FORWARD-LOOKING STATEMENTS This report includes "forward-looking statements" as that term is defined by theSecurities and Exchange Commission ("SEC"). Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as "may," "will," "expects," "should," "believes," "plans," "anticipates," "estimates," "predicts," "potential," "continue," "future" or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results ofTravel + Leisure Co. and its subsidiaries ("Travel + Leisure Co. " or "we") to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, uncertainty with respect to our ability to realize the benefits of the Travel + Leisure brand acquisition; the scope and duration of the novel coronavirus global pandemic ("COVID-19"), any resurgences and the pace of recovery; the timing of the widespread distribution and use of an effective vaccine or treatment for COVID-19; the potential impact of governmental, business and individuals' actions in response to the COVID-19 pandemic and our related contingency plans, including reductions in investment in our business, vacation ownership interest sales and tour flow, and consumer demand and liquidity; our ability to comply with financial and restrictive covenants under our indebtedness and our ability to access capital on reasonable terms, at a reasonable cost or at all; our ability and the ability ofWyndham Hotels & Resorts, Inc. ("Wyndham Hotels ") to maintain credit ratings; general economic conditions and unemployment rates, the performance of the financial and credit markets, the competition in and the economic environment for the leisure travel industry; risks associated with employees working remotely or operating with a reduced workforce; the impact of war, terrorist activity, political strife, severe weather events and other natural disasters, and pandemics (including COVID-19) or threats of pandemics; operating risks associated with the Vacation Ownership and Travel and Membership segments; uncertainties related to strategic transactions, including the spin-off of our hotels business,Wyndham Hotels , and any potential impact on our relationships with our customers, suppliers, employees and others with whom we have relationships, and possible disruption to our operations; our ability to execute on our strategy; the timing and amount of future dividends and share repurchases, if any, and those other factors disclosed as risks under "Risk Factors" in documents we have filed with theSEC , including in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSEC onFebruary 24, 2021 . We caution readers that any such statements are based on currently available operational, financial and competitive information, and they should not place undue reliance on these forward-looking statements, which reflect management's opinion only as of the date on which they were made. Except as required by law, we undertake no obligation to review or update these forward-looking statements to reflect events or circumstances as they occur. BUSINESS AND OVERVIEW We are a global provider of hospitality services and travel products and operate our business in the following two segments: •Vacation Ownership (formerlyWyndham Vacation Clubs )-develops, markets and sells vacation ownership interests ("VOIs") to individual consumers, provides consumer financing in connection with the sale of VOIs, and provides property management services at resorts. This segment is wholly comprised of ourWyndham Destinations business line. The following brands operate under theWyndham Destinations business line: Club Wyndham, WorldMark by Wyndham,Shell Vacations Club ,Margaritaville Vacation Club by Wyndham, and Presidential Reserve by Wyndham. •Travel and Membership (formerly Panorama or Vacation Exchange)-operates a variety of travel businesses, including three vacation exchange brands, a home exchange network, travel technology platforms, travel memberships, and direct-to-consumer rentals. This segment is comprised of our Panorama andTravel + Leisure Group business lines. The following brands operate under the Panorama business line: RCI, Panorama Travel Solutions,Alliance Reservations Network ("ARN"), 7Across, The Registry Collection, andLove Home Swap .The Travel + Leisure Group operates the go.travelandleisure.com,Travel + Leisure Travel Clubs , and Extra Holidays brands. Travel + Leisure Brand Acquisition OnJanuary 5, 2021 ,Wyndham Destinations, Inc. acquired the Travel + Leisure brand and related assets from Meredith Corporation ("Meredith") for$100 million , of which we paid$35 million at closing and an additional$20 million during the second quarter of 2021. The remaining payments are to be completed byJune 2024 . This acquisition included Travel + Leisure's branded travel clubs and their nearly 60,000 members. We acquired the Travel + Leisure brand to accelerate our strategic plan to broaden our reach with the launch of new travel services, expand our membership travel business, and amplify the global visibility of our leisure travel products. Meredith will continue to operate and monetize Travel + Leisure's branded multi-platform media assets across multiple channels under a 30-year royalty-free, renewable licensing relationship. In connection with this acquisition, onFebruary 17, 2021 ,Wyndham Destinations, Inc. was renamedTravel + Leisure Co. and continues to trade on theNew York Stock Exchange under the new ticker symbol TNL. 41
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In connection with the Travel + Leisure brand acquisition we updated the names and composition of our reportable segments to better align with how they are managed. We created theTravel + Leisure Group which falls under the Travel and Membership segment along with the Panorama business line. With the formation ofTravel + Leisure Group , we decided that the operations of our Extra Holidays business, which focuses on direct to consumer bookings, better aligns with the operations of this new business line and therefore transitioned the management of our Extra Holidays business to the Travel and Membership segment. As such, we reclassified the results of our Extra Holidays business, which were previously reported within the Vacation Ownership segment, into the Travel and Membership segment. Impact of COVID-19 on Our Business The results of operations for the three and nine months endedSeptember 30, 2021 and 2020 include impacts related to the novel coronavirus global pandemic ("COVID-19"), which have been significantly negative for the travel industry, our company, our customers, and our employees. Our response to COVID-19 initially focused on the health and safety of our owners, members, guests, and employees when we closed the majority of our resorts and sales centers in early 2020. As a result, we significantly reduced our workforce and furloughed thousands of employees. As ofSeptember 30, 2021 , we had reopened all of the resorts and sales offices inNorth America that we expect to reopen. The remaining closed resorts and sales offices that we intend to reopen are located in theSouth Pacific and are expected to reopen in 2021, contingent upon the lifting of government imposed travel restrictions. As a result of reopening substantially all of our resorts, the majority of furloughed employees have returned to work. Given the significant impacts of COVID-19 on our business, our revenues have been negatively impacted. While revenues are continuing to recover, not all product and service lines have yet reached pre-pandemic levels, and we believe that COVID-19 will continue to have an adverse effect on our financial condition and results of operations in the near term. Despite some volatility with recent spikes in COVID-19 case-counts as a result of variants, in general, we are seeing a broad increase in consumer confidence as well as a reduction in travel restrictions. These factors combined with progress in the roll-out of vaccinations have continued to help travel sentiment improve. We expect that further improvements in travel sentiment will help with a broader recovery of our business. Similar to the impact on revenue, COVID-19 also had a significant impact on our expenses. During the three and nine months endedSeptember 30, 2020 , we incurred$31 million and$377 million of COVID-19 related charges. During the three and nine months endedSeptember 30, 2021 we reversed$12 million and$28 million of COVID-19 charges, primarily due to the COVID-19 related allowance for loan losses on vacation ownership contract receivables ("VOCRs"). We believe our COVID-19 related expenses will continue to be at a significantly lower level than we experienced in 2020. See Note 20-COVID-19 Related Items to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details on the impact COVID-19 had on our business. Included in the$377 million of COVID-19 related charges during the nine months endedSeptember 30, 2020 was a$225 million COVID-19 related loan loss provision recorded as a result of our evaluation of the impact of COVID-19 on our owners' ability to repay their VOCRs. As we began to see an improvement in net new defaults and lower than expected unemployment rates, we reduced this provision by$20 million in the fourth quarter of 2020. During 2021, as a result of continued improvement in net new defaults, we further reduced this provision by$47 million during the nine months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , given the significant amount of government assistance provided to consumers during the pandemic, we expect default risk to remain elevated for approximately six months as those programs expire. If unemployment rates or our collection experience for our VOCRs differ significantly from current expectations, we may need to further increase or decrease our allowance for loan losses for VOCRs. As a precautionary measure to enhance liquidity during the pandemic, in the first quarter of 2020, we drew down our$1.0 billion revolving credit facility and suspended share repurchase activity. In the third quarter of 2020, we amended the credit agreement governing our revolving credit facility and term loan B, which provided financial covenant flexibility during the relief period spanning fromJuly 15, 2020 throughApril 1, 2022 (the "Relief Period"). During the Relief Period we were prohibited from using cash for share repurchases but maintained our ability to pay dividends and make investments in our business. During 2021 we repaid our$1.0 billion revolving credit facility and our$250 million 5.625% secured notes which came due inMarch 2021 . OnOctober 22, 2021 , we renewed the credit agreement governing our revolving credit facility and term loan B, which terminated the Relief Period, establishing new thresholds for our financial covenant ratios and eliminating 42
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the restrictions regarding share repurchases, dividends, and acquisitions
established by the 2020 amendment. See Other Information included in Part II,
Item 5 of this Quarterly Report on Form 10-Q for additional details on the
renewal.
During 2020 we successfully executed$900 million of securitization financings and issued$650 million of senior secured notes due 2026 with an interest rate of 6.625%. In the first quarter of 2021 we closed on a$500 million securitization financing at a more favorable cost than any securitization transaction we have completed in the past. OnOctober 26, 2021 we closed on a$350 million securitization financing, see Note 25-Subsequent Events to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details. These transactions together with improving operational results reinforce our expectation that we will be able to maintain adequate liquidity. As part of our reopening strategy, we focused on higher margin owner business by leveraging our owner upgrade pipeline. Prior to the pandemic, just under 40% of our sales transactions were to lower margin new owners as compared to 30% in the third quarter of 2021. We also raised our credit standards and directed our marketing efforts towards higher Fair Isaac Corporation ("FICO") scores, which we expect will continue to strengthen our receivables portfolio going forward. Additionally, we closed certain unprofitable marketing and sales locations and shifted marketing channels and resources to our most productive channels. All of these changes were designed to result in higher volume per guest ("VPG"), which is a measure of sales efficiency and is strongly correlated to profitability. For certain of the events, uncertainties, trends, and risks associated with the impact of the COVID-19 pandemic on our future results and financial condition, see "Risks Related to the COVID-19 Pandemic" included in Part I, Item 1A in the Annual Report filed on Form 10-K with theSEC onFebruary 24, 2021 . RESULTS OF OPERATIONS We have two reportable segments: Vacation Ownership (formerlyWyndham Vacation Clubs ) and Travel and Membership (formerly Panorama or Vacation Exchange). In connection with the Travel + Leisure brand acquisition and creation of theTravel + Leisure Group business line, we decided that the operations of our Extra Holidays business, which focuses on direct to consumer bookings, better aligns with the operations of the newTravel + Leisure Group business line and therefore transitioned the management of this business to the Travel and Membership segment. As such, we reclassified the results of our Extra Holidays business, which was previously reported within the Vacation Ownership segment, into the Travel and Membership segment. This change is reflected in all periods reported. The reportable segments presented below are those for which discrete financial information is available and which are utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying the reportable segments, we also consider the nature of services provided by our operating segments. Management uses net revenues and Adjusted EBITDA to assess the performance of the reportable segments. We define Adjusted EBITDA as Net income/(loss) from continuing operations before Depreciation and amortization, Interest expense (excluding Consumer financing interest), early extinguishment of debt, Interest income (excluding Consumer financing revenues) and income taxes. Adjusted EBITDA also excludes stock-based compensation costs, separation and restructuring costs, legacy items, transaction costs for acquisitions and divestitures, impairments, gains and losses on sale/disposition of business, and items that meet the conditions of unusual and/or infrequent. Legacy items include the resolution of and adjustments to certain contingent liabilities related to acquisitions of continuing businesses and dispositions, including the separation ofWyndham Hotels and Cendant, and the sale of the vacation rentals businesses. We believe that Adjusted EBITDA is a useful measure of performance for our segments which, when considered with GAAP measures, we believe gives a more complete understanding of our operating performance. Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. 43
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OPERATING STATISTICS The table below presents our operating statistics for the three months endedSeptember 30, 2021 and 2020. These operating statistics are the drivers of our revenues and therefore provide an enhanced understanding of our businesses. Refer to the Three Months EndedSeptember 30, 2021 vs. Three Months EndedSeptember 30, 2020 section for a discussion on how these operating statistics affected our business for the periods presented. Three
Months Ended
2021 2020 % Change (h)
Vacation Ownership
Gross VOI sales (in millions) (a) (i) $ 440 $ 256 72.3
Tours (in 000s) (b) 129 80 61.5
Volume Per Guest ("VPG") (c) $ 3,233 $ 3,039 6.4
Travel and Membership (d)
Transactions (in 000s) (e)
Exchange 256 214 19.9
Non-exchange 214 142 51.1
Total transactions 470 356 32.3
Revenue per transaction(f)
Exchange $ 339 $ 300 13.2
Non-exchange $ 214 $ 157 36.1
Total revenue per transaction $ 282 $ 243 16.2
Average number of exchange members (in 000s) (g) 3,895 3,680 5.8
(a)Represents total sales of VOIs, including sales under the Fee-for-Service
program before the effect of loan loss provisions. We believe that Gross VOI
sales provide an enhanced understanding of the performance of our Vacation
Ownership business because it directly measures the sales volume of this
business during a given reporting period.
(b)Represents the number of tours taken by guests in our efforts to sell VOIs.
(c)VPG is calculated by dividing Gross VOI sales (excluding tele-sales upgrades,
which are non-tour upgrade sales) by the number of tours. We believe that VPG
provides an enhanced understanding of the performance of our Vacation Ownership
business because it directly measures the efficiency of this business' tour
selling efforts during a given reporting period.
(d)Includes the impact from acquisitions from the acquisition dates forward.
(e)Represents the number of vacation bookings recognized as revenue during the
period, net of cancellations.
(f)Represents transactional revenue divided by transactions.
(g)Represents paid members in our vacation exchange programs who are current on
their annual membership dues or within the allowed grace period.
(h)Percentage of change may not calculate due to rounding.
(i)The following table provides a reconciliation of Vacation ownership interest
sales, net to Gross VOI sales for the three months ended September 30, 2021 and
2020 (in millions):
2021 2020
Vacation ownership interest sales, net
Loan loss provision
49 45 Gross VOI sales, net of Fee-for-Service sales 393 241 Fee-for-Service sales (1) 47 15 Gross VOI sales$ 440 $ 256 (1)Represents total sales of VOIs through our Fee-for-Service programs where inventory is sold through our sales and marketing channels for a commission. There were$28 million and$6 million Fee-for-Service commission revenues for the three months endedSeptember 30, 2021 and 2020. These commissions are reported within Service and membership fees on the Condensed Consolidated Statements of Income/(Loss) included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Our 2020 operating statistics include the impacts of COVID-19 which were significantly negative for the travel industry, our company, our customers, and our employees. In response to COVID-19, our Vacation Ownership segment temporarily closed its resorts inmid-March 2020 across the globe and suspended its sales and marketing operations. These closures resulted in lower tours which negatively impacted gross VOI sales. In our Travel and Membership segment, affiliate resort closures and regional travel restrictions contributed to decreased bookings and increased cancellations, which resulted in lower transactions and revenue per transaction during 2020. Given the pace of COVID-19 vaccinations in theU.S. , reduced travel restrictions, increased consumer confidence and pent-up leisure travel demand, we experienced significant improvements in VOI sales, tours, VPG, the number of Travel and Membership transactions, revenue per transaction, and average number of exchange 44
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members, finishing the first nine months of 2021 with increased momentum in these areas; however, not all product and service lines have yet returned to pre-pandemic levels. We expect the impact of COVID-19 on our operating statistics to continue through the remainder of 2021; however we do not expect to incur the level of COVID-19 expenses that we did in 2020.
THREE MONTHS ENDED
Our consolidated results are as follows (in millions):
Three Months Ended
2021 2020 Favorable/(Unfavorable) Net revenues$ 839 $ 614 $ 225 Expenses 653 550 (103) Operating income 186 64 122 Other (income), net - (5) (5) Interest expense 47 52 5 Interest (income) (1) (2) (1) Income before income taxes 140 19 121 Provision/(benefit) for income taxes 39 (21) (60) Net income attributable toTravel + Leisure Co. shareholders$ 101 $ 40 $ 61 Net revenues increased$225 million for the three months endedSeptember 30, 2021 , compared with the same period last year. In the third quarter of 2021, we analyzed the adequacy of the COVID-19 related allowance consistent with past methodology, and as a result of the improvements in net new defaults, we released$21 million of the COVID-19 related allowance which positively impacted revenues and recorded a corresponding$8 million increase in cost of vacation ownership interests representing the associated reduction in estimated recoveries. The net positive impact of the COVID-19 related allowance release on Adjusted EBITDA was$13 million . Revenue growth of$224 million (36.5%) was favorably impacted by foreign currency of$1 million (0.2%). Excluding the impacts of foreign currency and the COVID-19 related provision release discussed above, the remaining revenue increase was primarily the result of: •$164 million of increased revenues at our Vacation Ownership segment primarily due to an increase in gross VOI sales, property management revenues, and commission revenues as a result of the ongoing recovery of our operations from the impact of COVID-19; partially offset by a decrease in consumer financing revenues driven by a lower average portfolio balance; and •$39 million of increased revenues at our Travel and Membership segment driven by higher vacation transaction revenues as we continue to recover from the impacts of COVID-19. Expenses increased$103 million for the three months endedSeptember 30, 2021 , compared with the same period last year. The increase in expenses of$102 million (18.5%) was unfavorably impacted by foreign currency of$1 million (0.2%). Excluding the foreign currency impact, the increase in expenses was primarily the result of: •$30 million increase in sales and commission expenses at the Vacation Ownership segment due to higher gross VOI sales; •$28 million increase in operating costs in support of higher Travel and Membership revenues; •$21 million increase in the cost of VOIs sold primarily due to higher gross VOI sales and an$8 million reduction in estimated recoveries related to the partial release of our COVID-19 related provision; •$20 million increase in property management expenses due to higher management fees and reimbursable expenses; •$16 million increase in marketing costs in support of increased revenue; •$13 million increase in commission expense as a result of higher Fee-for-Service VOI sales; •$9 million increase in maintenance fees on unsold inventory; and •$6 million increase in general and administrative expenses primarily due to higher employee-related costs. These increases were partially offset by: •$30 million decrease in COVID-19 related costs including employee compensation related costs ($13 million ); the write-down of exchange inventory ($10 million ); impairments ($6 million ); and •$7 million decrease in consumer financing interest expense primarily due to a lower average non-recourse debt balance. 45
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Interest expense decreased$5 million for the three months endedSeptember 30, 2021 compared with the same period last year primarily due to repayment of the revolving credit facility and$250 million 5.625% notes in the first quarter of 2021. Our effective tax rates were 27.9% and (110.5)% during the three months endedSeptember 30, 2021 and 2020. The effective tax rate in the current year returned to a more normalized range after being significantly impacted in 2020 by COVID-19. Our effective tax rate in 2020 was significantly reduced due to a shift in the mix of earnings in higher tax rate jurisdictions and losses in lower tax rate jurisdictions. During the third quarter of 2020, we reported a tax benefit on pre-tax income resulting from the true-up of applying the revised forecasted effective tax rate to the prior quarter's losses.
As a result of these items, Net income attributable to
shareholders increased
as compared to the same period last year.
Our segment results are as follows (in millions):
Three Months Ended
September 30,
Net revenues 2021 2020
Vacation Ownership $ 660 $ 475
Travel and Membership 185 145
Total reportable segments 845 620
Corporate and other (a) (6) (6)
Total Company $ 839 $ 614
Three Months Ended
September 30,
Reconciliation of Net income to Adjusted EBITDA 2021 2020
Net income attributable to Travel + Leisure Co. shareholders $
101
Provision/(benefit) for income taxes 39 (21) Depreciation and amortization 31 32 Interest expense 47 52 Interest (income) (1) (2) Stock-based compensation 8 6 Legacy items 2 1 COVID-19 related costs (b) 1 13 Asset impairments - 6 Exchange inventory write-off - 10 Restructuring - 2 Adjusted EBITDA$ 228 $ 139 Three Months Ended September 30, Adjusted EBITDA 2021 2020 Vacation Ownership$ 177 $ 93 Travel and Membership 68 62 Total reportable segments 245 155 Corporate and other (a) (17) (16)Total Company $ 228 $ 139
(a)Includes the elimination of transactions between segments.
(b)Reflects severance and other costs associated with layoffs due to the
COVID-19 workforce reduction offset in part by employee retention credits
received in connection with the
Security (“CARES”) Act, the American Rescue Plan Act of 2021 (“ARPA”), and
similar international programs for wages paid to certain employees despite
having operations suspended. This amount does not include costs associated with
idle pay.
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Vacation Ownership Net revenues increased$185 million (38.9%) and Adjusted EBITDA increased$84 million (90.3%) during the three months endedSeptember 30, 2021 , compared with the same period of 2020. Net revenue and Adjusted EBITDA growth were not materially impacted by foreign currency. The net revenue increase was primarily driven by: •$152 million increase in gross VOI sales, net of Fee-for-Service sales, due to the ongoing recovery of our operations from the impact of COVID-19; •$25 million increase in property management revenues primarily due to higher management fees and reimbursable revenues; and •$22 million increase in commission revenues as a result of higher Fee-for-Service VOI sales. These increases were partially offset by: •$12 million decrease in consumer financing revenues primarily due to a lower average portfolio balance; and •$4 million increase in our provision for loan losses inclusive of a$21 million release of our COVID-19 related allowance. In addition to the drivers above, Adjusted EBITDA was further impacted by: •$30 million increase in sales and commission expenses due to higher gross VOI sales; •$21 million increase in the cost of VOIs sold primarily due to higher gross VOI sales and an$8 million reduction in estimated recoveries related to the partial release of our COVID-19 related provision; •$20 million increase in property management expenses primarily due to higher management fees and reimbursable expenses; •$13 million increase in marketing costs in support of increased revenue; •$13 million increase in commission expense as a result of higher Fee-for-Service VOI sales; and •$9 million increase in maintenance fees on unsold inventory. These increases were partially offset by a$7 million decrease in consumer financing interest expense primarily due to a lower average non-recourse debt balance. Travel and Membership Net revenues increased$40 million and Adjusted EBITDA increased$6 million during the three months endedSeptember 30, 2021 , compared with the same period of 2020. Revenue growth of$39 million (26.9%) was favorably impacted by foreign currency of$1 million (0.7%). The Adjusted EBITDA growth of$6 million (9.7%) was not materially impacted by foreign currency. Increases in net revenues excluding the impact of foreign currency were due to higher transaction revenue. Transactions increased 32% compared to the prior year as we continue to see recovery from the impact of COVID-19. In addition to the revenue change explained above, Adjusted EBITDA, excluding the impact of foreign currency, was further impacted by the following operational costs in support of higher revenue: •$24 million increase in cost of sales; •$4 million increase in other operational expenses; and •$3 million increase in marketing expense.
Corporate and other
Corporate Adjusted EBITDA decreased
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NINE MONTHS ENDED
Our consolidated results are as follows (in millions):
Nine Months Ended
2021 2020 Favorable/(Unfavorable)
Net revenues $ 2,264 $ 1,515 $ 749
Expenses 1,841 1,705 (136)
Operating income/(loss) 423 (190) 613
Other (income), net (2) (11) (9)
Interest expense 147 138 (9)
Interest (income) (1) (5) (4)
Income/(loss) before income taxes 279 (312) 591
Provision/(benefit) for income taxes 76 (54) (130)
Net income/(loss) from continuing operations 203 (258) 461
Loss on disposal of discontinued business, net of
income taxes (2) - (2)
Net income/(loss) attributable to Travel + Leisure
Co. shareholders $ 201 $ (258) $ 459
Net revenues increased $749 million for the nine months ended September 30, 2021
compared with the same period last year. In the first quarter of 2020, we
evaluated the potential impact of COVID-19 on our owner's ability to repay their
contract receivable and as a result of current and anticipated unemployment
rates at that time, we recorded a $225 million COVID-19 related provision, which
negatively impacted revenues, and a corresponding $55 million benefit to cost of
vacation ownership interests, representing estimated recoveries related to this
provision. These adjustments negatively impacted prior year Adjusted EBITDA by
$170 million . During the nine months ended September 30, 2021 , we analyzed the
adequacy of the COVID-19 related allowance consistent with past methodology,
resulting in a $47 million release, which positively impacted revenues, and a
corresponding $17 million increase in cost of vacation ownership interests,
representing the associated reduction in estimated recoveries. The net positive
impact of the COVID-19 related allowance release on Adjusted EBITDA was
$30 million .
Total revenue growth of $738 million (48.7%) was favorably impacted by foreign
currency of $11 million (0.7%). Excluding the impacts of foreign currency and
the COVID-19 related provision adjustments discussed above, the increase in net
revenues was primarily the result of:
•$313 million of increased revenues at our Vacation Ownership segment primarily
due to an increase in gross VOI sales, higher commission and property management
revenues as a result of the ongoing recovery of our operations from the impact
of COVID-19; partially offset by a decrease in consumer financing revenues
driven by a lower average portfolio balance; and
•$158 million of increased revenues at our Travel and Membership segment driven
by higher vacation transaction revenues as we continue to recover from the
impacts of COVID-19, partially offset by a decrease in subscription revenues
driven by lower new owner sales in the timeshare industry.
Expenses increased $136 million for the nine months ended September 30, 2021
compared with the same period last year. The increase in expenses of $127
million (7.4%) was unfavorably impacted by foreign currency of $9 million
(0.5%). Excluding the foreign currency impact, the increase in expenses was
primarily the result of:
•$130 million increase in the cost of VOIs sold primarily due to higher gross
VOI sales, the absence of a $55 million benefit recorded in the prior year
representing estimated recoveries related to the COVID-19 related provision, and
a $17 million increase associated with the COVID-19 related provision release in
the current year;
•$80 million increase in operating costs in support of higher Travel and
Membership revenues;
•$41 million increase in commission expense as a result of higher
Fee-for-Service VOI sales;
•$35 million increase in property management expenses due to higher management
fees and reimbursable expenses;
•$29 million increase in general and administrative expenses primarily due to
higher employee-related costs;
•$27 million increase in sales and commission expenses the Vacation Ownership
segment primarily due to higher gross VOI sales; and
•$13 million increase in marketing costs in support of increased revenue.
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These increases were partially offset by: •$205 million decrease in COVID-19 related costs including employee compensation related costs ($78 million ); impairments ($54 million ); the write-down of exchange inventory ($48 million ) and restructuring charges ($25 million ); and •$13 million decrease in consumer financing interest expense primarily due to a lower average non-recourse debt balance. Other income, net of other expenses decreased$9 million for the nine months endedSeptember 30, 2021 compared with the same period last year, primarily due to lower business interruption recoveries in 2021. Interest expense increased$9 million for the nine months endedSeptember 30, 2021 compared with the same period last year primarily due to interest on the$650 million 6.625% secured notes issued during the third quarter of 2020, partially offset by repayment of the revolving credit facility and$250 million 5.625% notes in the first quarter of 2021.
Our effective tax rates were 27.2% and 17.3% for the nine months ended
to a more normalized range after being significantly impacted in 2020 by
COVID-19. Our effective tax rate in 2020 was significantly reduced due to a
shift in the mix of earnings in higher tax rate jurisdictions and losses in
lower tax rate jurisdictions.
As a result of these items, Net income attributable toTravel + Leisure Co. shareholders was$201 million for the nine months endedSeptember 30, 2021 , as compared to a Net loss attributable toTravel + Leisure Co. shareholders of$258 million during the same period last year. 49
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Our segment results are as follows (in millions):
Nine Months Ended
September 30,
Net Revenues 2021 2020
Vacation Ownership $ 1,708 $ 1,116
Travel and Membership 573 411
Total reportable segments 2,281 1,527
Corporate and other (a) (17) (12)
Total Company $ 2,264 $ 1,515
Nine Months Ended
September 30,
Reconciliation of Net income to Adjusted EBITDA 2021 2020
Net income/(loss) attributable to
shareholders
$
201
Loss on disposal of discontinued business, net of income taxes 2 - Provision/(benefit) for income taxes 76 (54) Depreciation and amortization 93 94 Interest expense 147 138 Interest (income) (1) (5) Stock-based compensation 24 14 Legacy items 6 2 COVID-19 related costs (b) 3 51 Asset impairments (c) - 54 Exchange inventory write-off - 48 Restructuring (1) 27 Adjusted EBITDA$ 550 $ 111 Nine Months Ended September 30, Adjusted EBITDA 2021 2020 Vacation Ownership$ 377 $ 6 Travel and Membership 218 142 Total reportable segments 595 148 Corporate and other (a) (45) (37)Total Company $ 550 $ 111 (a)Includes the elimination of transactions between segments. (b)Reflects severance and other employee costs associated with layoffs due to the COVID-19 workforce reduction offset in part by employee retention credits received in connection with theU.S. CARES Act, ARPA, and similar international programs for wages paid to certain employees despite having operations suspended. This amount does not include costs associated with idle pay. (c)Includes$5 million of bad debt expense related to a note receivable for the nine months endedSeptember 30, 2021 , included in Operating expenses on the Condensed Consolidated Statements of Income/(Loss) included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Vacation Ownership Net revenues increased$592 million and Adjusted EBITDA increased$371 million during the nine months endedSeptember 30, 2021 compared with the same period of 2020. The net revenue growth of$585 million (52.4%) was favorably impacted by foreign currency of$7 million (0.6%) and the total Adjusted EBITDA growth of$369 million (6,150.0%) was favorably impacted by foreign currency of$2 million (33.3%). The net revenue increase excluding the impact of foreign currency was primarily driven by: •$272 million decrease in our provision for loan losses primarily due to the COVID-19 related allowance adjustments ($225 million provision recorded in the first quarter of 2020 and$47 million release during 2021); •$262 million increase in gross VOI sales, net of Fee-for-Service sales, due to the ongoing recovery of our operations from the impact of COVID-19; •$60 million increase in commission revenues as a result of higher Fee-for-Service VOI sales; and 50
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•$47 million increase in property management revenues primarily due to higher management fees and reimbursable revenues. These increases were partially offset by a$56 million decrease in consumer financing revenues primarily due to a lower average portfolio balance. In addition to the drivers above, Adjusted EBITDA excluding the impact of foreign currency was further impacted by: •$130 million increase in the cost of VOIs sold primarily due to higher gross VOI sales, the absence of a$55 million benefit recorded in the first quarter of 2020 representing estimated recoveries related to the COVID-19 related provision, and a$17 million reduction in estimated recoveries related to the partial release of our COVID-19 related provision; •$41 million increase in commission expense as a result of higher Fee-for-Service VOI sales; •$35 million increase in property management expenses primarily due to higher management fees and reimbursable expenses; •$27 million increase in sales and commission expenses due to higher gross VOI sales; •$11 million increase in general and administrative expenses primarily due to higher employee-related costs; •$8 million increase in marketing costs in support of increased revenue; and •$7 million of lower proceeds from business interruption claims. These increased expenses were partially offset by: •$29 million decrease in COVID-19 related costs associated with workforce reduction; and •$13 million decrease in consumer financing interest expense primarily due to a lower average non-recourse debt balance. Travel and Membership Net revenues increased$162 million and Adjusted EBITDA increased$76 million during the nine months endedSeptember 30, 2021 compared with the same period of 2020. Revenue growth of$158 million (38.4%) was favorably impacted by foreign currency of$4 million (1.0%). Adjusted EBITDA growth of$77 million (54.2%) was unfavorably impacted by foreign currency of$1 million (0.7%). Increases in net revenues excluding the impact of foreign currency were primarily driven by: •$165 million increase in transaction revenue driven by an increase in vacation transactions booked as we continue to recover from the impacts of COVID-19; partially offset by •$7 million decrease in subscription revenue due to a 2.6% decrease in the average member count in our exchange business driven by lower new owner sales in the timeshare industry. In addition to the revenue changes explained above, Adjusted EBITDA excluding the impact of foreign currency was further impacted by the following operational costs in support of increased revenues: •$80 million increase in cost of sales; and •$5 million increase in marketing expense. These increased expenses were partially offset by a$5 million decrease in general and administrative expenses resulting from staff reductions and cost savings initiatives implemented after the first quarter of 2020.
Corporate and other
Corporate Adjusted EBITDA decreased
currency of
primarily due to higher employee-related costs.
RESTRUCTURING PLANS During 2020, we recorded$37 million of restructuring charges,$36 million of which were COVID-19 related. Due to the impact of COVID-19, we decided in the second quarter of 2020 to abandon the remaining portion of our administrative offices inNew Jersey . We were notified in the second quarter of 2020 thatWyndham Hotels exercised its early termination rights under the sublease agreement. As a result, we recorded$22 million of restructuring charges associated with non-lease components of the office space and$24 million of impairment charges associated with the write-off of right-of-use assets and furniture, fixtures and equipment at the Travel and Membership segment. We also recognized$12 million of lease-related charges due to the renegotiation of an agreement and$2 million of facility-related restructuring charges associated with closed 51
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sales centers at the Vacation Ownership segment. The Travel and Membership segment additionally recognized$1 million in employee-related expenses associated with the consolidation of a shared service center. We reduced our restructuring liability by$12 million of cash payments in 2020 and another$1 million of cash payments during the nine months endedSeptember 30, 2021 . We also reversed$1 million of expense related to the reimbursement of prepaid licensing fees that were previously written-off, and increased the liability by$3 million of cash reimbursements during the current period at our Vacation Ownership segment. The remaining 2020 restructuring liability of$27 million is expected to be paid by the end of 2027.
We have other restructuring plans implemented prior to 2020. The remaining
liability of less than
personnel-related and is expected to be paid by the end of 2021.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
September 30, December 31, (In millions) 2021 2020 Change Total assets$ 6,601 $ 7,613 $ (1,012) Total liabilities 7,450 8,581 (1,131) Total (deficit) (849) (968) 119 Total assets decreased by$1.01 billion fromDecember 31, 2020 toSeptember 30, 2021 , primarily due to: •$850 million decrease in Cash and cash equivalents primarily due to net repayments on the revolving credit facility, notes, and non-recourse debt, interest payments, payments associated with the acquisition of the Travel + Leisure brand, and dividend payments, partially offset by VOCR principal collections; •$190 million decrease in Vacation ownership contract receivables, net, primarily due to principal collections and allowance for loan losses, partially offset by higher net VOI originations; and •$77 million decrease in Inventory driven by VOI sales and lower estimated VOI recoveries, partially offset by purchases.
These decreases were partially offset by a
intangibles, net primarily related to the acquisition of the Travel + Leisure
brand from Meredith.
Total liabilities decreased by$1.13 billion fromDecember 31, 2020 toSeptember 30, 2021 , primarily due to: •$53 million decrease in Deferred income due to increased usage of deferred VOI trial packages and VOI incentives as a result of owners and members returning to vacation as COVID-19 travel restrictions lifted; •$277 million decrease in Non-recourse vacation ownership debt due to net repayments; •$798 million decrease in Debt due to net repayments on the revolving credit facility and the$250 million notes repaid inMarch 2021 ; and •$25 million decrease in Deferred income taxes, primarily due to installment sales partially offset by the allowance for bad debt. These decreases were partially offset by a$24 million increase in Accrued expenses and other liabilities, primarily due to increases in employee related expenses and the purchase liability related to the acquisition of the Travel + Leisure brand, partially offset by decreases in accrued marketing, inventory obligations, accrued interest, and lease liabilities.
Total deficit decreased
2021
Leisure Co.
Liquidity and Capital Resources Currently, our financing needs are supported by cash generated from operations and borrowings under our revolving credit facility as well as the issuance of secured debt. In addition, we use our bank conduit facilities and non-recourse debt borrowings to finance our VOCRs. We believe that our net cash from operations, cash and cash equivalents, access to our revolving credit facilities and bank conduit facilities, and continued access to the debt markets provide us with sufficient liquidity to meet our ongoing cash needs for the foreseeable future, inclusive of the$650 million 4.25% secured notes which come due inMarch 2022 . As a precautionary measure at the onset of the global pandemic, inMarch 2020 we fully drew down our revolving credit facility. Based on the recovery of our business to date, our strong liquidity position and ability to access secured debt capital 52
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markets, during 2021 we fully repaid the remaining outstanding revolver balance. The revolving credit facility has a total capacity of$1.0 billion . As ofSeptember 30, 2021 , we had$949 million of available capacity, net of letters of credit.
We repaid our
OnJuly 15, 2020 , we amended our credit agreement governing our revolving credit facility and term loan B ("Credit Agreement Amendment"). The Credit Agreement Amendment established a Relief Period with respect to our secured revolving credit facility, which commenced onJuly 15, 2020 , and was scheduled to end onApril 1, 2022 . Among other changes, this amendment added a new minimum liquidity covenant, tested quarterly until the end of the Relief Period, of (i)$250 million plus (ii) 50% of the aggregate amount of dividends paid after the effective date of the Credit Agreement Amendment and on or prior to the last day of the relevant fiscal quarter. OnOctober 22, 2021 , we renewed the credit agreement governing our revolving credit facility and term loan B which resulted in the termination of this Relief Period and extends the commitment period for the revolving credit facility fromMay 2023 toOctober 2026 . See Other Information included in Part II, Item 5 of this Quarterly Report on Form 10-Q for additional details on the renewal. During 2020 we successfully executed$900 million of securitization financings and issued$650 million senior secured notes due 2026 with an interest rate of 6.625%. We plan to continue to use our conduit facilities and non-recourse debt borrowings to finance VOCRs. During the first quarter of 2021, we closed on our first securitization financing transaction of the year. High demand allowed us to upsize the transaction and we closed on a$500 million securitization financing at a 98% advance rate and a company record low weighted average yield of 1.57%. We also called the notes issued in the securitization financing transaction that we closed in April of 2020 and included that collateral in the 2021 transaction, reducing the interest rate going forward on our non-recourse debt. OnOctober 26, 2021 , we closed on an additional$350 million securitization financing at a 98% advance rate and a weighted average yield of 1.82% (see Note 25-Subsequent Events to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details). These transactions positively impact our liquidity and reinforce our expectation that we will maintain adequate liquidity. Our non-recourse timeshare receivablesU.S. dollars ("USD") bank conduit facility has a borrowing capacity of$800 million throughOctober 2022 , and had$486 million of available capacity as ofSeptember 30, 2021 . Borrowings under this facility are required to be repaid as the collateralized receivables amortize, but no later thanNovember 2023 . Our non-recourse timeshare receivables Australian andNew Zealand dollars ("AUD" and "NZD") bank conduit facility has a borrowing capacity ofA$250 million and NZ$48 million throughApril 2023 and had available capacity of$79 million as ofSeptember 30, 2021 . Borrowings under this facility are required to be repaid no later thanMay 2025 . We may, from time to time, depending on market conditions and other factors, repurchase our outstanding indebtedness, whether or not such indebtedness trades above or below its face amount, for cash and/or in exchange for other securities or other consideration, in each case in open market purchases and/or privately negotiated transactions. We are currently evaluating the impact of the transition from theLondon Interbank Offered Rate ("LIBOR") as an interest rate benchmark to other potential alternative reference rates, including but not limited to the Secured Overnight Financing Rate. Currently, we have debt and derivative instruments in place that reference LIBOR-based rates. Although certain of these LIBOR based obligations provide for alternative methods of calculating the related interest rate payable (including transition to an alternative benchmark rate) if LIBOR is not reported, uncertainty as to the extent and manner of future changes may result in interest rates and/or payments that are higher than, lower than, or that do not otherwise correlate over time with the interest rates and/or payments that would have been made on our obligations if LIBOR was available in its current form. The transition from LIBOR based benchmark rates is expected to beginJanuary 1, 2022 and be completed when USD LIBOR rates are phased out byJune 30, 2023 . Management will continue to actively assess the related opportunities and risks involved in this transition.
We adopted appropriate LIBOR replacement rate transition language into the
agreements for the renewal of our USD bank conduit facility in 2020 and the
renewal of the credit agreement governing the revolving credit facility and term
loan B which closed on
largest exposure to LIBOR. We intend to include such language in our other
relevant agreements prior to the end of 2021.
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CASH FLOW The following table summarizes the changes in cash, cash equivalents and restricted cash during the nine months endedSeptember 30, 2021 and 2020 (in millions): 2021 2020 Change Cash provided by/(used in): Operating activities$ 435 $ 224 $ 211 Investing activities (77) (98) 21 Financing activities (1,195) 775 (1,970)
Effects of changes in exchange rates on cash and cash
equivalents
(6) (5) (1) Net change in cash, cash equivalents and restricted cash$ (843) $ 896 $ (1,739) Operating Activities Net cash provided by operating activities was$435 million for the nine months endedSeptember 30, 2021 , compared to$224 million in the prior year. This$211 million increase was driven by a$459 million increase in net income; partially offset by a$203 million decrease in non-cash add-back items primarily due to a lower provision for loan losses and asset impairments, partially offset by deferred income taxes, and a$47 million increase in cash utilized for working capital. Investing Activities Net cash used in investing activities was$77 million for the nine months endedSeptember 30, 2021 , compared to$98 million in the prior year. This decrease was primarily related to$50 million of net investment purchases in 2020; partially offset by$37 million of cash payments for the acquisition of the Travel + Leisure brand in 2021. Financing Activities Net cash used in financing activities was$1.2 billion for the nine months endedSeptember 30, 2021 , compared to net cash provided by financing activities of$775 million in the prior year. The variance was primarily due to the drawdown of the$1.0 billion secured revolving credit facility and$650 million note issuance in the prior year. During 2021 we had$250 million increased repayments on the revolving credit facility and notes,$178 million of higher net repayments of non-recourse debt, and a$19 million increase in deferred consideration payments mainly associated with the acquisition of the Travel + Leisure brand; partially offset by a$128 million decrease in share repurchases, and$33 million of decreased dividend payments. Capital Deployment We focus on deploying capital for the highest possible returns. Ultimately, our business objective is to grow our business while optimizing cash flow and Adjusted EBITDA. We intend to continue to invest in select capital and technological improvements across our business. We may also seek to strategically grow the business through merger and acquisition activities. As part of our merger and acquisition strategy, we have made, and expect to continue to make, acquisition proposals and enter into non-binding letters of intent, allowing us to conduct due diligence on a confidential basis. A potential transaction contemplated by a letter of intent may never reach the point where we enter into a definitive agreement, nor can we predict the timing of such a potential transaction. We also seek to maintain a first lien leverage ratio below 4.25 to 1.0. Finally, over the long term we intend to continue to return value to shareholders through the repurchase of common stock and payment of dividends. All future declarations of quarterly cash dividends are subject to final approval by the Board of Directors ("Board"). During the nine months endedSeptember 30, 2021 , we spent$122 million on vacation ownership development projects (inventory). We expect that our Vacation Ownership business currently has adequate finished inventory to support vacation ownership sales for several years. During 2021, we anticipate spending between$160 million and$180 million on vacation ownership development projects. The average inventory spend on vacation ownership development projects for the four-year period 2022 through 2025 is expected to be between$140 million and$170 million annually. After factoring in the anticipated additional average annual spending, we expect to have adequate inventory to support vacation ownership sales through at least the next four to five years. During the nine months endedSeptember 30, 2021 , we spent$40 million on capital expenditures primarily for information technology and sales center improvement projects. During 2021, we anticipate spending between$60 million and$65 million on capital expenditures.
In connection with our focus on optimizing cash flow, we are continuing our
asset-light efforts in Vacation Ownership by seeking opportunities with
financial partners whereby they make strategic investments to develop assets on
our behalf. We refer to this as Just-in-Time. The partner may invest in new
ground-up development projects or purchase from us, for cash, existing
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in-process inventory which currently resides on our Condensed Consolidated Balance Sheets. The partner will complete the development of the project and we may purchase finished inventory at a future date as needed or as obligated under the agreement. We expect that the majority of the expenditures required to pursue our capital spending programs, strategic investments and vacation ownership development projects will be financed with cash flow generated through operations and cash and cash equivalents. Additional expenditures are expected to be financed with general corporate borrowings. Stock Repurchase Program OnAugust 20, 2007 , our Board authorized a stock repurchase program that enables us to purchase our common stock. The Board has since increased the capacity of the program eight times, most recently inOctober 2017 by$1.0 billion , bringing the total authorization under the current program to$6.0 billion . Proceeds received from stock option exercises increase our repurchase capacity under the program. We had$354 million of remaining availability in our program as ofSeptember 30, 2021 . The amount and timing of specific repurchases are subject to applicable legal requirements and other factors, including capital allocation priorities and market conditions. Repurchases may be conducted in the open market or in privately negotiated transactions. We suspended share repurchase activity inMarch 2020 due to uncertainty associated with COVID-19. OnJuly 15, 2020 , we amended the credit agreement for our revolving credit facility and term loan B. Among other changes, the Credit Agreement Amendment placed us into a Relief Period fromJuly 15, 2020 throughApril 1, 2022 that prohibited the use of cash for share repurchases during this period. OnOctober 22, 2021 , we renewed the credit agreement governing our revolving credit facility and term loan B. The renewal eliminated the Relief Period restrictions on share repurchases, among other changes, and we expect to resume our share repurchase program in the 2021 fourth quarter. See Other Information included in Part II, Item 5 of this Quarterly Report on Form 10-Q for additional details on the renewal.
Dividends
During the quarterly periods endedMarch 31 ,June 30 , andSeptember 30, 2021 , we paid cash dividends of$0.30 per share ($79 million in aggregate). During the quarterly periods endedMarch 31 , andJune 30, 2020 , we paid cash dividends of$0.50 per share, and in the quarterly period endedSeptember 30, 2020 , we paid cash dividends of$0.30 per share ($112 million in aggregate). OnJuly 15, 2020 , we amended the credit agreement governing our revolving credit facility and term loan B. Among other changes, the amendment placed us into a Relief Period which added a new minimum liquidity covenant, tested quarterly until the end of the Relief Period, of (i)$250 million plus (ii) 50% of the aggregate amount of dividends paid after the amendment effective date and on or prior to the last day of the relevant fiscal quarter. Additionally, the amendment limited the payout of dividends during the Relief Period to not exceed$0.50 per share, the rate in effect prior to the amendment. OnOctober 22, 2021 , we renewed the credit agreement governing our revolving credit facility and term loan B. This terminated the Relief Period which, among other changes, eliminated the restrictions on dividends and the Relief Period minimum liquidity covenant established by the 2020 amendment. See Other Information included in Part II, Item 5 of this Quarterly Report on Form 10-Q for additional details on the renewal. Although our quarterly dividend was reduced during the third quarter of 2020 due to the impact of COVID-19, our long-term plan is to grow our dividend at the rate of growth of our earnings at a minimum. The declaration and payment of future dividends to holders of our common stock are at the discretion of our Board and depend upon many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. There is no assurance that a payment of a dividend will occur in the future. LONG-TERM DEBT COVENANTS The revolving credit facilities and term loan B are subject to covenants including the maintenance of specific financial ratios as defined in the credit agreement. The financial ratio covenants consist of a minimum interest coverage ratio and a maximum first lien leverage ratio. The interest coverage ratio is calculated by dividing consolidated EBITDA (as defined in the credit agreement) by consolidated interest expense (as defined in the credit agreement), both as measured on a trailing 12-month basis preceding the measurement date. The first lien leverage ratio is calculated by dividing consolidated first lien debt (as defined in the credit agreement) as of the measurement date by consolidated EBITDA (as defined in the credit agreement) as measured on a trailing 12-month basis preceding the measurement date, or on an annualized basis as allowed for certain test periods during the Relief Period. 55
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The global spread of COVID-19 significantly impacted the travel industry, our company, our customers, and our employees. Our response to COVID-19 initially focused on the health and safety of our owners, members, guests and employees, when we closed the majority of our resorts and sales centers. We were also keenly focused on preserving cash, cutting costs and managing liquidity. While we have reopened all of the resorts and sales offices inNorth America that we expect to reopen, and expect to reopen our remaining locations in theSouth Pacific later this year, the continued impact of COVID-19 on our industry and business has led to a higher first lien leverage ratio which has begun to decrease and we expect will continue to decrease over time as the recovery in leisure travel continues. OnJuly 15, 2020 , we amended the credit agreement governing the revolving credit facility and term loan B. This amendment increased the maximum first lien leverage ratio and decreased the minimum interest coverage ratio allowed during the specified Relief Period, which was scheduled to continue through the first quarter of 2022. The Credit Agreement Amendment included certain restrictions on the use of cash during the Relief Period, including the prohibition of share repurchases and added a minimum liquidity covenant, which was to be tested quarterly and required us to maintain an interest coverage ratio (as defined in the credit agreement) of not less than 2.0 to 1.0. The maximum first lien leverage ratio for the test period endingSeptember 30, 2021 was 6.75 to 1.0. As ofSeptember 30, 2021 , our first lien leverage ratio was 4.2 to 1.0 and our interest coverage ratio was 3.6 to 1.0. These ratios do not include interest expense or indebtedness related to any qualified securitization financing (as defined in the credit agreement). As ofSeptember 30, 2021 , we were in compliance with the financial covenants described above. Under the Credit Agreement Amendment, when the first lien leverage ratio exceeds 4.25 to 1.0, the interest rate on revolver borrowings increases, and we are subject to higher fees associated with our letters of credit based on a tiered pricing grid. Given the first lien leverage ratio of 5.4 to 1.0 atDecember 31, 2020 , we became subject to higher fees associated with letters of credit and the interest rate on the revolver borrowings increased 25 basis points effectiveMarch 2, 2021 . OnOctober 22, 2021 , we renewed the credit agreement governing our revolving credit facility and term loan B. This renewal terminated the Relief Period and reestablished the tiered pricing grid that was in place prior to the Credit Agreement Amendment. The interest rate on revolver borrowings and fees associated with letters of credit are subject to future changes based on our first lien leverage ratio which could serve to further reduce this rate if this ratio were to decrease to 3.75 to 1.0 or below. Additionally, the renewal eliminated restrictions regarding share repurchases, dividends, acquisitions, and the Relief Period minimum liquidity covenant established by the 2020 amendment. See Other Information included in Part II, Item 5 of this Quarterly Report on Form 10-Q for additional details on the renewal. Each of our non-recourse, securitized term notes, and the bank conduit facilities contain various triggers relating to the performance of the applicable loan pools. If the VOCRs pool that collateralizes one of our securitization notes fails to perform within the parameters established by the contractual triggers (such as higher default or delinquency rates), there are provisions pursuant to which the cash flows for that pool will be maintained in the securitization as extra collateral for the note holders or applied to accelerate the repayment of outstanding principal to the note holders. As ofSeptember 30, 2021 , all of our securitized loan pools were in compliance with applicable contractual triggers.
For additional details regarding our credit facilities, term loan B, and
non-recourse debt see Note 10-Debt to the Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
LIQUIDITY
Our Vacation Ownership business finances certain of its VOCRs through (i)
asset-backed conduit facilities and (ii) term asset-backed securitizations, all
of which are non-recourse to us with respect to principal and interest.
We believe that our USD bank conduit facility with a term throughOctober 2022 , and our AUD/NZD bank conduit facility, with a term throughApril 2023 , amounting to a combined capacity of$1.02 billion , along with our ability to issue term asset-backed securities, should provide sufficient liquidity for our expected sales pace, and we expect to have available liquidity to finance the sale of VOIs for the foreseeable future. As ofSeptember 30, 2021 , we had$565 million of availability under these asset-backed conduit facilities. Our liquidity position may be negatively affected by unfavorable conditions in the capital markets in which we operate or if our VOCRs portfolios do not meet specified portfolio credit parameters. Our liquidity, as it relates to our VOCRs securitization program, could be adversely affected if we were to fail to renew or replace our conduit facilities on their expiration dates, or if a particular receivables pool were to fail to meet certain ratios, which could occur in certain instances if the default rates or other credit metrics of the underlying VOCRs deteriorate. Our ability to sell securities backed by our VOCRs depends on the continued ability and willingness of capital market participants to invest in such securities. 56
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During 2020 we completed$900 million of securitization financings and during the first quarter of 2021 we closed on a$500 million securitization financing at a 98% advance rate and a company record low weighted average yield of 1.57%. We also called the notes issued in the securitization financing transaction that we closed in April of 2020 and included that collateral in the 2021 transaction, reducing the interest rate going forward on our non-recourse debt. OnOctober 26, 2021 , we closed on an additional$350 million securitization financing at a 98% advance rate and a weighted average yield of 1.82%. See Note 25-Subsequent Events to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details. These transactions positively impact our liquidity and reinforce our expectation that we will maintain adequate liquidity. We primarily utilize surety bonds in our Vacation Ownership business for sales and development transactions in order to meet regulatory requirements of certain states. In the ordinary course of our business, we have assembled commitments from 12 surety providers in the amount of$2.3 billion , of which we had$297 million outstanding as ofSeptember 30, 2021 . The availability, terms and conditions and pricing of bonding capacity are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating. If the bonding capacity is unavailable or, alternatively, the terms and conditions and pricing of the bonding capacity are unacceptable to us, our Vacation Ownership business could be negatively impacted. Our secured debt is rated Ba3 with a "negative outlook" by Moody's Investors Service, BB- with a "negative outlook" byStandard & Poor's Rating Services , and BB+ with a "negative outlook" byFitch Rating Agency . A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal by the assigning rating organization. Reference in this report to any such credit rating is intended for the limited purpose of discussing or referring to aspects of our liquidity and of our costs of funds. Any reference to a credit rating is not intended to be any guarantee or assurance of, nor should there be any undue reliance upon, any credit rating or change in credit rating, nor is any such reference intended as any inference concerning future performance, future liquidity or any future credit rating. For information regarding the impact of our credit rating downgrade and credit rating downgrade ofWyndham Hotels , see Note 23-Transactions with Former Parent and Former Subsidiaries - Matters Related to the European Vacation Rentals Business to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
SEASONALITY
We experience seasonal fluctuations in our net revenues and net income from sales of VOIs and vacation exchange fees. Revenues from sales of VOIs are generally higher in the third quarter than in other quarters due to increased leisure travel. Revenues from vacation exchange fees are generally highest in the first quarter, which is generally when members of our vacation exchange business book their vacations for the year. Our seasonality has been and could continue to be impacted by COVID-19.
The seasonality of our business may cause fluctuations in our quarterly
operating results. As we expand into new markets and geographical locations, we
may experience increased or different seasonality dynamics that create
fluctuations in operating results different from the fluctuations we have
experienced in the past.
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CONTRACTUAL OBLIGATIONS
The following table summarizes our future contractual obligations for the
12-month periods set forth below (in millions):
10/1/21 - 10/1/22 - 10/1/23 - 10/1/24 - 10/1/25 -
9/30/22 9/30/23 9/30/24 9/30/25 9/30/26 Thereafter Total
Debt $ 652 $ 405 $
302
Non-recourse debt (a)
292 484 191 192 208 590
1,957
Purchase commitments (b) 268 129 101 98 123 192
911
Interest on debt (c) 218 183 153 137 92 75 858 Operating leases 32 30 28 26 16 38 170 Inventory sold subject to conditional repurchase (d) 35 30 - - - -
65
Separation liabilities (e) 1 12 - - - 2 15 Finance leases 4 2 1 - - - 7 Other (f) 20 25 10 - - - 55 Total (g)$ 1,522 $ 1,300 $ 786 $ 733 $ 1,426 $ 1,650 $ 7,417 (a)Represents debt that is securitized through bankruptcy-remote special purpose entities the creditors of which have no recourse to us for principal and interest. (b)Includes (i)$720 million for marketing-related activities; (ii)$79 million relating to the development of vacation ownership properties, of which$18 million is included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets included in Part I, Item 1 of this Quarterly Report on Form 10-Q; and (iii)$35 million for information technology activities. (c)Includes interest on debt, non-recourse debt, and finance leases; estimated using the stated interest rates on our debt and non-recourse debt. (d)Represents obligations to repurchase completed vacation ownership properties from third-party developers (See Note 8-Inventory to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail) of which$13 million was included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets included in Part I, Item 1 of this Quarterly Report on Form 10-Q. (e)Represents liabilities which we assumed and are responsible for pursuant to the Cendant Separation and spin-off ofWyndham Hotels (See Note 23-Transactions with Former Parent and Former Subsidiaries to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details). (f)Represents future consideration to be paid for the acquisitions of ARN and the Travel + Leisure brand (See Note 5-Acquisitions to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail). (g)Excludes a$42 million liability for unrecognized tax benefits associated with the accounting guidance for uncertainty in income taxes since it is not reasonably estimable to determine the periods in which such liability would be settled with the respective tax authorities. COMMITMENTS AND CONTINGENCIES From time to time, we are involved in claims, legal and regulatory proceedings, and governmental inquiries related to our business, none of which, in the opinion of management, is expected to have a material effect on our results of operations or financial condition. See Note 16-Commitments and Contingencies to the Condensed Consolidated Financial Statements for a description of claims and legal actions arising in the ordinary course of our business along with our guarantees and indemnifications and Note 23-Transactions with Former Parent and Former Subsidiaries to the Condensed Consolidated Financial Statements for a description of our obligations regarding Cendant contingent litigation, matters related toWyndham Hotels , matters related to the European vacation rentals business, and matters related to the North American vacation rentals business. Both notes are included in Part I, Item 1 of this Quarterly Report on Form 10-Q. CRITICAL ACCOUNTING POLICIES In presenting our Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it could result in a material impact to our consolidated results of operations, financial position, and liquidity. We believe that the estimates and assumptions we used when preparing our Condensed Consolidated Financial Statements were the most appropriate at that time. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the Annual Report filed on Form 10-K with theSEC onFebruary 24, 2021 , which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results. 58
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:no_upscale()/cloudfront-us-east-1.images.arcpublishing.com/dmn/SW3IRPCEVFBHHKXVCWSQ4ILZHY.jpg "My Kuzina offers some of the region’s best Greek food from a shipping container in Grand Prairie")
