had a net decrease in cash and cash equivalents
of $70.4 million compared to a net decrease of $74.3 million during the twelve weeks ended March 27, 2015. The following table summarizes these changes:
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
9,878
|
|
|
$
|
32,069
|
|
Investing activities
|
|
|
9,811
|
|
|
|
36,738
|
|
Financing activities
|
|
|
(90,667)
|
|
|
|
(141,689)
|
|
Effect of change in exchange rates on cash and cash equivalents
|
|
|
530
|
|
|
|
(1,453)
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
(70,448)
|
|
|
$
|
(74,335)
|
|
|
|
|
|
|
|
|
|
|
Cash from Operating Activities
Our primary sources of funds from operations are (1) cash sales and down payments on financed sales, (2) cash from our financing
operations, including principal and interest payments received on outstanding vacation ownership notes receivable and (3) net cash generated from our rental and resort management and other services operations. Outflows include spending for the
development of new phases of existing resorts, the acquisition of additional inventory and funding our working capital needs.
We minimize
our working capital needs through cash management, strict credit-granting policies, and disciplined collection efforts. Our working capital needs fluctuate throughout the year given the timing of annual maintenance fees on unsold inventory we pay to
property owners associations and certain annual compensation-related outflows. In addition, our cash from operations varies due to the timing of our owners repayment of vacation ownership notes receivable, the closing of sales contracts
for vacation ownership products, financing propensity and cash outlays for real estate inventory acquisition and development.
In the
twelve weeks ended March 25, 2016, we generated $9.9 million of cash flows from operating activities, compared to $32.1 million in the twelve weeks ended March 27, 2015. Excluding the impact of changes in net income and adjustments for non-cash
items, the decrease in cash flows reflects higher financing propensity due to the new financing program implemented in the second quarter of 2015, lower collections due to the reduction in the portfolio of outstanding vacation ownership notes
receivable and timing of payments to property owners associations for maintenance fees collected on their behalf partially offset by lower payments on the liability for the Marriott Rewards customer loyalty program.
In the twelve weeks ended March 27, 2015, we recorded residential contract sales of $28.4 million associated with the sale of 18 units in
Macau.
In addition to net income and adjustments for non-cash items, the following operating activities are key drivers of our cash flow
from operating activities:
Real Estate Inventory Spending In Excess of Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Real estate inventory spending
|
|
$
|
(48,126)
|
|
|
$
|
(17,309)
|
|
Purchase of operating property for future conversion to inventory
|
|
|
|
|
|
|
(46,614)
|
|
Real estate inventory costs
|
|
|
33,014
|
|
|
|
62,276
|
|
|
|
|
|
|
|
|
|
|
Real estate inventory spending in excess of cost of sales
|
|
$
|
(15,112)
|
|
|
$
|
(1,647)
|
|
|
|
|
|
|
|
|
|
|
We measure our real estate inventory capital efficiency by comparing the cash outflow for real estate
inventory spending (a cash item) to the amount of real estate inventory costs charged to expense on our Statements of Income related to sale of vacation ownership products (a non-cash item).
Our real estate inventory spending exceeded real estate inventory costs in the twelve weeks ended March 25, 2016, as a result of our
opportunistic acquisition efforts. Real estate inventory spending included $23.5 million for the acquisition of an operating property located in the South Beach area of Miami Beach, Florida. We intend to convert this property, in its entirety, into
vacation ownership interests for future use in our MVCD program. See Footnote No. 5, Acquisitions and Dispositions, to our Financial Statements for additional information regarding this transaction.
42
During the twelve weeks ended March 27, 2015, we capitalized on the opportunity to add a premier
destination to our portfolio through the acquisition of an operating property in San Diego, California. In order to ensure consistency with the expected related future cash flow presentation, $46.6 million of the cash purchase price allocated to
property and equipment was included as an operating activity in the Purchase of operating property for future conversion to inventory line on our Cash Flows. See Footnote No. 5, Acquisitions and Dispositions, to our Financial
Statements for additional information regarding this transaction. In the twelve weeks ended March 25, 2016, we began conversion of this property into vacation ownership interests for future use in our MVCD program.
Real estate inventory costs for the twelve weeks ended March 27, 2015 included $21.6 million related to the sale of the residential units in
Macau.
Through our existing vacation ownership interest repurchase program, we proactively buy back previously sold vacation ownership
interests at lower costs than would be required to develop new inventory. By repurchasing inventory in desirable locations, we expect to be able to stabilize the future cost of vacation ownership products.
Notes Receivable Collections in Excess of New Mortgages
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Vacation ownership notes receivable collections non-securitized
|
|
$
|
19,376
|
|
|
$
|
19,074
|
|
Vacation ownership notes receivable collections securitized
|
|
|
41,156
|
|
|
|
48,444
|
|
Vacation ownership notes receivable originations
|
|
|
(57,524)
|
|
|
|
(48,946)
|
|
|
|
|
|
|
|
|
|
|
Vacation ownership notes receivable collections in excess of originations
|
|
$
|
3,008
|
|
|
$
|
18,572
|
|
|
|
|
|
|
|
|
|
|
Vacation ownership notes receivable collections include principal from non-securitized and securitized
vacation ownership notes receivable. Vacation ownership notes receivable collections declined during the twelve weeks ended March 25, 2016 as compared to the twelve weeks ended March 27, 2015 due to the reduction in the portfolio of outstanding
vacation ownership notes receivable. Vacation ownership notes receivable originations in the twelve weeks ended March 25, 2016 increased due to an increase in financing propensity to 58.5 percent for the twelve weeks ended March 25, 2016 compared to
43.8 percent for the twelve weeks ended March 27, 2015 due to a new financing incentive program implemented in our North America segment in the second quarter of 2015. Given the success of this program to date, we expect financing propensity
levels to remain higher than the 40 to 45 percent that we have been averaging in recent years.
Cash from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Capital expenditures for property and equipment (excluding inventory)
|
|
$
|
(6,331)
|
|
|
$
|
(10,562)
|
|
Decrease in restricted cash
|
|
|
16,133
|
|
|
|
47,103
|
|
Dispositions, net
|
|
|
9
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
$
|
9,811
|
|
|
$
|
36,738
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures for Property and Equipment
Capital expenditures for property and equipment relate to spending for technology development, buildings and equipment used at sales locations
and ancillary offerings, such as food and beverage offerings, at locations where such offerings are provided.
In the twelve weeks ended
March 25, 2016, capital expenditures for property and equipment of $6.3 million included $4.7 million to support business operations (including $0.9 million for ancillary and operations assets and $3.8 million for sales location) and $1.6 million
for technology spending.
In the twelve weeks ended March 27, 2015, capital expenditures for property and equipment of $10.6 million
included $9.3 million to support business operations (including $8.5 million for ancillary and operations assets and $0.8 million for sales locations other than the operating property in San Diego, California), and $1.3 million for technology
spending. The capital expenditures for ancillary and operations assets included $7.7 million associated with the purchase price allocation for the operating property in San Diego, California. See Footnote No. 5, Acquisitions and
Dispositions, to our Financial Statements for additional information regarding the San Diego transaction.
43
Decrease in Restricted Cash
Restricted cash primarily consists of cash held in reserve accounts related to vacation ownership notes receivable securitizations, cash
collected for maintenance fees to be remitted to property owners associations and deposits received, primarily associated with tour package sales and vacation ownership product sales that are held in escrow until the associated contract has
closed or the period in which it can be rescinded has expired, depending on applicable legal requirements.
The decrease in restricted
cash in the twelve weeks ended March 25, 2016 reflected $17.5 million of higher cash distributions for maintenance fees remitted to certain property owners associations subsequent to the end of 2015, $2.1 million of higher cash distributed to
investors in connection with securitized vacation ownership notes receivable subsequent to the end of 2015 and a $0.5 million decrease in property refurbishment reserves for the Surfers Paradise property, partially offset by a $4.0 million increase
in cash associated with vacation ownership sales held in escrow.
The decrease in restricted cash in the twelve weeks ended March 27, 2015
reflected $48.0 million of higher cash distributions for maintenance fees remitted to certain property owners associations subsequent to the end of 2014, $6.6 million of higher cash distributed to investors in connection with securitized
vacation ownership notes receivable subsequent to the end of 2014 and a $0.1 million decrease in funds required to be held in escrow to guarantee our credit card business in the Asia Pacific segment, partially offset by a $6.8 million increase in
cash associated with vacation ownership sales held in escrow.
Cash from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
($ in thousands)
|
|
March 25, 2016
|
|
|
March 27, 2015
|
|
Borrowings from securitization transactions
|
|
$
|
51,130
|
|
|
$
|
|
|
Repayment of debt related to securitizations
|
|
|
(47,711)
|
|
|
|
(78,811)
|
|
Proceeds from vacation ownership inventory arrangement
|
|
|
|
|
|
|
5,375
|
|
Repurchase of common stock
|
|
|
(73,228)
|
|
|
|
(51,281)
|
|
Payment of dividends
|
|
|
(17,585)
|
|
|
|
(8,081)
|
|
Proceeds from stock option exercises
|
|
|
|
|
|
|
90
|
|
Payment of withholding taxes on vesting of restricted stock units
|
|
|
(3,864)
|
|
|
|
(9,061)
|
|
Other
|
|
|
591
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
$
|
(90,667)
|
|
|
$
|
(141,689)
|
|
|
|
|
|
|
|
|
|
|
Borrowings from / Repayments of Debt Related to Securitization Transactions
We reflect proceeds from securitizations of vacation ownership notes receivable, including draw downs on the Warehouse Credit Facility, as
Borrowings from securitization transactions. We reflect repayments of bonds associated with vacation ownership notes receivable securitizations and repayments on the Warehouse Credit Facility (including vacation ownership notes
receivable repurchases) as Repayment of debt related to securitization transactions.
On February 24, 2016, we made a
draw on the Warehouse Credit Facility. The carrying amount of the notes receivable securitized was $60.2 million. The advance rate was 85 percent, which resulted in gross proceeds of $51.1 million. Net proceeds were $50.7 million due to the funding
of reserve accounts in the amount of $0.4 million. At March 25, 2016, $50.7 million was outstanding under the Warehouse Credit Facility and $102.3 million of gross vacation ownership notes receivable were eligible for securitization.
Proceeds from Vacation Ownership Inventory Arrangement
In connection with our initiative of pursuing growth opportunities in ways that optimize the timing of our capital investments, including
working with third parties to develop new inventory or convert previously built units to be sold to us close to when we need such inventory for sale, we sold real property located in Marco Island, Florida during the first quarter of 2015 to a
third-party developer. Pursuant to this transaction, we are obligated to repurchase the completed property from the developer contingent upon the property meeting our brand standards and provided that the third-party developer has not sold the
property to another party. As discussed in Footnote No. 5, Acquisitions and Dispositions, to our Financial Statements, we received cash proceeds of $5.4 million upon the sale of this real property. In accordance with the
authoritative guidance on accounting for sales of real estate, our conditional obligation to repurchase the property constitutes continuing involvement and thus we were unable to account for this transaction as a sale, and as such have recorded
these proceeds as a financing activity.
Share Repurchase Program
During the twelve weeks ended March 25, 2016, we repurchased 1,326,982 shares of our common stock at an average price of $55.18 per share for
a total of $73.2 million. See Footnote No. 11, Shareholders Equity, to our Financial Statements for further information related to our share repurchase program.
44
Dividends
On December 8, 2015, our Board of Directors declared a quarterly dividend of $0.30 per share to shareholders of record as of December 21,
2015, which we paid on January 6, 2016. Also, on February 11, 2016, our Board of Directors declared a quarterly dividend of $0.30 per share to shareholders of record as of February 25, 2016, which we paid on March 10, 2016.
We currently expect to pay quarterly cash dividends in the future, but any future dividend payments will be subject to Board approval, which
will depend on our financial condition, results of operations and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business considerations that our Board of Directors considers relevant. In
addition, our Revolving Corporate Credit Facility contains restrictions on our ability to pay dividends, and the terms of agreements governing debt that we may incur in the future may also limit or prohibit dividend payments. Accordingly, there can
be no assurance that we will pay dividends in the future at the same rate or at all.
Contractual Obligations and Off-Balance Sheet
Arrangements
There have been no significant changes to our Contractual Obligations and Off-Balance Sheet Arrangements as
reported in Managements Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended January 1, 2016, other than those discussed below. As of March 25, 2016,
debt, net increased by $10.4 million to $689.2 million compared to $678.8 million at January 1, 2016, mainly due to $50.7 million of net proceeds drawn on the Warehouse Credit Facility and $7.2 million related to non-cash acquisitions of
property via capital leases, partially offset by a decrease of $47.3 million related to repayments of non-recourse gross debt associated with vacation ownership notes receivable securitizations. As of March 25, 2016, future debt payments to be
paid out of collections from our vacation ownership notes receivable, including principal and interest, totaled $755.8 million and are due as follows: $92.5 million in 2016; $105.5 million in 2017; $141.8 million in 2018; $84.2 million in 2019;
$79.5 million in 2020; and $252.3 million thereafter.
We expect to exercise our option to redeem the mandatorily redeemable preferred
stock of a consolidated subsidiary at par in October 2016, although we are not required to redeem it until October 2021.
We have
commitments to purchase vacation ownership units located in two resorts in Bali, Indonesia in two separate transactions, contingent upon completion of construction at agreed upon standards within specified timeframes, for use in our Asia Pacific
segment. We expect to complete the acquisition of 51 vacation ownership units in 2017 pursuant to one of the commitments, and to make payments with respect to these units, when specific construction milestones are completed as follows: $4.7 million
in 2016 and $19.0 million in 2017. We expect to complete the acquisition of 88 vacation ownership units in 2019 pursuant to the other commitment, and to make payments with respect to these units, when specific construction milestones are completed,
as follows: $7.8 million in 2016, $5.9 million in 2018, and $25.4 million in 2019.
We have a commitment to purchase an operating property
located in New York, New York for $158.5 million. We expect to acquire the units in the property, in their current form, over time, and we expect to make payments for these units of $96.8 million and $61.7 million in 2018 and 2019, respectively. See
Footnote No. 8, Contingencies and Commitments, and Footnote No. 13, Variable Interest Entities, to our Financial Statements for additional information on this transaction.
We have historically issued guarantees to certain lenders in connection with the provision of third-party financing for our sales of vacation
ownership products. The terms of these guarantees generally require us to fund if the purchaser fails to pay under the terms of its note payable. We are entitled to recover any payments we make to third-party lenders under these guarantees through
reacquisition and resale of the vacation ownership product. Our commitments under these guarantees expire as the underlying notes mature or are repaid. Our maximum exposure under such guarantees as of March 25, 2016 in the Asia Pacific and North
America segments was $4.8 million and $2.9 million, respectively. The terms of the underlying debt to third-party lenders extend to 2022.
For additional information on these guarantees and the circumstances under which they were entered into, see the Guarantees
caption within Footnote No. 8, Contingencies and Commitments, to our Financial Statements.
In the normal course of our
resort management business, we enter into purchase commitments with property owners associations to manage the daily operating needs of our resorts. Since we are reimbursed for these commitments from the cash flows of the resorts, these
obligations have minimal impact on our net income and cash flow.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported
amounts and related disclosures. Management considers an accounting estimate to be critical if: (1) it requires assumptions to be made that are uncertain at the time the estimate is made; and (2) changes in the estimate, or different
estimates that could have been selected, could have a material effect on our consolidated results of operations or financial condition.
While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information presently available. Actual
results may differ significantly. Additionally, changes in our assumptions, estimates or assessments as a result of unforeseen events or otherwise could have a material impact on our financial position or results of operations. We have discussed
45
those estimates that we believe are critical and require the use of complex judgment in their application in our most recent Annual Report on Form 10-K. Since the date of our most recent Annual
Report on Form 10-K, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.