Marriott’s Desert Spring Villas II in Palm Desert, CA.  Image Source: TripAdvisor

History

• Check out Episode 135 to first hear about Marriott International (MAR) if you haven’t already
• Marriott Vacations Worldwide is a “vacation club” or timeshare company, and was the first big hospitality brand to enter the timeshare industry.
• Marriott International spun the company off in 2011, so for every class A share of Marriott International (MAR) that you owned, you received one share of the new company.
• In 2010, the Marriott Vacations Club Destinations program was introduced, which let timeshare owners use annually allotted points to redeem for hotel stays and getaway experiences.
• In April 2018, the company made a major acquisition and purchased ILG Inc. (Interval Leisure Group) for $4.7 billion.  This was the parent company of a firm called Interval International, and was one of the largest timeshare companies, though smaller than rivals RCI and Wyndham Worldwide.

Business Overview

• So…what’s a timeshare?  A timeshare is a concept where, instead of paying for vacations as you take them, you essentially pre-purchase the right to stay at a hotel in a certain location for a set period of time.  You then retain those rights within a certain network of hotels and resorts (as long as you keep paying your fees 😉).
• There are two types of vacation ownership products that are sold:
• Benefits include less volatility in price than hotel rates, larger rooms with more amenities than typical hotel rooms, and the psychological “commitment to vacation” factor
• You can exchange your timeshare within a certain network, but supply and demand vary greatly depending on the location of the resort and the time of year (so it might be hard to actually execute an exchange when you want to).
• I’ve been to more than my fair share of timeshare presentations/events over the years and this is how it works.  Timeshare companies will often entice potential prospects with extravagant marketing tactics.  When I was younger going to timeshare presentations was a thing in my family.  We went on a vacation to Florida and in addition to our regular family vacation activities, we must have went to at least three timeshare presentations while we were there.
• Back to the business side of things, the appeal is that this business model can create a large amount of cash flow – think about the analogy of renting out a home.  In a typical arrangement, you find a tenant, get them to sign a lease for 12 months and then you collect a monthly rent from that tenant.  
• Now imagine instead of renting to a single tenant, renting to 50 tenants, one for each week of the year, and leaving two weeks open for property maintenance.  You can charge significantly more on a per-week basis then you can on a monthly basis.  Not only that, but: 
• You can see how this model works by looking at related businesses: AirBnB and VRBO.  These companies don’t own or operate the properties, they just take a cut of the revenue by providing the marketplace for sellers and buyers.  However, the model is the same if we consider AirBnB hosts, for example.  They can rent out the same unit several times per month if it is in demand, and collect more profit overall than if they were to opt for a long term lease with a single tenant.
• Marriott Vacation Worldwide makes money primary by selling Vacation Ownership directly to individuals and families.  They also make money through Exchange & Third-Party Management.  It’s about a 90%/10% split as far as revenue between the two.
• They operate under several brands: Marriott, Sheraton, Westin, Hyatt, Ritz-Carlton, St. Regis, and Vistana.
• Managing inventory is key for a business like this because customers’ demands need to be satisfied (people want certain locations at certain times of year) and maintenance costs have to be accounted for.
• The company has over 660,000 vacation owners as of December 2019.
• Here’s a breakdown of how they made money in 2019.  It’s not just revenue from selling timeshares but is more diversified than I initially expected:

Financials

Valuation and Closing Thoughts

• So….what about the impact of the virus?  They reduced pay for a lot of workers, and furloughed 40% of them.  They stopped all dividend payments and share repurchases for now.  The business has been hit pretty hard, though they plan to save around $300 MM throughout 2020 with all of these actions.  That is a meaningful amount relative to the size of the business, which is good because their expenses tend to run pretty high, so they need to do this to survive.
• Management expects to generate positive cash flow in the second half of 2020.
• Bookings are definitely down for H2 of 2020, but not as much as you might think.  They had 2.6 million bookings for H2 2019, and have 2.3 million for the same period in 2020.  That’s only an 11% decline, so not bad.
• My main concern with this business long term is the need to entice future generations (my generation and younger) to go through with vacation ownership.
• For my wife and I personally, we prefer the flexibility of being able to book where we want, when we want, instead of having to pay annual maintenance fees and a big up front cost to become a member of a timeshare network.  
• I can, however, see the appeal, particularly for families who want to lock in rates and commit to regular vacations when they aren’t already doing so.
• Right now the stock trades at around $93/share.  During normal times this is a business that has proven they can make $3/share in profits.  This is still pretty rich at 30x earnings, and I think the market is pricing it based on its adjusted earnings of $7.81/share.  This would give the stock a P/E of 12.
• The business makes real money, but I’m not convinced of the long term viability of the business model.  Trends related to home ownership versus renting are showing that more people are renting than ever before.  A significant percentage of the company’s revenue (around 50%+) comes from the Baby Boomer generation.  
• I’m not sure people will put down money for a guaranteed week-long vacation with ongoing fees if they aren’t willing to do the same for a home to raise their families in every other week of the year.  Granted, there is a big difference in the price commitment, but I’d need to see more data on this business and the context surrounding it before I’d be convinced to invest in it.

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