INTERIM CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Interim Consolidated Financial Statements present the results of operations, financial position and cash flows of Marriott Vacations Worldwide Corporation (referred to in this report as (i) “we,” “us,” “Marriott Vacations Worldwide,” “MVW” or “the Company,” which includes our consolidated subsidiaries except where the context of the reference is to a single corporate entity, or (ii) “MVWC,” which shall refer only to Marriott Vacations Worldwide Corporation, without its consolidated subsidiaries). In order to make this report easier to read, we refer throughout to (i) our Interim Consolidated Financial Statements as our “Financial Statements,” (ii) our Interim Consolidated Statements of Income as our “Income Statements,” (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 in these Notes to Interim Consolidated Financial Statements, unless otherwise noted. Capitalized terms used and not specifically defined herein have the same meanings given those terms in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Annual Report”). We use certain other terms that are defined within these Financial Statements.
The Financial Statements presented herein and discussed below include 100% of the assets, liabilities, revenues, expenses, and cash flows of Marriott Vacations Worldwide, all entities in which Marriott Vacations Worldwide has a controlling voting interest (“subsidiaries”), and those variable interest entities (“VIEs”) for which Marriott Vacations Worldwide is the primary beneficiary in accordance with consolidation accounting guidance. References in these Financial Statements to net income or loss attributable to common shareholders and MVW shareholders’ equity do not include noncontrolling interests, which represent the outside ownership of our consolidated non-wholly owned entities and are reported separately. Intercompany accounts and transactions between consolidated entities have been eliminated in consolidation.
Pursuant to a change in control of certain consolidated owners’ associations, we recorded a non-cash loss of $3 million in Gains (losses) and other income (expense), net on our Income Statement for each of the three and six months ended June 30, 2022, and deconsolidated $110 million of assets, inclusive of $48 million of restricted cash, and $99 million of liabilities, for a decrease in Noncontrolling interests of $8 million during the first half of 2022. We continue to act as manager for these owners’ associations pursuant to existing management contracts and retain membership interests via our ownership of vacation ownership interests.
These Financial Statements reflect our financial position, results of operations, and cash flows as prepared in conformity with United States Generally Accepted Accounting Principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, revenue recognition, allocations of the purchase price paid in business combinations, cost of vacation ownership products, inventory valuation, goodwill and intangibles valuation, accounting for acquired vacation ownership notes receivable, vacation ownership notes receivable reserves, income taxes, and loss contingencies. The uncertainty created by the COVID-19 pandemic, and the uncertainty of the success of ongoing efforts to mitigate the effects of the COVID-19 pandemic, have made it more challenging to make these estimates. Actual results could differ from our estimates, and such differences may be material.
In our opinion, our Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position, the results of our operations, and cash flows for the periods presented. Interim results may not be indicative of fiscal year performance because of, among other reasons, the impact of the COVID-19 pandemic and seasonal and short-term variations. These Financial Statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP. Although we believe our footnote disclosures are adequate to make the information presented not misleading, the Financial Statements in this report should be read in conjunction with the consolidated financial statements and notes thereto in our 2021 Annual Report.
Acquisition of Welk
On April 1, 2021, we completed the acquisition of Welk Hospitality Group, Inc. (“Welk”) through a series of transactions (the “Welk Acquisition”), after which Welk became our indirect wholly-owned subsidiary. We refer to the business and brands that we acquired as “Legacy-Welk.” See Footnote 3 “Acquisitions and Dispositions” for more information on the Welk Acquisition.
Disposition of VRI Americas
Our Financial Statements reflect the disposition of the Vacation Resorts International (“VRI”) and Trading Places International (“TPI”) businesses (together the “VRI Americas” business) on April 29, 2022. See Footnote 3 “Acquisitions and Dispositions” for more information on the disposition of VRI Americas.
| | | | | |
| 2. | SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING STANDARDS |
New Accounting Standards
Accounting Standards Update 2020-06 – “Debt — Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”)
In the first quarter of 2022, we adopted accounting standards update (“ASU”) 2020-06, using the modified retrospective method. Upon adoption of ASU 2020-06, our convertible notes were no longer separated into liability and equity components, and we are required to calculate the impact of our convertible notes on diluted earnings per share using the “if-converted” method, regardless of intent to settle or partially settle the debt in cash. Under the “if-converted” method, diluted earnings per share is generally calculated assuming that all of our convertible notes are converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive. The application of the “if-converted” method reduces our reported diluted earnings per share. The impacts of the adoption were recorded as a cumulative effect in the opening balance of retained earnings and the conversion feature related to our convertible notes was reclassified from equity to liabilities. In addition, we eliminated the related equity adjustment associated with the deferred tax liability. The adoption of ASU 2020-06 on January 1, 2022 resulted in an increase in debt of $107 million, a decrease in additional paid-in capital of $111 million, and a decrease in deferred taxes of $27 million, as well as a cumulative effect adjustment to the opening balance of retained earnings of $31 million. The remaining debt issuance costs will continue to be amortized over the respective terms of our convertible notes. The prior period consolidated financial statements have not been retrospectively restated and continue to be reported under the accounting standards in effect for those periods. See Footnote 13 “Debt” for further information on accounting for the 2022 Convertible Notes and the 2022 Convertible Note Hedges (as defined in Footnote 13 “Debt”), subsequent to the adoption of ASU 2020-06.
Accounting Standards Update 2021-08 - “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”)
In the first quarter of 2022, we adopted ASU 2021-08, which amended ASC 805 to require entities to apply ASC 606 to recognize and measure contract assets and contract liabilities from contracts with customers in a business combination. The adoption of ASU 2021-08 on January 1, 2022 did not have a material impact on our financial statements and disclosures. In the event that we complete business combinations in the future, the application of ASU 2021-08 could result in higher acquired deferred revenue.
Future Adoption of Accounting Standards
Accounting Standards Update 2020-04 – “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”)
In March 2020, the FASB issued ASU 2020-04, as amended, which provides optional expedients and exceptions to existing guidance on contract modifications and hedge accounting in an effort to ease the financial reporting burdens related to the expected market transition from the LIBOR and other interbank offered rates to alternative reference rates. This update was effective upon issuance and issuers may generally elect to adopt the optional expedients and exceptions over time through December 31, 2022. As of June 30, 2022, the interest rates applicable to borrowings under our existing Term Loan (as defined in Footnote 13 “Debt”) and Warehouse Credit Facility (as defined in Footnote 12 “Securitized Debt”) generally continued to reference LIBOR, as did certain interest rate swaps and collars. Subsequent to June 30, 2022, we amended the terms of our Warehouse Credit Facility to, among other things, reference SOFR (as defined in Footnote 12 “Securitized Debt”) rather than LIBOR. Our Term Loan and certain interest rate swaps and collars have not yet discontinued the use of LIBOR. To the extent these instruments are amended to reference a different benchmark interest rate, we may elect to utilize the relief available in ASU 2020-04. When we renew or amend our remaining existing debt instruments, we will determine a replacement rate for LIBOR. We have not adopted any of the optional expedients or exceptions as of June 30, 2022, but will continue to evaluate their adoption during the effective period as circumstances evolve.
Accounting Standards Update 2022-02 – “Financial Instruments–Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”)
In March 2022, the FASB issued ASU 2022-02, which eliminates the recognition and measurement guidance applicable to troubled debt restructurings for creditors and enhances disclosure requirements with respect to loan modifications for borrowers experiencing financial difficulty. ASU 2022-02 also requires disclosure of current-period gross write-offs by year of origination to be presented in the vintage disclosures for financing receivables. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. We are evaluating the impact that adoption of ASU 2022-02, including the timing of implementation, will have on our financial statements and disclosures; however, we do not expect adoption to have a material effect on our financial statements or disclosures other than disclosure changes related to vintage disclosures for financing receivables.
| | | | | |
| 3. | ACQUISITIONS AND DISPOSITIONS |
Welk Acquisition
On April 1, 2021 (the “Welk Acquisition Date”), we completed the Welk Acquisition. The following table presents the fair value of each type of consideration transferred at the Welk Acquisition Date, as finalized at March 31, 2022.
| | | | | |
| (in millions, except per share amounts) | |
| Equivalent shares of Marriott Vacations Worldwide common stock issued | 1.4 | |
| Marriott Vacations Worldwide common stock price per share as of Welk Acquisition Date | $ | 174.18 | |
| Fair value of Marriott Vacations Worldwide common stock issued | 248 | |
Cash consideration to Welk, net of cash and restricted cash acquired of $48 million | 157 | |
| |
| |
| |
| Total consideration transferred, net of cash and restricted cash acquired | $ | 405 | |
Fair Values of Assets Acquired and Liabilities Assumed
We accounted for the Welk Acquisition as a business combination, which required us to record the assets acquired and liabilities assumed at fair value as of the Welk Acquisition Date. The values attributed to Vacation ownership notes receivable, Inventory, Property and equipment, Intangible assets, and Securitized debt from VIEs were based on valuations prepared using Level 3 inputs and assumptions in accordance with ASC Topic 820, “Fair Value Measurements” (“ASC 820”). The value attributed to Debt was based on Level 2 inputs in accordance with ASC 820. During the first quarter of 2022, we finalized our allocation of the purchase price to the acquired assets and liabilities. The following table presents the fair values of the assets that we acquired and the liabilities that we assumed in connection with the business combination as previously reported at December 31, 2021, and as finalized at March 31, 2022. During the first quarter of 2022, we refined our valuation models related to certain acquired assets and liabilities as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| ($ in millions) | April 1, 2021
(as reported at
December 31, 2021) | | Adjustments | | April 1, 2021
(as finalized at
March 31, 2022) |
| Vacation ownership notes receivable, net | $ | 255 | | | $ | — | | | $ | 255 | |
| Inventory | 111 | | | — | | | 111 | |
| Property and equipment | 83 | | | — | | | 83 | |
| Intangible assets | 102 | | | — | | | 102 | |
| Other assets | 19 | | | — | | | 19 | |
| | | | | |
| Deferred taxes | (32) | | | 8 | | | (24) | |
| Debt | (189) | | | — | | | (189) | |
| Securitized debt | (184) | | | — | | | (184) | |
| Other liabilities | (93) | | | — | | | (93) | |
| Net assets acquired | 72 | | | 8 | | | 80 | |
Goodwill(1) | 333 | | | (8) | | | 325 | |
| $ | 405 | | | $ | — | | | $ | 405 | |
_________________________
(1)Goodwill is calculated as total consideration transferred, net of cash acquired, less identified net assets acquired. It represents the value that we expect to obtain from growth opportunities from our combined operations and is not deductible for tax purposes.
Pro Forma Results of Operations
The following unaudited pro forma information presents the combined results of operations of Marriott Vacations Worldwide and Legacy-Welk as if we had completed the Welk Acquisition on December 31, 2019, the last day of our 2019 fiscal year, but using the fair values of assets and liabilities as of the Welk Acquisition Date set forth above. As required by GAAP, these unaudited pro forma results do not reflect any synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Welk Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.
There were no Welk Acquisition-related costs included in the unaudited pro forma results below for the six months ended June 30, 2021.
| | | | | | | | |
| | | | Six Months Ended |
| ($ in millions, except per share data) | | | | June 30, 2021 |
| Revenues | | | | $ | 1,785 | |
| Net loss | | | | $ | (4) | |
| Net loss attributable to common shareholders | | | | $ | (10) | |
| LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS | | | | |
| Basic | | | | $ | (0.24) | |
| Diluted | | | | $ | (0.24) | |
Legacy-Welk Results of Operations
The following table presents the results of Legacy-Welk operations included in our Income Statement for the three months and six months ended June 30, 2022 and June 30, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| ($ in millions) | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Revenue | | $ | 56 | | | $ | 48 | | | $ | 107 | | | $ | 48 | |
| Net income | | $ | 5 | | | $ | 5 | | | $ | 12 | | | $ | 5 | |
Other Acquisitions
Bali
During the first quarter of 2022, we acquired 88 completed vacation ownership units, as well as a sales center, located in Bali, Indonesia for $36 million. The transaction was accounted for as an asset acquisition with the purchase price allocated to Property and equipment. As consideration for the acquisition, we paid $12 million in cash and issued a non-interest bearing note payable for $11 million. Further, we reclassified $13 million of previous deposits associated with the project from Other assets to Property and equipment.
Dispositions
On April 29, 2022, we disposed of VRI Americas for proceeds of $55 million, net of cash and restricted cash transferred to the buyer of $12 million, after determining that this business was not a core component of our future growth strategy and operating model. The results of VRI Americas are included in our Exchange and Third-Party Management segment through the date of the sale. The net carrying value of VRI Americas as of the date of the disposition was $51 million, including $25 million of goodwill and $20 million of intangible assets. As a result of the disposition, we recorded a gain of $16 million in Gains (losses) and other income (expense), net on our Income Statements for the three and six months ended June 30, 2022.
Additionally, on June 28, 2022, we disposed of entities that owned and operated a Vacation Ownership segment hotel in Puerto Vallarta, Mexico, for proceeds of $38 million, net of cash and restricted cash transferred to the buyer of $3 million, consistent with our development strategy to dispose of non-strategic assets. The net carrying value of the business disposed of as of the date of the disposition, excluding the cumulative translation adjustment, was $18 million, substantially all of which was property and equipment. As a result of this disposition, we recorded a gain of $33 million in Gains (losses) and other income (expense), net on our Income Statements for the three and six months ended June 30, 2022, which included the realization of cumulative foreign currency translation gains of $10 million associated with the disposition of these entities.
| | | | | |
| 4. | REVENUE AND RECEIVABLES |
Sources of Revenue by Segment
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| ($ in millions) | Vacation Ownership | | Exchange & Third-Party Management | | Corporate and Other | | Total |
| Sale of vacation ownership products | $ | 425 | | | $ | — | | | $ | — | | | $ | 425 | |
| | | | | | | |
| Ancillary revenues | 66 | | | 1 | | | — | | | 67 | |
| Management fee revenues | 41 | | | 11 | | | (1) | | | 51 | |
| Exchange and other services revenues | 33 | | | 46 | | | 6 | | | 85 | |
| Management and exchange | 140 | | | 58 | | | 5 | | | 203 | |
| | | | | | | |
| Rental | 129 | | | 11 | | | — | | | 140 | |
| | | | | | | |
| Cost reimbursements | 325 | | | 5 | | | (6) | | | 324 | |
| Revenue from contracts with customers | 1,019 | | | 74 | | | (1) | | | 1,092 | |
| | | | | | | |
| Financing | 72 | | | — | | | — | | | 72 | |
| Total Revenues | $ | 1,091 | | | $ | 74 | | | $ | (1) | | | $ | 1,164 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| ($ in millions) | Vacation Ownership | | Exchange & Third-Party Management | | Corporate and Other | | Total |
| Sale of vacation ownership products | $ | 296 | | | $ | — | | | $ | — | | | $ | 296 | |
| | | | | | | |
| Ancillary revenues | 52 | | | 1 | | | — | | | 53 | |
| Management fee revenues | 39 | | | 9 | | | (5) | | | 43 | |
| Exchange and other services revenues | 32 | | | 50 | | | 42 | | | 124 | |
| Management and exchange | 123 | | | 60 | | | 37 | | | 220 | |
| | | | | | | |
| Rental | 110 | | | 11 | | | — | | | 121 | |
| | | | | | | |
| Cost reimbursements | 286 | | | 15 | | | (27) | | | 274 | |
| Revenue from contracts with customers | 815 | | | 86 | | | 10 | | | 911 | |
| | | | | | | |
| Financing | 68 | | | — | | | — | | | 68 | |
| Total Revenues | $ | 883 | | | $ | 86 | | | $ | 10 | | | $ | 979 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| ($ in millions) | Vacation Ownership | | Exchange & Third-Party Management | | Corporate and Other | | Total |
| Sale of vacation ownership products | $ | 735 | | | $ | — | | | $ | — | | | $ | 735 | |
| | | | | | | |
| Ancillary revenues | 120 | | | 2 | | | — | | | 122 | |
| Management fee revenues | 83 | | | 21 | | | (4) | | | 100 | |
| Exchange and other services revenues | 63 | | | 99 | | | 41 | | | 203 | |
| Management and exchange | 266 | | | 122 | | | 37 | | | 425 | |
| | | | | | | |
| Rental | 251 | | | 22 | | | — | | | 273 | |
| | | | | | | |
| Cost reimbursements | 652 | | | 14 | | | (26) | | | 640 | |
| Revenue from contracts with customers | 1,904 | | | 158 | | | 11 | | | 2,073 | |
| | | | | | | |
| Financing | 143 | | | — | | | — | | | 143 | |
| Total Revenues | $ | 2,047 | | | $ | 158 | | | $ | 11 | | | $ | 2,216 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| ($ in millions) | Vacation Ownership | | Exchange & Third-Party Management | | Corporate and Other | | Total |
| Sale of vacation ownership products | $ | 459 | | | $ | — | | | $ | — | | | $ | 459 | |
| | | | | | | |
| Ancillary revenues | 80 | | | 1 | | | — | | | 81 | |
| Management fee revenues | 77 | | | 14 | | | (11) | | | 80 | |
| Exchange and other services revenues | 60 | | | 105 | | | 87 | | | 252 | |
| Management and exchange | 217 | | | 120 | | | 76 | | | 413 | |
| | | | | | | |
| Rental | 187 | | | 23 | | | — | | | 210 | |
| | | | | | | |
| Cost reimbursements | 554 | | | 29 | | | (54) | | | 529 | |
| Revenue from contracts with customers | 1,417 | | | 172 | | | 22 | | | 1,611 | |
| | | | | | | |
| Financing | 127 | | | — | | | — | | | 127 | |
| Total Revenues | $ | 1,544 | | | $ | 172 | | | $ | 22 | | | $ | 1,738 | |
Timing of Revenue from Contracts with Customers by Segment
The following tables detail the timing of revenue from contracts with customers by segment for the time periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| ($ in millions) | Vacation Ownership | | Exchange & Third-Party Management | | Corporate and Other | | Total |
| Services transferred over time | $ | 523 | | | $ | 34 | | | $ | (1) | | | $ | 556 | |
| Goods or services transferred at a point in time | 496 | | | 40 | | | — | | | 536 | |
| Revenue from contracts with customers | $ | 1,019 | | | $ | 74 | | | $ | (1) | | | $ | 1,092 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| ($ in millions) | Vacation Ownership | | Exchange & Third-Party Management | | Corporate and Other | | Total |
| Services transferred over time | $ | 463 | | | $ | 43 | | | $ | 10 | | | $ | 516 | |
| Goods or services transferred at a point in time | 352 | | | 43 | | | — | | | 395 | |
| Revenue from contracts with customers | $ | 815 | | | $ | 86 | | | $ | 10 | | | $ | 911 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| ($ in millions) | Vacation Ownership | | Exchange & Third-Party Management | | Corporate and Other | | Total |
| Services transferred over time | $ | 1,041 | | | $ | 72 | | | $ | 11 | | | $ | 1,124 | |
| Goods or services transferred at a point in time | 863 | | | 86 | | | — | | | 949 | |
| Revenue from contracts with customers | $ | 1,904 | | | $ | 158 | | | $ | 11 | | | $ | 2,073 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| ($ in millions) | Vacation Ownership | | Exchange & Third-Party Management | | Corporate and Other | | Total |
| Services transferred over time | $ | 871 | | | $ | 80 | | | $ | 22 | | | $ | 973 | |
| Goods or services transferred at a point in time | 546 | | | 92 | | | — | | | 638 | |
| Revenue from contracts with customers | $ | 1,417 | | | $ | 172 | | | $ | 22 | | | $ | 1,611 | |
Sale of Vacation Ownership Products
Revenue declined during the second quarter and first half of 2022 by $3 million and $5 million, respectively, due to changes in our estimates of variable consideration for performance obligations that were satisfied in prior periods.
Receivables from Contracts with Customers, Contract Assets, & Contract Liabilities
The following table shows the composition of our receivables from contracts with customers and contract liabilities. We had no contract assets at either June 30, 2022 or December 31, 2021.
| | | | | | | | | | | |
| ($ in millions) | At June 30, 2022 | | At December 31, 2021 |
| Receivables from Contracts with Customers | | | |
| Accounts receivable, net | $ | 118 | | | $ | 172 | |
| Vacation ownership notes receivable, net | 2,075 | | | 2,045 | |
| $ | 2,193 | | | $ | 2,217 | |
| Contract Liabilities | | | |
| Advance deposits | $ | 195 | | | $ | 160 | |
| Deferred revenue | 372 | | | 453 | |
| $ | 567 | | | $ | 613 | |
Revenue recognized during the second quarter and first half of 2022 that was included in our contract liabilities balance at December 31, 2021 was $117 million and $243 million, respectively.
Remaining Performance Obligations
Our remaining performance obligations represent the expected transaction price allocated to our contracts that we expect to recognize as revenue in future periods when we perform under the contracts. At June 30, 2022, approximately 87% of this amount is expected to be recognized as revenue over the next two years.
Accounts Receivable
Accounts receivable is comprised of amounts due from customers, primarily owners’ associations, resort developers and members, credit card receivables, interest receivables, amounts due from taxing authorities, indemnification assets, and other miscellaneous receivables. The following table shows the composition of our accounts receivable balances:
| | | | | | | | | | | |
| ($ in millions) | At June 30, 2022 | | At December 31, 2021 |
| Receivables from contracts with customers, net | $ | 118 | | | $ | 172 | |
Note receivable from variable interest entity(1) | 47 | | | — | |
| Interest receivable | 15 | | | 14 | |
| Tax receivable | 22 | | | 48 | |
| Indemnification assets | 19 | | | 22 | |
| Employee tax credit receivable | 17 | | | 19 | |
| Other | 6 | | | 4 | |
| $ | 244 | | | $ | 279 | |
_________________________
(1)See Footnote 16 “Variable Interest Entities” for additional information on the loan extended to a VIE during the second quarter of 2022 when we amended our commitment to purchase a property located in Waikiki, Hawaii.
Our provision for income taxes is calculated using an estimated annual effective tax rate, based upon expected annual income, less losses in certain jurisdictions, permanent items, statutory rates and planned tax strategies in the various jurisdictions in which we operate. However, discrete items related to prior year tax items are treated separately.
Our interim effective tax rate was 24.3% and 75.4% for the three months ended June 30, 2022 and June 30, 2021, respectively. Our interim effective tax rate was 28.1% and (1,737.7%) for the six months ended June 30, 2022 and June 30, 2021, respectively. The change in the effective tax rate for both the three and six months ended June 30, 2022 is predominately attributable to an increase in pre-tax income.
Unrecognized Tax Benefits
The following table summarizes the activity related to our unrecognized tax benefits (excluding interest and penalties) during the six months ended June 30, 2022. These unrecognized tax benefits relate to uncertain income tax positions, which would affect the effective tax rate if recognized.
| | | | | | | |
| |
| ($ in millions) | Unrecognized Tax Benefits |
| Balance at December 31, 2021 | $ | 26 | | | |
| Increases related to tax positions taken during a prior period | 2 | | | |
| | | |
| | | |
| | | |
| Decreases as a result of a lapse of the applicable statute of limitations | (1) | | | |
Balance at June 30, 2022 | $ | 27 | | | |
The total amount of gross interest and penalties accrued was $47 million at June 30, 2022 and $42 million at December 31, 2021. We anticipate $14 million of unrecognized tax benefits, including interest and penalties, to be indemnified pursuant to a Tax Matters Agreement dated May 11, 2016 by and among Starwood Hotels & Resorts Worldwide, Inc., Vistana Signature Experiences, Inc., and Interval Leisure Group, Inc., and consequently have recorded a corresponding indemnification asset. The unrecognized tax benefits, including accrued interest and penalties, are included in Other liabilities on our Balance Sheet.
Our income tax returns are subject to examination by relevant tax authorities. Certain of our returns are being audited in various jurisdictions for tax years 2007 through 2020. The amount of the unrecognized tax benefits may increase or decrease within the next twelve months as a result of audits or audit settlements.
| | | | | |
| 6. | VACATION OWNERSHIP NOTES RECEIVABLE |
The following table shows the composition of our vacation ownership notes receivable balances, net of reserves.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| ($ in millions) | Originated | | Acquired | | Total | | Originated | | Acquired | | Total |
| Securitized | $ | 1,390 | | | $ | 269 | | | $ | 1,659 | | | $ | 1,308 | | | $ | 354 | | | $ | 1,662 | |
| Non-securitized | | | | | | | | | | | |
Eligible for securitization(1) | 89 | | | 1 | | | 90 | | | 96 | | | 1 | | | 97 | |
Not eligible for securitization(1) | 305 | | | 21 | | | 326 | | | 267 | | | 19 | | | 286 | |
| Subtotal | 394 | | | 22 | | | 416 | | | 363 | | | 20 | | | 383 | |
| $ | 1,784 | | | $ | 291 | | | $ | 2,075 | | | $ | 1,671 | | | $ | 374 | | | $ | 2,045 | |
_________________________
(1)Refer to Footnote 7 “Financial Instruments” for a discussion of eligibility of our vacation ownership notes receivable for securitization.
We reflect interest income associated with vacation ownership notes receivable in our Income Statements in the Financing revenues caption. The following table summarizes interest income associated with vacation ownership notes receivable.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ($ in millions) | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Interest income associated with vacation ownership notes receivable — securitized | $ | 60 | | | $ | 57 | | | $ | 119 | | | $ | 105 | |
| Interest income associated with vacation ownership notes receivable — non-securitized | 9 | | | 8 | | | 19 | | | 18 | |
| Total interest income associated with vacation ownership notes receivable | $ | 69 | | | $ | 65 | | | $ | 138 | | | $ | 123 | |
Acquired Vacation Ownership Notes Receivable
Acquired vacation ownership notes receivable represent vacation ownership notes receivable acquired as part of the ILG Acquisition and the Welk Acquisition. The following table shows future contractual principal payments, net of reserves, and interest rates for our acquired vacation ownership notes receivable at June 30, 2022.
| | | | | | | | | | | | | | | | | |
| Acquired Vacation Ownership Notes Receivable |
| ($ in millions) | Non-Securitized | | Securitized | | Total |
| 2022, remaining | $ | 2 | | | $ | 20 | | | $ | 22 | |
| 2023 | 3 | | | 41 | | | 44 | |
| 2024 | 3 | | | 41 | | | 44 | |
| 2025 | 2 | | | 39 | | | 41 | |
| 2026 | 2 | | | 36 | | | 38 | |
| Thereafter | 10 | | | 92 | | | 102 | |
| Balance at June 30, 2022 | $ | 22 | | | $ | 269 | | | $ | 291 | |
| Weighted average stated interest rate | 13.9% | | 14.2% | | 14.1% |
| Range of stated interest rates | 0.0% to 21.9% | | 0.0% to 21.9% | | 0.0% to 21.9% |
The following table summarizes activity related to our acquired vacation ownership notes receivable reserve.
| | | | | | | | | | | | | | | | | |
| Acquired Vacation Ownership Notes Receivable Reserve |
| ($ in millions) | Non-Securitized | | Securitized | | Total |
| Balance at December 31, 2021 | $ | 47 | | | $ | 23 | | | $ | 70 | |
| Securitizations | (1) | | | 1 | | | — | |
| Clean-up call | 1 | | | (1) | | | — | |
| Write-offs | (29) | | | — | | | (29) | |
| Recoveries | 18 | | | — | | | 18 | |
Defaulted vacation ownership notes receivable repurchase activity(1) | 14 | | | (14) | | | — | |
| | | | | |
| (Decrease) increase in vacation ownership notes receivable reserve | (14) | | | 14 | | | — | |
| Balance at June 30, 2022 | $ | 36 | | | $ | 23 | | | $ | 59 | |
_________________________
(1)Reflects the change attributable to the transfer of the reserve from the securitized vacation ownership notes receivable reserve to the non-securitized vacation ownership notes receivable reserve when we voluntarily repurchase securitized vacation ownership notes receivable.
Originated Vacation Ownership Notes Receivable
Originated vacation ownership notes receivable represent vacation ownership notes receivable originated by Legacy-ILG and Legacy-Welk subsequent to each respective acquisition date and all Legacy-MVW vacation ownership notes receivable. The following table shows future principal payments, net of reserves, and interest rates for our originated vacation ownership notes receivable at June 30, 2022.
| | | | | | | | | | | | | | | | | |
| Originated Vacation Ownership Notes Receivable |
| ($ in millions) | Non-Securitized | | Securitized | | Total |
| 2022, remaining | $ | 37 | | | $ | 64 | | | $ | 101 | |
| 2023 | 34 | | | 130 | | | 164 | |
| 2024 | 30 | | | 133 | | | 163 | |
| 2025 | 30 | | | 135 | | | 165 | |
| 2026 | 31 | | | 141 | | | 172 | |
| Thereafter | 232 | | | 787 | | | 1,019 | |
| Balance at June 30, 2022 | $ | 394 | | | $ | 1,390 | | | $ | 1,784 | |
| Weighted average stated interest rate | 12.7% | | 13.0% | | 12.9% |
| Range of stated interest rates | 0.0% to 20.9% | | 0.0% to 19.9% | | 0.0% to 20.9% |
For originated vacation ownership notes receivable, we record the difference between the vacation ownership note receivable and the variable consideration included in the transaction price for the sale of the related vacation ownership product as a reserve on our vacation ownership notes receivable. The following table summarizes the activity related to our originated vacation ownership notes receivable reserve.
| | | | | | | | | | | | | | | | | |
| Originated Vacation Ownership Notes Receivable Reserve |
| ($ in millions) | Non-Securitized | | Securitized | | Total |
| Balance at December 31, 2021 | $ | 193 | | | $ | 140 | | | $ | 333 | |
| Increase in vacation ownership notes receivable reserve | 56 | | | 10 | | | 66 | |
| Securitizations | (55) | | | 55 | | | — | |
| Clean-up call | 15 | | | (15) | | | — | |
| Write-offs | (58) | | | — | | | (58) | |
Defaulted vacation ownership notes receivable repurchase activity(1) | 32 | | | (32) | | | — | |
| Balance at June 30, 2022 | $ | 183 | | | $ | 158 | | | $ | 341 | |
_________________________
(1)Reflects the change attributable to the transfer of the reserve from the securitized vacation ownership notes receivable reserve to the non-securitized vacation ownership notes receivable reserve when we voluntarily repurchase securitized vacation ownership notes receivable.
Credit Quality of Legacy-MVW Vacation Ownership Notes Receivable
For both Legacy-MVW non-securitized and securitized vacation ownership notes receivable, we estimated average remaining default rates of 6.81% as of June 30, 2022, and 6.74% as of December 31, 2021. A 0.5 percentage point increase in the estimated default rate would have resulted in an increase in the related vacation ownership notes receivable reserve of $6 million as of both June 30, 2022 and December 31, 2021.
We use the aging of the vacation ownership notes receivable as the primary credit quality indicator for our Legacy-MVW vacation ownership notes receivable, as historical performance indicates that there is a relationship between the default behavior of borrowers and the age of the receivable associated with the vacation ownership interest.
The following table shows our recorded investment in non-accrual Legacy-MVW vacation ownership notes receivable, which are vacation ownership notes receivable that are 90 days or more past due.
| | | | | | | | | | | | | | | | | |
| Legacy-MVW Vacation Ownership Notes Receivable |
| ($ in millions) | Non-Securitized | | Securitized | | Total |
| Investment in vacation ownership notes receivable on non-accrual status at June 30, 2022 | $ | 75 | | | $ | 6 | | | $ | 81 | |
| Investment in vacation ownership notes receivable on non-accrual status at December 31, 2021 | $ | 88 | | | $ | 8 | | | $ | 96 | |
The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-MVW vacation ownership notes receivable as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Legacy-MVW Vacation Ownership Notes Receivable |
| As of June 30, 2022 | | As of December 31, 2021 |
| ($ in millions) | Non-Securitized | | Securitized | | Total | | Non-Securitized | | Securitized | | Total |
| 31 – 90 days past due | $ | 6 | | | $ | 19 | | | $ | 25 | | | $ | 6 | | | $ | 20 | | | $ | 26 | |
| 91 – 150 days past due | 3 | | | 6 | | | 9 | | | 4 | | | 8 | | | 12 | |
| Greater than 150 days past due | 72 | | | — | | | 72 | | | 84 | | | — | | | 84 | |
| Total past due | 81 | | | 25 | | | 106 | | | 94 | | | 28 | | | 122 | |
| Current | 190 | | | 1,058 | | | 1,248 | | | 180 | | | 1,027 | | | 1,207 | |
| Total vacation ownership notes receivable | $ | 271 | | | $ | 1,083 | | | $ | 1,354 | | | $ | 274 | | | $ | 1,055 | | | $ | 1,329 | |
The following table details the origination year of our Legacy-MVW vacation ownership notes receivable as of June 30, 2022.
| | | | | | | | | | | | | | | | | |
| Legacy-MVW Vacation Ownership Notes Receivable |
| ($ in millions) | Non-Securitized | | Securitized | | Total |
| Year of Origination | | | | | |
| 2022 | $ | 124 | | | $ | 112 | | | $ | 236 | |
| 2021 | 31 | | | 339 | | | 370 | |
| 2020 | 18 | | | 135 | | | 153 | |
| 2019 | 37 | | | 205 | | | 242 | |
| 2018 | 23 | | | 130 | | | 153 | |
| 2017 & Prior | 38 | | | 162 | | | 200 | |
| $ | 271 | | | $ | 1,083 | | | $ | 1,354 | |
Credit Quality of Legacy-ILG and Legacy-Welk Vacation Ownership Notes Receivable
At June 30, 2022 and December 31, 2021, the weighted average FICO score within our consolidated Legacy-ILG and Legacy-Welk vacation ownership notes receivable pools was 709 and 707, respectively, based upon the FICO score of the borrower at the time of origination. The average estimated rate for all future defaults for our Legacy-ILG and Legacy-Welk consolidated outstanding pool of vacation ownership notes receivable was 16.85% as of June 30, 2022 and 17.33% as of December 31, 2021. A 0.5 percentage point increase in the estimated default rate on the Legacy-ILG and Legacy-Welk vacation ownership notes receivable would have resulted in an increase in the related vacation ownership notes receivable reserve of $5 million as of June 30, 2022 and $4 million as of December 31, 2021.
We use the origination of the vacation ownership notes receivable by brand (Westin, Sheraton, Hyatt, Welk) and the FICO scores of the customer as the primary credit quality indicators for our Legacy-ILG and Legacy-Welk vacation ownership notes receivable, as historical performance indicates that there is a relationship between the default behavior of borrowers and the brand associated with the vacation ownership interest they have acquired, supplemented by the FICO scores of the customers. Vacation ownership notes receivable with no FICO score in the tables below primarily relate to non-U.S. resident borrowers.
The following table shows our recorded investment in non-accrual Legacy-ILG and Legacy-Welk vacation ownership notes receivable, which are vacation ownership notes receivable that are 90 days or more past due.
| | | | | | | | | | | | | | | | | |
| Legacy-ILG and Legacy-Welk Vacation Ownership Notes Receivable |
| ($ in millions) | Non-Securitized | | Securitized | | Total |
| Investment in vacation ownership notes receivable on non-accrual status at June 30, 2022 | $ | 95 | | | $ | 9 | | | $ | 104 | |
| Investment in vacation ownership notes receivable on non-accrual status at December 31, 2021 | $ | 114 | | | $ | 10 | | | $ | 124 | |
The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-ILG and Legacy-Welk vacation ownership notes receivable as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Legacy-ILG and Legacy-Welk Vacation Ownership Notes Receivable |
| As of June 30, 2022 | | As of December 31, 2021 |
| ($ in millions) | Non-Securitized | | Securitized | | Total | | Non-Securitized | | Securitized | | Total |
| 31 – 90 days past due | $ | 9 | | | $ | 20 | | | $ | 29 | | | $ | 16 | | | $ | 24 | | | $ | 40 | |
| 91 – 120 days past due | 4 | | | 5 | | | 9 | | | 4 | | | 6 | | | 10 | |
| Greater than 120 days past due | 91 | | | 4 | | | 95 | | | 110 | | | 4 | | | 114 | |
| Total past due | 104 | | | 29 | | | 133 | | | 130 | | | 34 | | | 164 | |
| Current | 259 | | | 728 | | | 987 | | | 219 | | | 735 | | | 954 | |
| Total vacation ownership notes receivable | $ | 363 | | | $ | 757 | | | $ | 1,120 | | | $ | 349 | | | $ | 769 | | | $ | 1,118 | |
The following tables show the Legacy-ILG and Legacy-Welk acquired vacation ownership notes receivable, before reserves, by brand and FICO score.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquired Vacation Ownership Notes Receivable |
| As of June 30, 2022 | | As of December 31, 2021 |
| ($ in millions) | 700 + | | 600 - 699 | | < 600 | | No Score | | Total | | 700 + | | 600 - 699 | | < 600 | | No Score | | Total |
| Westin | $ | 42 | | | $ | 26 | | | $ | 2 | | | $ | 6 | | | $ | 76 | | | $ | 52 | | | $ | 32 | | | $ | 3 | | | $ | 8 | | | $ | 95 | |
| Sheraton | 43 | | | 37 | | | 6 | | | 15 | | | 101 | | | 54 | | | 48 | | | 8 | | | 23 | | | 133 | |
| Hyatt | 6 | | | 4 | | | 1 | | | — | | | 11 | | | 8 | | | 6 | | | 1 | | | — | | | 15 | |
| Welk | 93 | | | 63 | | | 1 | | | 2 | | | 159 | | | 115 | | | 79 | | | 1 | | | 2 | | | 197 | |
| Other | 1 | | | 1 | | | — | | | 1 | | | 3 | | | 2 | | | — | | | — | | | 2 | | | 4 | |
| $ | 185 | | | $ | 131 | | | $ | 10 | | | $ | 24 | | | $ | 350 | | | $ | 231 | | | $ | 165 | | | $ | 13 | | | $ | 35 | | | $ | 444 | |
The following tables detail the origination year of our Legacy-ILG and Legacy-Welk acquired vacation ownership notes receivable by brand and FICO score as of June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Acquired Vacation Ownership Notes Receivable 2018 & Prior |
| ($ in millions) | Westin | | Sheraton | | Hyatt & Other | | Total |
| 700 + | $ | 42 | | | $ | 43 | | | $ | 7 | | | $ | 92 | |
| 600 - 699 | 26 | | | 37 | | | 5 | | | 68 | |
| < 600 | 2 | | | 6 | | | 1 | | | 9 | |
| No Score | 6 | | | 15 | | | 1 | | | 22 | |
| $ | 76 | | | $ | 101 | | | $ | 14 | | | $ | 191 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Acquired Vacation Ownership Notes Receivable - Welk |
| ($ in millions) | | | 2021 | | 2020 | | 2019 | | 2018 & Prior | | Total |
| 700 + | | | $ | 7 | | | $ | 20 | | | $ | 24 | | | $ | 42 | | | $ | 93 | |
| 600 - 699 | | | 4 | | | 12 | | | 16 | | | 31 | | | 63 | |
| < 600 | | | — | | | 1 | | | — | | | — | | | 1 | |
| No Score | | | — | | | — | | | 1 | | | 1 | | | 2 | |
| | | $ | 11 | | | $ | 33 | | | $ | 41 | | | $ | 74 | | | $ | 159 | |
The following tables show the Legacy-ILG and Legacy-Welk originated vacation ownership notes receivable, before reserves, by brand and FICO score.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Originated Vacation Ownership Notes Receivable as of June 30, 2022 |
| ($ in millions) | 700 + | | 600 - 699 | | < 600 | | No Score | | Total |
| Westin | $ | 155 | | | $ | 73 | | | $ | 8 | | | $ | 44 | | | $ | 280 | |
| Sheraton | 146 | | | 104 | | | 20 | | | 41 | | | 311 | |
| Hyatt | 25 | | | 12 | | | 1 | | | — | | | 38 | |
| Welk | 99 | | | 39 | | | 2 | | | 1 | | | 141 | |
| $ | 425 | | | $ | 228 | | | $ | 31 | | | $ | 86 | | | $ | 770 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Originated Vacation Ownership Notes Receivable as of December 31, 2021 |
| ($ in millions) | 700 + | | 600 - 699 | | < 600 | | No Score | | Total |
| Westin | $ | 143 | | | $ | 66 | | | $ | 8 | | | $ | 34 | | | $ | 251 | |
| Sheraton | 136 | | | 94 | | | 20 | | | 46 | | | 296 | |
| Hyatt | 22 | | | 11 | | | — | | | — | | | 33 | |
| Welk | 65 | | | 27 | | | 1 | | | 1 | | | 94 | |
| $ | 366 | | | $ | 198 | | | $ | 29 | | | $ | 81 | | | $ | 674 | |
The following tables detail the origination year of our Legacy-ILG and Legacy-Welk originated vacation ownership notes receivable by brand and FICO score as of June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Originated Vacation Ownership Notes Receivable - Westin |
| ($ in millions) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Total |
| 700 + | $ | 39 | | | $ | 56 | | | $ | 19 | | | $ | 34 | | | $ | 7 | | | $ | 155 | |
| 600 - 699 | 15 | | | 27 | | | 9 | | | 18 | | | 4 | | | 73 | |
| < 600 | 2 | | | 3 | | | 1 | | | 2 | | | — | | | 8 | |
| No Score | 25 | | | 7 | | | 4 | | | 7 | | | 1 | | | 44 | |
| $ | 81 | | | $ | 93 | | | $ | 33 | | | $ | 61 | | | $ | 12 | | | $ | 280 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Originated Vacation Ownership Notes Receivable - Sheraton |
| ($ in millions) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Total |
| 700 + | $ | 39 | | | $ | 51 | | | $ | 19 | | | $ | 29 | | | $ | 8 | | | $ | 146 | |
| 600 - 699 | 24 | | | 40 | | | 13 | | | 21 | | | 6 | | | 104 | |
| < 600 | 3 | | | 8 | | | 3 | | | 5 | | | 1 | | | 20 | |
| No Score | 8 | | | 10 | | | 7 | | | 13 | | | 3 | | | 41 | |
| $ | 74 | | | $ | 109 | | | $ | 42 | | | $ | 68 | | | $ | 18 | | | $ | 311 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Originated Vacation Ownership Notes Receivable - Hyatt |
| ($ in millions) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Total |
| 700 + | $ | 10 | | | $ | 8 | | | $ | 2 | | | $ | 4 | | | $ | 1 | | | $ | 25 | |
| 600 - 699 | 4 | | | 4 | | | 1 | | | 2 | | | 1 | | | 12 | |
| < 600 | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| No Score | — | | | — | | | — | | | — | | | — | | | — | |
| $ | 14 | | | $ | 13 | | | $ | 3 | | | $ | 6 | | | $ | 2 | | | $ | 38 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Originated Vacation Ownership Notes Receivable - Welk |
| ($ in millions) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Total |
| 700 + | $ | 52 | | | $ | 47 | | | $ | — | | | $ | — | | | $ | — | | | $ | 99 | |
| 600 - 699 | 19 | | | 20 | | | — | | | — | | | — | | | 39 | |
| < 600 | 1 | | | 1 | | | — | | | — | | | — | | | 2 | |
| No Score | 1 | | | — | | | — | | | — | | | — | | | 1 | |
| $ | 73 | | | $ | 68 | | | $ | — | | | $ | — | | | $ | — | | | $ | 141 | |
The following table shows the carrying values and the estimated fair values of financial assets and liabilities that qualify as financial instruments, determined in accordance with the authoritative guidance for disclosures regarding the fair value of financial instruments. Considerable judgment is required in interpreting market data to develop estimates of fair value. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. The table excludes Cash and cash equivalents, Restricted cash, Accounts receivable, deposits included in Other assets, Accounts payable, Advance deposits, Accrued liabilities, and derivative instruments, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
| | | | | | | | | | | | | | | | | | | | | | | |
| At June 30, 2022 | | At December 31, 2021 |
| ($ in millions) | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Vacation ownership notes receivable, net | $ | 2,075 | | | $ | 2,160 | | | $ | 2,045 | | | $ | 2,102 | |
| Other assets | 71 | | | 71 | | | 76 | | | 76 | |
| Total financial assets | $ | 2,146 | | | $ | 2,231 | | | $ | 2,121 | | | $ | 2,178 | |
| | | | | | | |
| Securitized debt, net | $ | (1,846) | | | $ | (1,754) | | | $ | (1,856) | | | $ | (1,900) | |
| 2025 Notes, net | (248) | | | (249) | | | (248) | | | (261) | |
| 2028 Notes, net | (346) | | | (304) | | | (346) | | | (362) | |
| 2029 Notes, net | (494) | | | (416) | | | (493) | | | (505) | |
| Term Loan, net | (777) | | | (745) | | | (776) | | | (784) | |
| | | | | | | |
2022 Convertible Notes, net(1) | (225) | | | (225) | | | (224) | | | (280) | |
2026 Convertible Notes, net(1) | (564) | | | (520) | | | (461) | | | (682) | |
| Non-interest bearing note payable, net | (10) | | | (10) | | | — | | | — | |
| Total financial liabilities | $ | (4,510) | | | $ | (4,223) | | | $ | (4,404) | | | $ | (4,774) | |
_________________________
(1)Prior period amounts have not been adjusted to reflect our adoption of ASU 2020-06 under the modified retrospective method. See Footnote 2 “Significant Accounting Policies and Recent Accounting Standards” for information on our adoption of ASU 2020-06.
Vacation Ownership Notes Receivable
| | | | | | | | | | | | | | | | | | | | | | | |
| At June 30, 2022 | | At December 31, 2021 |
| ($ in millions) | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Vacation ownership notes receivable, net | | | | | | | |
| Securitized | $ | 1,659 | | | $ | 1,736 | | | $ | 1,662 | | | $ | 1,712 | |
| | | | | | | |
| Eligible for securitization | 90 | | | 98 | | | 97 | | | 104 | |
| Not eligible for securitization | 326 | | | 326 | | | 286 | | | 286 | |
| Non-securitized | 416 | | | 424 | | | 383 | | | 390 | |
| $ | 2,075 | | | $ | 2,160 | | | $ | 2,045 | | | $ | 2,102 | |
We estimate the fair value of our vacation ownership notes receivable that have been securitized using a discounted cash flow model. We believe this is comparable to the model that an independent third party would use in the current market. Our model uses default rates, prepayment rates, coupon rates, and loan terms for our securitized vacation ownership notes receivable portfolio as key drivers of risk and relative value to determine the fair value of the underlying vacation ownership notes receivable. We concluded that this fair value measurement should be categorized within Level 3.
Due to factors that impact the general marketability of our vacation ownership notes receivable that have not been securitized, as well as current market conditions, we bifurcate our non-securitized vacation ownership notes receivable at each balance sheet date into those eligible and not eligible for securitization using criteria applicable to current securitization transactions in the ABS market. Generally, vacation ownership notes receivable are considered not eligible
for securitization if any of the following attributes are present: (1) payments are greater than 30 days past due; (2) the first payment has not been received; or (3) the collateral is located in Asia or Europe. In some cases, eligibility may also be determined based on the credit score of the borrower, the remaining term of the loans and other similar factors that may reflect investor demand in a securitization transaction or the cost to effectively securitize the vacation ownership notes receivable.
The table above shows the bifurcation of our vacation ownership notes receivable that have not been securitized into those eligible and not eligible for securitization based upon the aforementioned eligibility criteria. We estimate the fair value of the portion of our vacation ownership notes receivable that have not been securitized that we believe will ultimately be securitized in the same manner as vacation ownership notes receivable that have been securitized. We value the remaining vacation ownership notes receivable that have not been securitized at their carrying value, rather than using our pricing model. We believe that the carrying value of these particular vacation ownership notes receivable approximates fair value because the stated, or otherwise imputed, interest rates of these loans are consistent with current market rates and the reserve for these vacation ownership notes receivable appropriately accounts for risks in default rates, prepayment rates, discount rates, and loan terms. We concluded that this fair value measurement should be categorized within Level 3.
Other Assets
Other assets include $71 million of company owned insurance policies (the “COLI policies”), acquired on the lives of certain participants in the Marriott Vacations Worldwide Deferred Compensation Plan, that are held in a rabbi trust. The carrying value of the COLI policies is equal to their cash surrender value (Level 2 inputs).
Securitized Debt
We generate cash flow estimates by modeling all bond tranches for our active vacation ownership notes receivable securitization transactions, with consideration for the collateral specific to each tranche. The key drivers in our analysis include default rates, prepayment rates, bond interest rates, and other structural factors, which we use to estimate the projected cash flows. In order to estimate market credit spreads by rating, we obtain indicative credit spreads from investment banks that actively issue and facilitate the market for vacation ownership securities and determine an average credit spread by rating level of the different tranches. We then apply those estimated market spreads to swap rates in order to estimate an underlying discount rate for calculating the fair value of the active bonds payable. We concluded that this fair value measurement should be categorized within Level 3.
Senior Notes
We estimate the fair value of our 2025 Notes, 2028 Notes, and 2029 Notes (each as defined in Footnote 13 “Debt”) using quoted market prices as of the last trading day for the quarter; however these notes have only a limited trading history and volume, and as such this fair value estimate is not necessarily indicative of the value at which these notes could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 2.
Term Loan
We estimate the fair value of our Term Loan (as defined in Footnote 13 “Debt”) using quotes from securities dealers as of the last trading day for the quarter; however this loan has only a limited trading history and volume, and as such this fair value estimate is not necessarily indicative of the value at which the Term Loan could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 3.
Convertible Notes
We estimate the fair value of the 2026 Convertible Notes (as defined in Footnote 13 “Debt”) using quoted market prices as of the last trading day for the quarter; however these notes have only a limited trading history and volume, and as such this fair value estimate is not necessarily indicative of the value at which the 2026 Convertible Notes could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 2. The difference between the carrying value and the fair value is primarily attributed to the underlying conversion feature and the spread between the conversion price and the market value of the shares underlying the 2026 Convertible notes.
Prior to June 2022, we estimated the fair value of the 2022 Convertible Notes (as defined in Footnote 13 “Debt”) using the same approach as the aforementioned 2026 Convertible Notes. In June 2022, the fair value of the 2022 Convertible Notes was calculated using the “with and without” approach (Level 2) based upon comparable debt yields.
Non-Interest Bearing Note Payable
The carrying value of our non-interest bearing note payable issued in connection with the acquisition of vacation ownership units located in Bali, Indonesia approximates fair value, because the imputed interest rate used to discount this note payable is consistent with current market rates. We concluded that this fair value measurement should be categorized within Level 3.
Basic earnings or loss per common share attributable to common shareholders is calculated by dividing net income or loss attributable to common shareholders by the weighted average number of shares of common stock outstanding during the reporting period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings or loss per common share attributable to common shareholders is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period, except in periods when there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted earnings or loss per common share applicable to common shareholders by application of the treasury stock method using average market prices during the period.
We adopted ASU 2020-06 on January 1, 2022 using the modified retrospective method. ASU 2020-06 is applicable to our convertible notes outstanding as of adoption and requires us to calculate the impact of our convertible notes on diluted earnings per share using the “if-converted” method, regardless of our intent to settle or partially settle the debt in cash. Under the “if-converted” method, shares issuable upon conversion of our convertible notes are assumed to be converted into common stock at the beginning of the period, to the extent dilutive. We issued notice of our intent to settle the 2022 Convertible Notes in cash, which became irrevocable on June 15, 2022, and as a result, we suspended the use of the “if-converted” method for the 2022 Convertible Notes at that time, as there was no longer a share settlement option. Earnings per share for the three and six months ended June 30, 2021 have not been retrospectively restated and continue to be reported under the accounting standards in effect for that period.
The shares issuable on exercise of the warrants sold in connection with the issuance of our convertible notes will not impact the total dilutive weighted average shares outstanding unless and until the price of our common stock exceeds the respective strike price. If and when the price of our common stock exceeds the respective strike price of either of the warrants, we will include the dilutive effect of the additional shares that may be issued upon exercise of the warrants in total dilutive weighted average shares outstanding, which we calculate using the treasury stock method. The convertible note hedges purchased in connection with each issuance of convertible notes are considered to be anti-dilutive and do not impact our calculation of diluted earnings per share attributable to common shareholders for any periods presented herein. See Footnote 13 “Debt” for further information on our convertible notes.
The table below illustrates the reconciliation of the earnings or loss and number of shares used in our calculation of basic earnings or loss per share attributable to common shareholders.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| (in millions, except per share amounts) | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Computation of Basic Earnings (Loss) Per Share Attributable to Common Shareholders |
| Net income (loss) attributable to common shareholders | $ | 136 | | | $ | 6 | | | $ | 194 | | | $ | (22) | |
| Shares for basic earnings (loss) per share | 41.3 | | | 42.9 | | | 41.9 | | | 42.1 | |
| Basic earnings (loss) per share | $ | 3.30 | | | $ | 0.15 | | | $ | 4.64 | | | $ | (0.52) | |
The table below illustrates the reconciliation of the earnings or loss and number of shares used in our calculation of diluted earnings or loss per share attributable to common shareholders.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| (in millions, except per share amounts) | June 30, 2022(1) | | June 30, 2021(1) | | June 30, 2022(1) | | June 30, 2021(1) |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Computation of Diluted Earnings (Loss) Per Share Attributable to Common Shareholders |
| Net income (loss) attributable to common shareholders | $ | 136 | | | $ | 6 | | | $ | 194 | | | $ | (22) | |
| Add back of interest expense related to convertible notes subsequent to the adoption of ASU 2020-06, net of tax | 2 | | | — | | | 3 | | | — | |
| Numerator used to calculate diluted EPS | $ | 138 | | | $ | 6 | | | $ | 197 | | | $ | (22) | |
| | | | | | | |
| Shares for basic earnings (loss) per share | 41.3 | | | 42.9 | | | 41.9 | | | 42.1 | |
Effect of dilutive shares outstanding(2) | | | | | | | |
| Employee SARs | 0.2 | | | 0.2 | | | 0.2 | | | — | |
| Restricted stock units | 0.3 | | | 0.5 | | | 0.3 | | | — | |
2022 Convertible Notes ($230 million of principal)(3) | 1.3 | | | 0.2 | | | 1.4 | | | — | |
2026 Convertible Notes ($575 million of principal) | 3.4 | | | — | | | 3.4 | | | — | |
| Shares for diluted earnings (loss) per share | 46.5 | | | 43.8 | | | 47.2 | | | 42.1 | |
| Diluted earnings (loss) per share | $ | 2.97 | | | $ | 0.15 | | | $ | 4.18 | | | $ | (0.52) | |
_______________________________
(1)The computations of diluted earnings per share attributable to common shareholders exclude approximately 293,000 and 299,000 shares of common stock, the maximum number of shares issuable as of June 30, 2022 and June 30, 2021, respectively, upon the vesting of certain performance-based awards, because the performance conditions required to be met for the shares subject to such awards to vest were not achieved by the end of the reporting period.
(2)For the first half of 2021, the following potentially dilutive securities were excluded from the above calculation of diluted net loss per share attributable to common shareholders during the periods presented, as the effects of including these securities would have been anti-dilutive.
| | | | | | | | | | | |
| | | | | Six Months Ended |
| (in millions) | | | | | | | June 30, 2021 |
| Employee SARs | | | | | | | 0.2 | |
| Restricted stock units | | | | | | | 0.5 | |
2022 Convertible Notes ($230 million of principal) | | | | | | | 0.2 | |
| | | | | | | |
| | | | | | | 0.9 | |
(3)We had the option to settle the 2022 Convertible Notes in cash, stock, or a combination of the two. Therefore, from the beginning of the period through the date on which our notice of our intent to settle the 2022 Convertible Notes in cash became irrevocable, we included shares in the denominator of the diluted earnings per share calculation, applying the “if-converted” method. For the period from June 15, 2022 through June 30, 2022, we excluded the related shares from the denominator of the diluted earnings per share calculation.
In accordance with the applicable accounting guidance for calculating earnings per share, for the second quarter of 2022, we excluded from our calculation of diluted earnings per share 252,314 shares underlying stock appreciation rights (“SARs”) that may settle in shares of common stock because the exercise prices of such SARs, which ranged from $143.38 to $173.88, were greater than the average market price of our common stock for the applicable period.
For the first half of 2022, we excluded from our calculation of diluted earnings per share 199,813 shares underlying SARs that may settle in shares of common stock because the exercise prices of such SARs, which ranged from $159.27 to $173.88, were greater than the average market price of our common stock for the applicable period.
For the second quarter of 2021, we excluded from our calculation of diluted earnings per share 127,857 shares underlying SARs that may settle in shares of common stock because the exercise price of $173.88 of such SARs was greater than the average market price of our common stock for the applicable period.
The following table shows the composition of our inventory balances:
| | | | | | | | | | | |
| ($ in millions) | At June 30, 2022 | | At December 31, 2021 |
| | | |
| | | |
Real estate inventory(1) | $ | 686 | | | $ | 710 | |
| Other | 9 | | | 9 | |
| $ | 695 | | | $ | 719 | |
_________________________
(1)Represents completed inventory that is registered for sale as vacation ownership interests and vacation ownership inventory expected to be reacquired pursuant to estimated future foreclosures.
We value vacation ownership products at the lower of cost or fair market value less costs to sell, in accordance with applicable accounting guidance, and we record operating supplies at the lower of cost (using the first-in, first-out method) or net realizable value. Product cost true-up activity relating to vacation ownership products increased carrying values of inventory by $10 million during the first half of 2022 and by $1 million during the first half of 2021.
In addition to the above, at June 30, 2022 and December 31, 2021, we had $506 million and $460 million, respectively, of completed vacation ownership units which are classified as a component of Property and equipment, net until the time at which they are available and legally registered for sale as vacation ownership products.
| | | | | |
| 10. | GOODWILL AND INTANGIBLES |
Goodwill
The following table details the carrying amount of our goodwill at June 30, 2022 and December 31, 2021, and reflects goodwill attributed to the ILG Acquisition and the Welk Acquisition.
| | | | | | | | | | | | | | | | | |
| ($ in millions) | Vacation Ownership Reporting Unit | | Exchange & Third-Party Management Reporting Unit | | Total Consolidated |
| Balance at December 31, 2021 | $ | 2,778 | | | $ | 372 | | | $ | 3,150 | |
| | | | | |
| Measurement period adjustments | (8) | | | — | | | (8) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Disposition of VRI Americas | — | | | (25) | | | (25) | |
| | | | | |
| Balance at June 30, 2022 | $ | 2,770 | | | $ | 347 | | | $ | 3,117 | |
Intangible Assets
The following table details the composition of our intangible asset balances:
| | | | | | | | | | | |
| ($ in millions) | At June 30, 2022 | | At December 31, 2021 |
| Definite-lived intangible assets | | | |
| Member relationships | $ | 670 | | | $ | 671 | |
| Management contracts | 427 | | | 452 | |
| 1,097 | | | 1,123 | |
| Accumulated amortization | (219) | | | (194) | |
| 878 | | | 929 | |
| Indefinite-lived intangible assets | | | |
| Trade names | 63 | | | 64 | |
| $ | 941 | | | $ | 993 | |
| | | | | |
| 11. | CONTINGENCIES AND COMMITMENTS |
Commitments and Letters of Credit
As of June 30, 2022, we had the following commitments outstanding:
•We have various contracts for the use of information technology hardware and software that we use in the normal course of business. Our aggregate commitment under these contracts was $81 million, of which we expect $28 million, $30 million, $13 million, $7 million, and $3 million will be paid in the remainder of 2022, 2023, 2024, 2025, and 2026 and thereafter, respectively.
•We have a commitment to acquire real estate for use in our Vacation Ownership segment via our involvement with a VIE. Refer to Footnote 16 “Variable Interest Entities” for additional information and our activities relating to the VIE involved in this transaction.
•We have commitments to acquire inventory from our managed owners’ associations in the remainder of 2022 for $30 million.
Surety bonds issued as of June 30, 2022 totaled $127 million, the majority of which were requested by federal, state, or local governments in connection with our operations.
As of June 30, 2022, we had $1 million of letters of credit outstanding under our Revolving Corporate Credit Facility (as defined in Footnote 13 “Debt”). In addition, as of June 30, 2022, we had $2 million in letters of credit outstanding related to and in lieu of reserves required for several vacation ownership notes receivable securitization transactions outstanding. These letters of credit are not issued pursuant to, nor do they impact our borrowing capacity under, the Revolving Corporate Credit Facility.
Guarantees
Certain of our rental management agreements in our Exchange & Third-Party Management segment provide for owners of properties we manage to receive specified percentages of rental revenue or guaranteed amounts generated under our management. In these cases, the operating expenses for the rental operations are paid from the revenue generated by the rentals, the owners are then paid their contractual percentages or guaranteed amounts, and we either retain the balance (if any) as our fee or we make up the deficit. At June 30, 2022, our maximum exposure under fixed dollar guarantees was $8 million, of which $1 million, $2 million, $2 million, $1 million, $1 million, and $1 million relate to the remainder of 2022, 2023, 2024, 2025, 2026, and thereafter, respectively.
We have a commitment to an owners’ association that we manage to pay for any shortfall between the actual expenses incurred by the owners’ association and the income received by the owners’ association, in lieu of maintenance fees for unsold inventory. The agreement will terminate on the earlier of: 1) sale of 95% of the total ownership interests in the owners’ association; or 2) written notification of termination by either party. At June 30, 2022, our expected commitment for the remainder of 2022 is $5 million, which will ultimately be recorded as a component of rental expense on our income statement.
Loss Contingencies
In February 2019, the owners’ association for the St. Regis Residence Club, New York filed a lawsuit in the Supreme Court for the State of New York, New York County, Commercial Division against ILG and several of its subsidiaries and certain third parties. The operative complaint alleges that the defendants breached their fiduciary duties related to sale and rental practices, aided and abetted certain breaches of fiduciary duty, engaged in self-dealing as the sponsor and manager of the club, tortiously interfered with the management agreement, were unjustly enriched, and engaged in anticompetitive conduct. The plaintiff is seeking unspecified damages, punitive damages and disgorgement of payments under the management and purchase agreements. In February 2022, the Court granted our motion to dismiss the complaint and dismissed with prejudice all claims except one, with respect to which the plaintiff was granted leave to amend its complaint. The plaintiff has filed an amended complaint and has appealed the dismissal of the other claims.
In April 2019, a purported class-action lawsuit was filed by Alan and Marjorie Helman and others against us in the Superior Court of the Virgin Islands, Division of St. Thomas alleging that their fractional interests were devalued by the affiliation of The Ritz-Carlton Club, St. Thomas and other Ritz-Carlton Clubs with our MVCD program. The lawsuit was subsequently removed to the U.S. District Court for the District of the Virgin Islands. The plaintiffs are seeking unspecified damages, disgorgement of profits, fees and costs.
We believe we have meritorious defenses to the claims in each of the above matters and intend to vigorously defend each matter.
In the ordinary course of our business, various claims and lawsuits have been filed or are pending against us. A number of these lawsuits and claims may exist at any given time. Additionally, the COVID-19 pandemic may give rise to various claims and lawsuits from owners, members and other parties. We record and accrue for legal contingencies when we determine that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations, we evaluate, among other things, the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, our ability to make a reasonable estimate of loss. We review these accruals each reporting period and make revisions based on changes in facts and circumstances.
We have not accrued for any of the pending matters described above and we cannot estimate a range of the potential liability associated with these pending matters, if any, at this time. We have accrued for other claims and lawsuits, but the amount accrued is not material individually or in the aggregate. For matters not requiring accrual, we do not believe that the ultimate outcome of such matters, individually or in the aggregate, will materially harm our financial position, cash flows, or overall trends in results of operations based on information currently available. However, legal proceedings are inherently uncertain, and while we believe that our accruals are adequate and/or we have valid defenses to the claims asserted, unfavorable rulings could occur that could, individually or in the aggregate, have a material adverse effect on our business, financial condition, or operating results.
Leases That Have Not Yet Commenced
During 2020, we entered into a finance lease arrangement, which was then amended in 2021, for our new global headquarters office building, which is being constructed in Orlando, Florida. The initial lease term is approximately 16 years with total lease payments of $137 million for the aforementioned period. We expect the new office building to be completed in 2023. Upon commencement of the lease term, a right-of-use asset and corresponding liability will be recorded on our balance sheet.
The following table provides detail on our securitized debt, net of unamortized debt discount and issuance costs.
| | | | | | | | | | | | | | |
| ($ in millions) | At June 30, 2022 | | At December 31, 2021 |
Vacation ownership notes receivable securitizations, gross(1) | $ | 1,868 | | | $ | 1,877 | |
| Unamortized debt discount and issuance costs | (22) | | | (21) | |
| | | | |
| | | | |
| | | |
| | | |
| | | | |
| | | | |
| | | | |
| | $ | 1,846 | | | $ | 1,856 | |
_________________________
(1)Interest rates as of June 30, 2022 range from 1.5% to 4.6%, with a weighted average interest rate of 2.7%.
All of our securitized debt is non-recourse to MVWC. See Footnote 16 “Variable Interest Entities” for a discussion of the collateral for the non-recourse debt associated with our securitized debt.
The following table shows scheduled future principal payments for our securitized debt as of June 30, 2022.
| | | | | | | | | | | |
| Vacation Ownership
Notes Receivable Securitizations | | | | | | |
| ($ in millions) | | | |
| Payments Year | | | | | | | |
| 2022, remaining | $ | 90 | | | | | | | |
| 2023 | 183 | | | | | | | |
| 2024 | 188 | | | | | | | |
| 2025 | 189 | | | | | | | |
| 2026 | 191 | | | | | | | |
| Thereafter | 1,027 | | | | | | | |
| $ | 1,868 | | | | | | | |
Vacation Ownership Notes Receivable Securitizations
Each of the securitized vacation ownership notes receivable transactions contains various triggers relating to the performance of the underlying vacation ownership notes receivable. If a pool of securitized vacation ownership notes receivable fails to perform within the pool’s established parameters (default or delinquency thresholds vary by transaction), transaction provisions effectively redirect the monthly excess spread we would otherwise receive from that pool (attributable to the interests we retained) to accelerate the principal payments to investors (taking into account the subordination of the different tranches to the extent there are multiple tranches) until the performance trigger is cured. During the second quarter of 2022, and as of June 30, 2022, we had 14 securitized vacation ownership notes receivable pools outstanding, none of which were out of compliance with their respective established parameters.
As the contractual terms of the underlying securitized vacation ownership notes receivable determine the maturities of the non-recourse debt associated with them, actual maturities may occur earlier than shown above due to prepayments by the vacation ownership notes receivable obligors.
During the second quarter of 2022, we completed the securitization of a pool of $383 million of vacation ownership notes receivable. Approximately $342 million of the vacation ownership notes receivable were purchased by MVW 2022-1 LLC (the “2022-1 LLC”) during the second quarter of 2022, and as of June 30, 2022, the 2022-1 LLC held $40 million of the proceeds, which was released as the remaining vacation ownership notes receivable were purchased subsequent to June 30, 2022.
In connection with the securitization, investors purchased $375 million in vacation ownership loan backed notes issued by the 2022-1 LLC in a private placement. The 2022-1 LLC issued four classes of vacation ownership loan backed notes: $220 million of Class A Notes, $77 million of Class B Notes, $48 million of Class C Notes, and $30 million of Class D Notes. The Class A Notes have an interest rate of 4.15%, the Class B Notes have an interest rate of 4.40%, the Class C Notes have an interest rate of 5.23%, and the Class D Notes have an interest rate of 7.35%, for an overall weighted average interest rate of 4.59%. Of the $375 million in proceeds from the transaction, approximately $98 million was used to repay all outstanding amounts previously drawn under our Warehouse Credit Facility (as defined below), approximately $7 million was used to pay transaction expenses and fund required reserves, and the remaining $176 million will be used for general corporate purposes. In connection with this securitization, we redeemed the remaining vacation ownership loan backed notes issued in a prior securitization transaction for approximately $38 million. The majority of the loans acquired through the redemption were purchased by the 2022-1 LLC.
Subsequent to the end of the second quarter of 2022, the 2022-1 LLC purchased the remaining $41 million of vacation ownership notes receivable and $40 million was released from restricted cash.
Warehouse Credit Facility
Our warehouse credit facility (the “Warehouse Credit Facility”), which has a borrowing capacity of $350 million, allows for the securitization of vacation ownership notes receivable on a revolving non-recourse basis. During the first quarter of 2022, we securitized vacation ownership notes receivable under our Warehouse Credit Facility. The carrying amount of the vacation ownership notes receivable securitized was $125 million. The average advance rate was 81%, which resulted in gross proceeds of $102 million. Net proceeds were $101 million due to the funding of reserve accounts of $1 million. As of June 30, 2022, there were no cash borrowings outstanding under our Warehouse Credit Facility.
Subsequent to the end of the second quarter of 2022, we amended certain agreements associated with our Warehouse Credit Facility (the “Warehouse Amendment”). The Warehouse Amendment increased the borrowing capacity of the existing facility from $350 million to $425 million and extended the revolving period from April 21, 2023 to July 28, 2024. The Warehouse Amendment also modified the interest rate applicable to most borrowings under the Warehouse Credit Facility. The Warehouse Credit Facility now uses a U.S. Treasury overnight financing rate (Secured Overnight Financing Rate or “SOFR”) plus a 0.10% adjustment (“Adjusted SOFR”) replacing 1-month LIBOR as its benchmark interest rate. As part of the Warehouse Amendment, the credit spread remained at 135 basis points over Adjusted SOFR. The Warehouse Amendment made no other material changes to the Warehouse Credit Facility.
The following table provides detail on our debt balances, net of unamortized debt discount and issuance costs.
| | | | | | | | | | | | | | |
| ($ in millions) | At June 30, 2022 | | At December 31, 2021 |
| Senior Secured Notes | | | |
| 2025 Notes | $ | 250 | | | $ | 250 | |
| Unamortized debt discount and issuance costs | (2) | | | (2) | |
| | 248 | | | 248 | |
| Senior Unsecured Notes | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| 2028 Notes | 350 | | | 350 | |
| Unamortized debt discount and issuance costs | (4) | | | (4) | |
| | 346 | | | 346 | |
| | | | |
| 2029 Notes | 500 | | | 500 | |
| Unamortized debt discount and issuance costs | (6) | | | (7) | |
| | 494 | | | 493 | |
| Corporate Credit Facility | | | |
| Term Loan | 784 | | | 784 | |
| Unamortized debt discount and issuance costs | (7) | | | (8) | |
| | 777 | | | 776 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Convertible Notes | | | |
| 2022 Convertible Notes | 230 | | | 230 | |
| Unamortized debt discount and issuance costs | (5) | | | (6) | |
| | 225 | | | 224 | |
| | | | |
| 2026 Convertible Notes | 575 | | | 575 | |
| Unamortized debt discount and issuance costs | (11) | | | (114) | |
| | 564 | | | 461 | |
| | | | |
| Non-interest bearing note payable | 10 | | | — | |
| | | |
| | | | |
| | | | |
| Finance Leases | 84 | | | 83 | |
| | $ | 2,748 | | | $ | 2,631 | |
The following table shows scheduled principal payments for our debt, excluding finance leases, as of June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | 2025
Notes | | | | 2028
Notes | | 2029
Notes | | Term
Loan | | | | 2022 Convertible Notes | | 2026 Convertible Notes | | Non-Interest Bearing Note Payable | | Total |
| Year Payments | | | | | | | | | | | | | | | | | | | |
| 2022, remaining | $ | — | | | | | $ | — | | | $ | — | | | $ | — | | | | | $ | 230 | | | $ | — | | | $ | — | | | $ | 230 | |
| 2023 | — | | | | | — | | | — | | | — | | | | | — | | | — | | | 6 | | | 6 | |
| 2024 | — | | | | | — | | | — | | | — | | | | | — | | | — | | | 4 | | | 4 | |
| 2025 | 250 | | | | | — | | | — | | | 784 | | | | | — | | | — | | | — | | | 1,034 | |
| 2026 | — | | | | | — | | | — | | | — | | | | | — | | | 575 | | | — | | | 575 | |
| Thereafter | — | | | | | 350 | | | 500 | | | — | | | | | — | | | — | | | — | | | 850 | |
| $ | 250 | | | | | $ | 350 | | | $ | 500 | | | $ | 784 | | | | | $ | 230 | | | $ | 575 | | | $ | 10 | | | $ | 2,699 | |
Senior Notes
Our senior notes include:
•$500 million aggregate principal amount of 6.125% Senior Secured Notes due 2025 issued in the second quarter of 2020 with a maturity date of September 15, 2025 (the “2025 Notes”), of which $250 million of principal was outstanding as of June 30, 2022.
•$350 million aggregate principal amount of 4.750% Senior Unsecured Notes due 2028 issued in the fourth quarter of 2019 with a maturity date of January 15, 2028 (the “2028 Notes”).
•$500 million aggregate principal amount of 4.500% Senior Unsecured Notes due 2029 issued in the second quarter of 2021 with a maturity date of June 15, 2029 (the “2029 Notes”).
Corporate Credit Facility
Our corporate credit facility (“Corporate Credit Facility”), which provides support for our business, including ongoing liquidity and letters of credit, includes a $900 million term loan facility (the “Term Loan”), which matures on August 31, 2025, and bears interest at LIBOR plus 1.75%, and a revolving credit facility (the “Revolving Corporate Credit Facility”) which includes a letter of credit sub-facility of $75 million.
During the first quarter of 2022, we entered into an amendment to the Revolving Corporate Credit Facility (the “Revolver Amendment”), which increased the borrowing capacity of the existing revolving credit facility from $600 million to $750 million and extended the maturity date from August 31, 2023 to March 31, 2027. The Revolver Amendment modified the interest rate applicable to borrowings under the Revolving Corporate Credit Facility to reference SOFR and to be based on “Adjusted Term SOFR,” which is calculated as Term SOFR (as defined in the Revolver Amendment), plus a 0.10% adjustment, subject to a 0.00% floor. Interest rates for other select non-U.S. dollar borrowings were also amended to be based on updated variable rate indices. The applicable margins with respect to the Revolving Corporate Credit Facility were amended to be based on leverage-based measures instead of credit ratings-based measures. The Revolver Amendment made no other material changes to the Corporate Credit Facility.
Prior to 2020, we entered into $250 million of interest rate swaps under which we pay a fixed rate of 2.9625% and receive a floating interest rate through September 2023 and $200 million of interest rate swaps under which we pay a fixed rate of 2.2480% and receive a floating interest rate through April 2024, in each case to hedge a portion of our interest rate risk on the Term Loan. We also entered into a $100 million interest rate collar with a cap strike rate of 2.5000% and a floor strike rate of 1.8810% through April 2024 to further hedge our interest rate risk on the Term Loan. Both the interest rate swaps and the interest rate collar have been designated and qualify as cash flow hedges of interest rate risk and recorded in Other assets on our Balance Sheet as of June 30, 2022 and in Other liabilities on our Balance Sheet as of December 31, 2021. We characterize payments we make in connection with these derivative instruments as interest expense and a reclassification of accumulated other comprehensive income or loss for presentation purposes.
The following table reflects the activity in accumulated other comprehensive income or loss related to our derivative instruments during the first half of 2022 and 2021. There were no reclassifications to the Income Statement for either of the periods presented below.
| | | | | | | | | | | |
| ($ in millions) | 2022 | | 2021 |
| Derivative instrument adjustment balance, January 1 | $ | (18) | | | $ | (39) | |
| Other comprehensive gain before reclassifications | 16 | | | 6 | |
| | | |
| | | |
| Derivative instrument adjustment balance, March 31 | (2) | | | (33) | |
| Other comprehensive gain before reclassifications | 7 | | | 3 | |
| | | |
| | | |
| Derivative instrument adjustment balance, June 30 | $ | 5 | | | $ | (30) | |
| | | |
| | | |
| | | |
| | | |
Convertible Notes
2022 Convertible Notes
During 2017, we issued $230 million of aggregate principal amount of convertible senior notes (the “2022 Convertible Notes”) that bear interest at a rate of 1.50%, payable in cash semi-annually. The 2022 Convertible Notes mature on September 15, 2022, unless repurchased or converted in accordance with their terms prior to that date.
The conversion rate is subject to adjustment for certain events as described in the indenture governing the notes, and was subject to adjustment as of June 30, 2022 to 6.8540 shares of common stock per $1,000 principal amount of 2022 Convertible Notes (equivalent to a conversion price of $145.90 per share of our common stock), as a result of the dividends we declared since issuance of the 2022 Convertible Notes that were greater than the quarterly dividend we paid when the 2022 Convertible Notes were issued. As of June 30, 2022, the effective interest rate was 10.85%.
The following table reflects the activity related to our 2022 Convertible Notes during the first half of 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Principal Amount | | Unamortized Debt Discount | | Unamortized Debt Issuance Costs | | Debt, net | | Carrying Amount of Equity Component, net of Issuance Costs |
| At December 31, 2021 | $ | 230 | | | $ | (5) | | | $ | (1) | | | $ | 224 | | | $ | 33 | |
Adoption of ASU 2020-06(1) | — | | | 5 | | | — | | | 5 | | | (33) | |
| At January 1, 2022 | 230 | | | — | | | (1) | | | 229 | | | — | |
| Amortization of debt issuance costs | — | | | — | | | 1 | | | 1 | | | — | |
Fair value of conversion option transferred to other liabilities(2) | — | | | (5) | | | — | | | (5) | | | — | |
| At June 30, 2022 | $ | 230 | | | $ | (5) | | | $ | — | | | $ | 225 | | | $ | — | |
________________________
(1)As a result of the adoption of ASU 2020-06 during the first quarter of 2022, we no longer accounted for the liability and equity components of the convertible notes separately, and we reclassified the conversion feature related to the 2022 Convertible Notes from equity to liabilities. Prior period amounts have not been adjusted to reflect our adoption of ASU 2020-06 under the modified retrospective method. See Footnote 2 “Significant Accounting Policies and Recent Accounting Standards” for information on our adoption of ASU 2020-06.
(2)We issued notice of our intent to settle the 2022 Convertible Notes in cash, which became irrevocable on June 15, 2022, and as a result, our previous exception to derivative accounting no longer applied and we were required to fair value the conversion feature on the 2022 Convertible Notes at that time. The fair value of the conversion feature of $5 million was recorded as a debt discount and a corresponding increase to Other liabilities on our balance sheet. Subsequent changes to the fair value of the conversion feature will be recorded on our income statement.
The following table shows interest expense information related to the 2022 Convertible Notes.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ($ in millions) | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Contractual interest expense | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 2 | |
| Amortization of debt discount | — | | | 2 | | | — | | | 4 | |
| Amortization of debt issuance costs | 1 | | | — | | | 1 | | | — | |
| $ | 2 | | | $ | 3 | | | $ | 3 | | | $ | 6 | |
2022 Convertible Note Hedges and Warrants
In connection with the offering of the 2022 Convertible Notes, we concurrently entered into the following privately-negotiated separate transactions: convertible note hedge transactions with respect to our common stock (“2022 Convertible Note Hedges”), covering a total of approximately 1.6 million shares of our common stock, and warrant transactions (“2022 Warrants”), whereby we sold to the counterparties to the 2022 Convertible Note Hedges warrants to acquire approximately 1.6 million shares of our common stock. As of June 30, 2022, the strike prices of the 2022 Convertible Note Hedges and the 2022 Warrants were subject to adjustment to approximately $147.99 and $176.45, respectively, and no 2022 Convertible Note Hedges or 2022 Warrants have been exercised.
The 2022 Note Hedges are required to follow the same settlement provisions as the 2022 Convertible Notes. As such, upon issuance of the irrevocable notice of our intent to settle the 2022 Convertible Notes in cash, our previous exception to the derivative accounting for the 2022 Convertible Note Hedges no longer applied and we were required to fair value the 2022 Convertible Note Hedges at that time. The fair value of the 2022 Convertible Note Hedges of $6 million was estimated using the Black-Scholes model based on historical and implied volatility and the U.S. Treasury risk-free rate (Level 2 inputs) and recorded in Other assets and Additional paid-in capital on our balance sheet. Subsequent changes to the fair value of the 2022 Convertible Note Hedges will be recorded on our income statement.
2026 Convertible Notes
During 2021, we issued $575 million aggregate principal amount of convertible senior notes (the “2026 Convertible Notes”) that bear interest at a rate of 0.00%. The 2026 Convertible Notes mature on January 15, 2026, unless repurchased or converted in accordance with their terms prior to that date.
The conversion rate is subject to adjustment for certain events as described in the indenture governing the notes, and was subject to adjustment as of June 30, 2022 to 5.9395 shares of common stock per $1,000 principal amount of 2026 Convertible Notes (equivalent to a conversion price of $168.36 per share of our common stock), as a result of the dividends we declared since issuance of the 2026 Convertible Notes that were greater than the quarterly dividend we paid when the 2026 Convertible Notes were issued. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. As of June 30, 2022, the effective interest rate was 0.55%.
The following table shows the net carrying value of the 2026 Convertible Notes.
| | | | | | | | | | | |
| ($ in millions) | At June 30, 2022 | | At December 31, 2021 |
| Liability component | | | |
| Principal amount | $ | 575 | | | $ | 575 | |
Unamortized debt discount(1) | — | | | (104) | |
| Unamortized debt issuance costs | (11) | | | (10) | |
| Net carrying amount of the liability component | $ | 564 | | | $ | 461 | |
| | | |
Carrying amount of equity component, net of issuance costs(1) | $ | — | | | $ | 117 | |
________________________
(1)As a result of adoption of ASU 2020-06 during the first quarter of 2022, we no longer account for the liability and equity components of the convertible notes separately, and we reclassified the conversion feature related to the 2026 Convertible Notes from equity to liabilities. Prior period amounts have not been adjusted to reflect our adoption of ASU 2020-06 under the modified retrospective method. See Footnote 2 “Significant Accounting Policies and Recent Accounting Standards” for information on our adoption of ASU 2020-06.
The following table shows interest expense information related to the 2026 Convertible Notes.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ($ in millions) | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Amortization of debt discount | $ | — | | | $ | 5 | | | $ | — | | | $ | 10 | |
| Amortization of debt issuance costs | — | | | 1 | | | 1 | | | 1 | |
| $ | — | | | $ | 6 | | | $ | 1 | | | $ | 11 | |
2026 Convertible Note Hedges and Warrants
In connection with the offering of the 2026 Convertible Notes, we concurrently entered into the following privately-negotiated separate transactions: convertible note hedge transactions with respect to our common stock (“2026 Convertible Note Hedges”), covering a total of approximately 3.4 million shares of our common stock, and warrant transactions (“2026 Warrants”), whereby we sold to the counterparties to the 2026 Convertible Note Hedges, warrants to acquire approximately 3.4 million shares of our common stock. As of June 30, 2022, the strike prices of the 2026 Convertible Note Hedges and the 2026 Warrants were subject to adjustment to approximately $168.36 and $210.45, respectively, and no 2026 Convertible Note Hedges or 2026 Warrants have been exercised.
Security and Guarantees
Amounts borrowed under the Corporate Credit Facility and the 2025 Notes, as well as obligations with respect to letters of credit issued pursuant to the Corporate Credit Facility, are secured by a perfected first priority security interest in substantially all of the assets of the borrowers under, and guarantors of, that facility (which include MVWC and certain of our direct and indirect, existing and future, domestic subsidiaries, excluding certain bankruptcy remote special purpose subsidiaries), in each case including inventory, subject to certain exceptions. In addition, the Corporate Credit Facility, the 2026 Convertible Notes, the 2025 Notes, the 2028 Notes, and the 2029 Notes are guaranteed by MVWC and certain of our direct and indirect, existing and future, domestic subsidiaries, excluding bankruptcy remote special purpose subsidiaries.
Non-Interest Bearing Note Payable
During the first quarter of 2022, we issued a non-interest bearing note payable in connection with the acquisition of vacation ownership units located in Bali, Indonesia. See Footnote 3 “Acquisitions and Dispositions” for additional information on this transaction.
Marriott Vacations Worldwide has 100,000,000 authorized shares of common stock, par value of $0.01 per share. At June 30, 2022, there were 75,741,585 shares of Marriott Vacations Worldwide common stock issued, of which 40,364,584 shares were outstanding and 35,377,001 shares were held as treasury stock. At December 31, 2021, there were 75,519,049 shares of Marriott Vacations Worldwide common stock issued, of which 42,283,378 shares were outstanding and 33,235,671 shares were held as treasury stock. Marriott Vacations Worldwide has 2,000,000 authorized shares of preferred stock, par value of $0.01 per share, none of which were issued or outstanding as of June 30, 2022 or December 31, 2021.
Share Repurchase Program
From time to time, with the approval of our Board of Directors, we may undertake programs to purchase our own shares (each, a “Share Repurchase Program” and collectively, the “Share Repurchase Programs”). During the third quarter of 2021, our Board of Directors authorized us to purchase shares of our common stock under a Share Repurchase Program for an aggregate purchase price not to exceed $250 million, prior to December 31, 2022. During the first quarter of 2022, our Board of Directors authorized the purchase of up to an additional $300 million of our common stock under this program, as well as the extension of the term of this program to March 31, 2023.
As of June 30, 2022, approximately $160 million remained available for share repurchases under the Share Repurchase Program.
Subsequent to the end of the second quarter of 2022, our Board of Directors authorized the repurchase of up to an additional $500 million of our common stock, as well as the extension of the term of the Share Repurchase Program to June 30, 2023.
Share repurchases may be made through open market purchases, privately negotiated transactions, block transactions, tender offers, or otherwise. The specific timing, amount and other terms of the repurchases will depend on market conditions, corporate and regulatory requirements, contractual restrictions, and other factors. In connection with the Share Repurchase Program, we are authorized to adopt one or more plans pursuant to the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The authorization for the current Share Repurchase Program may be suspended, terminated, increased or decreased by our Board of Directors at any time without prior notice. Acquired shares of our common stock are currently held as treasury shares and carried at cost in our Financial Statements.
The following table summarizes share repurchase activity under our Share Repurchase Programs:
| | | | | | | | | | | | | | | | | |
| ($ in millions, except per share amounts) | Number of Shares Repurchased | | Cost of Shares Repurchased | | Average Price
Paid per Share |
| As of December 31, 2021 | 17,681,395 | | | $ | 1,418 | | | $ | 80.17 | |
| For the first half of 2022 | 2,187,336 | | | 312 | | | $ | 143.02 | |
| As of June 30, 2022 | 19,868,731 | | | $ | 1,730 | | | $ | 87.09 | |
Dividends
We declared cash dividends to holders of common stock during the first half of 2022 as follows. Any future dividend payments will be subject to the restrictions imposed under the agreements covering our debt, and Board approval. There can be no assurance that we will pay dividends in the future.
| | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Shareholder Record Date | | Distribution Date | | Dividend per Share |
| February 18, 2022 | | March 3, 2022 | | March 17, 2022 | | $0.62 |
| May 12, 2022 | | May 26, 2022 | | June 9, 2022 | | $0.62 |
Noncontrolling Interests - Owners’ Associations
We consolidate certain owners’ associations. Noncontrolling interests represent the portion of the owners’ associations related to third-party vacation ownership interest owners. Noncontrolling interests of $1 million and $10 million, as of June 30, 2022 and December 31, 2021, respectively, are included on our Balance Sheets as a component of equity.
| | | | | |
| 15. | SHARE-BASED COMPENSATION |
We maintain the Marriott Vacations Worldwide Corporation 2020 Equity Incentive Plan (the “MVW Equity Plan”) for the benefit of our officers, directors, and employees. Under the MVW Equity Plan, we are authorized to award: (1) restricted stock units (“RSUs”) of our common stock, (2) stock appreciation rights (“SARs”) relating to our common stock, and (3) stock options to purchase our common stock. A total of 1.8 million shares are authorized for issuance pursuant to grants under the MVW Equity Plan. As of June 30, 2022, approximately 1.0 million shares were available for grants under the MVW Equity Plan.
The following table details our share-based compensation expense related to award grants to our officers, directors, and employees:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ($ in millions) | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Service-based RSUs | $ | 10 | | | $ | 9 | | | $ | 17 | | | $ | 15 | |
| Performance-based RSUs | 1 | | | 2 | | | 1 | | | 3 | |
| | | | | | | |
| 11 | | | 11 | | | 18 | | | 18 | |
| SARs | 1 | | | 3 | | | 2 | | | 4 | |
| | | | | | | |
| $ | 12 | | | $ | 14 | | | $ | 20 | | | $ | 22 | |
The following table details our deferred compensation costs related to unvested awards:
| | | | | | | | | | | |
| ($ in millions) | At June 30, 2022 | | At December 31, 2021 |
| Service-based RSUs | $ | 42 | | | $ | 33 | |
| Performance-based RSUs | 9 | | | — | |
| | | |
| 51 | | | 33 | |
| SARs | 3 | | | 2 | |
| | | |
| $ | 54 | | | $ | 35 | |
Restricted Stock Units
We granted 177,951 service-based RSUs, which are subject to time-based vesting conditions, with a weighted average grant-date fair value of $152.18, to our employees and non-employee directors during the first half of 2022. During the first half of 2022, we also granted performance-based RSUs, which are subject to performance-based vesting conditions, to members of management. A maximum of 135,012 RSUs may be earned under the performance-based RSU awards granted during the first half of 2022.
Stock Appreciation Rights
We granted 77,037 SARs, with a weighted average grant-date fair value of $59.68 and a weighted average exercise price of $159.27, to members of management during the first half of 2022. We use the Black-Scholes model to estimate the fair value of the SARs granted. The expected stock price volatility was calculated based on the average of the historical and implied volatility of our stock price. The average expected life was calculated using the simplified method, as we have insufficient historical information to provide a basis for estimating average expected life. The risk-free interest rate was calculated based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The dividend yield assumption listed below is based on the expectation of future payouts.
The following table outlines the assumptions used to estimate the fair value of grants during the first half of 2022:
| | | | | |
| Expected volatility | 42.86% |
| Dividend yield | 1.53% |
| Risk-free rate | 1.77% |
| Expected term (in years) | 6.25 |
| | | | | |
| 16. | VARIABLE INTEREST ENTITIES |
Variable Interest Entities Related to Our Vacation Ownership Notes Receivable Securitizations
We periodically securitize, without recourse, through bankruptcy remote special purpose entities, notes receivable originated in connection with the sale of vacation ownership products. These vacation ownership notes receivable securitizations provide liquidity for general corporate purposes. In a vacation ownership notes receivable securitization, various classes of debt securities issued by a special purpose entity are generally collateralized by a single tranche of transferred assets, which consist of vacation ownership notes receivable. With each vacation ownership notes receivable securitization, we may retain a portion of the securities, subordinated tranches, interest-only strips, subordinated interests in accrued interest and fees on the securitized vacation ownership notes receivable or, in some cases, overcollateralization and cash reserve accounts.
We created these bankruptcy remote special purpose entities to serve as a mechanism for holding assets and related liabilities, and the entities have no equity investment at risk, making them VIEs. We continue to service the vacation ownership notes receivable, transfer all proceeds collected to these special purpose entities, and retain rights to receive benefits that are potentially significant to the entities. Accordingly, we concluded that we are the entities’ primary beneficiary and, therefore, consolidate them. There is no noncontrolling interest balance related to these entities and the creditors of these entities do not have general recourse to us.
The following table shows consolidated assets, which are collateral for the obligations of these VIEs, and consolidated liabilities included on our Balance Sheet at June 30, 2022:
| | | | | | | | | | | | | | | | | |
| ($ in millions) | Vacation Ownership
Notes Receivable
Securitizations | | Warehouse
Credit Facility | | Total |
| Consolidated Assets | | | | | |
| Vacation ownership notes receivable, net of reserves | $ | 1,659 | | | $ | — | | | $ | 1,659 | |
| Interest receivable | 12 | | | — | | | 12 | |
| Restricted cash | 108 | | | — | | | 108 | |
| Total | $ | 1,779 | | | $ | — | | | $ | 1,779 | |
| Consolidated Liabilities | | | | | |
| Interest payable | $ | 2 | | | $ | — | | | $ | 2 | |
| Securitized debt | 1,868 | | | — | | | 1,868 | |
| Total | $ | 1,870 | | | $ | — | | | $ | 1,870 | |
The following table shows the interest income and expense recognized as a result of our involvement with these VIEs during the second quarter of 2022:
| | | | | | | | | | | | | | | | | |
| ($ in millions) | Vacation Ownership
Notes Receivable
Securitizations | | Warehouse
Credit Facility | | Total |
| Interest income | $ | 59 | | | $ | 1 | | | $ | 60 | |
| Interest expense to investors | $ | 11 | | | $ | 1 | | | $ | 12 | |
| Debt issuance cost amortization | $ | 2 | | | $ | — | | | $ | 2 | |
| | | | | |
The following table shows the interest income and expense recognized as a result of our involvement with these VIEs during the first half of 2022:
| | | | | | | | | | | | | | | | | |
| ($ in millions) | Vacation Ownership
Notes Receivable
Securitizations | | Warehouse
Credit Facility | | Total |
| Interest income | $ | 116 | | | $ | 3 | | | $ | 119 | |
| Interest expense to investors | $ | 21 | | | $ | 1 | | | $ | 22 | |
| Debt issuance cost amortization | $ | 4 | | | $ | 1 | | | $ | 5 | |
| Administrative expenses | $ | 1 | | | $ | — | | | $ | 1 | |
The following table shows cash flows between us and the vacation ownership notes receivable securitization VIEs:
| | | | | | | | | | | |
| Six Months Ended |
| ($ in millions) | June 30, 2022 | | June 30, 2021 |
| Cash Inflows | | | |
| Net proceeds from vacation ownership notes receivable securitizations | $ | 371 | | | $ | 421 | |
| Principal receipts | 280 | | | 286 | |
| Interest receipts | 116 | | | 108 | |
| Reserve release | 113 | | | 108 | |
| Total | 880 | | | 923 | |
| Cash Outflows | | | |
| Principal to investors | (299) | | | (290) | |
| Voluntary repurchases of defaulted vacation ownership notes receivable | (46) | | | (58) | |
| Voluntary clean-up call | (39) | | | (72) | |
| Interest to investors | (21) | | | (22) | |
| Funding of restricted cash | (96) | | | (109) | |
| Total | (501) | | | (551) | |
| Net Cash Flows | $ | 379 | | | $ | 372 | |
Under the terms of our vacation ownership notes receivable securitizations, we have the right to substitute loans for, or repurchase, defaulted loans at our option, subject to certain limitations. Our maximum exposure to potential loss relating to the special purpose entities that purchase, sell and own these vacation ownership notes receivable is the overcollateralization amount (the difference between the loan collateral balance and the balance of the outstanding vacation ownership notes receivable), plus cash reserves and any residual interest in future cash flows from collateral.
The following table shows cash flows between us and the Warehouse Credit Facility VIE:
| | | | | | | | | | | |
| Six Months Ended |
| ($ in millions) | June 30, 2022 | | June 30, 2021 |
| Cash Inflows | | | |
| Proceeds from vacation ownership notes receivable securitizations | $ | 102 | | | $ | — | |
| Principal receipts | 8 | | | — | |
| Interest receipts | 3 | | | — | |
| Reserve release | 1 | | | — | |
| Total | 114 | | | — | |
| Cash Outflows | | | |
| Principal to investors | (3) | | | — | |
| | | |
| Repayment of Warehouse Credit Facility | (98) | | | — | |
| Interest to investors | (1) | | | (1) | |
| Funding of restricted cash | (1) | | | — | |
| Total | (103) | | | (1) | |
| Net Cash Flows | $ | 11 | | | $ | (1) | |
Other Variable Interest Entities
We have a commitment to purchase a property located in Waikiki, Hawaii which is held by a VIE for which we are not the primary beneficiary. Accordingly, we have not consolidated the VIE. During the second quarter of 2022, we extended a loan to the VIE for $47 million and amended the terms of this commitment. If we are unable to negotiate a capital efficient inventory arrangement under which a third party will develop the property and agree to resell it to us at a later date, we are committed to purchase the property, in its then current form, for $80 million in the fourth quarter of 2022, unless it has been sold to another party. The loan extended to the VIE is due in full upon the earlier of sale of the property, including a sale to us, or an amendment and restatement of our purchase commitment. In the latter case, the existing loan of $47 million would be repaid to us as part of that revised purchase commitment. As of June 30, 2022, our Balance Sheet reflected $48 million in Accounts Receivable, including the note receivable of $47 million. We believe that our maximum exposure to loss as a result of our involvement with this VIE is approximately $48 million as of June 30, 2022.
Deferred Compensation Plan
We consolidate the liabilities of the Marriott Vacations Worldwide Deferred Compensation Plan and the related assets, which consist of the COLI policies held in the rabbi trust. The rabbi trust is considered a VIE. We are considered the primary beneficiary of the rabbi trust because we direct the activities of the trust and are the beneficiary of the trust. At June 30, 2022, the value of the assets held in the rabbi trust was $71 million, which is included in the Other line within assets on our Balance Sheets.
We define our reportable segments based on the way in which the chief operating decision maker (“CODM”), currently our chief executive officer, manages the operations of the Company for purposes of allocating resources and assessing performance. We operate in two operating and reportable business segments:
•Vacation Ownership includes a diverse portfolio of resorts that includes some of the world’s most iconic brands licensed under exclusive, long-term relationships. We are the exclusive worldwide developer, marketer, seller, and manager of vacation ownership and related products under the Marriott Vacation Club, Grand Residences by Marriott, Sheraton Vacation Club, Westin Vacation Club, and Hyatt Residence Club brands, as well as under Marriott Vacation Club Pulse, an extension to the Marriott Vacation Club brand. We are also the exclusive worldwide developer, marketer, and seller of vacation ownership and related products under The Ritz-Carlton Destination Club brand, we have the non-exclusive right to develop, market, and sell whole ownership residential products under The Ritz-Carlton Residences brand and have a license to use the St. Regis brand for specified fractional ownership resorts.
•Our Vacation Ownership segment generates most of its revenues from four primary sources: selling vacation ownership products; managing vacation ownership resorts, clubs, and owners’ associations; financing consumer purchases of vacation ownership products; and renting vacation ownership inventory.
•Exchange & Third-Party Management includes exchange networks and membership programs, as well as provision of management services to other resorts and lodging properties. We provide these services through Interval International and Aqua-Aston. Exchange & Third-Party Management revenue generally is fee-based and derived from membership, exchange and rental transactions, owners’ association management, and other related products and services. VRI Americas was part of the Exchange & Third-Party Management segment through the date of sale in April 2022. See Footnote 3 “Acquisitions and Dispositions” for more information on the disposition of VRI Americas.
Our CODM evaluates the performance of our segments based primarily on the results of the segment without allocating corporate expenses or income taxes. We do not allocate corporate interest expense or indirect general and administrative expenses to our segments. We include interest income specific to segment activities within the appropriate segment. We allocate depreciation, other gains and losses, equity in earnings or losses from our joint ventures, and noncontrolling interest to each of our segments as appropriate. Corporate and other represents that portion of our results that are not allocable to our segments, including those relating to consolidated owners’ associations, as our CODM does not use this information to make operating segment resource allocations.
Our CODM uses Adjusted EBITDA to evaluate the profitability of our operating segments, and the components of net income or loss attributable to common shareholders excluded from Adjusted EBITDA are not separately evaluated. Adjusted EBITDA is defined as net income or loss attributable to common shareholders, before interest expense (excluding consumer financing interest expense associated with securitization transactions), income taxes, depreciation and amortization, excluding share-based compensation expense and adjusted for certain items that affect the comparability of our operating performance. Our reconciliation of the aggregate amount of Adjusted EBITDA for our reportable segments to consolidated net income or loss attributable to common shareholders is presented below.
Revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ($ in millions) | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Vacation Ownership | $ | 1,091 | | | $ | 883 | | | $ | 2,047 | | | $ | 1,544 | |
| Exchange & Third-Party Management | 74 | | | 86 | | | 158 | | | 172 | |
| Total segment revenues | 1,165 | | | 969 | | | 2,205 | | | 1,716 | |
| Corporate and other | (1) | | | 10 | | | 11 | | | 22 | |
| $ | 1,164 | | | $ | 979 | | | $ | 2,216 | | | $ | 1,738 | |
Adjusted EBITDA and Reconciliation to Net Income or Loss Attributable to Common Shareholders
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ($ in millions) | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Adjusted EBITDA Vacation Ownership | $ | 274 | | | $ | 182 | | | $ | 473 | | | $ | 250 | |
| Adjusted EBITDA Exchange & Third-Party Management | 35 | | | 37 | | | 78 | | | 78 | |
| Reconciling items: | | | | | | | |
| Corporate and other | (54) | | | (55) | | | (108) | | | (95) | |
| Interest expense | (30) | | | (44) | | | (57) | | | (87) | |
| Tax provision | (43) | | | (27) | | | (75) | | | (16) | |
| Depreciation and amortization | (32) | | | (36) | | | (65) | | | (77) | |
| Share-based compensation expense | (12) | | | (14) | | | (20) | | | (22) | |
| Certain items | (2) | | | (37) | | | (32) | | | (53) | |
| Net income (loss) attributable to common shareholders | $ | 136 | | | $ | 6 | | | $ | 194 | | | $ | (22) | |
Assets
| | | | | | | | | | | |
| ($ in millions) | At June 30, 2022 | | At December 31, 2021 |
| Vacation Ownership | $ | 7,969 | | | $ | 7,897 | |
| Exchange & Third-Party Management | 837 | | | 911 | |
| Total segment assets | 8,806 | | | 8,808 | |
| Corporate and other | 534 | | | 805 | |
| $ | 9,340 | | | $ | 9,613 | |
We conduct business globally, and our operations outside the United States represented approximately 11% and 10% of our revenues, excluding cost reimbursements, for the three months ended June 30, 2022 and June 30, 2021, respectively, and 11% and 9% of our revenues, excluding cost reimbursements, for the six months ended June 30, 2022 and June 30, 2021, respectively.
