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    MARKET EDGES

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Lani Kane-Hanan (Chief Growth and Inventory Officer)

  • Inventory Management
    • Have several resorts under development in North America
    • May buy back inventory from existing owners or buy distressed inventory from 3rd parties
    • Other ways of getting inventory:
      • Build
      • Buy turnkey inventory for a management fee
      • Manage someone else's inventory
    • Will not develop new resorts anytime soon.
  • Current Inventory
    • North America
      • Completed: $320MM spend or $840MM of contracted sales - 18 months at their current sales pace
      • Under construction: $230MM spend on B/S, which would yield potential contract sales of $930MM
      • Future phases to complete (land at adjacent resort): $275MM spend, which would translate into $4.23BN of potential contract sales
      • Total: $6BN of potential future sales
    • Asia Pacific strategy
      • Complete existing projects
      • Reacquire inventory
      • Turnkey projects
      • Co-located property
    • Europe Strategy
      • Sell existing inventory by 2015
      • Opportunistically reacquire inventory
      • Ongoing resort mgmt, rentals and customer service
    • Luxury Strategy
      • Ongoing sales of existing inventory; leveraging the existing distribution challenges
      • Bulk land dispositions
      • Future growth through asset light strategy
    • Optimization for Sale
      • Offering incentives to existing owners like MAR Rewards
      • Since 2008, cost of sales is greater than real estate inventory spending
      • In 2010, they had 10,810 VOI units flying the MAR flag - 6% were unsold
        • This translates into 5.5MM available keys in 2010. In 2010, 75% of those units were used by owners, 14% were rented to transient guests,2% was used towards marketing and packages, 2% was getting refurbished, and only 7% went unused.
        • Their occupancies have consistently been over 90% (91.6% in 2010, ~92% in 2008, and 91.4% in 2009)
    • Opportunities for growth
      • Capital efficiency
        • Offer new experience to owners that aren't capital intensive - safaris/ cruises/ tours/ outside of their systems for new points
        • Recycling inventory: buying back owner inventory which is cheaper than new construction
        • Cross brand utilization
        • Selective asset light deals: Turnkey developments with 3rd party owners, fee for service arrangements, affiliation arrangements, co-development deals
      • Recurring income streams:
        • Exchange fees

Joe Bramuchi (VP Capital Markets, Treasury and Financial Risk Mgmt)

  • $700MM of non-recourse debt on balance sheet
  • $40MM of preferred stock
  • Has a warehouse facility and revolver
  • Profitable consumer financing business
    • Typically 45% of their customers take MAR financing at the point of sales at an 80% LTV
    • They use their warehouse facility to fund the loans and accumulate them in the warehouse for about a year before packaging them into an ABS deal and securitizing the receivables in a loan sale.
    • Their loans are 10 year, fixed fully amortizing loans at 12.5-13.5%
      • No prepayment penalty
      • Low monthly payment: $315/month
      • FICO: 737 average
      • 10% down is a minimum downpayment
    • High coupon and FICO score provide them with a large spread.  Before 2007, they would incentive customers to take financing by offering extra points/ etc. When the ABS market weakened, they stopped offering those incentives.
  • At any point in time, they hold some of the notes receivable because they are not securitizable for one reason or another.  Expect their loan receivable balance to level off in 2014 and then begin to grow as sales grow.
  • Note Securitization terms
    • Year 2010-2011
    • Gross note sales volume: $229MM
    • Advance rate: 95%
    • Weighted average coupon: 13.2%
    • Investor return: 3.6%
    • Excess spread: 9.6%
  • Their worst deal was in 2009-2010
    • Only a 72% advance rate and 3.4% excess spread (they repurchased this deal)
  • Timeshare paper has had similar performance to credit card and auto performance  - and was much better than home equity loan.  The performance of MAR paper tends to lead the industry.
  • Other sources of liquidity
    • $300MM warehouse line of credit
    • R/C: $200MM (undrawn at spinoff)
    • Expect to access the ABS market regularly going forward
    • Rated: BB- by S&P (similar to HST and HOT at BB+)

John Geller (CFO of MVCI)

  • Enhance cash from sales of land in Luxury segment
  • Their base management fees are very stable
  • Contract sales: accurate measure of demand trends
    • Require a 10% down payment by customer
    • In 2010, volume declined 8% (weak economy, start up impact of point program, and closure of sales office). They have been focusing sales to existing owners rather than pursue new buyers.
    • Believe that pricing and volumes going forward will exceed 08' levels
    • Will monetize Luxury inventory. Going forward, they will focus on affiliations.
    • Europe - sells weeks based program. Expects that contract sales will decline as they wind down their inventory.
    • Asia Pacific - contract sales should continue to improve; Total contract sales in 2011: flat YoY but better in 2H
  • Cancellation allowance (many luxury customers canceled their purchases)
    • This should go away going forward.  When they sold projects based on week programs, they couldn't recognize many sales as some projects were still under construction.  Currently, that is less of an issue, however, they must have 10% net of promotional allowances before they can recognize a sale and they must surpass a recision period of 7-10 days. So on a 10% down financed sale, it takes a few months to recognize the sale.  As they recognize revenues they reserve for about 11% of financed sales (5% of total sales).
  • Product costs (Cost to build/acquire inventory)
    • In 2011, it was 38-40%, down from 42% in 2009 given the higher promotional environment then.  Going forward, construction costs have moderated and luxury sales are de-emphasized, so cost of sales should improve.  Their luxury sales have much lower margins as they carry much higher cost of sales.
  • Marketing and sales costs
    • Going forward they are targeting a return of 42-46% after marketing and sales costs.  Currently 49-51% in 2011.
  • Expect that financing revenue will continue to decline in 2014 and then grow steadily thereafter with sales volumes.
  • Rental revenue: $205-215MM in 2011 ($175-180MM in NA); net of expenses: loss of 7-12MM and +15-20MM in NA. Maintenance fees on unsold inventory totaled $68MM in 2010 and estimated $58-60MM in 2011.  25% is from luxury inventory.  Intention to sell out luxury inventory and elimination of those associated expenses will save them $10MM or so per year
  • Management fee revenue:
    • 10% of maintenance fee by owner
    • 2500 point purchase: $1000/annual mgmt fee; In 2011: $63MM of estimated fees
  • Reduced SG&A expenses since 2008 - past years were adjusted for the MAR royalty fee and approx $12MM of standalone company expenses.  SG&A of $140-145MM in 2011
  • Forecasts for 2012:
    • 2011E: $95-105MM EBITDA
    • Flat contract sales: $116MM
      • 5% growth: $127MM
      • 10% growth: $138MM
      • 5% decline: flat with 2011 levels
    • Assumes $66MM of fees to Marriott International, and $134-135MM of SG&A
    • Expect $150MM of proceeds or so on the land sales
    • Expect to only have 5 projects under construction vs. 20 in 2008.  Will be focused on maximized FCF.

Q&A

  • Their compensation policy is yet to be determined. They will make sure that the management team is impacted by the performance of MVW.
  • ROIC: high points were 15% or so.  Their business was dragged down by the luxury segment. Points based program is also more capital efficient since you don't need as much under construction inventory and they can adjust construction appropriately based on demand.
  • Management fees of $63MM are net of all expenses
  • Why does rental P&L lose money?  It carries the unsold maintenance fee, marriott reward expenses, costs of advertising and rental expense of the inventory.  In 2009 they carried a lot of the Luxury inventory; they are also unable to rent out some of that inventory due to zoning restrictions.
  • Historically, financing propensity was in the 40-50% range; however, around 2007, they incentivized their buyers to take financing in return for MAR reward points.  So when they were no longer getting 100% advance rates, they went back to the historical norms.
  • Bringing over the securitized note balances, $40MM of preferred stock at a 12% coupon, 10 year redeemable callable in 5 years.
    • Also $800MM of debt and cash in working capital to run the business ($25-30MM day 1)
  • Timeframe for lowering their marketing and cost of sales from 50% now to 42-46%: NA is running at 47% today, luxury and Europe are dragging up the cost today so once those segments are wound down, costs of marketing will improve. Part of it will depend on volumes improving.
  • Focus on consumer confidence the most as a general proxy for the health of their business since this is a large discretionary purchase
  • Interval International provides their weeks program customers with the functionality of exchanging their weeks
  • In Form 10, they have a $1.4BN servicing portfolio.  The delinquencies in the Form 10 are $104MM over 150 days.  Foreclosure process can take up to a year so they are seeing a build up there.  Still seeing the work out of loans from 2009 - their $104MM still reflects a lot of the 2009 overhang.  For financed contract sales, they include in their inventory some amount of foreclosure units (which they estimate).
  • Their priority today is to sell down their existing inventory.  As they look to develop new units they will consider asset light strategies (cruises/tours/fee for service deals/distressed condo acquisitions/ engaging 3rd parties to build product for them to take in as they need it)
  • Brands: they may develop a new brand or acquire an existing brand.  Right now, they have been solely focused on the spin. They aren't so focused on new brands right now. 
  • Where can contract sales go?  You can look historically; they used to be at $1BN back in 2007.  Today only 8% of eligible people in NA own timeshare.
  • Their priority is to maintain a 4.5-5x leverage ratio (includes securitized notes) to keep their rating so that they can maintain access to the ABS market.
  • Marriott is 65 out of 2500 II resorts - so maybe they are 100/2500 II resorts.  They have spoken about starting an exchange business.  Their points based business enabled the start of their own exchange based business; so they are just in their infancy in that business.  Right now, they are really focused on converting their existing ownership base.  Don't see their business with II going away.
  • They don't really view sites as VBRO as a threat