Description

On February 21st, 2024, Marriott Vacations Worldwide (VAC) reported results which appear to represent a positive inflection point.  VAC’s 2023 results were depressed due to factors which should all be temporary / one time in nature.   Those difficulties have created opportunity to invest in a secularly growing business at a 10%+ free cash flow yield.

VAC is a unique and resilient, 100% leisure-focused, timeshare business.  35% of adjusted EBITDA comes from recurring sources (Management & Exchange, Financing, Rentals and Development).  Vacation ownership represents 87% of adjusted EBITDA and includes seven upscale resort brands (exclusive use of Marriott, Sheraton, Westin and Hyatt brands), 120 resorts and 700,000 owner families.  13% of adjusted EBITDA is ‘Exchange and Third-party management’ which counts 1.6M Interval International members and 3,200 exchange resorts; this segment is a higher margin, low capital intensity (52% adjusted EBITDA margin & Capex = 1% of revenue) part of VAC but will not be the focus of this report given its small size.

We don’t think the quality of Marriott Vacations is appreciated.   Much has changed in the timeshare industry over the past ~15 years:

·   Consolidation among the large operators (VAC, HGV and WH have all made large timeshare acquisitions), with VAC expanding its brands from three to seven.

·   The timeshare industry became significantly more rational after the 2008 financial crisis.   Prior to 2008, because companies would chase volume, marketing costs would often reach 50% to 60% of sales.  With a post-2008 focus on efficiency, the industry generally runs in the 30% to 45% range, with Marriott Vacations marketing costs below that given its substantial loyalty membership base and superior customer mix.

·   The industry’s move from site-specific fractional ownership used on a per-week basis to a points-based system applied across the property portfolio improved the owner experience.

·   The time share model is more asset-light, now that contract sales are securitized.

·   More working from home (WFH) means more flexibility to own or rent from VAC.

·   Many primary residential mortgages locked at ~3% interest rates creates more discretionary household cash flow and willingness to take on timeshare debt.

VAC operates with a powerful model.  Pre-paid vacations drive high occupancy, in the 88%+ range.  On-property guests in turn drive 85% of vacation ownership sales, which come at a much lower marketing expense.   VAC is hugely advantaged in its licensed relationships with Marriot (196 million Bonvoy Loyalty Members) and Hyatt (36 million Loyalty Members), which create a low-cost, affinity-based prospect pipeline, the largest in the timeshare industry.  VAC is able to mine Marriott’s billion person database as well.

During 2023, the company implemented a program called ‘Abound’ which temporarily depressed operating results but will accelerate revenue growth going forward.  Abound creates a single points currency and owners now have more exchange options across the VAC portfolio (excluding Hyatt) including experience tours (cruises, safaris etc.).  Abound will increase the ability to close sales, reduce costs and complexity and provide more balance sheet flexibility.  Securitizations will no longer be limited to individual products, as inventory feeds into one Marriott points-based securitization conduit Trust.  Owners will automatically be enrolled in Abound at a $250 annual cost.  Volume per guest (VPG) increased 15% in the first quarter for sites that transitioned to Abound.

The company was forced to reduce 2023 guidance due to Abound and other issues, with the stock massively underperforming the S&P 500 index last year.   However, this week VAC’s CEO explicitly stated, “At this point, the impact of the Abound transition is behind us.”  The following additional contributors to reduced 2023 guidance should also be resolved going forward:

·       $50 million EBITDA reduction was due to the wildfires in Maui.  Maui is 10% of contract sales.  None of its four resorts were physically damaged and VAC expects occupancy to return to the normal 95%+ rate during 2024.  October occupancy reached 60% shortly after reopening and December 2023 occupancy approached the 2022 December level.

·       $50 million EBITDA reduction was to address Sheraton/Vistana acquired customers which needed more loan loss reserves.  VAC has repeatedly stated it is now adequately reserved.   The company has consistently experienced best-in-industry loan losses while maintaining lower-than-peer reserves.   VAC’s average owner net worth at $1.5 million and average income at $150,000 are industry-best.

·       $30 to $40 million EBITDA reduction due to softness in tour flow and volume per guest (VPG) along with occupancy and average daily rate (ADR) below expectation with rentals.  Q4 results demonstrate this softness has inflected positively:  ** Excluding the impact of the Maui wildfires, Q4 contract sales would have grown 4%, tours would have increased 4% and VPG would have been unchanged compared to Q3 2023 **.

2024 is set up to exceed expectations, with sell side consensus EBITDA revised 30% lower over the past year.     VAC’s first half bookings for 2024 are ahead of where they were at this point in 2023.  Company guidance is for 2024 contract sales in a range of $1,880M to $1,930M vs 2023 at $1,772M.  We believe the analyst community has taken a very conservative view, given the reduction in 2023 guidance delivered by a new CEO and CFO.  A recently retired VAC SVP expressed to us a lot of confidence in new leadership, adding that VAC has the best management depth and breadth in the industry and its CEO has a strong track record during his career at MAR and VAC.

VAC trades at the low end of its historical forward multiples of earnings and operating cash flow:

Marriott Vacations is inherently and consistently highly cash generative.   The company is guiding to $400M to $450M in adjusted free cash flow for 2024, which represents a 12.5% free cash flow yield on current market capitalization.   The stock has often traded at a more reasonable 8% (or lower) free cash flow yield.   At an 8% yield on expected 2024 free cash flow, the stock offers 50% upside, even after the recent 10% jump in the stock price on the company’s Q4 report.

Additional positives which should drive results & valuation over time:

·       The time share industry has grown a long time at a 5%+ annual rate.

·       92% of Americans recently surveyed said they plan to travel as much or more in 2024 vs. 2023

·       First time buyers were 50% of VAC tours and 30+% of contract sales in 2023.  This bodes well for 2024 as new owners make additional purchases.

·       Post COVID results have been hampered by added carrying costs of excess inventory – the company is returning to its more efficient ‘just in time inventory’.  COVID also interrupted the flow of bringing in new owners – the foundation for growing revenue – which hurt VPG in 2023 but will abate over time as the company moves past the COVID effect.

·       Greater use of digital and AI for higher return marketing – smarter sales and more self service

·       Liquidity ample at $930 million plus 70% of debt fixed at 4.2% rate.

·       2023 total shareholder yield is 11% - the company will reduce leverage to 3x into 2025 but should still deliver an annual shareholder yield > 7% between the dividend and buybacks.

·       $430M of excess inventory supports more than $2 billion in future sales.

·       Acquisition of Welk Resorts, rebranded to Hyatt, adds 3+ years of built inventory, and this business will move into VAC’s lower-cost sales channels, with further boost to cash flow by incorporating the Interval exchange.

·       VAC has a lot of excess land at existing well-located resorts on which it can build inventory out for years to come – saving the majority of development cost (land) in most cases.

·       The Marriott family owns 10% of the stock and the CEO and then CFO bought $564,000 and $204,000 respectively at $113 during August 2023.

Catalyst

Moving past effects of COVID and the 2023 down year for the business.