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Text: I am joined today by Steve Weisz, Chief Executive Officer; our President, John Geller; and Tony Terry, our new Executive Vice President and Chief Financial Officer.
These statements are subject to numerous risks and uncertainties, as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments.
Throughout the call, we will make references to non-GAAP financial information.
While most of the time we are joining you from sunny Florida, today is particularly exciting is we're at the New York Stock Exchange to celebrate an important milestone for Marriott Vacations Worldwide, our 10th year anniversary as an independent publicly traded company.
10 years ago we were a pure-play vacation ownership company, with three brands, 64 resorts and approximately 420,000 owners.
Today we're about vacation experiences, with seven brands, 120 resorts and 700,000 loyal owners in our vacation ownership business and we also have 3,200 resorts and 1.3 million members in our exchange business and more than 150 other resorts and lodging properties in our third-party management business.
Our large portfolio of offerings allows our owners and members to access virtually any kind of vacation experience they can ever want.
We've built a business characterized by strong organic growth and recurring cash flow, driven in part by our capital-efficient inventory approach.
This has provided fuel to enable us to expand our resort footprint and pursue M&A activities, including the acquisitions of ILG and Welk Resorts, while simultaneously returning excess cash to shareholders.
We've built an incredible team of talented associates throughout the world, I'm sincerely appreciative of their dedication and contributions to our success.
I'm equally grateful for the millions of loyal owners, members and guests who have put their trust in us to deliver remarkable vacation experiences time and time again to help fuel this growth.
And there's much more to come, including new products, new digital tools to delight our existing customers, while also attracting new ones.
I've been with Marriott Vacations for 25 years.
I can honestly say that our best days are still ahead of us.
Starting with our vacation ownership business.
Occupancies in our North American resorts were very strong during the quarter, despite softness in a few markets due to the Delta variant and the fires in the Lake Tahoe Basin.
For example, we ran nearly 95% occupancy in Hawaii for the quarter, so when the government asked travelers to stay away for a few months, we did see occupancy soften a few points late in the quarter.
In Orlando, another large market for us, occupancy dipped during August and September due to the variant, while occupancies at our Florida Beach resorts were well above 2019 levels, illustrating travelers' desire to get back on vacation.
Our urban locations continued to improve nicely during the quarter, with San Diego running over 85% occupancy and Boston running nearly 95%.
And encouragingly, we saw a nice sequential improvement in our European locations as the quarter progressed.
With the strong domestic occupancy, we delivered $380 million in contract sales which was within 3% of 2019 levels.
First-time buyers represented more than 30% of contract sales improving sequentially from the second quarter.
And this is important for the health of the system as first-time buyers have historically doubled their revenue contribution within the first five years of ownership.
And with the products we sell resonating with customers now more than ever VPG excluding, Welk was almost $4500, nearing 30% higher than the third quarter of 2019 with both first-time buyer and owner VPG up double digit.
Moving to our exchange and third-party management business.
Interval signed a contract with LS Resorts of leading all-inclusive developer in Nexa.
This resort group will transition its members to interval on January 1, leveraging our technology to ensure a seamless customer experience.
And with the acquisition of Welk Resorts earlier this year, we are now working to transition, Welk owners to Interval effective January 1, one year earlier than originally planned.
This will not only add new numbers to the Interval network, but also highly desirable inventory in key leisure destinations such as San Diego, Loscabos, Breckenridge and Lake Tahoe.
In total these agreements will bring nearly 50,000 new members through the interval system beginning on January 1.
Companywide, we also continue to make good progress on our technology initiatives to drive growth and expand margins.
For example, our Vacation Ownership business recently launched new digital reservation technology which we expect to increase our marketing efficiency and improve customer service.
Interval is continuing to work to significantly expand its addressable market beyond this time share and we look forward to sharing our progress on this initiative with the next year.
And we're making good progress linking our Marriott Westin and Sheraton brands into a single point based product, greatly improving owner access across our Marriott branded portfolio products in the first half of next year.
So let's talk about the balance of the year.
We continue to be very encouraged with the improvement of our business.
Occupancies remain very strong in October with particularly strong in reach and novel properties.
The integration of Welk into our high vacation ownership business continues to go well and we're working diligently to transition Welk owners to Interval, a year earlier than originally planned.
We sold more tour packages in the third quarter than we did in the second, ending September with more than 214,000 tours in our package pipeline.
And with the strong ramp-up of package sales this year, we ended the quarter roughly in line with 2019 despite causing most marketing activities for much of last year.
Owner and preview reservations for the first half of next year are up 10% compared to the same time in 2019.
In a recent survey 71% of our owners stated that they are likely to travel within the next three months with 90% likely to travel in the next 12 months.
With the change in government restrictions our Cancun and Cabo reports are once again allowed to operate at full capacity and Hawaii's Governor is once again welcoming vacationers to the island.
And we're looking forward to welcoming our international guests back to our US resorts this month now that the restrictions have been relapsed.
All of this puts us in a position to close the year on a high note and setting us up for a strong 2022.
But before I start, I want to congratulate Tony for his recent promotion.
I've had the pleasure of working closely with Tony since I joined Marriott Vacations nearly 13 years ago and I couldn't be happier for him.
Today, I'm going to review our third quarter results, highlight the continued strong recovery across our businesses and discuss the strength of our balance sheet and liquidity position, as well as our expectations for the fourth quarter.
Starting with our Vacation Ownership business.
The value of our leisure-focused business model was evident again this quarter.
Despite the Delta variant occupancies continue to hold strong in the quarter with owner occupancies above 2019 levels though this was partially offset by some softness in transient and preview bookings.
As a result, we grew contract sales by 5% sequentially in the third quarter to $380 million which was almost back to 2019 levels.
VPG was largely unchanged compared to the second quarter and remain well above pre-pandemic levels, illustrating how well our product continues to resonate with customers as well as the benefits of our channel optimization initiatives.
Adjusted development profit increased 19% sequentially to $98 million.
Adjusted development profit margin expanded sequentially by 335 basis points to 30%, the highest margin in our 10 years since becoming a public company, highlighting the benefits of more efficient marketing and sales spending, lower inventory costs and synergy savings.
Turning to our rental business, as I mentioned last quarter, in order to get more of our owners back on vacation, we decided early in the pandemic to allocate more of our rental keys to owners as demand recovered.
This did impact our transient keys rented during the third quarter, but with average revenue per key, increasing 9% sequentially, rental revenues increased 11% and profit grew 73%.
The stickier revenue businesses within our vacation ownership segment also performed well in the quarter.
Resort management revenue increased 2% compared to the second quarter and margin was approximately 56% and financing profit increased 16% from the prior year due to the inclusion of Welk.
With our contract sales growing 5% sequentially in the third quarter, and financing propensity improving to 60%, our notes receivable balance increased sequentially.
Based on these trends and the acquisition of Welk, we expect our 2022 financing profit to be well above 2019 levels.
Our portfolio also continues to perform well with the delinquency and default activity in line or even below pre-pandemic levels for each of our brands, and we expect to complete our next securitization this quarter and terms remain very favorable.
Turning to the acquisition of Welk, while we're not providing detailed results for the Welk business given its relative size, our vacation ownership results did include $30 million of contract sales and $18 million of adjusted EBITDA better than we anticipated.
As a result, total adjusted EBITDA in our vacation ownership segment increased 18% sequentially to $215 million.
The quarter benefited from strong growth in development and rental profit and the impact of our business transformation initiatives, enabling us to deliver margins that were nearly 360 basis points higher than two years ago.
Turning to the exchange and third-party management segment, active members at Interval declined slightly on a sequential basis, and average revenue per member declined 7% due to lower exchange volumes, which I mentioned last quarter.
As a result, adjusted EBITDA at our exchange and third-party management segment declined $2 million sequentially.
However, margins expanded by 70 basis points on cost-saving initiatives.
I'm also very excited about all the new resort affiliations Steve talked about, which will bring nearly 50,000 new interval members to the system by early next year.
Finally, corporate G&A expense declined 20% sequentially in the third quarter, primarily related to lower bonus expense.
As a result, total company adjusted EBITDA increased 25% in the quarter on a sequential basis to $205 million and margin improved to over 27%, more than 300 basis points above the third quarter of 2019, demonstrating the strength of our leisure-focused business model and the benefits of our synergy and transformation initiatives.
Moving to our balance sheet, as I mentioned last quarter, we've been preparing to return to a balanced capital allocation approach.
So with the recovery in the business, we felt that now was the right time to reduce our corporate debt by the $500 million, we borrowed last May at the onset of the pandemic and begin to return cash to shareholders again.
In September, we've paid off the remaining $250 million of our 6.5% notes due 2026.
We followed that in October by repaying $250 million of the 6% and 8% notes we issued last May.
With our current corporate debt at $2.5 billion and the strong recovery in the business, we are on track to get back to debt to adjusted EBITDA of three times or less.
And more importantly by taking advantage of the favorable rate environment and healthy capital markets, we expect our cash interest expense next year to be around $20 million lower than our 2019 cash interest expense.
We ended the quarter with $448 million of cash, gross notes receivable eligible for securitization of $278 million and almost $600 million of available capacity under our revolver.
Pro forma for the debt repayment in October, we had $4.1 billion of debt outstanding including $1.6 billion of non-recourse debt related to our securitized notes receivable as well as total liquidity of more than $1 billion.
Finally our Board of Directors reinstated our quarterly dividend and authorized the $250 million share repurchase program effective September 10, enabling us to repurchase $4.5 million of our own shares in the last couple of weeks in September.
We also paid a dividend in October, our first since before the pandemic.
Looking ahead, while we're not giving guidance, I do want to help you think through what the balance of the year could look like.
The fourth quarter has started off well with contract sales above 2019 levels with occupancies at pre-pandemic levels in most of our North America resorts and international travelers now able to visit the United States again.
We expect tours to grow sequentially in the fourth quarter while VPGs will remain well above pre-pandemic levels.
As a result, we expect contract sales to grow to between $385 million and $405 million in the fourth quarter just above the fourth quarter 2019 at the midpoint.
Similar to prior years, we expect reportability to be positive in the fourth quarter.
For those trying to compare our fourth quarter results to the fourth quarter of 2019, remember that reportability that year positively impacted our adjusted EBITDA by $22 million.
And this year, we only expect the benefit to be in the $10 million to $12 million range.
Finally, while we're not providing free cash flow guidance today, with more than $640 million of excess inventory, I would expect our adjusted EBITDA to adjusted free cash flow conversion to be well above our normal 55% range for a number of years enabling us to return to our historic capital allocation strategy.

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projects contract sales of $385 million to $405 million in q4 of 2021.

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