Good afternoon. Thanks, everyone, for coming to our final session of the day. To wrap it up, we have Marriott Vacations Worldwide with us, and here we have to my left, to your right, Mr. John Geller, President and CEO, and then CFO Jason Marino. Up front here, we also have Neal Goldner from Investor Relations. I know we have a number of people in the crowd that are familiar with the story, some that may not be. So we'll start at kind of a high level here and, maybe for you, John, if you can kind of talk, just the basics of your business and sort of the strategic priorities going into this year.
Yeah. So about 90% of our business is the vacation ownership segment, and then the other 10% is really our exchange business, Interval International. Vacation ownership, we've got the Marriott brands under a long-term licensing agreement with Marriott Hotels, and then we have the Hyatt brand under a long-term licensing agreement. About 120 resorts in vacation ownership, 22 are Hyatt-branded, and the rest are Marriott. So that's everything from Ritz, St. Regis, Marriott, Westin, and Sheraton. And the business is primarily in North America, but we've got five resorts in Europe, and six resorts in Asia-Pacific. And from a growth perspective, we still see good long-term growth both here in North America but even more so in Asia-Pacific. Our contract sales there last year grew 50%. We, we still see strong recovery in the Asian market in terms of travelers coming back.
You know, they're probably a year behind what we experienced here in the U.S. in 2022. That was more last year for them, but still more to come, if you will, on the international side. So the way you think about the VO business is about half of our revenues come from the actual sales of timeshare, $2 billion a year. And then if you think about it like a pie, that's about half our profits, give or take. But the other parts of the business kind of work in concert with the vacation ownership sales. That's financing. We provide seller financing. About 60% of the people that buy with us take our financing. We loan at, call it, 13.5%-14%. When we turn around and package that up in the securitization market, typically get a 98% advance rate on that.
We're the 2% residual, and then we're the excess spread. So, more recently, higher interest rates, that excess spread, which was more than 1,000 basis points. We were doing securitizations, you know, in that 2%-3% for a long period of time. We just announced we did our first securitization this year, which was about $430 million in notes, and the all-in cost of funds was a very respectable 5.5%. And just to put that in contrast, more recently, the deal we did in the fourth quarter was about 6.5%. So, really strong demand securitization market, very robust, and just allows us to recycle that paper and make money on it. We also have a management business. We provide all the management services.
A little bit different than the hotel business where our management fees are percent of the cost to operate the resorts, so call it 10%-15%. Different than the lodging business, right, where you're typically getting a fee on revenues, as well as an incentive fee, right, based on the profit. So much stickier in terms of just good growth in management fees each year without a real or really no volatility, if you will, from a management fee perspective. And then finally, we have a rental business. So if you're an owner, you can exchange to go outside the vacation ownership system. And with that, we take the time you would otherwise use in the system when we rent that and we make a little bit of money. We also have inventory that we haven't sold yet.
We pay the maintenance fee on that, and we're able to rent that and make a little bit of money on the rental side. So if you grow your contract sales, and historically, you know, we target kind of a higher single-digit contract sales, the rest of the pie kind of grows, and you can grow your EBITDA at a similar rate. And that's really been the model since we went public back in 2011.
Great. I'll try to stop a couple times throughout to see if there are any questions from the audience. But you know, one of the things I think we appreciate about this conference is kind of hearing the latest and greatest consumer trends. And I know we've kind of talked in the past about the factors and drivers that can be a tailwind or headwind to VOI sales. So how are you thinking about, you know, GDP growth, stock portfolios going up, all the wealth effects and how it's driving your business?
Yeah. And I'll, I'll talk to that in a second. The one thing to keep in mind, and I'm not sure we've had a normal recessionary cycle, in, in any recent memory here, but if you look at timeshare, we'll, we'll celebrate our 40th year, as Marriott Vacation Club this year. So we've been around a long time. And if you go back over those 40 years and you kind of look at the normal recessionary cycles, the industry timeshare has grown even in recessionary cycles. Obviously, you know, the financial crisis was a much different outcome, in terms of that. But I'm not sure I'd call that a, a normal recessionary cycle. And then you've had things like COVID, right, which, you know, the world shut down, and obviously travel shut down for a period of time. But it is a very resilient model. It's a sold product.
People, even more so now coming out of COVID, love the vacation, right? They're, you know, notwithstanding higher inflation and things like that, people seem to continue to prioritize experiences and vacations over other spend. And so that, that bodes well. You know, what we saw in the business, and we got this question a lot in 2022, our VPGs, volume per guest, which is just a efficiency measure of sales, total sales by number of tours, people that actually went on a sales tour, was 30% higher in 2022 than it was in 2019, right? So you had a lot of pent-up demand for travel. People had more cash in their pocket, you know, because they hadn't been traveling and spending as much money during COVID. And so we really saw that benefit in 2022.
And we would get the question, you know, what does that normalize back down to, which was a hard question to answer at the time. And that's what we saw really in 2023. I would argue we, you know, out-earned, outperformed in 2022 because of that pent-up demand. We saw our VPGs start to normalize back down. And the good news was, notwithstanding, you know, kind of the broader macro uncertainty, by the third or fourth quarter, those had really kind of, you know, plateaued, if you will, down to and we saw, you know, our VPGs, for example, in the fourth quarter, which had been down year-over-year, in the previous quarters were roughly flat. And even in the third quarter, they were only down slightly. So we're feeling good about, you know, where the customer is now.
Our customer demographic, given our price point, is probably higher than some of our peers in terms of who we target. You know, not saying that, you know, somehow they're not impacted by the broader macro type events, but probably a little bit better insulated, right, in terms of their household income and net worth, that those, you know, owners and first-time buyers, as we call them, people that don't own our products. So, coming into 2024, as we talked about on our year-end call, you know, we've seen that stabilization on VPGs. The goal this year is to grow our contract sales, call it that high single digit, 6%-9%.
Though we don't guide growth from VPGs versus tours, you know, we expect to grow VPG this year a little bit and then also grow our tour flow to get to that total contract sales growth. So, I feel a lot better right now coming into this year, notwithstanding there's still uncertainty out there, but just what we're seeing in our customer and their propensity to buy.
And on the topic of factors that are kind of impacting your guidance, can you kind of give the overview of Maui and how that's affecting comparisons for this year?
Yeah. Yeah. So, our sales centers in West Maui, you know, probably 4 mi from Lahaina, prior to the Maui wildfires, about 10% of our contract sales came out of those Maui sales centers, so a couple hundred million dollars a year. Last year, when the fires happened, I think it was August 10th, give or take, through the balance of the year, we saw about $55 million of impact in contract sales for 2023 related specifically to the Maui wildfires. And while we don't guide specific geographic regions, we did say, 2023 in our guidance, excuse me, 2024 in the guidance we've put out there, Maui's still in recovery. You know, the good news is on the occupancy side, we've seen people come back to Maui, our resort occupancies in January, you know, were 91%-92%.
And you could be like, "Wow, that's, that's unbelievable." Well, our normal year-round occupancies in Hawaii, including Maui, run 97%-98%. So still a little bit of recovery, on the occupancy side. But where we've seen the impact is more on the marketing and sales side. We did have some of our salespeople leave the island because of the fires. Some of it was housing related. The governor's still working through that, you know, call it medium-term housing. You know, they're looking to 4,000-5,000 rental units for Maui residents that were impacted or displaced from the fires. So, that's starting to settle down, and we're getting our sales team back into Maui. And we're thinking hopefully by, you know, kind of mid-year, third quarter, we'll be more fully staffed on the marketing and sales side.
That said, you know, contract sales this year might be up slightly in Maui versus what we did last year with the $55 million, but 2025's going to be more the recovery year back to more normalized levels for us as we're seeing it. And that's what our 2024 guidance reflects.
Awesome. Do we have any questions related to Maui or, or guidance? If not, we I'd like to touch on the Abound program and, and sort of the, completion outside of the some of the sales centers in Orlando that haven't, translated. But, can you just talk at a high level about the benefits from the customer standpoint and from an inventory management standpoint of, related to Abound?
Yeah. So the Abound program, one of the things with timeshare is you can never change the product that was originally sold, right? So we've got our legacy Marriott Vacation Club product. We bought Vistana with the ILG acquisition, and we got their Westin points product and their Sheraton points product. Think of the Abound program, it brings all those legacy products under one point currency, right, and allows owners to directly now, if they elect into the Abound program, to get their points and use those across all the Marriott resorts more seamlessly. The big benefit for the Westin and Sheraton owners was those products didn't have all the exchange options. So, you know, we've got, you know, 5,000 vacation options you can use your ownership for, you know, for anything from cruises.
You know, we've got tour providers that do African safaris, trips to Tuscany, you name it. There's all types of vacation options. Our Marriott program had those, but the legacy Westin and Sheraton were very limited. So for those owners, they get a lot more vacation options with their same ownership. Long term, we know the Abound program, one point currency, a lot more vacation options, right, will resonate with more first-time buyers, and even for our owners, give them more options on how they can use their existing ownership. So that transition that happened this year was really switching over the legacy Vistana, the Westin and Sheraton, you know, to selling the Abound program. We knew going in because we did this in 2010 when we went from selling a weeks-based product and we launched our Marriott points-based product. Owners bought that weeks- based product.
They were sold that product as the best product to buy, and now you're selling a different product. So part of what the transition looks like is educating the owners, right? Two-thirds of our sales are existing owners who own our product, love our product, buy more of our product every year. That's where getting them not only to understand the benefits but actually use the product. If you're a Westin owner, for example, maybe you've never stayed at a Marriott Vacation Club, and you don't know what that means, right? And so that's what's happening now. You're seeing the owners start to use the product, better understand it. And the sales team, we're selling a different product before, right? Now they're selling a new product.
So we did see some bumpiness in that transition, mostly in the second quarter when we started doing it at the legacy Vistana sales centers. That improved dramatically into the third quarter. And by the fourth quarter, you know, we started to see that, you know, VPG, as I talked about, the system VPG was year-over-year about flat, right? So we had, you know, some of the inefficiencies we saw in the transition, and that's why we say that that transition's behind us, right? Now going forward, you know, the goal, like it's always been, is now you got a better product, and hopefully that helps with closing efficiencies and people wanting to buy the product, you know, as you go forward.
Speaking on efficiencies, the one of the what I think is probably not as talked about is the Hyatt Vacation Club. Can you talk about sort of the opportunities with, like, off-premise channel sales and sort of translating that to higher yielding channels and how that can impact VPG for the VO business?
Yeah. As you think about Hyatt, I think I mentioned earlier, there's only 22 resorts there. And when we bought ILG and got the Hyatt Vacation Club, you know, there was probably 15, 16 resorts. So it's a much smaller portfolio. And the other thing is when you look at where the existing Hyatt products are, they're not. They're in great vacation destinations, and they're great products, but they're not what I'll call in great sales markets, right? So, for example, we don't have today a Hyatt Vacation Club in Orlando where, you know, sales centers in Orlando, you know, you could probably do with Hyatt, you know, maybe a $40 million-$50 million a year, but we got to get inventory there, right? So it gives us a lot more, with the brand being different on the Marriott side.
I have, I think, eight resorts in Orlando, plenty of supply. We probably wouldn't build a new Marriott resort, but we would build a new Hyatt. So it gives you that expansion. I mean, you mentioned on the Welk side, we've rebranded all the legacy Welk to the Hyatt Vacation Club brand. We launched the BEYOND program there, which is similar to the Marriott, it's what we call all the, you know, vacation exchanges, cruises, things like that to add value to the existing owners in terms of how they can use the product. But when you buy an unbranded, they use, you know, what we call in the industry, OPC, off-premise marketing. And that could be, you know, at the San Diego Padres. You know, they'll have a kiosk there to sell tours up to our property, the Hyatt property in Escondido.
Those by nature are much lower VPG channels, as you'd expect. And, you know, what we're working on and we'll continue to improve the VPGs is now that we've rebranded everything Hyatt, we can leverage the Hyatt-branded channels, right, selling packages, through the, you know, World of Hyatt affiliation, on the loyalty program. And those branded channels have a much more efficient, higher VPG, which will give us the opportunity to get better on the Hyatt side in terms of more efficient sales, which longer term will help your development margin, and profits that you make on the sale of vacation ownership.
Wanted to kind of expand on your last point there with development profit. And as you sort of think about selling through the inventory that's on your system, and the puts and takes of kind of recaptured inventory versus new development, how do you think about development profit margins over the next few years?
Yeah. So we've been running, on the contract sales, more recently about a 30% development profit. Prior to COVID, right, that was, you know, 23%, give or take. So we've seen that expansion. And while we've gotten a little bit more efficient on the marketing and sales costs, a lot of it has been on the product cost. And, we do recycle inventory, which means, you know, when you've been in business 40 years, say on the Marriott side, there's people that have used that product, you know, have gotten great vacations, they're not traveling as much anymore, and they want to get out of the product. We take that back at below replacement cost and put it back into the system, which helps us, you know, blend down the product cost. So we've had the benefit of that.
Based on what we have on our balance sheet and what we see in recycled inventory, you know, our product cost should be fairly constant over the next two or three years. But as we add new resorts, which is a good thing for the system, right, new flags on the map, new build comes at a higher product cost. So that, that blend of product costs could go up over time. But the good news is that means you're adding more flags, adding more sales centers with those new resorts. And the system benefit is more places for your owners and first-time buyers to go to, right? So, it's not just a pure product cost play as much as you want to continue to grow the system, add more flags, add more resorts, add more sales centers, and you get that benefit as well.
So we'll know more based on, you know, over the next two or three years. We do have new properties coming online now. We've got a, a brand new resort opening in Waikiki. It's our first one in Waikiki. We're on Oahu, but, we've got a big resort out in Ko Olina, which is about an hour outside on the ocean, oceanfront property. So we've got that flag we announced last year. We're adding new Westin Vacation Clubs in both Charleston, as well as Savannah. And so we're looking, right, because, you know, if it's greenfield development, that could take plus or minus three years from the time you identify the project, get all the, you know, permitting, zoning, all the stuff for and then build it, right? And so that can take, take some time. So we're constantly looking down the road for those.
But those do, like I said, though, new build's going to come with an average higher product cost if you just look at it just for the sales that'll go on there. But if you think about it from a system perspective, you should get some lift more broadly in the system of having more flags on the map.
That makes sense. If we can talk about the loan portfolio for a second, sort of a little bit of shakiness towards the end of last year. You saw one of your peers have sort of similar issues recently. How are you thinking about sort of the loan loss provision historically versus now and going forward?
Yeah. So we started to see some higher defaults in the fourth quarter of 2022, first quarter of 2023 we were talking about it. And then we did take an additional reserve, call it roughly net $50 million, I guess in the second quarter, third quarter last year, to, you know, reflect some of the higher delinquencies and defaults. You know, we expect our default rate will be a little bit higher going forward, and therefore our reserves will be slightly higher, about 50 basis points, give or take, from what we've been doing historically. And, you know, while you can't put your finger on it exactly, when you look at what's been defaulting, it has been versus what our static pools would say, more notes that were originated probably in 2021 and 2022 than what the models would say they should be.
I think, you know, it makes sense at some level because you got people coming out of COVID, had a little more cash in their pocket. They buy it, right, not thinking you're going to have inflation over the next couple of years in 2021, 2022, 2023, right? Those inflation numbers started to compound, and your household expenses now are significantly higher, right? Because if you think about a timeshare loan payment, it's, you know, roughly $400-$450 a month for the average purchase. So it's not like it's that much, but if you've got the compounding effect of other household expenses, that's where we've seen a little bit more in terms of that uptick. The good news is, if there is, we'll wait and see what happens, is now inflation's moderated.
The people that are buying now, right, are buying with those high, higher household expenses, assuming inflation continues at a more, you know, modest increase like we're seeing. Hopefully those loans maybe will perform a little bit better, right? That's where, you know, the way we do the loan loss provisioning, it's a 10-year static pool, and you're using history to predict what could happen in the future, even though, you know, you can have some things that in the future that, you know, could be different than obviously what happened in the past.
Do we have any questions from the audience related? Okay. Maybe for, for you, Jason, with the, the financing that, John was talking about earlier that, that came out this morning, $430 million, 5.5%, you know, how are what are you seeing in, in the ABS market right now? And can you talk about sort of the lagging, impact of, you know, securitizations now in the timeline of, of where do you start to see that come in the, in the financial statements?
Yeah. So first, as it relates to the deal that we announced earlier today, the 100 basis point improvement, versus the last deal we did, we did in Q4 of last year was roughly about 50 basis points in the underlying benchmark rate and then about 50 basis points of spread compression on those classes. So both the underlying came in as well as, you know, better performance in the form of lower spread. So we're seeing it across both pieces there. From a financial statement impact, what you're really going to see in 2024 is the rolling through of the higher rate deals that we did in 2023. So as we think about interest expense going forward, we're still going to have those headwinds here, even though we just priced a lower deal, really, from the deals that we did last year.
That's really going to be the bigger, biggest impact here, as we go through 2024. As we look ahead to 2025, we think financing profit's going to grow even at the current interest rates because as the loan portfolio continues to grow, yes, our interest expense will be higher next year, but our interest revenue will be even higher. We'll have profit growth, hopefully, in 2025 in the financing portfolio.
You've sort of communicated the goal to get to 3x net leverage by the end of next year. Based on our model, you know, we calculate that there's a significant capacity to, you know, repurchase stocks. So how are you thinking about capital allocation within the context of your other needs for inventory and things of that nature?
Yeah. So as John talked about, we've got some new inventory coming online that we've announced, and that's all really encapsulated in our free cash flow guidance for 2024. So as we look to get to that 3 x by the end of 2025, it's going to be through a combination of both EBITDA growth and, and then as we see EBITDA, we'll potentially repay some debt as well to make sure to hit that 3 x. You know, we think hitting running the business in that 2.5x-3x leverage is really the right zip code for a timeshare business just due to cost of funds, financial flexibility. But we do want to make sure that we've got capital to grow the business, whether it's organically or potentially through other acquisitions.
But really operating in that 3x zip code is where we feel most comfortable.
So the nice thing about our model is the amount of free cash flow it does generate on a recurring basis. We typically have converted 55%-60% of our adjusted EBITDA to free cash flow. And as Jason said, that's with funding new development, right? That's inherent in that, that cash flow model. So you can grow, add new resorts, and at the same time still deliver a pretty consistent conversion of that. So notwithstanding the debt being a little bit higher because our EBITDA is lower than we expected it to be here for 2023, as we grow the EBITDA, right, we're still going to have cash flow. We've got optionality now, right?
We will still be returning excess capital to shareholders in terms of dividends and share repurchases, but we'll also closely evaluate, you know, the need to pay down some debt as well as the EBITDA grows.
When I see some of the partnerships that peers have done in this space with different brands, and they're definitely, you know, sort of targeting a different customer base than Marriott Vacations is, things like kind of Bass Pro Shops or Sports Illustrated, like, is there an opportunity in the higher-end segment to engage in partnerships? Or do you feel that that's sort of unique to the higher-end customers that you serve, that it's there's not as many opportunities there?
Yeah. I mean, well, we obviously always look at those types of things. You got to remember, you know, difference for us is we've got the Marriott brands, we've got the Hyatt brands, right? A lot of times you see those affiliations, to your point, on your more moderate-tier brands maybe or not brands at all, right? They don't really have the affinity of a loyalty program, like Bonvoy and World of Hyatt. And, you know, we pay Marriott and Hyatt good money for that, right? It's well worth it for us in terms of the quality of the brands that we have, and our ability to market and leverage their programs in terms of how we look to grow.
So, I would never say never, but for us, it's really about growing our higher-end system of resorts and continuing to grow to the Marriott and the, the Hyatt portfolio and grow those brands.
You know, you've had a few hires with technology experience, recently. So as you think about kind of modernizing your business, with sort of a more digital infrastructure, like, how do you think about the effects that it has on your owners and also your associates from a sales perspective?
Yeah. I mean, we're still, I would say, early stages in a lot, you know, getting a lot of those benefits. We've got, you know, we've partnered with Salesforce. We haven't rolled it all out yet in terms of, you know, Salesforce for marketing and sales. And those benefits should, should help in terms of how we market and sell. But we've also done a lot on the technology side, like a lot of companies, you know, whether those be automating processes and chatbots to virtual voice at our call centers to handle, you know, simpler tasks, right, that can get done through technology. So, there continues to be opportunities.
We've moved more and more opportunities to be able to book your vacations to the owner website, but there's still more opportunities there to move more of those bookings, you know, especially when you talk about exchanges and, and going outside the system of resorts. So, technology and it has been. We, you know, in our numbers, we've got, both from a, a P&L as well as capital, we've got, you know, numbers in there today, and we have for the last couple of years to continue to invest in drive efficiencies longer term, whether that's for our associates, but also for, you know, as you said, for our owners and, and potentially first-time buyers.
We are up against time. I'd like to thank John, Jason, and his team for coming today. I think we have some sort of refreshment event back out there. So hope you all enjoyed today. And, if you're leaving today, safe travels. If not, we'll see you tomorrow morning.
Thank you.
Thanks.