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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

  x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

COMMISSION FILE NO. 001-32876

 

 

WYNDHAM WORLDWIDE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

DELAWARE   20-0052541

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

22 SYLVAN WAY

PARSIPPANY, NEW JERSEY

 

07054

(Zip Code)

(Address of Principal Executive Offices)  

(973) 753-6000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class

 

Name of each exchange

            on which registered            

Common Stock, Par Value $0.01 per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  þ   Accelerated filer  ¨   Non-accelerated filer  ¨    Smaller reporting company  ¨
   

(Do not check if a smaller

reporting company)

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2011, was $5,521,675,980. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.

As of January 31, 2012, the registrant had outstanding 145,946,692 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement prepared for the 2012 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
  

PART I

  

Item 1.

  

Business

     1   

Item 1A.

  

Risk Factors

     31   

Item 1B.

  

Unresolved Staff Comments

     38   

Item 2.

  

Properties

     38   

Item 3.

  

Legal Proceedings

     39   
  

PART II

  

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     40   

Item 6.

  

Selected Financial Data

     43   

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     45   

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     81   

Item 8.

  

Financial Statements and Supplementary Data

     82   

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     82   

Item 9A.

  

Controls and Procedures

     82   

Item 9B.

  

Other Information

     82   
  

PART III

  

Item 10.

  

Directors, Executive Officers and Corporate Governance

     83   

Item 11.

  

Executive Compensation

     84   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     85   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     85   

Item 14.

  

Principal Accounting Fees and Services

     85   
  

PART IV

  

Item 15.

  

Exhibits and Financial Statement Schedules

     86   
  

Signatures

     87   

 


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PART I

Forward Looking Statements

This report includes “forward-looking” statements, as that term is defined by the Securities and Exchange Commission (“SEC”) in its rules, regulations and releases. 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,” “expects,” “should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,” or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results 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, general economic conditions, our financial and business prospects, our capital requirements, our financing prospects, our relationships with associates, and those disclosed as risks under “Risk Factors” in Part I, Item 1A of this report. 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 disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.

Where You Can Find More Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website at http://www.WyndhamWorldwide.com as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also read and copy any filed document at the SEC’s public reference room in Washington, D.C. at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about public reference rooms.

We maintain an Internet site at http://www.WyndhamWorldwide.com. Our website and the information contained on or connected to that site are not incorporated into this Annual Report.

 

ITEM 1. BUSINESS

OVERVIEW

As one of the world’s largest hospitality companies, we offer individual consumers and business customers a broad array of hospitality services and products across various accommodation alternatives and price ranges through our portfolio of world-renowned brands. The hospitality industry is a major component of the travel industry, which is one of the largest retail industry segments of the global economy. Our operations are grouped into three segments of the hospitality industry: lodging, vacation exchange and rentals and vacation ownership. With our 30 brands, which include Wyndham Hotels and Resorts, Tryp by Wyndham, Ramada, Days Inn, Super 8, Howard Johnson, Wyndham Rewards, Wingate by Wyndham, Microtel Inns & Suites, RCI, The Registry Collection, Landal GreenParks, Novasol, Hoseasons, cottages4you, James Villa Holidays, ResortQuest by Wyndham Vacation Rentals, The Resort Company by Wyndham Vacation Rentals, Wyndham Vacation Resorts and WorldMark by Wyndham, we have built a significant presence in most major hospitality markets in the U.S. and throughout the rest of the world.

 

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Approximately 60% of our revenues come from fees that we receive in exchange for providing services. We refer to the businesses that generate these fees as our “fee-for-service” businesses. We receive fees: (i) in the form of royalties for use of our brand names; (ii) for providing hotel and resort management services; (iii) for providing property management services to vacation ownership resorts; (iv) for providing vacation exchange and rentals services; and (v) for providing services under our Wyndham Asset Affiliation Model (“WAAM”). The remainder of our revenue comes primarily from proceeds received from the sale of vacation ownership interests and related financing.

 

   

Our lodging business, Wyndham Hotel Group, is the world’s largest hotel company based on the number of properties, franchising in the upper upscale, upscale, upper midscale, midscale, economy and extended stay segments of the lodging industry and providing hotel management services globally for full-service hotels. This is predominantly a fee-for-service business that provides recurring revenue streams, requires low capital investment and produces strong cash flow.

 

   

Our vacation exchange and rentals business, Wyndham Exchange & Rentals, is the world’s largest member-based vacation exchange network based on the number of vacation exchange members and the world’s largest marketer of professionally serviced vacation rental properties based on the number of vacation rental properties marketed. Through this business, we provide vacation exchange services and products and access to distribution systems and networks to resort developers and owners of intervals of vacation ownership interests, and we market vacation rental properties primarily on behalf of independent owners, vacation ownership developers and other hospitality providers. This is primarily a fee-for-service business that provides stable revenue streams, requires low capital investment and produces strong cash flow.

 

   

Our vacation ownership business, Wyndham Vacation Ownership, is the world’s largest vacation ownership business based on the number of resorts, units, owners and revenues. Through our vacation ownership business, we develop and market vacation ownership interests to individual consumers, provide consumer financing in connection with the sale of vacation ownership interests and provide property management services at resorts. While the vacation ownership business has historically required us to invest in inventory development, a central strategy for Wyndham Worldwide is to leverage our scale and marketing expertise to pursue low-capital requirement, fee-for-service business relationships that produce strong cash flow. In 2010, we introduced WAAM which offers turn-key solutions for developers or banks in possession of newly developed inventory, which we sell for a fee through our extensive sales and marketing channels.

Our mission is to increase shareholder value by being the leader in travel accommodations and welcoming our guests to iconic brands and vacation destinations through our signature “Count On Me!” service. Our strategies to achieve these objectives are to:

 

   

Increase market share by delivering exceptional customer service;

 

   

Grow cash flow and operating margins through superior execution in all of our businesses;

 

   

Rebalance the Wyndham Worldwide portfolio to emphasize our fee-for-service business models;

 

   

Attract, retain and develop human capital across our organization; and

 

   

Support and promote Wyndham Green and Wyndham Diversity initiatives.

We strive to provide value-added services and products that are intended to both enhance the travel experience of the individual consumer and drive revenues to our business customers. The depth and breadth of our businesses across different segments of the hospitality industry provide us with the opportunity to expand our relationships with our existing individual and business customers in one or more segments of our business by offering them additional or alternative services and products from our other segments.

We expect to generate annual net cash provided by operating activities less capital expenditures, equity investments and development advances in the range of approximately $600 million to $700 million in 2012. This cash flow is expected to be utilized for (i) investment in our businesses including acquisitions, (ii) share repurchases and (iii) dividends.

 

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Our lodging, vacation exchange and rentals and vacation ownership businesses all have both domestic and international operations. During 2011, we derived 71% of our revenues in the U.S. and 29% internationally (approximately $755 million (18%) in Europe and $460 million (11%) in all other international regions). For a discussion of our segment revenues, profits, assets and geographical operations, see Note 21 to the Consolidated Financial Statements included in this Annual Report.

History and Development

Wyndham Worldwide’s corporate history can be traced back to the 1990 formation of Hospitality Franchise Systems (which changed its name to HFS Incorporated or HFS). HFS initially began as a hotel franchisor that later expanded its hospitality business and became a major real estate and car rental franchisor. In December 1997, HFS merged with CUC International, Inc., or CUC, to form Cendant Corporation (which changed its name to Avis Budget Group, Inc. in September 2006).

In October 2005, Cendant determined to separate Cendant through spin-offs into four separate companies, including a spin-off of its Hospitality Services businesses to be re-named Wyndham Worldwide Corporation. During July 2006, Cendant transferred to its subsidiary, Wyndham Worldwide Corporation, all of the assets and liabilities of Cendant’s Hospitality Services businesses and on July 31, 2006, Cendant distributed all of the shares of Wyndham Worldwide common stock to the holders of Cendant common stock issued and outstanding on July 21, 2006, the record date for the distribution. The separation was effective on July 31, 2006. On August 1, 2006, we commenced “regular way” trading on the New York Stock Exchange under the symbol “WYN.”

Each of our lodging, vacation exchange and rentals and vacation ownership businesses has a long operating history. Our lodging business began with the Howard Johnson and Ramada brands which opened their first hotels in 1954. RCI, our vacation exchange business, was established 38 years ago, and we have acquired and grown some of the world’s most renowned vacation rentals brands with histories starting as early as Hoseasons in 1940, Landal GreenParks in 1954 and Novasol in 1968. Our vacation ownership brands, Wyndham Vacation Resorts and WorldMark by Wyndham, began vacation ownership operations in 1980 and 1989, respectively.

Our portfolio of well-known hospitality brands was assembled over the past twenty years. The following is a timeline of our significant brand acquisitions:

 

1990:    Howard Johnson and Ramada (US)
1992:    Days Inn
1993:    Super 8
1995:    Knights Inn
1996:    Travelodge North America
   Resort Condominiums International (RCI)
2001:    Cuendet
   Holiday Cottages Group
   Fairfield Resorts (now Wyndham Vacation Resorts)
2002:    Novasol
   Trendwest Resorts (now WorldMark by Wyndham)
2004:    Ramada International
   Landal GreenParks
2005:    Wyndham Hotels and Resorts
2006:    Baymont
2008:    Microtel Inns & Suites and Hawthorn Suites
2010:    Hoseasons
   Tryp
   ResortQuest
   James Villa Holidays
2011:    The Resort Company

 

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The following is a description of the business of each of our three business units, Wyndham Hotel Group, Wyndham Exchange & Rentals and Wyndham Vacation Ownership and the industries in which they compete.

WYNDHAM HOTEL GROUP

Lodging Industry

The global lodging market consists of over 145,000 hotels with combined annual revenues over $354 billion, or $2.4 million per hotel. The market is geographically concentrated with the top 20 countries accounting for over 81% of global rooms.

Companies in the lodging industry operate primarily under one of the following business models:

 

   

Franchise — Under the franchise model, a company typically grants the use of a brand name to owners of hotels that the company neither owns nor manages in exchange for royalty fees that are typically equal to a percentage of room sales. Since the royalty fees are a recurring revenue stream and the cost structure is relatively low, the franchise model yields high margins and steady, predictable cash flows. During 2011, approximately 70% of the available hotel rooms in the U.S. were affiliated with a brand compared to only 41% in each of Europe and the Asia Pacific region.

 

   

Management — Under the management model, a company provides professional oversight and comprehensive operations support to lodging properties that it owns and/or lodging properties owned by a third party in exchange for management fees, that are typically equal to a percentage of hotel revenue, which may also include incentive fees based on the financial performance of the properties.

 

   

Ownership — Under the ownership model, a company owns hotel properties and benefits financially from hotel revenues, earnings and appreciation in the value of the property.

Performance in the lodging industry is measured by the following key metrics:

 

   

average daily rate, or ADR;

 

   

average occupancy rate, or occupancy;

 

   

revenue per available room, or RevPAR, which is calculated by multiplying ADR by the average occupancy rate; and

 

   

new room additions.

Demand in the global lodging industry is driven by, among other factors, business and leisure travel, both of which are significantly affected by the health of the economy. In a prosperous economy, demand is typically high, which leads to higher occupancy levels and permits increases in room rates. This cycle continues and ultimately spurs new hotel development. In a poor economy, demand deteriorates, which leads to lower occupancy levels and reduced rates. Demand outside the U.S. is also affected by demographics, airfare, trade and tourism, affluence and the freedom to travel.

 

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The U.S. is the most dominant sector of the global lodging market with over 30% of global room revenues. The U.S. lodging industry consists of over 50,000 hotels with combined annual revenues of over $107 billion, or $2.1 million per hotel. There are approximately 4.8 million guest rooms at these hotels, of which 3.4 million rooms are affiliated with a hotel chain. The following table displays trends in the key performance metrics for the U.S. lodging industry over the last six years and for 2012 (estimate):

 

                         Change in  

Year

   Occupancy     ADR      RevPAR*      Occupancy     ADR     RevPAR*  

2006

         63.1   $ 97.81       $ 61.75         0.2     7.4     7.7

2007

     62.8     104.31         65.52         (0.5 )%      6.6     6.1

2008

     59.8     107.38         64.22         (4.8 )%      3.0     (2.0 )% 

2009

     54.6     98.06         53.50         (8.8 )%      (8.7 )%      (16.7 )% 

2010

     57.5     98.06         56.43         5.5     0.0     5.5

2011

     60.1     101.64         61.06         4.4     3.7     8.2

2012 Estimate

     60.9         106.86             65.05         1.3     5.1     6.5

 

*: RevPAR may not recalculate by multiplying occupancy by ADR due to rounding

Sources: Smith Travel Research Global (“STR”) (2006 to 2011); PricewaterhouseCoopers (“PWC”) (2012). 2012 estimated data is as of January 2012.

The following table depicts trends in revenues and new rooms added on a yearly basis for the U.S. lodging industry over the last six years and for 2012 (estimate):

 

     Revenues
($bn)
     New  Rooms
(000s)
     Changes in  

Year

         Revenues     New Rooms  

2006

   $ 133.3                 138.9         8.8     66.5

2007

         139.4         145.9         4.5     5.0

2008

     140.3         132.5         0.7     (9.4 )% 

2009

     127.2         47.6         (9.4 )%      (64.0 )% 

2010

     136.9         30.2         7.7     (36.6 )% 

2011

     n/a         44.0         n/a        45.6

2012 Estimate

     n/a         55.5         n/a        26.1

 

Sources *: STR (2006 to 2011); PWC (2012). 2012 estimated data is as of January 2012.

The U.S. lodging industry experienced positive RevPAR performance over the last year primarily resulting from the ongoing recovery of demand. As the overall health of the economy improved during late 2010 and all of 2011, the lodging industry benefited from the return of corporate spending on business travel as well as increased leisure travel. Demand, as measured by room night consumption, increased 4.4% driven by a normalization of travel patterns experienced throughout 2011. ADR has continued to stabilize since rebounding in the second quarter of 2010 and, as is typical for the lodging industry, the increase in demand during 2011 stimulated ADR increases throughout the year. During 2011, ADR grew 3.7%. As a result of the occupancy and ADR gains, the U.S. Lodging industry experienced RevPAR growth of 8.2% in 2011. According to PwC’s most recent outlook on the Hospitality and Leisure Industry, it is expected that U.S hotel demand will increase approximately 2.0% in 2012, ADR will grow over 5%, a level that hasn’t been achieved since 2007, and occupancy and ADR gains will be experienced across all segments. Beyond 2012, certain industry experts project RevPAR in the U.S. to grow at a 5.9% compounded annual growth rate (“CAGR”) over the next three years (2013 – 2015).

According to PwC, supply growth still remains at low levels although new construction activity appears to be increasing over the unusually low levels of 2010.

 

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Performance in the U.S. lodging industry is evaluated based upon chain scale segments, which are generally defined as follows:

 

   

Luxury — typically offers first class appointments and an extensive range of on-property amenities and services, including restaurants, spas, recreational facilities, business centers, concierges, room service and local transportation (shuttle service to airport and/or local attractions). ADR is normally greater than $180 for hotels in this category.

 

   

Upper Upscale — typically offers well-appointed properties that offer a full range of on-property amenities and services, including restaurants, spas, recreational facilities, business centers, concierges, room service and local transportation (shuttle service to airport and/or local attractions). ADR normally falls in the range of $120 and $180 for hotels in this category.

 

   

Upscale — typically offers a full range of on-property amenities and services, including restaurants, spas, recreational facilities, business centers, concierges, room service and local transportation (shuttle service to airport and/or local attractions). ADR normally falls in the range of $100 and $120 for hotels in this category.

 

   

Upper Midscale — typically offers restaurants, vending, selected business services, partial recreational facilities (either a pool or fitness equipment) and limited transportation (airport shuttle). ADR normally falls in the range of $85 and $100.

 

   

Midscale — typically offers restaurants (“midscale with food and beverage”) or limited breakfast service (“midscale without food and beverage”), vending, selected business services, limited recreational facilities (either a pool or fitness equipment) and limited transportation (airport shuttle). ADR normally falls in the range of $60 and $85.

 

   

Economy — typically offers basic amenities and a limited breakfast. ADR is normally less than $60.

The following table sets forth the estimated key metrics for each chain scale segment and associated sub-segments within the U.S. for 2011 compared to 2010 as currently defined by STR:

 

          Change in  

Segment

  

ADR

   Demand     Room
Supply
    Occupancy     ADR     RevPAR  

Luxury

   Greater than $180      6.0     0.8     5.2     5.7     11.2

Upper upscale

   $120 to $180      4.6     1.8     2.8     3.6     6.6

Upscale

   $100 to $120      6.0     1.8     4.1     3.8     8.0

Upper Midscale

   $85 to $100      11.0     5.5     5.2     3.3     8.6

Midscale

   $60 to $85      (5.5 )%      (8.7 )%      3.5     (0.5 )%      3.0

Economy

   Less than $60      4.0     0.3     3.7     2.2     6.0

Total

        5.0     0.6     4.4     3.7     8.2

 

Source: STR

The European lodging industry consists of over 52,000 hotels with combined annual revenues over $135 billion, or $2.6 million per hotel. There are approximately 4.0 million guest rooms at these hotels, of which, 1.6 million rooms are affiliated with a hotel chain. The Asia Pacific lodging industry consists of over 20,000 hotels with combined annual revenues of approximately $96 billion, or $4.6 million per hotel. There are approximately 2.8 million guest rooms at these hotels, of which 1.2 million are affiliated with a hotel chain. The following table displays changes in the key performance metrics for the European and Asia Pacific lodging industry during 2011 as compared to 2010:

 

     Change in  

Region

   Demand     Room
Supply
    Occupancy     ADR     RevPAR  

Europe

     4.2     1.0     3.1     9.4     12.7

Asia Pacific

     3.0     2.8     0.2     9.5     9.8

 

Source: STR

 

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Wyndham Hotel Group Overview

Our lodging business, Wyndham Hotel Group, is the world’s largest hotel company (based on number of properties). Over 88% of Wyndham Hotel Group’s revenues are derived from franchising activities. Wyndham Hotel Group generally does not own any hotels with the exception of its flagship resort, the Wyndham Grand Orlando Resort Bonnet Creek. Therefore, its business model is easily adaptable to changing economic environments due to low operating cost structures, which in combination with recurring fee streams, yield high margins and predictable cash flows. Capital requirements are relatively low and mostly limited to technology expenditures to support core capabilities, and any incentives we may employ to generate new business, such as key money, development advance notes and mezzanine or other forms of subordinated financing to assist franchisees and hotel owners in converting to one of our brands or building a new hotel branded under a Wyndham Hotel Group brand.

Wyndham Hotel Group comprises the following 15 brands, with 7,205 hotels representing over 613,000 rooms on six continents and another nearly 850 hotels representing approximately 111,900 rooms in the development pipeline as of December 31, 2011. Wyndham Hotel Group franchises in most segments of the industry with the highest concentration in the economy segment, and provides management services globally for full-service hotels. The following describes these 15 widely-known lodging brands:

 

   

Days Inn is a leading global brand in the economy segment with more guest rooms than any other economy brand in the world with approximately 1,865 properties worldwide. Under its ‘A Promise As Sure As the Sun’ service culture, Days Inn hotels offer value-conscious consumers free high-speed internet, upgraded bath amenities and the Wyndham Rewards loyalty program. Most hotels also offer free Daybreak breakfast, restaurants and meeting rooms.

 

   

Super 8 Worldwide is a leading global brand in the economy segment with approximately 2,250 properties in the U.S., Canada and China, making Super 8 the largest chain of economy hotels in the world. Under its “8 point promise” service culture, Super 8 hotels offer complimentary SuperStart breakfast, free high speed internet access, upgraded bath amenities, free in-room coffee, kids under 17 stay free and free premium cable or satellite TV as well as the Wyndham Rewards loyalty program.

 

   

Microtel Inns & Suites is an award winning economy chain of 315 properties predominantly located throughout North America. Microtel is also the only prototypical, all new-construction brand in the economy segment. For guests, this means a consistent experience featuring award-winning contemporary guest rooms and public area designs. For developers, Microtel provides hotel operators low cost of construction combined with support and guidance from ground break to grand opening as well as low cost of ongoing operations. Positioned in the upper-end of the economy segment, all properties offer complimentary continental breakfast, free wired and wireless internet access, free local and long distance calls and the Wyndham Rewards loyalty program.

 

   

Howard Johnson is an iconic American hotel brand having pioneered hotel franchising in 1954. Today, Howard Johnson has over 450 hotels in North America, Latin America, Asia and other international markets. In North America, the brand operates in the midscale and economy segments while internationally the brand includes midscale and upscale hotels. The Howard Johnson brand targets families and leisure travelers, providing complimentary continental “Rise and Dine” breakfast and high-speed internet access as well as the Wyndham Rewards loyalty program.

 

   

Travelodge is a hotel chain with 440 properties located across North America. The brand operates primarily in the economy segment in the U.S. and in the midscale segment in Canada. Using its “Sleepy Bear” brand ambassador, Travelodge targets leisure travelers with a focus on those who prefer an active lifestyle of outdoor activity and offers guests complimentary Bear Bites continental breakfast and free high-speed internet access as well as the Wyndham Rewards loyalty program.

 

   

Knights Inn is a budget economy hotel chain with approximately 350 locations across North America. Knights Inn hotels provide basic overnight accommodations and complimentary breakfast for an

 

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affordable price as well as the Wyndham Rewards loyalty program. For operators, from first time owners to experienced hoteliers, the brand provides a lower cost of entry and competitive terms while still providing the extensive tools, systems and resources of the Wyndham Hotel Group.

 

   

Ramada Worldwide is a global midscale hotel chain with 845 properties located in 53 countries worldwide. Under its “You Do Your Thing, Leave the Rest to Us,” marketing foundation and supported by the “i am” service culture, most Ramada hotels feature free wireless high-speed internet access, meeting rooms, business services, fitness facilities, upgraded bath amenities and the Wyndham Rewards loyalty program. Most properties have an on-site restaurant/lounge, while other sites offer a complimentary continental breakfast with food available in the Ramada Mart.

 

   

Baymont Inn & Suites is a midscale hotel chain with approximately 260 properties located across North America. The brand’s commitment to providing ‘hometown hospitality’ means guests are offered fresh baked cookies, complimentary breakfast and high-speed internet access as well as the Wyndham Rewards loyalty program. Most hotels also offer swimming pools and fitness centers.

 

   

Wyndham Hotels and Resorts is an upscale, full service brand of 100 properties located in key business and vacation destinations around the world. Business locations feature meeting space flexible for large and small meetings, as well as business centers and fitness centers. The brand is tiered as follows: Wyndham Grand Collection, comprised primarily of 4+Diamond hotels in resort or urban destinations, offer a unique guest experience, sophisticated design and distinct dining options; Wyndham Hotels and Resorts offers customers amenities such as golf, tennis, beautiful beaches and/or spas; and Wyndham Garden Hotels, generally located in corporate or suburban areas, provide flexible space for small to midsize meetings and relaxed dining options. Each tier offers the Wyndham Rewards loyalty program.

 

   

Wingate by Wyndham is a prototypical design hotel chain in the upper end of the midscale segment with over 160 properties in North America. Each hotel offers amenities and services that make life on the road more productive, all at a single rate. Guests enjoy oversized rooms appointed with all the comforts and conveniences of home and office. Each room is equipped with a flat screen TV, high-speed internet access, in-room microwave and refrigerator. The brand also offers complimentary hot breakfast, a 24-hour business center with free printing, copying and faxing and free access to a gym facility and the Wyndham Rewards loyalty program.

 

   

Tryp by Wyndham is a select-service, mid-priced hotel brand comprised of over 90 hotels located predominantly throughout Europe and South America in key center city, airport and business center markets. This brand caters to both business and leisure travelers with varying accommodations suited for different travel needs and preferences. Guests enjoy free Internet in all rooms, free breakfast buffet with a special emphasis on healthy, fresh ingredients and the Wyndham Rewards loyalty program.

 

   

Hawthorn Suites by Wyndham is an extended stay brand that provides an ideal atmosphere for multi-night visits at approximately 75 properties predominantly in the U.S. We believe this brand provides a solution for longer-term travelers who typically seek accommodations at our Wyndham Hotels and Resorts or Wingate by Wyndham properties. Each hotel offers an inviting and practical environment for travelers with well appointed, spacious one and two-bedroom suites and fully-equipped kitchens. Guests enjoy free Internet in all rooms and common areas, complimentary hot breakfast buffets and evening social hours, as well as the Wyndham Rewards loyalty program.

 

   

Planet Hollywood is a 4+Diamond, full-service, entertainment-based hotel brand that will be located in key destination cities globally. We have a 20 year affiliation relationship with Planet Hollywood Resorts International, LLC to franchise this brand and provide management services globally for branded hotels. All hotels will offer multiple food and beverage outlets, flexible meeting space, entertainment-based theming and the Wyndham Rewards loyalty program. As of December 31, 2011, we had no properties franchised or managed by us under this affiliation arrangement.

 

   

Dream is a full-service, light-hearted brand with trend-setting design for gateway cities and resort destinations. This brand was added to our portfolio of offerings in January 2011 when we entered into a

 

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30 year affiliation relationship with Chatwal Hotels & Resorts, LLC to franchise this brand and provide management services globally for branded hotels. The progressive service offerings emulate those of luxury hotels, but with a more relaxed point of view. All hotels also offer guests the Wyndham Rewards loyalty program. As of December 31, 2011, we had 5 properties franchised by us under this affiliation arrangement.

 

   

Night is an ‘affordably chic’ brand featuring innovative designs. This brand was added to our portfolio of offerings in January 2011 when we entered into a 30 year affiliation relationship with Chatwal Hotels & Resorts, LLC to franchise this brand and provide management services globally for branded hotels. These hotels offer unique services such as guest deejays in lounges, discounts for green motorists with hybrid and electric cars, gourmet quick-serve food and beverage options and the Wyndham Rewards loyalty program. As of December 31, 2011, we had 1 property franchised by us under this affiliation arrangement.

The following table provides operating statistics for each of our brands with properties in our system as of and for the year ended December 31, 2011. We derived occupancy, ADR and RevPAR from information provided by our franchisees.

 

Brand

  Global Segment
Served (1)
  Average
Rooms Per
Property
    # of
Properties
    # of
Rooms
    Average
Occupancy
Rate
    ADR     RevPAR *  

Days Inn

  Economy     81        1,864        150,436        47.0   $ 61.42      $ 28.88   

Super 8

  Economy     63        2,249        142,254        52.1   $ 54.32      $ 28.29   

Microtel Inns and Suites

  Economy     71        315        22,441        52.7   $ 59.07      $ 31.11   

Howard Johnson

  Economy     100        451        45,115        46.7   $ 60.72      $ 28.33   

Travelodge

  Economy     75        440        33,081        46.7   $ 65.12      $ 30.41   

Knights Inn

  Economy     62        349        21,698        38.7   $ 42.32      $ 16.39   

Ramada

  Midscale     135        845        114,306        51.4   $ 76.40      $ 39.29   

Baymont

  Midscale     83        259        21,605        47.5   $ 62.00      $ 29.43   

Wyndham Hotels and Resorts

  Upscale     262        100        26,180        58.4   $ 108.27      $ 63.22   

Wingate by Wyndham

  Midscale     92        162        14,836        59.7   $ 80.61      $ 48.11   

Tryp by Wyndham

  Upper Midscale     144        91        13,076        60.5   $ 103.27      $ 62.48   

Hawthorn Suites by Wyndham

  Midscale     95        74        7,036        61.1   $ 74.76      $ 45.69   

Night

  Upper Upscale     72        1        72        94.0   $ 241.42      $ 227.05   

Dream

  Upper Upscale     198        5        990        75.6   $ 198.31      $ 149.88   
     

 

 

   

 

 

       

Total

              7,205        613,126        50.2   $ 66.46      $ 33.34   
     

 

 

   

 

 

       

 

 * RevPAR may not recalculate by multiplying average occupancy rate by ADR due to rounding.
(1) 

The global segments served column reflects the primary chain scale segments served using the STR Global definition and method as of December 2011. STR Global is U.S. centric and categorizes a hotel chain, or brand, based on ADR in the U.S. We utilized these chain scale segments to classify our brands both in the U.S. and internationally.

The following table depicts our geographic distribution and key operating metrics by region:

 

Region

   # of
Properties
     # of
Rooms (1)
     Occupancy     ADR      RevPAR *  

United States

     5,821         450,788         48.4   $ 63.12       $ 30.57   

Canada

     476         38,473         52.5     95.99         50.43   

Europe/Middle East/Africa

     322         42,875         58.5     86.29         50.49   

Asia/Pacific

     490         68,602         55.2     50.91         28.08   

Latin/South America

     96         12,388         52.5     92.36         48.52   
  

 

 

    

 

 

         

Total

           7,205         613,126         50.2     66.46         33.34   
  

 

 

    

 

 

         

 

 * RevPAR may not recalculate by multiplying occupancy by ADR due to rounding.
(1) 

From time to time, as a result of weather or other business interruption and ordinary wear and tear, some of the rooms at these hotels may be taken out of service for repair.

 

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Our franchising business is designed to generate revenues for our hotel owners through the delivery of room night bookings to the hotel, the promotion of brand awareness among the consumer base, global sales efforts, ensuring guest satisfaction and providing outstanding service to hotel guests and our hotel owners.

The sources of revenues from franchising hotels include (i) ongoing franchise fees, which are comprised of royalty, marketing and reservation fees, (ii) initial franchise fees, which relate to services provided to assist a franchised hotel to open for business under one of our brands and (iii) other service fees. Royalty fees are intended to cover the use of our trademarks and our operating expenses, such as expenses incurred for franchise services, including quality assurance and administrative support, and to provide us with operating profits. Marketing and reservation fees are intended to reimburse us for expenses associated with operating an international, centralized, brand-specific reservations system, access to third-party distribution channels, such as online travel agents (“OTAs”), advertising and marketing programs, global sales efforts, operations support, training and other related services. We promote and sell our brands through e-commerce initiatives, including online paid search and banner advertising as well as traditional media, including print and broadcast advertising. Since franchise fees generally are based on percentages of the franchised hotel’s gross room revenues, expanding our portfolio of franchised hotels and growing RevPAR at franchised hotels are important to our revenue growth. Other service fees include fees derived from providing ancillary services, which are intended to reimburse us for direct expenses associated with providing these services.

Our management business offers hotel owners the benefits of a global brand and a full range of management, marketing and reservation services. In addition to the standard franchise services described below, our hotel management business provides full-service hotel owners with professional oversight and comprehensive operations support services such as hiring, training and supervising the managers and employees who operate the hotels as well as annual budget preparation, financial analysis and extensive food and beverage services. Revenues earned from our management business include management and service fees. Management fees are comprised of base fees, which typically are calculated based on a specified percentage of gross revenues from hotel operations, and incentive fees, which typically are calculated based on a specified percentage of a hotel’s gross operating profit. Service fees include fees derived from accounting, design, construction and purchasing services and technical assistance provided to managed hotels. In general, all operating and other expenses are paid by the hotel owner and we are reimbursed for our out-of-pocket expenses. We are also required to recognize as revenue fees relating to payroll costs for operational employees who work at certain of our managed hotels. Although these costs are funded by hotel owners, we are required to report these fees on a gross basis as both revenues and expenses; there is no effect on our operating income.

We also earn revenues from the Wyndham Rewards loyalty program when a member stays at a participating hotel. These revenues are derived from a fee we charge based upon a percentage of room revenues generated from such stay. These loyalty fees are intended to reimburse us for expenses associated with administering and marketing the program.

Reservation Booking Channels

In 2011, hotels within our system sold 7.6% or approximately 80 million, of the one billion hotel room nights sold in the U.S. and another 30 million hotel room nights across other parts of the world. Over 97% of the hotels in our system are in the economy and midscale segments of the global lodging industry. Economy and midscale hotels are typically located on highway roadsides for convenience to business and leisure travelers. Therefore, the majority of hotel room nights sold at these hotels is to guests who seek accommodations on a walk-in basis, which we believe is attributable to the brand reputation and recognition of the brand name.

For guests who book their hotel stay in advance, we booked on behalf of hotels within our system a total of 42 million room nights in 2011, which represents 38% of total bookings at these hotels and includes close to 17 million room nights booked through our Wyndham Rewards loyalty program.

 

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Our most significant and fastest growing reservation source is online channels, which include proprietary web and mobile sites for each of our brands and for the Wyndham Rewards loyalty program, as well as OTAs and other third-party Internet booking sources. In 2011, we booked 19.2 million room nights through online channels on behalf of U.S. hotels within our system, representing 24% of the total bookings at these hotels. Since 2006, bookings made directly by customers on our brand web and mobile sites have increased at a five year CAGR of approximately 11%, and increased to over 8.2 million room nights in 2011, and bookings made through OTAs and other third-party Internet booking sources increased at a five year CAGR of approximately 17% to approximately 11 million room nights in 2011.

Therefore, a key strategy for reservation delivery is the continual investment in and optimization of our eCommerce capabilities (websites, mobile and other online channels) as well as the deployment of advertising spend to drive online traffic to our proprietary eCommerce channels, including through marketing agreements we have with travel related search websites and affiliate networks, and other initiatives to drive business directly to our online channels. In addition, to ensure our franchisees receive bookings from OTAs and other third-party Internet sources, we provide direct connections between our central reservations system and strategic third-party Internet booking sources. These direct connections allow us to deliver more accurate and consistent rates and inventory, send bookings directly to our central systems without interference or delay and reduce our franchise distribution costs.

Apart from the Internet, our call centers contributed over 2.7 million room nights in 2011 which represents 3.4% of the total bookings at the U.S. hotels within our system. We maintain call centers in Saint John, Canada; Aberdeen, South Dakota; and Manila, Philippines that handle bookings generated through toll-free numbers for our brands.

Our global distribution partners, such as Sabre and Amadeus, and global sales team also contributed a total of almost 2.8 million room nights in 2011, which represents 3.5% of the total bookings at the U.S. hotels within our system. Our global distribution partners process reservations made by offline travel agents and by any OTAs that do not have the ability to directly connect with our reservation system. Our global sales team generates sales from global and meeting planners, tour operators, travel agents, government and military clients, and corporate and small business accounts, to supplement the on-property sales efforts.

Loyalty Program

The Wyndham Rewards program, which was introduced in 2003, has grown steadily to become one of the lodging industry’s largest loyalty programs (based upon number of participating properties). The diversity of our brands uniquely enables us to meet our members’ leisure as well as business travel needs across the greatest number of locations and a wide range of price points. The Wyndham Rewards program is offered in the U.S., Canada, Mexico, throughout Europe and in China. As of December 31, 2011, there were 28 million members enrolled in the program of whom 7 million were active (members who have either earned or redeemed within the last 18 months). These members stay at our brands more often and drive incremental room nights, higher ADR and a longer length of stay than guests who are not members.

Wyndham Rewards offers its members numerous ways to earn and redeem points. Members accumulate points by staying in one of approximately 6,500 branded hotels participating in the program or by purchasing everyday services and products using a co-branded Wyndham Rewards credit card. Members also have the option to earn points or airline miles with approximately 40 business partners, including Wyndham Vacation Resorts, American Airlines, Continental Airlines, Delta Airlines, US Airways, United Airlines, Southwest Airlines, Alamo and National Car Rental, Avis Budget Group, Amtrak, Aeromexico, Air China and BMI. When staying at one of our franchised or managed hotels, Wyndham Rewards members may elect to earn airline miles or rail points instead of Wyndham Rewards points. Wyndham Rewards members have thousands of options for redeeming their points including hotel stays, airline tickets, resort vacations, car rentals, electronics, sporting goods, movie and theme park tickets, and gift certificates.

 

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Marketing, Sales and Revenue Management Services

Our brand marketing teams develop and implement global marketing strategies for each of our hotel brands, including generating consumer awareness of, and preference for each brand as well as direct response activities designed to drive bookings through our central reservation systems. While brand positioning and strategy is generated from our U.S. headquarters, we have seasoned marketing professionals positioned around the globe to modify and implement these strategies on a local market level. Our marketing efforts communicate the unique value proposition of each of our individual brands, and are designed to build consumer awareness and drive business to our hotels, either directly or through our own reservation channels. We deploy a variety of marketing strategies and tactics depending on the needs of the specific brand and local market, including online advertising, traditional media planning and buying (radio, television and print), creative development, promotions, sponsorships and direct marketing. Our Best Available Rate guarantee gives consumers confidence to book directly with us by providing the same rates regardless of whether they book through our call centers, websites or other third party channel. In addition, we leverage the strength of our Wyndham Rewards program to develop meaningful marketing promotions and campaigns to drive new and repeat business to hotels in our system. Our Wyndham Rewards marketing efforts drive tens of millions of consumer impressions through the program’s channels and through the program’s partners’ channels.

Our global sales organization, strategically located throughout the world, leverages the significant size of our portfolio and our hotel brands to gain a larger share of business for each of our hotels through relationship-based selling to a diverse range of customers. Because our hotel portfolio meets the needs of all types of travelers, we can find more complete solutions for a client/company who may have travel needs ranging from economy to upscale brands. We are able to accommodate travelers almost anywhere business or leisure travelers go with our selection of over 7,200 hotels throughout the world. The sales team is deployed globally in key markets within Europe, Mexico, Canada, Korea, China, Singapore, the Middle East and throughout the U.S. in order to leverage multidimensional customer needs for our hotels. The global sales team also works with each hotel to identify the hotel’s individual needs and then works to find the right customers to stay with those brands and those hotels.

We offer revenue management services to help maximize revenues of our hotel owners by improving rate and inventory management capabilities and also coordinating all recommended revenue programs delivered to our hotels in tandem with e-commerce and brand marketing strategies. Properties enrolled in our revenue management services have experienced higher production from call centers, websites and other channels, as well as stronger RevPAR index performance. As a result, the 4,700+ properties currently enrolled in the revenue management program have experienced improvement in RevPAR index since enrolling in our revenue management services.

Property Services

We continue to support our franchisees with a team of dedicated support and service providers both field based and housed at our corporate office. This team of industry veterans collaborates with hotel owners on all aspects of their operations and creates detailed and individualized strategies for success. By providing key services, such as system integration, operations support, training, strategic sourcing, and development planning and construction, we are able to make a meaningful contribution to the operations of the hotel resulting in more profits for our hotel owners.

Our field services team, strategically dispersed worldwide, integrates new properties into our system and helps existing properties improve RevPAR performance and guest satisfaction. Our training teams provide robust educational opportunities to our hotel owners through instructor led, web-based and electronic learning vehicles for a number of relevant topics. Our strategic sourcing department helps franchisees control costs by leveraging the buying power of the entire Wyndham Worldwide organization to produce discounted prices on numerous items necessary for the successful operation of a hotel, such as linens and coffee. Our development planning and construction team provides architectural and interior design guidance to hotel owners to ensure compliance with brand standards, including construction site visits and the creation of interior design schemes.

 

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We also provide hotel owners with property management system software that synchronizes each hotel’s inventory with our central reservations platform. These systems help hotel owners manage their rooms inventory (room nights), rates (ADR) and reservations, which leads to greater profits at the property level and better enables us to deliver reservations at the right price to our hotel owners.

Additionally, MyPortal, which is a property-focused intranet website, is the key communication vehicle and a single access point to all the information and tools available to help our hotel owners manage their day-to-day activities.

New Development

Our development team consists of approximately 100 professionals dispersed throughout the world, including in the U.S., China, Mexico, India, Europe and the Middle East. Our development efforts typically target existing franchisees as well as hotel developers, owners of independent hotels and owners of hotels leaving competitor brands. Approximately 30% of the new rooms added in 2011 were with franchisees or managed hotel owners already doing business with us.

Our hotel management business gives us access to development opportunities beyond pure play franchising transactions. When a hotel owner is seeking both a brand and a manager for a full-service hotel, we are able to couple these services in one offering which we believe gives us a competitive advantage.

During 2011, our development team generated 760 applications for new franchise and/or management agreements, of which 492, or 65%, resulted in new franchise and/or management agreements. The difference is attributable to various factors such as financing and agreement on contractual terms. Once executed, about 94% of hotels open within the following year, while 4% open between 12 and 24 months due to extensive renovations, permitting and delayed construction. The remaining may never open due to various factors such as financing.

As of December 31, 2011, we had approximately 850 hotels and 111,900 rooms pending opening in our development pipeline, of which 60% were international and 57% were new construction.

In North America, we generally employ a direct franchise model whereby we contract with and provide various services and reservations assistance directly to independent owner-operators of hotels. Under our direct franchise model, we principally market our lodging brands to hotel developers, owners of independent hotels and hotel owners who have the right to terminate their franchise affiliations with other lodging brands. We also market franchises to existing franchisees because many own, or may own in the future, other hotels that can be converted to one of our brands. Our standard franchise agreement grants a franchisee the right to non-exclusive use of the applicable franchise system in the operation of a single hotel at a specified location, typically for a period of 15 to 20 years, and gives the franchisor and franchisee certain rights to terminate the franchise agreement before its conclusion under certain circumstances, such as upon the lapse of a certain number of years after commencement of the agreement. Early termination options in franchise agreements give us flexibility to terminate franchised hotels if business circumstances warrant. We also have the right to terminate a franchise agreement for failure by a franchisee to bring its property into compliance with contractual or quality standards within specified periods of time, pay required franchise fees or comply with other requirements of the franchise agreement.

Although we generally employ a direct franchise model in North America, we opened our first company-owned hotel, The Wyndham Grand Orlando Resort Bonnet Creek, in late 2011. This hotel is situated in our Bonnet Creek vacation ownership resort near the Walt Disney World resort in Florida and enables us to leverage the synergies of our company’s hotel and vacation ownership components.

In other parts of the world, we employ a direct franchise model or, where we are not yet ready to support the required infrastructure for that region, we may employ a master franchise model. Franchise agreements in regions outside of North America may carry a lower fee structure based upon the breadth of services we are

 

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prepared to provide in that particular region. Under our master franchise model, we principally market our lodging brands to third parties that assume the principal role of franchisor, which entails selling individual franchise agreements and providing quality assurance, marketing and reservations support to franchisees. Since we provide only limited services to master franchisors, the fees we receive in connection with master franchise agreements are typically lower than the fees we receive under a direct franchising model. Master franchise agreements, which are individually negotiated and vary among our different brands, typically contain provisions that permit us to terminate the agreement if the other party to the agreement fails to meet specified development schedules. The terms of our master franchise agreements generally are competitive with industry averages.

We also enter into affiliation relationships whereby we provide our development, marketing and franchise services to brands owned by our affiliated partners. These relationships give us the ability to offer unique experiences to our guests and unique brand concepts to developers seeking to do business with Wyndham Hotel Group. Affiliation agreements typically carry lower royalty fees since we do not incur costs associated with owning the underlying intellectual property. Certain of these affiliated relationships contain development targets whereby our future development rights may be terminated upon failure to meet the specified targets.

Strategies

Wyndham Hotel Group is strategically focused on two objectives that we believe are essential to our business: increasing our system size and strengthening our customer value proposition.

To increase our system size, we intend to add new rooms and retain existing properties that meet our performance criteria.

 

   

We expect to deploy the following tactics to add new rooms:

 

   

create franchise conversion programs for our Super 8, Days Inn and Ramada brands with a goal of reducing the average age of the North America system;

 

   

target new construction and conversion opportunities in China, the Middle East, Latin America, United Kingdom and India for our Wyndham, Ramada, Days Inn and Super 8 brands:

 

   

target key markets globally where the Wyndham brand is underrepresented and deploy a hub-and-spoke development strategy as well as offer customized financing solutions to hotel owners;

 

   

spur new construction growth in our Microtel and Wingate brands by developing a unique offering of franchisee-financing options for multi-unit developers in North America; and

 

   

introduce the Tryp by Wyndham brand to North America with targeted development efforts in key markets and continuing to increase its existing presence in Latin America and Europe.

 

   

To execute on retaining existing properties that meet our performance criteria, we will:

 

   

continue to strengthen our value proposition; and

 

   

continue to deploy our exceptional service culture tool, “Count on Me!”, into every aspect of the business to attain optimal customer satisfaction.

Helping make our franchised and managed hotels profitable, whether through incremental revenue, cost efficiencies, operational excellence or better service, is essential in attracting new owners and retaining existing properties. This is why continually strengthening our customer value proposition is our second strategic objective. To this end, we are executing a comprehensive, multi-faceted plan to drive more business through our own direct, lowest cost channels. The launch of our new websites and improved content during 2011 were the first step in setting the foundation for these efforts. There are several other initiatives recently launched or in development to enable us to capture more business through our own online channels, including piloting ratings and reviews on our website, an umbrella, cross branded website, new mobile sites and apps, and our investment

 

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in Room Key, which is a joint venture we invested in with 5 other major hotel companies. We have also invested in building out our eCommerce operational capabilities in the areas of online customer experience, online marketing and online retailing.

Our global strategy generally focuses on pursuing new room growth organically although we may consider the select acquisition of brands that fulfill our strategic objectives.

Seasonality

Franchise and management fees are generally higher in the second and third quarters than in the first or fourth quarters of any calendar year as a result of increased leisure travel and the related ability to charge higher ADRs during the spring and summer months.

Competition

Competition is robust among the lodging brand franchisors to grow their franchise systems and retain their existing franchisees. We believe existing and potential franchisees make decisions based principally upon the perceived value and quality of the brand and the services offered to franchisees. We further believe that the perceived value of a brand name is, to some extent, a function of the success of the existing hotels franchised under the brands. We believe that existing and prospective franchisees value a franchise based upon their views of the relationship between the costs, including costs of conversion and affiliation, to the benefits, including potential for increased revenues and profitability, and upon the reputation of the franchisor.

The ability of an individual franchisee to compete may be affected by the location and quality of its property, the number of competing properties in the vicinity, community reputation and other factors. A franchisee’s success may also be affected by general, regional and local economic conditions. The potential negative effect of these conditions on our results of operations is substantially reduced by virtue of the diverse geographical locations of our franchised hotels and by the scale of our franchisee base. Our franchise system is dispersed among approximately 5,600 franchisees, which reduces our exposure to any one franchisee. No one franchisee accounts for more than 4% of our franchised hotels or total segment revenues.

WYNDHAM EXCHANGE & RENTALS

Vacation Exchange and Rentals Industries

The vacation exchange and rentals industries offer leisure travelers access to a range of fully-furnished vacation properties, which include privately-owned vacation homes, villas, cottages, apartments, condominiums and vacation ownership resorts, as well as flexibility (subject to availability) in time of travel and choice of lodging options in regions where travelers may not typically have access to such choices.

The vacation exchange industry is a fee-for-service business. The industry offers services and products to timeshare (also known as “vacation ownership”) developers and consumers. To participate in a vacation exchange through an exchange company, an owner generally provides their interval to an exchange company’s network and, in exchange, receives the opportunity to exchange for another interval. The exchange company then values the owner’s interval within its network based upon a number of factors, including the location and size of the unit, the start date of the interval week, and amenities at the resort. Owners can then take advantage of their opportunity to exchange by selecting from other available inventory within the exchange company’s network. An exchange may then be completed based on these conditions. Exchange companies generally derive revenues from owners of intervals by charging exchange fees for facilitating exchanges and through annual membership dues. In 2010, 71% of owners of intervals were members of vacation exchange companies, and 52% of such owners exchanged their intervals through such exchange companies.

 

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The long-term trend in the vacation exchange industry has been growth in the number of members of vacation exchange companies. Current economic conditions have resulted in stable membership levels, but we believe that an economic recovery will support a return to stronger growth. In 2010, there were approximately 6.0 million members industry-wide who completed approximately 3.1 million exchanges. Within the broader long-term growth trend of the vacation exchange industry, there is also a trend where timeshare developers are enrolling members in private label clubs, where members have the option to exchange within the club or through external exchange channels. The club trend has a positive impact on the average number of members, but a negative effect on the number of exchange transactions per average member and revenue per member.

The over $65 billion global vacation rentals industry is largely a fee-for-service business that offers vacation property owners the opportunity to rent their properties to leisure travelers. The industry is divided broadly into two segments. The first is the professionally managed rental segment, where the homeowner provides their property to an agent to rent, in a majority of cases, on an exclusive basis and the agent receives a commission for marketing the property, managing bookings and providing quality assurance to the renter. Additionally, the agent may offer services such as daily housekeeping, on-site check-in, in-unit maintenance, and in-room guest amenities. The other segment of the industry is the listing business, where there is no exclusive relationship and the property owner pays a fixed fee for an online listing or a directory listing with minimal additional services, typically with minimal to no direct booking ability or quality assurance services. In the listing model, this fixed fee is generally charged regardless of whether the unit is ultimately rented. Typically, professionally managed vacation rental companies collect rent in advance and, after deducting the applicable commissions, remit the net amounts due to the property owners and/or property managers. In addition to commissions, professionally managed vacation rental companies may earn revenues from rental customers through fees that are incidental to the rental of the properties, such as fees for travel services, local transportation, on-site services and insurance or similar types of products.

The global supply of vacation rental inventory is less organized than the lodging industry and is highly fragmented with much of it being made available by individual property owners. We believe that as of December 31, 2011, there were approximately 1.3 million and 2.7 million vacation properties available for rental in the U.S. and Europe, respectively. In the U.S., the vacation properties available for rental are primarily condominiums or stand-alone houses. In Europe, the vacation properties available for rental include individual homes and apartments, campsites and vacation park bungalows. Individual owners of vacation properties in the U.S. and Europe may own their properties as investments and may sometimes use such properties for their own use for portions of the year. We believe that the overall supply of vacation rental properties has grown primarily because of the increasing desire by existing owners of second homes to gain an earnings stream evidenced by homes not previously offered for rent appearing on the market.

We believe that the overall demand for vacation rentals has been growing for the following reasons: (i) the consumer value of renting a unit for an entire family; (ii) the increased use of the Internet as a tool for facilitating vacation rental transactions; and (iii) increased consumer awareness of vacation rental options. The global demand per year for vacation rentals is approximately 54 million vacation weeks, 34 million of which are rented by leisure travelers from Europe. Demand for vacation rental properties is often regional since many leisure travelers rent properties within driving distance of their home. Some leisure travelers, however, travel relatively long distances from their homes to vacation properties in domestic or international destinations. Current economic conditions have resulted in slower growth in demand in the near term, but we believe that long-term trends will support a return to stronger growth.

The destinations where leisure travelers from Europe and the U.S. generally rent properties vary by country of origin of the leisure travelers. Leisure travelers from Europe generally rent properties in European holiday destinations, including the United Kingdom, Denmark, Ireland, Spain, France, the Netherlands, Germany, Italy and Portugal. Demand from European leisure travelers has recently been shifting beyond traditional Western Europe, based on increased accessibility of Eastern Europe, the expansion of the European Union and political stability across Europe. Demand from U.S. leisure travelers is focused on rentals in seaside destinations, such as

 

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Hawaii, Florida and the Carolinas, in ski destinations such as the Rocky Mountains, and in urban centers such as Las Vegas, Nevada and San Francisco, California. Demand is also growing for destinations in Mexico and the Caribbean by leisure travelers from the U.S.

Wyndham Exchange & Rentals Overview

Wyndham Exchange & Rentals is largely a fee-for-service business that provides vacation exchange services and products to developers, managers and owners of intervals of vacation ownership interests, and markets and services vacation rental properties. We are the world’s largest vacation exchange network based on the number of vacation exchange members and the world’s largest global marketer of vacation rental properties based on the number of professionally managed vacation rental properties. Our vacation exchange and rentals business primarily derives its revenues from fees that generate stable and predictable cash flows. The revenues generated in our vacation exchange and rentals business are substantially derived from the direct customer relationships we have with our over 3.7 million vacation exchange members, the affiliated developers of over 4,000 resorts, our approximately 55,000 independent property owners and our repeat vacation rentals customers. No one external customer, developer or customer group accounts for more than 2% of our vacation exchange and rentals revenues.

Our vacation exchange business, RCI, derives a majority of its revenues from annual membership dues and exchange fees for facilitating transactions. Our vacation exchange business also derives revenues from ancillary services including additional services provided to transacting members, programs with affiliated resorts, club servicing and loyalty programs.

Our vacation rentals business, Wyndham Vacation Rentals, primarily derives its revenues from fees, which generally average between 20% and 50% of the gross booking fees for non-proprietary inventory, except for where we receive 100% of the revenues for properties that we own or operate under long-term capital leases. Our vacation rentals business also derives revenues from ancillary services delivered to property owners and travelers.

Our vacation exchange and rentals business has access for specified periods, in a majority of cases on an exclusive basis, to approximately 100,000 vacation properties, which are comprised of over 4,000 vacation ownership resorts around the world through our vacation exchange business, and over 95,000 vacation rental properties with approximately 88,000 properties located in Europe and over 7,000 located in the U.S. Each year, our vacation exchange and rentals business provides more than 5 million leisure-bound families with vacation exchange and rentals services and products. The properties available to leisure travelers through our vacation exchange and rentals business include vacation ownership condominiums, homes, villas, cottages, bungalows, campgrounds, city apartments, fractional private residences, luxury destination clubs, boats and yachts. We offer leisure travelers flexibility (subject to availability) as to time of travel and a choice of lodging options in regions to which such travelers may not typically have such ease of access, and we offer property owners marketing, booking and quality control services. Additionally, some of our brands offer property management services ranging from key-holding to full property maintenance for such properties. Our vacation exchange and rentals business has over 150 worldwide offices. We market our services and products using eleven primary consumer brands and other related brands.

Vacation Exchange

Through our vacation exchange business, RCI, we have relationships with over 4,000 vacation ownership resorts in approximately 100 countries. We have over 3.7 million vacation exchange members and generally retain more than 85% of members each year, with the overall membership base currently stable and expected to grow over the long term, and generate fees from members for both annual membership subscriptions and transaction based services. We acquire substantially all members of our exchange programs indirectly. In substantially all cases, an affiliated resort developer buys the initial term of an RCI membership on behalf of the

 

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consumer when the consumer purchases a vacation ownership interval. Generally, this initial term is either 1 or 2 years and entitles the vacation ownership interval purchaser to receive periodicals published by RCI and to use the applicable exchange program for an additional fee. The vacation ownership interval purchaser generally pays for membership renewals, or such member renewals are paid for by the developer on the purchaser’s behalf. Additionally, such purchaser generally pays any applicable fees for exchange transactions and other services.

RCI operates three worldwide exchange programs that have a member base of vacation owners who are generally well-traveled and who want flexibility and variety in their travel plans each year. Our vacation exchange business’ three exchange programs, which serve owners of intervals at affiliated resorts, are RCI Weeks, RCI Points and The Registry Collection. Participants in these vacation exchange programs pay annual membership dues. For additional fees, participants are entitled to exchange intervals for intervals at other properties affiliated with our vacation exchange business. In addition, certain participants may exchange intervals for other leisure-related services and products. We refer to participants in these three exchange programs as “members.”

The RCI Weeks exchange program is the world’s largest vacation ownership exchange network and generally provides members with the ability to exchange week-long intervals in units at their resorts for week-long intervals at comparable resorts. In order to do so, RCI Weeks members first deposit their vacation intervals with RCI and obtain trading power that they can then use to exchange for another interval within RCI’s program. With the introduction of Enhanced Weeks, members can now also combine deposited timeshare intervals, which allow them the ability to exchange into highly-demanded vacations that they might not otherwise be able to exchange into, and receive a deposit credit if the value of their deposited interval is greater than the interval into which they have exchanged. During 2011, RCI also launched RCI Weeks Platinum membership, a premium level of membership that offers exclusive exchange and lifestyle benefits to subscribing members.

The RCI Points exchange program, launched in 2000, is a global points-based exchange network, which allocates points to intervals that members cede to the exchange program. Under the RCI Points exchange program, members may redeem their points for the use of vacation properties in the exchange program or for discounts on other services and products which may change from time to time, such as airfare, car rentals, cruises, hotels and other accommodations. When points are redeemed for these other services and products, our vacation exchange business gains the right to these points so it can rent vacation properties backed by these points in order to recoup the expense of providing discounts on other services and products. In 2010, RCI launched RCI Points Platinum membership, a premium level of membership that offers exclusive exchange and lifestyle benefits to subscribing members.

We believe that The Registry Collection exchange program is the industry’s largest and first global exchange network of luxury vacation accommodations. The luxury vacation accommodations in The Registry Collection network include higher-end vacation ownership resorts, fractional ownership resorts, condo-hotels and yachts. The Registry Collection program allows members to exchange their intervals for the use of other vacation properties within the network for a fee and also offers access to other services and products, such as cruises, yachts, adventure travel, hotels and other accommodations. The members of The Registry Collection exchange program often own greater than two-week intervals at affiliated resorts.

Our vacation exchange business operates worldwide primarily in the following regions: North America, Europe, Latin America, Southern Africa, Asia Pacific and the Middle East. We tailor our strategies and operating plans for each of the geographical environments where RCI has, or seeks to develop, a substantial member base.

Vacation Rentals

Our vacation rentals business, Wyndham Vacation Rentals, markets vacation rental properties including privately-owned villas, homes, cottages, bungalows, campgrounds, apartments and condominiums that generally belong to independent property owners in more than 500 destinations. The variety, location and caliber of properties in the Wyndham Vacation Rentals portfolio, in addition to the many benefits and services that

 

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Wyndham Vacation Rentals offers, provides consumers the opportunity for memorable vacation experiences and gives travelers unique moments in more parts of the world than ever before. In addition to these properties, we market inventory from our vacation exchange business and from other sources. We generate fee income from marketing and renting these properties to consumers. We currently make over 1.3 million vacation rental bookings a year. We market vacation rental properties under proprietary brand names, such as Landal GreenParks, Hoseasons, Villas4You, cottages4you, James Villa Holidays, Novasol, Dansommer, Cuendet and Canvas Holidays, as well as ResortQuest by Wyndham Vacation Rentals, Steamboat Resorts by Wyndham Vacation Rentals and The Resort Company by Wyndham Vacation Rentals. Additionally, we market vacation rental properties through select private-label arrangements. Our vacation rentals business has over 95,000 properties with approximately 88,000 properties in Europe and over 7,000 properties in the U.S. The following is a description of some of our major vacation rental brands:

 

   

The Hoseasons Group operates a number of well-recognized and established brands within the vacation rental market, including Hoseasons, cottages4you and James Villa Holidays, and offers unparalleled access to over 44,000 properties across the U.K. and Europe.

 

   

Novasol is one of continental Europe’s largest rental companies, featuring properties in more than 20 European countries including holiday homes in Denmark, Norway, Sweden, France, Italy and Croatia, with approximately 30,000 exclusive holiday homes available for rent through established brands such as Novasol, Dansommer and Cuendet.

 

   

Landal GreenParks is one of Holland’s leading holiday park companies, with over 70 holiday parks offering approximately 11,000 holiday park bungalows, villas and apartments in the Netherlands, Germany, Belgium, Austria, Switzerland and the Czech Republic. Every year more than 2 million guests visit Landal’s parks, many of which offer dining, shopping and wellness facilities.

 

   

Canvas Holidays is a specialist tour operator offering luxury camping holidays in Europe at 90 of the finest European campsites with over 2,500 accommodation units. It has a wide choice of luxury accommodations — spacious lodges, comfortable mobile homes and the unique Maxi Tent, plus an exciting range of children’s and family clubs.

 

   

ResortQuest by Wyndham Vacation Rentals is a leading provider of full-service, wholly-owned vacation condominiums and home rentals in the U.S. With more than 20 years of experience in the industry, ResortQuest represents a portfolio of approximately 6,000 vacation rental properties, marketed through established brands, in resort destinations across the United States — such as Colorado, Utah, South Carolina, Florida and Delaware.

 

   

The Resort Company operates under the The Resort Company by Wyndham Vacation Rentals and Steamboat Resorts by Wyndham Vacation Rentals brands and provides full-service management through hotel-type services to owners and guests. Their portfolio of approximately 1,000 vacation properties is concentrated in the Colorado Rocky Mountains in world class resorts.

Most of the rental activity under our brands takes place in Europe and the U.S. Our vacation rentals business also has the opportunity to provide inventory to our over 3.7 million vacation exchange members and our exchange and rentals business has the ability to source and rent inventory in approximately 100 countries.

Wyndham Vacation Rentals offers travelers exceptional vacation experiences around the world. Our vacation rentals business currently has relationships with approximately 55,000 independent property owners in 32 countries, including the Netherlands, United Kingdom, Germany, Denmark, Sweden, France, Ireland, Belgium, Italy, Spain, Portugal, Norway, Greece, Austria, Croatia, certain countries in Eastern Europe and the U.S. Property owners typically enter into annual contracts with our vacation rentals subsidiaries to market the rental of their properties within our rental portfolio. Our vacation rentals business also has an ownership interest in, or capital leases under our Landal GreenParks brand, approximately 7% of the properties in our rental portfolio.

 

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Customer Development

In our vacation exchange business, we affiliate with vacation ownership developers directly as a result of the efforts of our in-house sales teams. Affiliated developers sign long-term agreements each with an average duration of approximately 5 years. Our members are acquired primarily through our affiliated developers as part of the vacation ownership purchase process.

In our vacation rentals business, we primarily enter into exclusive annual rental agreements with property owners. We market rental properties online and offline to large databases of customers which generate repeat bookings. Additional customers are sourced through bookable websites and offline advertising and promotions, and through the use of third-party travel agencies, tour operators, and online distribution channels to drive additional occupancy. We have a number of specific branded websites, such as http://www.cottages4you.co.uk and http://www.resortquest.com as well as a new global portal highlighting all of our vacation rental brands across product type and geography, http://www.wyndhamrentals.com, to promote, sell and inform new customers about vacation rentals. Given the diversified nature of our rental brands, there is limited dependence on a single customer group or business partner.

Loyalty Program

Our U.S. vacation exchange business’ member loyalty program is RCI Elite Rewards, which offers a branded credit card, the RCI Elite Rewards credit card. The card allows members to earn reward points that can be redeemed for items related to our exchange programs, including annual membership dues and exchange fees for transactions, and other services and products offered by our vacation exchange business or certain third parties, including airlines and retailers.

Internet

Given the increasing interest of our members and rental customers to transact on the Internet, we invest and will continue to invest in cutting edge and innovative online technologies to ensure that our members and rental customers have access to similar information and services online that we provide through our call centers. Through our comprehensive http://www.RCI.com initiative, which began in 2008, we launched enhanced search capabilities that greatly simplify our search process and make it easier for a member to find a desired vacation. We have also greatly expanded our online content, including multiple resort pictures and high-definition videos, to help educate members about potential vacation options. Additionally, through this initiative, we released a significant series of technology enhancements to our members. This new technology included program enhancements for our RCI Weeks members that provide complete trading power transparency, allowing members to better understand the trading power value of the timeshare interval that they deposited with RCI and the timeshare interval into which they want to exchange. Members also have the ability to combine the timeshare intervals that they have deposited with RCI for increased trading power and get a deposit credit if the trading power value of their deposited interval is greater than the interval that they have received by exchange. We also have enhanced our ability to merchandise offers through web only channels and have launched mobile technologies such as applications for the iPhone, Blackberry and Android devices to access http://www.RCI.com functionality.

In 2011, we brought even more simplicity, speed, and efficiency to the vacation exchange experience with another major technology upgrade. This included a new property information management platform, as well as a new enhanced search function for our RCI Points members. In addition, we launched an innovative recommendation engine technology where members see real-time vacation suggestions that best fit their unique travel preferences. Our RCI.com initiatives have increased our web penetration to 38% in 2011 from 13% in 2008 when we launched this initiative.

Over the last several years, we have improved our web penetration to 61% in 2011 for European rentals through enhancements that have moved the majority of bookings online. As our online distribution channels

 

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improve, members and rental customers will shift from transacting business through our call centers to transacting business online, which we expect will generate cost savings. By offering our members and rental customers the opportunity to transact business either through our call centers or online, we offer our members and rental customers the ability to use the distribution channel with which they are most comfortable. Regardless of the distribution channel our members and rental customers use, our goals are member and rental customer satisfaction and retention.

Call Centers

Our vacation exchange and rentals business also services its members and rental customers through global call centers. The requests that we receive at our global call centers are handled by our vacation guides, who are trained to fulfill our members’ and rental customers’ requests for vacation exchanges and rentals. When our members’ and rental customers’ primary choices are unavailable in periods of high demand, our guides offer the next nearest match in order to fulfill the members’ and rental customers’ needs. Call centers are currently an important distribution channel and therefore we invest resources and will continue to do so to ensure that members and rental customers continue to receive a high level of personalized customer service through our call centers.

Marketing

We market to our members and rental customers through several marketing channels including direct mail, email, telemarketing, online distribution channels, brochures, magazines and travel agencies. Our vacation exchange business has a comprehensive social media platform including an RCI app for the iPhone, Blackberry and Android devices, a Facebook fan page, a Facebook application called RCI’s Share Your Vacation, a Twitter account, a YouTube channel, an online video content network called RCI TV, and the RCI Blog. Our vacation exchange and rentals brands have over 85 publications involved in the marketing of the business, including various resort directories and periodicals related to the vacation industry and other travel-related services. We use our publications not only for marketing, but also for member and rental customer retention and loyalty. Additionally, we promote our offerings to owners of resorts and vacation homes through publications, trade shows, online and other marketing efforts.

Strategies

We intend to grow our vacation exchange and rentals business profitability by focusing on five strategic themes:

 

   

Inspire world-class associate engagement and “Count On Me!” service so that we will deliver better services and products, resulting in improved customer satisfaction and optimal business growth;

 

   

Invest in technology to improve the customer experience, grow market share and reduce costs;

 

   

Offer more options to our guests by expanding into new geographic markets and product lines, and by leveraging the scale of our inventory across all of our exchange and rentals brands;

 

   

Develop compelling new services and products, and maximize occupancy and yield by improving our analytic process; and

 

   

Promote the benefits of timeshare and vacation rentals to new and existing customer segments.

Our plans generally focus on pursuing these strategies organically. However, in appropriate circumstances, we will consider opportunities to acquire businesses, both domestic and international.

Seasonality

Vacation exchange transaction revenues are normally highest in the first quarter, which is generally when members of RCI plan and book their vacations for the year. Rental transaction revenues earned are usually

 

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highest in the third quarter, when vacation rentals are highest. More than half of our European vacation rental customers book their reservations within 11 weeks of departure dates and almost 75% of our European vacation rental customers book their reservations within 20 weeks of departure dates. More than half of our North American vacation rental customers book their reservations within 8 weeks of departure dates and almost 75% of our North American vacation rental customers book their reservations within 15 weeks of departure dates, reflecting recent trends of bookings closer to the travel date.

Competition

The vacation exchange and rentals business faces competition throughout the world. Our vacation exchange business competes with a third-party international exchange company, with regional and local vacation exchange companies and with Internet-only limited service exchanges. In addition, certain developers offer exchanges through internal networks of properties, which can be operated by us or by the developer, that offer owners of intervals access to exchanges other than those offered by our vacation exchange business. Our vacation rentals business faces competition from a broad variety of professional vacation rental managers and rent-by-owner channels that collectively use brokerage services, direct marketing and the Internet to market and rent vacation properties.

WYNDHAM VACATION OWNERSHIP

Vacation Ownership Industry

The global vacation ownership industry, which is also referred to as the timeshare industry, is an important component of the domestic and international hospitality industry. The vacation ownership industry enables customers to share ownership of a fully-furnished vacation accommodation. Typically, a vacation ownership purchaser acquires either a fee simple interest in a property, which gives the purchaser title to a fraction of a unit, or a right to use a property, which gives the purchaser the right to use a property for a specific period of time. Generally, a vacation ownership purchaser’s fee simple interest in or right to use a property is referred to as a “vacation ownership interest.” For many vacation ownership interest purchasers, vacation ownership is an attractive vacation alternative to traditional lodging accommodations at hotels or owning vacation properties. Owners of vacation ownership interests are not subject to the variance in room rates to which lodging customers are subject, and vacation ownership units are, on average, more than twice the size of traditional hotel rooms and typically have more amenities, such as kitchens, than do traditional hotel rooms.

The vacation ownership concept originated in Europe during the late 1960s and spread to the U.S. shortly thereafter. The vacation ownership industry expanded slowly in the U.S. until the mid-1980s. From the mid-1980s through 2007, the vacation ownership industry grew at a double-digit CAGR, although sales slowed by approximately 8% in 2008 and experienced even greater declines in 2009 due to the global recession and a significant disruption in the credit markets. According to a May 2011 report issued by the American Resort Development Association or ARDA, a trade association representing the vacation ownership and resort development industries, domestic sales of vacation ownership interests were approximately $6.4 billion in 2010. ARDA estimated that in 2010, there were approximately 8.1 million households that owned one or more vacation ownership interests in the U.S.

Based on published industry data, we believe that the following factors have contributed to the strength and stability, particularly in North America, of the vacation ownership industry over the past two decades:

 

   

inherent appeal of a timeshare vacation option as opposed to a hotel stay;

 

   

improvement in quality of resorts and resort management and servicing;

 

   

increased flexibility for owners of vacation ownership interests made possible through owners’ affiliations with vacation ownership exchange companies and vacation ownership companies’ internal exchange programs;

 

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entry of widely-known lodging and entertainment companies into the industry; and

 

   

increased consumer confidence in the industry based on enhanced consumer protection regulation of the industry.

Demographic factors explain, in part, the continued appeal of vacation ownership. A 2010 study of recent U.S. vacation ownership purchasers revealed that the average purchaser was 52 years of age and had a median household income of $78,400. The average purchaser in the U.S., therefore, is a baby boomer who has disposable income and interest in purchasing vacation products. We believe that baby boomers will continue to have a positive influence on the vacation ownership industry.

According to information compiled by ARDA, four primary reasons consumers cite for purchasing vacation ownership interests are: (i) flexibility with respect to different locations, unit sizes and times of year, (ii) the certainty of quality accommodations, (iii) credibility of the timeshare company and (iv) the opportunity to exchange into other resort locations. According to a 2010 ARDA study, nearly 84% of owners of vacation ownership interests expressed satisfaction with owning timeshare. With respect to exchange opportunities, most owners of vacation ownership interests can exchange vacation ownership interests through exchange companies and through the applicable vacation ownership company’s internal network of properties.

Wyndham Vacation Ownership Overview

Wyndham Vacation Ownership, our vacation ownership business, includes marketing and sales of vacation ownership interests, consumer financing in connection with the purchase by individuals of vacation ownership interests, property management services to property owners’ associations and development and acquisition of vacation ownership resorts. We have the largest vacation ownership business in the world as measured by the number of vacation ownership resorts, vacation ownership units and owners of vacation ownership interests and by annual revenues associated with the sale of vacation ownership interests. As of December 31, 2011, we have developed or acquired over 160 vacation ownership resorts in the U.S., Canada, Mexico, the Caribbean and the South Pacific that represent approximately 20,800 individual vacation ownership units and over 813,000 owners of vacation ownership interests.

We operate our vacation ownership business through our two primary brands, Wyndham Vacation Resorts and WorldMark by Wyndham. In October 1999, WorldMark by Wyndham formed Wyndham Vacation Resorts Asia Pacific Pty. Ltd., a New South Wales corporation, or Wyndham Asia Pacific, as its direct wholly owned subsidiary for the purpose of conducting sales, marketing and resort development activities in the South Pacific. Wyndham Asia Pacific is currently the largest vacation ownership business in Australia.

During 2011, Wyndham Vacation Ownership expanded its portfolio with the addition of resorts in Waikiki, Hawaii; North Myrtle Beach, South Carolina; Destin, Florida; and Smugglers’ Notch, Vermont and added additional inventory at locations in Orlando, Florida; Australia; and New Zealand.

In response to worldwide economic conditions impacting the general availability of credit on which our vacation ownership business has historically been reliant, we announced in late 2008 a plan to reduce our 2009 gross VOI sales by approximately 40% in order to reduce our need to access the asset-backed securities markets during 2009 and beyond, and also significantly reduce costs and capital needs while enhancing cash flow. Accordingly, during 2009, we achieved approximately $1.3 billion in gross vacation ownership interest sales, a reduction over 2008. In 2011, we achieved gross VOI sales of $1.6 billion which includes $106 million of WAAM sales.

Our primary vacation ownership brands, Wyndham Vacation Resorts and WorldMark by Wyndham, operate vacation ownership programs through which vacation ownership interests can be redeemed for vacations through points- or credits-based internal reservation systems that provide owners with flexibility (subject to availability) as to resort location, length of stay, unit type and time of year. The points-or credits-based reservation systems

 

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offer owners redemption opportunities for other travel and leisure products that may be offered from time to time, and the opportunity for owners to use our products for one or more vacations per year. Our vacation ownership programs allow us to market and sell our vacation ownership products in variable quantities as opposed to the fixed quantity of the traditional, fixed-week vacation ownership, which is primarily sold on a weekly interval basis, and to offer to existing owners “upgrade” sales to supplement such owners’ existing vacation ownership interests. Although we operate Wyndham Vacation Resorts and WorldMark by Wyndham as separate brands, we have integrated substantially all of the business functions of Wyndham Vacation Resorts and WorldMark by Wyndham, including consumer finance, information technology, certain staff functions, product development and certain marketing activities.

Our vacation ownership business derives a majority of its revenues from sales of vacation ownership interests and derives other revenues from consumer financing and property management. Because revenues from sales of vacation ownership interests and consumer finance in connection with such sales depend on the number of vacation ownership units in which we sell vacation ownership interests, increasing the number of such units is important in achieving our revenue goals. Because revenues from property management depend, in part, on the number of units we manage, increasing the number of such units has a direct effect of increasing our revenues from property management.

Sales and Marketing of Vacation Ownership Interests

Vacation Ownership Interests, Portfolio of Resorts and Maintenance Fees. Wyndham Vacation Resorts markets and sells vacation ownership interests that entitle an owner to resort accommodations that are not restricted to a particular week of the year. As of December 31, 2011, over 523,000 owners held interests in Wyndham Vacation Resorts resort properties. Wyndham Vacation Resorts properties are located primarily in the U.S. and, as of December 31, 2011, consisted of 76 resorts (six of which are shared with WorldMark by Wyndham) that represented approximately 13,300 units.

Wyndham Vacation Resorts currently offers two vacation ownership programs, Club Wyndham Select and Club Wyndham Access. Club Wyndham Select owners purchase an undivided interest in a select resort and receive a deed to that resort, which becomes their “home” resort. Club Wyndham Access owners do not directly receive a deed, but own an interest in a perpetual club. Through Club Wyndham Plus, Club Wyndham Access owners have an advanced reservation priority access to the multiple Wyndham Vacation Resorts locations based on the amount of inventory deeded to Club Wyndham Access.

The majority of the resorts in which Wyndham Vacation Resorts develops, markets and sells vacation ownership and other real estate interests are destination resorts that are located at or near attractions such as the Walt Disney World Resort in Florida; the Las Vegas Strip in Nevada; Myrtle Beach in South Carolina; Colonial Williamsburg in Virginia; and the Hawaiian Islands. Most Wyndham Vacation Resorts properties are affiliated with Wyndham Worldwide’s vacation exchange business, RCI, which annually awards to the top 25-35% of RCI affiliated vacation ownership resorts throughout the world, designations of an RCI Gold Crown Resort winner or an RCI Silver Crown Resort winner for exceptional resort standards and service levels. Among Wyndham Vacation Resorts’ 76 resort properties, 82% have been awarded designations of an RCI Gold Crown Resort winner or an RCI Silver Crown Resort winner.

Like Wyndham Vacation Resorts, WorldMark by Wyndham and Wyndham Asia Pacific sell vacation ownership interests that entitle an owner to resort accommodations that are not restricted to a particular week of the year. After WorldMark by Wyndham or Wyndham Asia Pacific develops or acquires resorts, it conveys the resorts to WorldMark, The Club or WorldMark South Pacific Club, which we refer to collectively as the Clubs, as applicable. In exchange for the conveyances, WorldMark by Wyndham or Wyndham Asia Pacific receives the exclusive rights to sell the vacation credits associated with the conveyed resorts and to receive the proceeds from the sales of the vacation credits. Vacation ownership interests sold by WorldMark by Wyndham and Wyndham Asia Pacific represent credits in the Clubs which entitle the owner of the credits to reserve units at the resorts that

 

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are owned and operated by the Clubs. Although vacation credits, unlike vacation ownership interests in Wyndham Vacation Resorts resort properties, do not constitute deeded interests in real estate, vacation credits are regulated in most jurisdictions by the same agency that regulates vacation ownership interests evidenced by deeded interests in real estate. As of December 31, 2011, approximately 290,000 owners held vacation credits in the Clubs.

WorldMark by Wyndham resorts are located primarily in the Western U.S., Canada, Mexico and the South Pacific and, as of December 31, 2011, consisted of 92 resorts (six of which are shared with Wyndham Vacation Resorts) that represented approximately 7,400 units. Of the WorldMark by Wyndham resorts and units, Wyndham Asia Pacific has a total of 21 resorts with approximately 900 units.

The resorts in which WorldMark by Wyndham develops, markets and sells vacation credits are primarily drive-to resorts. Most WorldMark by Wyndham resorts are affiliated with Wyndham Worldwide’s vacation exchange subsidiary, RCI. Among WorldMark by Wyndham’s 92 resorts, 63% have been awarded designations of an RCI Gold Crown Resort winner or an RCI Silver Crown Resort winner.

Owners of vacation ownership interests pay annual maintenance fees to the property owners’ associations responsible for managing the applicable resorts or to the Clubs. The annual maintenance fee associated with the average vacation ownership interest purchased ranges from approximately $400 to approximately $900. These fees generally are used to renovate and replace furnishings, pay operating, maintenance and cleaning costs, pay management fees and expenses, and cover taxes (in some states), insurance and other related costs. Wyndham Vacation Ownership, as the owner of unsold inventory at resorts or unsold interests in the Clubs, also pays maintenance fees in accordance with the legal requirements of the states or jurisdictions in which the resorts are located. In addition, at certain newly-developed resorts, Wyndham Vacation Ownership sometimes enters into subsidy agreements with the property owners’ associations to cover costs that otherwise would be covered by annual maintenance fees payable with respect to vacation ownership interests that have not yet been sold.

Club Wyndham Plus. Wyndham Vacation Resorts uses a points-based internal reservation system called Club Wyndham Plus (formerly known as FairShare Plus) to provide owners with flexibility (subject to availability) as to resort location, length of stay, unit type and time of year. With the launch of Club Wyndham Plus in 1991, Wyndham Vacation Resorts became one of the first U.S. developers of vacation ownership properties to move from traditional, fixed-week vacation ownership to a points-based program. Owners of vacation ownership interests in Wyndham Vacation Resorts properties that are eligible to participate in the program may elect, and with respect to certain resorts are obligated, to participate in Club Wyndham Plus. Both Club Wyndham Select and Club Wyndham Access utilize Club Wyndham Plus as the internal exchange program to expand owners’ vacation options.

Owners who participate in Club Wyndham Plus assign their use rights to a trust in exchange for the right to reserve in the internal reservation system. The number of points that an owner receives as a result of the assignment to the trust of the owner’s use rights, and the number of points required to take a particular vacation, is set forth on a published schedule and varies depending on the resort location, length of stay, unit type and time of year associated with the interests assigned to the trust or requested by the owner, as applicable. Participants in Club Wyndham Plus may choose (subject to availability) the Wyndham Vacation Resorts resort properties, length of stay, unit types and times of year, depending on the number of points to which they are entitled and the number of points required to take the vacations of their preference. Participants in the program may redeem their points not only for resort stays, but also for other travel and leisure products that may be offered from time to time. Owners of vacation points are able to borrow vacation points from the next year for use in the current year. Wyndham Vacation Resorts offers various programs that provide existing owners with the opportunity to “upgrade,” or acquire additional vacation ownership interests to increase the number of points such owners can use in Club Wyndham Plus.

 

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WorldMark, The Club and WorldMark South Pacific Club. The Clubs provide owners of vacation credits with flexibility (subject to availability) as to resort location, length of stay, unit type and time of year. Depending on the number of vacation credits an owner has purchased, the owner may use the vacation credits for one or more vacations annually. The number of vacation credits that are required for each day’s stay at a unit is listed on a published schedule and varies depending upon the resort location, unit type, time of year and the day of the week. Owners may also redeem their credits for other travel and leisure products that may be offered from time to time.

Owners of vacation credits are also able to purchase bonus time from the Clubs for use when space is available. Bonus time gives owners the opportunity to use available resorts on short notice and at a reduced rate and to obtain usage beyond owners’ allotments of vacation credits. In addition, WorldMark by Wyndham offers owners the opportunity to “upgrade,” or acquire additional vacation credits to increase the number of credits such owners can use in the Clubs.

Owners of vacation credits can make reservations through the Clubs, or may elect to join and exchange their vacation ownership interests through Wyndham’s vacation exchange business, RCI, or other third-party international exchange companies.

Sales and Marketing

Wyndham Vacation Ownership employs a variety of marketing channels as part of Wyndham Vacation Resorts and WorldMark by Wyndham marketing programs to encourage prospective owners of vacation ownership interests to tour Wyndham Vacation Ownership properties and attend sales presentations at off-site sales offices. Our resort-based sales centers also enable us to actively solicit upgrade sales to existing owners of vacation ownership interests while such owners vacation at our resort properties. Sales of vacation ownership interests relating to upgrades represented approximately 68%, 68% and 64% of our net sales of vacation ownership interests during 2011, 2010 and 2009, respectively.

Wyndham Vacation Ownership uses a variety of marketing programs to attract prospective owners, including sponsored contests that offer vacation packages or gifts, targeted mailings, outbound and inbound telemarketing efforts, and in association with Wyndham Worldwide hotel brands, associated loyalty and other co-branded marketing programs and events. Wyndham Vacation Ownership also co-sponsors sweepstakes, giveaways and promotional programs with professional teams at major sporting events and with other third parties at other high-traffic consumer events. Where permissible under state law, Wyndham Vacation Ownership offers existing owners cash awards or other incentives for referrals of new owners. New owner acquisition is an important strategy for Wyndham Vacation Ownership in order to continue to maintain our pool of “lifetime” buyers of vacation ownership. New owners will enable Wyndham Vacation Ownership to solicit upgrade sales in the future. We added approximately 27,000 and 22,000 new owners during 2011 and 2010, respectively, to our pool of “lifetime” buyers which may ultimately become repeat buyers of vacation ownership interests as they upgrade.

Wyndham Vacation Ownership’s marketing and sales activities are often facilitated through marketing alliances with other travel, hospitality, entertainment, gaming and retail companies that provide access to such companies’ present and past customers through a variety of co-branded marketing offers. Wyndham Vacation Ownership’s resort-based sales centers, which are located in popular travel destinations throughout the U.S., generate substantial tour flow through providing local offers. The sales centers enable Wyndham Vacation Ownership to market to tourists already visiting destination areas. Wyndham Vacation Ownership’s marketing agents, which often operate on the premises of the hospitality, entertainment, gaming and retail companies with which Wyndham Vacation Ownership has alliances within these markets, solicit local tourists with offers relating to activities and entertainment in exchange for the tourists visiting the local resorts and attending sales presentations.

 

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An example of a marketing alliance through which Wyndham Vacation Ownership markets to tourists already visiting destination areas is Wyndham Vacation Ownership’s current arrangement with Caesars Entertainment in Las Vegas, Nevada, which enables Wyndham Vacation Ownership to operate concierge-style marketing kiosks throughout select casinos and permits Wyndham Vacation Ownership to solicit patrons to attend tours and sales presentations with casino-related rewards and entertainment offers, such as gaming chips, show tickets and dining certificates. Wyndham Vacation Ownership also operates its primary Las Vegas sales center within Harrah’s Casino and regularly shuttles prospective owners targeted by such sales centers to and from Wyndham Vacation Ownership’s nearby resort property.

Wyndham Vacation Ownership offers a variety of entry-level programs and products as part of its sales strategies. One such program allows prospective owners a one-time allotment of points or credits with no further obligations; another such product is a biennial interest that provides for vacations every other year. As part of its sales strategies, Wyndham Vacation Ownership relies on its points/credits-based programs, which provide prospective owners with the flexibility to buy relatively small packages of points or credits, which can be upgraded at a later date. To facilitate upgrades among existing owners, Wyndham Vacation Ownership markets opportunities for owners to purchase additional points or credits through periodic marketing campaigns and promotions to owners while those owners vacation at Wyndham Vacation Ownership resort properties.

Wyndham Vacation Ownership’s resort-based sales centers also enable Wyndham Vacation Ownership to actively market upgrade sales to existing owners of vacation ownership interests while such owners vacation at Wyndham Vacation Ownership resort properties. In addition, we also operate a telesales program designed to market upgrade sales to existing owners of our products.

During 2011, we deployed a proprietary pre-screening program designed to better estimate the credit worthiness of consumers to whom we market and sell. The program, which is now active at approximately 75% of our off-site marketing locations, enables us to bypass consumers who do not meet our credit standards and eliminate tours that historically have proven unprofitable. We plan to deploy the program at all remaining off-site marketing locations throughout 2012.

Purchaser Financing

Wyndham Vacation Ownership offers financing to purchasers of vacation ownership interests. By offering consumer financing, we are able to reduce the initial cash required by customers to purchase vacation ownership interests, thereby enabling us to attract additional customers and generate substantial incremental revenues and profits. Wyndham Vacation Ownership funds and services loans extended by Wyndham Vacation Resorts and WorldMark by Wyndham through our consumer financing subsidiary, Wyndham Consumer Finance, a wholly owned subsidiary of Wyndham Vacation Resorts based in Las Vegas, Nevada that performs loan financing, servicing and related administrative functions.

Wyndham Vacation Ownership typically performs a credit investigation or other review or inquiry into every purchaser’s credit history before offering to finance a portion of the purchase price of the vacation ownership interest. The interest rate offered to participating purchasers is determined by an automated underwriting based upon the purchaser’s credit score, the amount of the down payment and the size of purchase. Wyndham Vacation Ownership uses a FICO score which is a branded version of a consumer credit score widely used within the U.S. by the largest banks and lending institutions. FICO scores range from 300 – 850 and are calculated based on information obtained from one or more of the three major U.S. credit reporting agencies that compile and report on a consumer’s credit history. Our weighted average FICO score on new originations for 2011, 2010 and 2009 was approximately 725, reflecting an approximate 30 point increase since the Company’s realignment in 2008. Wyndham Vacation Ownership offers purchasers an interest rate reduction if they participate in our pre-authorized checking programs, pursuant to which our consumer financing subsidiary each month debits a purchaser’s bank account or major credit card in the amount of the monthly payment by a pre-authorized fund transfer on the payment date.

 

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During 2011, we generated new receivables of $969 million on gross vacation ownership sales, net of WAAM sales, of $1.5 billion, which amounts to 65% of vacation ownership sales being financed. However, the 65% is prior to the receipt of addenda cash. Addenda cash represents the cash received for full payment of a loan within 15 to 60 days of origination. After the application of addenda cash, approximately 55% of vacation ownership sales are financed, with the remaining 45% being cash sales.

Wyndham Vacation Ownership generally requires a minimum down payment of 10% of the purchase price on all sales of vacation ownership interests and offer consumer financing for the remaining balance for up to ten years. While the minimum is generally 10%, during 2011, our average down payment was approximately 26% for financed sales of vacation ownership interests. These loans are structured so that we receive equal monthly installments that fully amortize the principal due by the final due date.

Similar to other companies that provide consumer financing, we historically securitize a majority of the receivables originated in connection with the sales of vacation ownership interests. We initially place the financed contracts into a revolving warehouse securitization facility generally within 30 to 90 days after origination. Many of the receivables are subsequently transferred from the warehouse securitization facility and placed into term securitization facilities.

Our consumer financing subsidiary is responsible for the maintenance of contract receivables files and all customer service, billing and collection activities related to the domestic loans we extend. We assess the performance of our loan portfolio by monitoring numerous metrics including collections rates, defaults by state residency and bankruptcies. Our consumer financing subsidiary also manages the selection and processing of loans pledged or to be pledged in our warehouse and term securitization facilities. As of December 31, 2011, our loan portfolio was 95.6% current (i.e., not more than 30 days past due).

Property Management

Program, Property and Club Management. In exchange for management fees, Wyndham Vacation Resorts, itself or through a Wyndham Vacation Resorts affiliate, manages Club Wyndham Plus, the majority of property owners’ associations at resorts in which Wyndham Vacation Resorts develops, markets and sells vacation ownership interests, and property owners’ associations at resorts developed by third parties. On behalf of Club Wyndham Plus, Wyndham Vacation Resorts or its affiliate manages the reservation system for Club Wyndham Plus and provides owner services and billing and collections services. The term of the trust agreement of Club Wyndham Plus runs through December 31, 2025, and the term is automatically extended for successive ten year periods unless a majority of the members of the program vote to terminate the trust agreement prior to the expiration of the term then in effect. The term of the management agreement, under which Wyndham Vacation Resorts manages the Club Wyndham Plus program, is for five years and is automatically renewed annually for successive terms of five years, provided the trustee under the program does not serve notice of termination to Wyndham Vacation Resorts at the end of any calendar year. On behalf of property owners’ associations, Wyndham Vacation Resorts or its affiliates generally provide day-to-day management for vacation ownership resorts, including oversight of housekeeping services, maintenance and refurbishment of the units, and provides certain accounting and administrative services to property owners’ associations.

We receive fees for such property management services which are generally based upon total costs to operate such resorts. Fees for property management services typically approximate 10% of budgeted operating expenses. Property management revenues, which are comprised of management fee revenue and reimbursable revenue, were $424 million, $405 million and $376 million, during 2011, 2010 and 2009, respectively. Management fee revenues were $198 million, $183 million and $170 million during 2011, 2010 and 2009, respectively. Reimbursable revenues, which are based upon certain reimbursable costs with no added margin, were $226 million, $222 million and $206 million, respectively, during 2011, 2010 and 2009. These reimbursable costs principally relate to the payroll costs for management of the associations, club and resort properties where we are the employer and are reflected as a component of operating expenses on the Consolidated Statements of Income. The terms of the property management agreements with the property

 

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owners’ associations at resorts in which Wyndham Vacation Resorts develops, markets and sells vacation ownership interests vary; however, the vast majority of the agreements provide a mechanism for automatic renewal upon expiration of the terms. At some established sites, the property owners’ associations have entered into property management agreements with professional management companies other than Wyndham Vacation Resorts or its affiliates.

In exchange for management fees, WorldMark by Wyndham, itself or through a WorldMark by Wyndham affiliate, serves as the exclusive property manager and servicing agent of the Clubs and all resort units owned or operated by the Clubs. On behalf of the Clubs, WorldMark by Wyndham or its affiliate provides day-to-day management for vacation ownership resorts, including oversight of housekeeping services, maintenance and refurbishment of the units, and provides certain accounting and administrative services. WorldMark by Wyndham or its affiliate also manages the reservation system for the Clubs and provides owner services and billing and collections services.

Strategies

Wyndham Vacation Ownership is strategically focused on the following objectives that we believe are essential to our business:

 

   

maximize cash flow;

 

   

further strengthening the financial profile of the business through the continued development of alternative business models, such as WAAM;

 

   

drive greater sales and marketing efficiencies at all levels, including new owner channels; and

 

   

delivering “Count On Me!” service to our customers, partners and associates.

Manage for Cash Flow. We plan to increasingly manage our business for cash flow by improving the quality of our loan portfolio through maintaining more restrictive financing terms for customers that fall within lower credit classifications, seeking higher down payments at the time of sale and strengthening the effectiveness of our collections efforts. We will continue to streamline our balance sheet through controlled development spending and selling through our existing finished inventory as well as pursuing just in time inventory arrangements as new sources of inventory. Additionally, we will continue to generate recurring income associated with (i) property management fees, (ii) interest income from our large pool of receivables, and (iii) upgrade sales from our deeply loyal customer base.

WAAM. We also plan to expand our fee-for-service timeshare sales model designed to capitalize upon the large quantities of newly developed, nearly completed or recently finished condominium or hotel inventory within the current real estate market without assuming the significant cost that accompanies new construction. This business model offers turn-key solutions for developers or banks in possession of newly developed inventory, which we sell for a fee through our extensive sales and marketing channels. WAAM enables us to expand our resort portfolio with little or no` capital deployment, while providing additional channels for new owner acquisition and growth for our fee-for-service property management business.

In addition to our original WAAM business model, and in keeping with our efforts to leverage the abundance of already developed inventory while minimizing our use of capital, we are also pursuing an enhancement which we refer to as WAAM 2.0. This strategy will enable us to acquire and own completed units close to the timing of the sales of these units and will significantly reduce the period between the deployment of capital to acquire inventory and the subsequent return on investment which occurs at the time of its sale to a timeshare purchaser. Inventory will be recorded on our balance sheet at the time of registration. In connection with the sale of the VOI, we will pay for the inventory sold and offer the purchaser the option of financing with us.

 

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WAAM 2.0 will enable us to expand our resort portfolio with minimal upfront capital investment, while providing additional channels for new owner acquisition and growth for our fee-for-service consumer financing, servicing operations and property management business. We plan to acquire 55 units using this model at our existing project at Wyndham Reunion Resort near Orlando, Florida and anticipate additional opportunities to further apply this strategy in 2012.

During 2010, we commenced sales in connection with two WAAM projects — one in South Carolina and another in Florida and in early 2011, we signed two additional WAAM projects — one in Vermont and another on the Florida Gulf coast. In 2011, we had $106 million in WAAM sales which represents 7% of gross VOI sales. We expect to have WAAM sales of approximately 15% to 20% of gross VOI sales within the next several years.

Drive Greater Sales and Marketing Efficiency and Strengthen New Owner Channels. We plan to drive greater sales and marketing efficiencies by aggressively applying strengthened tour qualification standards, primarily through our proprietary pre-screening program designed to estimate the credit worthiness of the consumers to whom we market and sell. We expect to thus limit our marketing activities to only the highest quality prospects both in terms of such persons’ interest in purchasing our products and their demonstrated ability to self-finance and/or qualify for our more restrictive financing terms. These marketing initiatives will be heavily utilized for new owner marketing channels to ensure sufficient levels of new owners are generated in the most efficient manner possible.

We will continue to focus a large portion of our efforts on current owners, who are our most reliable marketing prospects and the most efficient from a marketing standpoint, as well as highly qualified prospect categories including certain existing Wyndham Hotel Group customers and consumers affiliated with the Wyndham Rewards loyalty programs. We are also focusing our efforts on new owner acquisition as this will continue to maintain our pool of “lifetime” buyers of vacation ownership. We believe this market is underpenetrated and estimate there are 53 million U.S. households which we consider as potential purchasers of vacation ownership interests. We added approximately 27,000 and 22,000 new owners during 2011 and 2010, respectively, to our pool of “lifetime” buyers who may ultimately become repeat buyers of vacation ownership interests if they upgrade.

We will also seek to develop and market mixed-use hotel and vacation ownership properties in conjunction with the Wyndham brand. The mixed-use properties would afford us access to both hotel clients in higher income demographics for the purpose of marketing vacation ownership interests and hotel inventory for use in our marketing programs.

Delivering “Count On Me!” Service. Wyndham Vacation Ownership is committed to providing exceptional customer service to its owners and guests at every interaction. We consistently monitor our progress by inviting service feedback at key customer touch points, including point of sale, post-vacation experience, and annual owner surveys, which gauge service performance in a variety of areas and identify improvement opportunities. The Company service culture also extends to associates, who are committed to be responsive, be respectful, and to deliver a great experience to owners, guests, partners, our communities and each other.

Seasonality

We rely, in part, upon tour flow to generate sales of vacation ownership interests; consequently, sales volume tends to increase in the spring and summer months as a result of greater tour flow from spring and summer travelers. Revenues from sales of vacation ownership interests therefore are generally higher in the second and third quarters than in other quarters. We cannot predict whether these seasonal trends will continue in the future.

 

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Competition

The vacation ownership industry is highly competitive and is comprised of a number of companies specializing primarily in sales and marketing, consumer financing, property management and development of vacation ownership properties. In addition, a number of national hospitality chains develop and sell vacation ownership interests to consumers.

TRADEMARKS

Our brand names and related trademarks, service marks, logos and trade names are very important to the businesses that make up our Wyndham Hotel Group, Wyndham Exchange & Rentals, and Wyndham Vacation Ownership business units. Our subsidiaries actively use or license for use all significant marks, and we own or have exclusive licenses to use these marks. We register the marks that we own in the United States Patent and Trademark Office, as well as with other relevant authorities where we deem appropriate, and seek to protect our marks from unauthorized use as permitted by law.

EMPLOYEES

As of December 31, 2011, we had approximately 27,800 employees, including approximately 8,200 employees outside of the U.S. As of December 31, 2011, our lodging business had approximately 4,300 employees, our vacation exchange and rentals business had approximately 9,300 employees, our vacation ownership business had approximately 13,700 employees and our corporate group had approximately 500 employees. Approximately 1% of our employees are subject to collective bargaining agreements governing their employment with our company. We believe that our relations with employees are good.

ENVIRONMENTAL COMPLIANCE

Our compliance with laws and regulations relating to environmental protection and discharge of hazardous materials has not had a material impact on our capital expenditures, earnings or competitive position, and we do not anticipate any material impact from such compliance in the future.

 

ITEM 1A. RISK FACTORS

Before you invest in our securities you should carefully consider each of the following risk factors and all of the other information provided in this report. We believe that the following information identifies the most significant risks that may impact us. However, the risks and uncertainties we face are not limited to those set forth in the risk factors described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. If any of the following risks and uncertainties develops into an actual event, the event could have a material effect on our business, financial condition or results of operations. In such case, the market price of our common stock could decline.

The hospitality industry is highly competitive and we are subject to risks relating to competition that may adversely affect our performance.

We will be adversely impacted if we cannot compete effectively in the highly competitive hospitality industry. Our continued success depends upon our ability to compete effectively in markets that contain numerous competitors, some of which may have significantly greater financial, marketing and other resources than we have. Competition may reduce fee structures, potentially causing us to lower our fees or prices, which may adversely impact our profits. New competition or existing competition that uses a business model that is different from our business model may put pressure on us to change our model so that we can remain competitive.

 

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Our revenues are highly dependent on the travel industry and declines in or disruptions to the travel industry, such as those caused by economic slowdown, terrorism, political strife, acts of God and war may adversely affect us.

Declines in or disruptions to the travel industry may adversely impact us. Risks affecting the travel industry include: economic slowdown and recession; economic factors, such as increased costs of living and reduced discretionary income, adversely impacting consumers’ and businesses’ decisions to use and consume travel services and products; terrorist incidents and threats (and associated heightened travel security measures); political strife; acts of God (such as earthquakes, hurricanes, fires, floods, volcanoes and other natural disasters); war; pandemics or threat of pandemics (such as the H1N1 flu); environmental disasters (such as the Gulf of Mexico oil spill); increased pricing, financial instability and capacity constraints of air carriers; airline job actions and strikes; and increases in gasoline and other fuel prices.

We are subject to operating or other risks common to the hospitality industry.

Our business is subject to numerous operating or other risks common to the hospitality industry including:

 

   

changes in operating costs, including inflation, energy, labor costs (including minimum wage increases and unionization), workers’ compensation and health-care related costs and insurance;

 

   

changes in desirability of geographic regions of the hotels or resorts in our business;

 

   

changes in the supply and demand for hotel rooms, vacation exchange and rental services and vacation ownership services and products;

 

   

seasonality in our businesses, which may cause fluctuations in our operating results;

 

   

geographic concentrations of our operations and customers;

 

   

increases in costs due to inflation that may not be fully offset by price and fee increases in our business;

 

   

availability of acceptable financing and cost of capital as they apply to us, our customers, current and potential hotel franchisees and developers, owners of hotels with which we have hotel management contracts, our RCI affiliates and other developers of vacation ownership resorts;

 

   

our ability to securitize the receivables that we originate in connection with sales of vacation ownership interests;

 

   

the risk that purchasers of vacation ownership interests who finance a portion of the purchase price default on their loans due to adverse macro or personal economic conditions or otherwise, which would increase loan loss reserves and adversely affect loan portfolio performance; that if such defaults occur during the early part of the loan amortization period we will not have recovered the marketing, selling, administrative and other costs associated with such vacation ownership interests; such costs will be incurred again in connection with the resale of the repossessed vacation ownership interest; and the value we recover in a default is not, in all instances, sufficient to cover the outstanding debt;

 

   

the quality of the services provided by franchisees, our vacation exchange and rentals business, resorts with units that are exchanged through our vacation exchange business and/or resorts in which we sell vacation ownership interests may adversely affect our image and reputation;

 

   

our ability to generate sufficient cash to buy from third-party suppliers the products that we need to provide to the participants in our points programs who want to redeem points for such products;

 

   

overbuilding in one or more segments of the hospitality industry and/or in one or more geographic regions;

 

   

changes in the number and occupancy and room rates of hotels operating under franchise and management agreements;

 

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changes in the relative mix of franchised hotels in the various lodging industry price categories;

 

   

our ability to develop and maintain positive relations and contractual arrangements with current and potential franchisees, hotel owners, vacation exchange members, vacation ownership interest owners, resorts with units that are exchanged through our vacation exchange business and/or owners of vacation properties that our vacation rentals business markets for rental;

 

   

the availability of and competition for desirable sites for the development of vacation ownership properties; difficulties associated with obtaining entitlements to develop vacation ownership properties; liability under state and local laws with respect to any construction defects in the vacation ownership properties we develop; and our ability to adjust our pace of completion of resort development relative to the pace of our sales of the underlying vacation ownership interests;

 

   

our ability to adjust our business model to generate greater cash flow and require less capital expenditures;

 

   

private resale of vacation ownership interests, which could adversely affect our vacation ownership resorts and vacation exchange businesses;

 

   

revenues from our lodging business are indirectly affected by our franchisees’ pricing decisions;

 

   

organized labor activities and associated litigation;

 

   

maintenance and infringement of our intellectual property;

 

   

the bankruptcy or insolvency of any one of our customers, which could impair our ability to collect outstanding fees or other amounts due or otherwise exercise our contractual rights;

 

   

franchisees that have development advance notes with us may experience financial difficulties;

 

   

increases in the use of third-party Internet services to book online hotel reservations; and

 

   

disruptions in relationships with third parties, including marketing alliances and affiliations with e-commerce channels.

We may not be able to achieve our growth objectives.

We may not be able to achieve our growth objectives for increasing our cash flows, the number of franchised and/or managed properties in our lodging business, the number of vacation exchange members in our vacation exchange business, the number of rental weeks sold by our vacation rentals business and the number of tours generated and vacation ownership interests sold by our vacation ownership business.

We may be unable to identify acquisition targets that complement our businesses, and if we are able to identify suitable acquisition targets, we may not be able to complete acquisitions on commercially reasonable terms. Our ability to complete acquisitions depends on a variety of factors, including our ability to obtain financing on acceptable terms and requisite government approvals. If we are able to complete acquisitions, there is no assurance that we will be able to achieve the revenue and cost benefits that we expected in connection with such acquisitions or to successfully integrate the acquired businesses into our existing operations.

Our international operations are subject to risks not generally applicable to our domestic operations.

Our international operations are subject to numerous risks including exposure to local economic conditions; potential adverse changes in the diplomatic relations of foreign countries with the U.S.; hostility from local populations; restrictions and taxes on the withdrawal of foreign investment and earnings; government policies against businesses owned by foreigners; investment restrictions or requirements; diminished ability to legally enforce our contractual rights in foreign countries; foreign exchange restrictions; fluctuations in foreign currency exchange rates; local laws might conflict with U.S. laws; withholding and other taxes on remittances and other payments by subsidiaries; and changes in and application of foreign taxation structures including value-added taxes.

 

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Any adverse outcome resulting from the financial instability within certain European economies and the related volatility on foreign exchange and interest rates could have an effect on our results of operations, financial position or cash flows.

We are subject to risks related to litigation filed by or against us.

We are subject to a number of legal actions and the risk of future litigation as described under “Legal Proceedings”. We cannot predict with certainty the ultimate outcome and related damages and costs of litigation and other proceedings filed by or against us. Adverse results in litigation and other proceedings may harm our business.

We are subject to certain risks related to our indebtedness, hedging transactions, our securitization of certain of our assets, our surety bond requirements, the cost and availability of capital and the extension of credit by us.

We are a borrower of funds under our credit facilities, credit lines, senior notes and securitization financings. We extend credit when we finance purchases of vacation ownership interests and in instances when we provide key money, development advance notes and mezzanine or other forms of subordinated financing to assist franchisees and hotel owners in converting to or building a new hotel branded under one of our Wyndham Hotel Group brands. We use financial instruments to reduce or hedge our financial exposure to the effects of currency and interest rate fluctuations. We are required to post surety bonds in connection with our development activities. In connection with our debt obligations, hedging transactions, the securitization of certain of our assets, our surety bond requirements, the cost and availability of capital and the extension of credit by us, we are subject to numerous risks including:

 

   

our cash flows from operations or available lines of credit may be insufficient to meet required payments of principal and interest, which could result in a default and acceleration of the underlying debt;

 

   

if we are unable to comply with the terms of the financial covenants under our revolving credit facility, including a breach of the financial ratios or tests, such non-compliance could result in a default and acceleration of the underlying revolver debt and under other debt instruments that contain cross-default provisions;

 

   

our leverage may adversely affect our ability to obtain additional financing;

 

   

our leverage may require the dedication of a significant portion of our cash flows to the payment of principal and interest thus reducing the availability of cash flows to fund working capital, capital expenditures or other operating needs;

 

   

increases in interest rates;

 

   

rating agency downgrades for our debt that could increase our borrowing costs;

 

   

failure or non-performance of counterparties to foreign exchange and interest rate hedging transactions;

 

   

we may not be able to securitize our vacation ownership contract receivables on terms acceptable to us because of, among other factors, the performance of the vacation ownership contract receivables, adverse conditions in the market for vacation ownership loan-backed notes and asset-backed notes in general and the risk that the actual amount of uncollectible accounts on our securitized vacation ownership contract receivables and other credit we extend is greater than expected;

 

   

our securitizations contain portfolio performance triggers which, if violated, may result in a disruption or loss of cash flow from such transactions;

 

   

a reduction in commitments from surety bond providers which may impair our vacation ownership business by requiring us to escrow cash in order to meet regulatory requirements of certain states;

 

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prohibitive cost and inadequate availability of capital could restrict the development or acquisition of vacation ownership resorts by us and the financing of purchases of vacation ownership interests;

 

   

the inability of hotel owners that have received mezzanine loans from us to pay back such loans; and

 

   

if interest rates increase significantly, we may not be able to increase the interest rate offered to finance purchases of vacation ownership interests by the same amount of the increase.

Economic conditions affecting the hospitality industry, the global economy and credit markets generally may adversely affect our business and results of operations, our ability to obtain financing and/or securitize our receivables on reasonable and acceptable terms, the performance of our loan portfolio and the market price of our common stock.

The future economic environment for the hospitality industry and the global economy may continue to be challenged. The hospitality industry has experienced and may continue to experience significant downturns in connection with, or in anticipation of, declines in general economic conditions. The current economy has been characterized by higher unemployment, lower family income, lower business investment and lower consumer spending, leading to lower demand for hospitality services and products. Declines in consumer and commercial spending may adversely affect our revenues and profits.

Uncertainty in the equity and credit markets may negatively affect our ability to access short-term and long-term financing on reasonable terms or at all, which would negatively impact our liquidity and financial condition. In addition, if one or more of the financial institutions that support our existing credit facilities fails, we may not be able to find a replacement, which would negatively impact our ability to borrow under the credit facilities. Disruptions in the financial markets may adversely affect our credit rating and the market value of our common stock. If we are unable to refinance, if necessary, our outstanding debt when due, our results of operations and financial condition will be materially and adversely affected.

While we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital, debt service and capital expenditures for the foreseeable future, if our cash flow or capital resources prove inadequate we could face liquidity problems that could materially and adversely affect our results of operations and financial condition.

Our liquidity as it relates to our vacation ownership contract receivables securitization program could be adversely affected if we were to fail to renew or replace our securitization warehouse conduit facility on its renewal date 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 vacation ownership contract receivables deteriorate. Our ability to sell securities backed by our vacation ownership contract receivables depends on the continued ability and willingness of capital market participants to invest in such securities. It is possible that asset-backed securities issued pursuant to our securitization programs could in the future be downgraded by credit agencies. If a downgrade occurs, our ability to complete other securitization transactions on acceptable terms or at all could be jeopardized, and we could be forced to rely on other potentially more expensive and less attractive funding sources, to the extent available, which would decrease our profitability and may require us to adjust our business operations accordingly, including reducing or suspending our financing to purchasers of vacation ownership interests.

Our businesses are subject to extensive regulation and the cost of compliance or failure to comply with such regulations may adversely affect us.

Our businesses are heavily regulated by federal, state and local governments in the countries in which our operations are conducted. In addition, domestic and foreign federal, state and local regulators may enact new laws and regulations that may reduce our revenues, cause our expenses to increase and/or require us to modify substantially our business practices. If we are not in compliance with applicable laws and regulations, including,

 

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among others, those governing franchising, timeshare, lending, information security and data privacy, marketing and sales, unfair and deceptive trade practices, telemarketing, licensing, labor, employment, health care, health and safety, accessibility, immigration, gaming, environmental (including climate change), and regulations applicable under the Office of Foreign Asset Control and the Foreign Corrupt Practices Act (and local equivalents in international jurisdictions), we may be subject to regulatory investigations or actions, fines, penalties and potential criminal prosecution.

We are subject to risks related to corporate responsibility.

Many factors influence our reputation and the value of our brands including perceptions of us held by our key stakeholders and the communities in which we do business. Businesses face increasing scrutiny of the social and environmental impact of their actions and there is a risk of damage to our reputation and the value of our brands if we fail to act responsibly or comply with regulatory requirements in a number of areas such as safety and security, sustainability, responsible tourism, environmental management, human rights and support for local communities.

We are dependent on our senior management.

We believe that our future growth depends, in part, on the continued services of our senior management team. Losing the services of any members of our senior management team could adversely affect our strategic and customer relationships and impede our ability to execute our business strategies.

Our inability to adequately protect and maintain our intellectual property could adversely affect our business.

Our inability to adequately protect and maintain our trademarks, trade dress and other intellectual property rights could adversely affect our business. We generate, maintain, utilize and enforce a substantial portfolio of trademarks, trade dress and other intellectual property that are fundamental to the brands that we use in all of our businesses. There can be no assurance that the steps we take to protect our intellectual property will be adequate. Any event that materially damages the reputation of one or more of our brands could have an adverse impact on the value of that brand and subsequent revenues from that brand. The value of any brand is influenced by a number of factors, including consumer preference and perception and our failure to ensure compliance with brand standards.

Disasters, disruptions and other impairment of our information technologies and systems could adversely affect our business.

Any disaster, disruption or other impairment in our technology capabilities could harm our business. Our businesses depend upon the use of sophisticated information technologies and systems, including technology and systems utilized for reservation systems, vacation exchange systems, hotel/property management, communications, procurement, member record databases, call centers, operation of our loyalty programs and administrative systems. The operation, maintenance and updating of these technologies and systems are dependent upon internal and third-party technologies, systems and services for which there are no assurances of uninterrupted availability or adequate protection.

Failure to maintain the security of personally identifiable and other information, non-compliance with our contractual or other legal obligations regarding such information, or a violation of the Company’s privacy and security policies with respect to such information, could adversely affect us.

In connection with our business, we and our service providers collect and retain significant volumes of certain types of personally identifiable and other information pertaining to our customers, stockholders and employees. The legal, regulatory and contractual environment surrounding information security and privacy is

 

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constantly evolving and the hospitality industry is under increasing attack by cyber-criminals in the U.S. and other jurisdictions in which we operate. A significant actual or potential theft, loss, fraudulent use or misuse of customer, stockholder, employee or our data by cybercrime or otherwise, non-compliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could adversely impact our reputation and could result in significant costs, fines, litigation or regulatory action against us.

The market price of our shares may fluctuate.

The market price of our common stock may fluctuate depending upon many factors, some of which may be beyond our control, including our quarterly or annual earnings or those of other companies in our industry; actual or anticipated fluctuations in our operating results due to seasonality and other factors related to our business; changes in accounting principles or rules; announcements by us or our competitors of significant acquisitions or dispositions; the failure of securities analysts to cover our common stock; changes in earnings estimates by securities analysts or our ability to meet those estimates; the operating and stock price performance of comparable companies; overall market fluctuations; and general economic conditions. Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

Your percentage ownership in Wyndham Worldwide may be diluted in the future.

Your percentage ownership in Wyndham Worldwide may be diluted in the future because of equity awards that we expect will be granted over time to our directors, officers and employees as well as due to the exercise of options. In addition, our Board may issue shares of our common and preferred stock, and debt securities convertible into shares of our common and preferred stock, up to certain regulatory thresholds without shareholder approval.

Provisions in our certificate of incorporation and by-laws and under Delaware law may prevent or delay an acquisition of our Company, which could impact the trading price of our common stock.

Our certificate of incorporation and by-laws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive and to encourage prospective acquirers to negotiate with our Board rather than to attempt a hostile takeover. These provisions include a Board of Directors that is divided into three classes with staggered terms; elimination of the right of our stockholders to act by written consent; rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings; the right of our Board to issue preferred stock without stockholder approval; and limitations on the right of stockholders to remove directors. Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding shares of common stock.

We cannot provide assurance that we will continue to pay dividends.

There can be no assurance that we will have sufficient surplus under Delaware law to be able to continue to pay dividends. This may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding of capital expenditures, increases in reserves or lack of available capital. Our Board of Directors may also suspend the payment of dividends if the Board deems such action to be in the best interests of the Company or stockholders. If we do not pay dividends, the price of our common stock must appreciate for you to realize a gain on your investment in Wyndham Worldwide. This appreciation may not occur and our stock may in fact depreciate in value.

 

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We are responsible for certain of Cendant’s contingent and other corporate liabilities.

Under the separation agreement and the tax sharing agreement that we executed with Cendant (now Avis Budget Group) and former Cendant units, Realogy and Travelport, we and Realogy generally are responsible for 37.5% and 62.5%, respectively, of certain of Cendant’s contingent and other corporate liabilities and associated costs, including certain contingent and other corporate liabilities of Cendant and/or its subsidiaries to the extent incurred on or prior to August 23, 2006, including liabilities relating to certain of Cendant’s terminated or divested businesses, the Travelport sale, the Cendant litigation described in this report, actions with respect to the separation plan and payments under certain contracts that were not allocated to any specific party in connection with the separation.

If any party responsible for the liabilities described above were to default on its obligations, each non-defaulting party (including Avis Budget) would be required to pay an equal portion of the amounts in default. Accordingly, we could, under certain circumstances, be obligated to pay amounts in excess of our share of the assumed obligations related to such liabilities including associated costs. On or about April 10, 2007, Realogy Corporation was acquired by affiliates of Apollo Management VI, L.P. and its stock is no longer publicly traded. The acquisition does not negate Realogy’s obligation to satisfy 62.5% of such contingent and other corporate liabilities of Cendant or its subsidiaries pursuant to the terms of the separation agreement. As a result of the acquisition, however, Realogy has greater debt obligations and its ability to satisfy its portion of these liabilities may be adversely impacted. In accordance with the terms of the separation agreement, Realogy posted a letter of credit in April 2007 for our and Cendant’s benefit to cover its estimated share of the assumed liabilities discussed above, although there can be no assurance that such letter of credit will be sufficient to cover Realogy’s actual obligations if and when they arise.

We may be required to write-off all or a portion of the remaining value of our goodwill or other intangibles of companies we have acquired.

Under generally accepted accounting principles, we review our intangible assets, including goodwill, for impairment at least annually or when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or other intangible assets may not be recoverable, include a sustained decline in our stock price and market capitalization, reduced future cash flow estimates and slower growth rates in our industry. We may be required to record a significant non-cash impairment charge in our financial statements during the period in which any impairment of our goodwill or other intangible assets is determined, negatively impacting our results of operations and stockholders’ equity.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our corporate headquarters is located in a leased office at 22 Sylvan Way in Parsippany, New Jersey, which lease expires in 2024. We also have a leased office in Virginia Beach, Virginia for our Employee Service Center, which lease expires in 2014.

Wyndham Hotel Group

The main corporate operations of our lodging business shares office space at a building leased by Wyndham in Parsippany, New Jersey. Our lodging business also leases space for its reservations centers and/or data warehouses in Phoenix, Arizona; Saint John, New Brunswick, Canada: and Aberdeen, South Dakota pursuant to leases that expire in 2012, 2013 and 2016, respectively. In addition, our lodging business leases office space in Beijing, China expiring in 2012; Hong Kong, China expiring in 2013; Shanghai, China expiring in 2013; Bangkok, Thailand expiring in 2012; Singapore expiring in 2012; Gurgaon, India expiring in 2012; London,

 

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United Kingdom expiring in 2021; Dubai, UAE, expiring in 2012; Miramichi, New Brunswick, Canada expiring in 2013; Mission Viejo, California expiring in 2013; Oakland Park, Florida expiring in 2015; Atlanta, Georgia expiring in 2015; Rosemont, Illinois expiring in 2015; and Dallas, Texas expiring in 2013. All leases that are due to expire in 2012 are presently under review related to our ongoing requirements.

Wyndham Exchange & Rentals

Our vacation exchange and rentals business has its main corporate operations at a leased office in Parsippany, New Jersey, which lease has been extended on a month to month basis, until such time as we move into a new leased facility which is currently under construction in Parsippany, New Jersey with estimated completion in 2013 and a lease term through 2028. Our vacation exchange business also owns five properties located in the following cities: Carmel, Indiana; Cork, Ireland; Kettering, United Kingdom; Mexico City, Mexico; and Albufeira, Portugal. Our vacation exchange business also has one other leased office located within the U.S. pursuant to a lease that expires in 2014 and 24 additional leased spaces in various countries outside the U.S. pursuant to leases that expire generally between 1 and 3 years except for 5 leases that expire between 2015 and 2020. Our vacation rentals business’ operations are managed in twenty-two owned locations (United Kingdom locations in Earby, Lowestoft and Maidstone; Denmark locations in Fano, Hvide Sande, Romo, Sondervig and Varde; an Italy location in Monteriggioni; and U.S. locations in Breckenridge, Colorado; Steamboat Springs, Colorado; Seacrest Beach, Florida; Santa Rosa Beach, Florida; Miramar Beach, Florida; Destin, Florida; Kissimmee, Florida; Davenport, Florida; and Hilton Head, South Carolina) and four main leased locations pursuant to leases that expire in 2012 (Hellerup, Denmark and Dunfermline, United Kingdom), 2015 (Leidschendam, Netherlands) and 2021 (Fort Walton Beach, Florida in the U.S.) as well as 111 smaller leased offices throughout Europe and the U.S. The vacation exchange and rentals business also occupies space in London, United Kingdom pursuant to a lease that expires in 2021. All leases that are due to expire in 2012 are presently under review related to our ongoing requirements.

Wyndham Vacation Ownership

Our vacation ownership business has its main corporate operations in Orlando, Florida pursuant to several leases, which expire beginning 2012 and will be consolidated into a single new office with a lease expiring in 2025. Our vacation ownership business also owns a contact center facility in Redmond, Washington as well as leases space in Springfield, Missouri and Las Vegas, Nevada with various expiration dates for this same function. Our vacation ownership business leases space for administrative functions in Las Vegas, Nevada expiring in 2018. In addition, the vacation ownership business leases approximately 74 marketing and sales offices, of which approximately 66 are throughout the U.S. with various expiration dates, and 8 offices are in Australia expiring between 2013 and 2015, with the exception of the main corporate operations in Bundall, Australia expiring in 2018.

 

ITEM 3. LEGAL PROCEEDINGS

We are involved in various claims and lawsuits arising in the ordinary course of 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 17 to the Consolidated Financial Statements for a description of claims and legal actions arising in the ordinary course of our business and Note 23 to the Consolidated Financial Statements for a description of our obligations regarding Cendant contingent litigation.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of Common Stock

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “WYN”. As of January 31, 2012, the number of stockholders of record was 7,232. The following table sets forth the quarterly high and low closing sales prices per share of WYN common stock as reported by the NYSE for the years ended December 31, 2011 and 2010.

 

2011

   High      Low  

First Quarter

   $ 32.13       $ 28.13   

Second Quarter

     34.97         30.78   

Third Quarter

     35.40         25.38   

Fourth Quarter

     38.09         26.92   

 

2010

   High      Low  

First Quarter

   $ 25.94       $ 20.28   

Second Quarter

     27.59         20.14   

Third Quarter

     28.27         20.12   

Fourth Quarter

     31.08         27.32   

Dividend Policy

During 2011 and 2010, we paid a quarterly dividend of $0.15 and $0.12, respectively, per share of Common Stock issued and outstanding on the record date for the applicable dividend. During February 2012, our Board of Directors authorized an increase of quarterly dividends to $0.23 per share beginning with the dividend expected to be declared during the first quarter 2012. Our dividend payout ratio is now approximately 32% of the midpoint of our estimated 2012 net income after certain adjustments. Our dividend policy for the future is to grow our dividend at least at the rate of growth of our earnings. The declaration and payment of future dividends to holders of our common stock are at the discretion of our Board of Directors 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 can be no assurance that a payment of a dividend will occur in the future.

 

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Issuer Purchases of Equity Securities

Below is a summary of our Wyndham Worldwide common stock repurchases by month for the quarter ended December 31, 2011:

 

ISSUER PURCHASES OF EQUITY SECURITIES   
         
Period    Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number of
Shares
Purchased as
Part of Publicly
Announced Plan
     Approximate Dollar
Value of Shares that
May Yet Be  Purchased
Under the Publicly
Announced Plan
 

October 1 – 31, 2011

     1,588,753       $ 29.90         1,588,753       $ 544,814,120   

November 1 – 30, 2011

     2,039,937         33.46         2,039,937         476,564,358   

December 1 – 31, 2011(*)

     3,036,900         36.02         3,036,900         367,261,969   

Total

     6,665,590       $ 33.78         6,665,590       $ 367,261,969   

 

(*) 

Includes 316,000 shares purchased for which the trade date occurred during December 2011 while settlement occurred during January 2012.

We expect to generate annual net cash provided by operating activities less capital expenditures, equity investments and development advances in the range of approximately $600 million to $700 million in 2012. A portion of this cash flow is expected to be returned to our shareholders in the form of share repurchases and dividends. On August 20, 2007, our Board of Directors authorized a stock repurchase program that enabled us to purchase up to $200 million of our common stock. On July 22, 2010, the Board increased the authorization for the stock repurchase program by $300 million and, on both April 25, 2011 and August 11, 2011, further increased the authorization by $500 million. As a result of such increases, total authorization under the program was $1.5 billion as of December 31, 2011. During 2011, repurchase capacity increased $11 million from proceeds received from stock option exercises. Such repurchase capacity will continue to be increased by proceeds received from future stock option exercises.

During the period January 1, 2012 through February 16, 2012, we repurchased an additional 2 million shares at an average price of $40.04 for a cost of $79 million. We currently have $295 million remaining availability in our program. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. Repurchases may be conducted in the open market or in privately negotiated transactions.

 

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Stock Performance Graph

The Stock Performance Graph is not deemed filed with the Commission and shall not be deemed incorporated by reference into any of our prior or future filings made with the Commission.

The following line graph compares the cumulative total stockholder return of our common stock against the S&P 500 Index and the S&P Hotels, Resorts & Cruise Lines Index (consisting of Carnival plc, Marriott International Inc., Starwood Hotels & Resorts Worldwide, Inc. and Wyndham Worldwide Corporation) for the period from December 31, 2006 to December 31, 2011. The graph assumes that $100 was invested on December 31, 2006 and all dividends and other distributions were reinvested.

 

LOGO

Cumulative Total Return

 

     12/06      12/07      12/08      12/09      12/10      12/11  

Wyndham Worldwide Corporation

   $ 100.00         73.78         20.85         65.45         99.16         127.59   

S&P 500 Index

     100.00         105.49         66.46         84.05         96.71         98.75   

S&P Hotels, Resorts & Cruise Lines Index

     100.00         87.58         45.44         70.81         108.54         87.64   

 

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ITEM 6. SELECTED FINANCIAL DATA

 

    As of or For the Year Ended December 31,  
    2011     2010     2009     2008     2007  

Statement of Operations Data (in millions):

         

Net revenues

  $ 4,254      $ 3,851      $ 3,750      $ 4,281      $ 4,360   

Expenses:

         

Operating and other (a)

    3,246        2,947        2,916        3,422        3,468   

Goodwill and other impairments

    57        4        15        1,426          

Restructuring costs

    6        9        47        79          

Separation and related costs

                                16   

Depreciation and amortization

    178        173        178        184        166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income/(loss)

    767        718        594        (830     710   

Other income, net (b)

    (11     (7     (6     (11     (7

Interest expense

    152        167        114        80        73   

Interest income

    (24     (5     (7     (12     (11
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income taxes

    650        563        493        (887     655   

Provision for income taxes (c)

    233        184        200        187        252   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

  $ 417      $ 379      $ 293      $ (1,074   $ 403   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data (d)

         

Basic

         

Net income/(loss)

  $ 2.57      $ 2.13      $ 1.64      $ (6.05   $ 2.22   

Diluted

         

Net income/(loss)

  $ 2.51      $ 2.05      $ 1.61      $ (6.05   $ 2.20   

Dividends

         

Cash dividends declared per share (e)

  $ 0.60      $ 0.48      $ 0.16      $ 0.16      $ 0.08   

Balance Sheet Data (in millions):

         

Securitized assets (f)

  $ 2,638      $ 2,865      $ 2,755      $ 2,929      $ 2,608   

Total assets

    9,023        9,416        9,352        9,573        10,459   

Securitized debt (g)

    1,862        1,650        1,507        1,810        2,081   

Long-term debt

    2,153        2,094        2,015        1,984        1,526   

Total stockholders’ equity

    2,232        2,917        2,688        2,342        3,516   

Operating Statistics: (h)

         

Lodging (i)

         

Number of rooms (j)

    613,100        612,700        597,700        592,900        550,600   

RevPAR

  $ 33.34      $ 31.14      $ 30.34      $ 35.74      $ 36.48   

Vacation Exchange and Rentals (k)

         

Average number of members (in 000s)

    3,750        3,753        3,782        3,670        3,526   

Exchange revenue per member

  $ 179.59      $ 177.53      $ 176.73      $ 198.48      $ 209.80   

Vacation rental transactions (in 000s)

    1,347        1,163        964        936        942   

Average net price per vacation rental

  $ 530.78      $ 425.38      $ 477.38      $ 528.95      $ 480.32   

Vacation Ownership

         

Gross Vacation Ownership Interest (“VOI”) sales (in 000s)

  $ 1,595,000      $ 1,464,000      $ 1,315,000      $ 1,987,000      $ 1,993,000   

Tours

    685,000        634,000        617,000        1,143,000        1,144,000   

Volume Per Guest (“VPG”)

  $ 2,229      $ 2,183      $ 1,964      $ 1,602      $ 1,606   

 

(a) 

Includes operating, cost of vacation ownership interests, consumer financing interest, marketing and reservation and general and administrative expenses. During 2011, 2010, 2009, 2008 and 2007, general and administrative expenses include $12 million of a net benefit, $54 million of a net benefit, $6 million of a net expense, and $18 million of a net benefit and $46 million of a net benefit, respectively, from the resolution of and adjustment to certain contingent liabilities and assets. During 2008, general and administrative

 

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  expenses include charges of $24 million due to currency conversion losses related to the transfer of cash from our Venezuelan operations at our vacation exchange and rentals business.
(b) 

Includes a $4 million gain during 2011 related to the redemption of a preferred stock investment allocated to us in connection with our separation from Cendant.

(c) 

The difference in our 2008 effective tax rate is primarily due to (i) the non-deductibility of the goodwill impairment charge recorded during 2008, (ii) charges in a tax-free zone resulting from currency conversion losses related to the transfer of cash from our Venezuelan operations at our vacation exchange and rentals business and (iii) a non-cash impairment charge related to the write-off of an investment in a non-performing joint venture at our vacation exchange and rentals business. See Note 7 — Income Taxes for detailed reconciliations of our effective tax rates for 2011, 2010 and 2009.

(d) 

This calculation is based on basic and diluted weighted average shares of 162 million and 166 million, respectively, during 2011, 178 million and 185 million, respectively, during 2010, 179 million and 182 million, respectively, during 2009, 178 million during 2008 and 181 million and 183 million, respectively, during 2007.

(e) 

Prior to the third quarter of 2007, we did not pay dividends.

(f) 

Represents the portion of gross vacation ownership contract receivables, securitization restricted cash and related assets that collateralize our securitized debt. Refer to Note 14 — Transfer and Servicing of Financial Assets for further information.

(g) 

Represents debt that is securitized through bankruptcy-remote special purpose entities, the creditors of which have no recourse to us.

(h) 

See “Operating Statistics” within Item 7 — Management’s Discussion and Analysis for descriptions of the Company’s operating statistics.

(i) 

U.S. Franchise Systems, Inc. and its Microtel Inns & Suites and Hawthorn Suites hotel brands were acquired on July 18, 2008 and the Tryp hotel brand was acquired on June 30, 2010. The results of operations of these businesses have been included from their acquisition dates forward.

(j) 

The amounts in 2009 and 2008 also included approximately 3,000 rooms affiliated with the Wyndham Hotels and Resorts brand for which we received a fee for reservation and/or other services provided.

(k) 

Hoseasons Holdings Ltd. was acquired on March 1, 2010, ResortQuest International, LLC was acquired on September 30, 2010, James Villa Holdings Ltd. was acquired on November 30, 2010 and two tuck-in acquisitions were made during the third quarter of 2011. The results of operations of these businesses have been included from their acquisition dates forward.

In presenting the financial data above in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition, Liquidity and Capital Resources — Critical Accounting Policies,” for a detailed discussion of the accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.

ACQUISITIONS (2007 – 2011)

Between January 1, 2007 and December 31, 2011, we completed the following acquisitions, the results of operations and financial position of which have been included beginning from the relevant acquisition dates:

 

   

Two vacation rentals tuck-in acquisitions (Third quarter 2011)

 

   

James Villa Holdings Ltd. (November 2010)

 

   

ResortQuest International, LLC (September 2010)

 

   

Tryp hotel brand (June 2010)

 

   

Hoseasons Holdings Ltd. (March 2010)

 

   

U.S. Franchise Systems, Inc. and its Microtel Inns & Suites and Hawthorn Suites hotel brands (July 2008)

See Note 4 to the Consolidated Financial Statements for a discussion of the acquisitions completed during 2011 and 2010.

IMPAIRMENT & RESTRUCTURING CHARGES

During 2011, we recorded non-cash asset impairment charges at our lodging business which consisted of a write-down of (i) $44 million of franchise and management agreements, development advance notes and other receivables and (ii) a $13 million investment in an international joint venture. In addition, we recorded $6 million of restructuring costs primarily related to a strategic realignment initiative committed to during 2010 at our vacation exchange and rentals business.

 

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During 2010, we recorded (i) $9 million of restructuring costs related to a strategic realignment initiative committed to during 2010 at our vacation exchange and rentals business and (ii) a charge of $4 million to reduce the value of certain vacation ownership properties and related assets that were no longer consistent with our development plans.

During 2009, we recorded (i) $47 million of restructuring costs related to various strategic realignment initiatives committed to during 2008, (ii) a charge of $9 million to reduce the value of certain vacation ownership properties and related assets held for sale that were no longer consistent with our development plans and (iii) a charge of $6 million to reduce the value of an underperforming joint venture at our lodging business.

During 2008, we recorded (i) a charge of $1,342 million to impair goodwill related to plans announced during the fourth quarter of 2008 to reduce our VOI sales pace and associated size of our vacation ownership business, (ii) a charge of $84 million to reduce the carrying value of certain long-lived assets based on their revised estimated fair values and (iii) $79 million of restructuring costs related to various strategic realignment initiatives.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS AND OVERVIEW

We are a global provider of hospitality services and products and operate our business in the following three segments:

 

   

Lodging — franchises hotels in the upper upscale, upscale, upper midscale, midscale, economy and extended stay segments of the lodging industry and provides hotel management services for full-service hotels globally.

 

   

Vacation Exchange and Rentals — provides vacation exchange services and products to owners of intervals of vacation ownership interests (“VOIs”) and markets vacation rental properties primarily on behalf of independent owners.

 

   

Vacation Ownership — develops, markets and sells VOIs to individual consumers, provides consumer financing in connection with the sale of VOIs and provides property management services at resorts.

Separation from Cendant

On July 31, 2006, Cendant Corporation, currently known as Avis Budget Group, Inc. (or “former Parent”), distributed all of the shares of Wyndham common stock to the holders of Cendant common stock issued and outstanding on July 21, 2006, the record date for the distribution. On August 1, 2006, we commenced “regular way” trading on the New York Stock Exchange under the symbol “WYN.”

Before our separation from Cendant (“Separation”), we entered into separation, transition services and several other agreements with Cendant, Realogy and Travelport to effect the separation and distribution, govern the relationships among the parties after the separation and allocate among the parties Cendant’s assets, liabilities and obligations attributable to periods prior to the separation. Under the Separation and Distribution Agreement, we assumed 37.5% of certain contingent and other corporate liabilities of Cendant or its subsidiaries which were not primarily related to our business or the businesses of Realogy, Travelport or Avis Budget Group, and Realogy assumed 62.5% of these contingent and other corporate liabilities. These include liabilities relating to Cendant’s terminated or divested businesses, the Travelport sale on August 22, 2006, taxes of Travelport for taxable periods through the date of the Travelport sale, certain litigation matters, generally any actions relating to the separation plan and payments under certain contracts that were not allocated to any specific party in connection with the separation.

 

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RESULTS OF OPERATIONS

Lodging

Our franchising business is designed to generate revenues for our hotel owners through the delivery of room night bookings to the hotel, the promotion of brand awareness among the consumer base, global sales efforts, ensuring guest satisfaction and providing outstanding customer service to both our customers and guests staying at hotels in our system.

We enter into agreements to franchise our lodging brands to independent hotel owners. Our standard franchise agreement typically has a term of 15 to 20 years and provides a franchisee with certain rights to terminate the franchise agreement before the term of the agreement under certain circumstances. The principal source of revenues from franchising hotels is ongoing franchise fees, which are comprised of royalty fees and other fees relating to marketing and reservation services. Ongoing franchise fees typically are based on a percentage of gross room revenues of each franchised hotel and are intended to cover the use of our trademarks and our operating expenses, such as expenses incurred for franchise services, including quality assurance and administrative support, and to provide us with operating profits. These fees are recognized as revenue upon becoming due from the franchisee. An estimate of uncollectible ongoing franchise fees is charged to bad debt expense and included in operating expenses on the Consolidated Statements of Income. Lodging revenues also include initial franchise fees, which are recognized as revenues when all material services or conditions have been substantially performed, which is either when a franchised hotel opens for business or when a franchise agreement is terminated after it has been determined that the franchised hotel will not open.

Our franchise agreements also require the payment of marketing and reservation fees, which are intended to reimburse us for expenses associated with operating an international, centralized, brand-specific reservations system, access to third-party distribution channels, such as online travel agents, advertising and marketing programs, global sales efforts, operations support, training and other related services. These fees are recognized as revenue upon becoming due from the franchisee. An estimate of uncollectible ongoing marketing and reservation fees is charged to bad debt expense and included in marketing and reservation expenses on the Consolidated Statements of Income.

We are contractually obligated to expend the marketing and reservation fees we collect from franchisees in accordance with the franchise agreements; as such, revenues earned in excess of costs incurred are accrued as a liability for future marketing or reservation costs. Costs incurred in excess of revenues earned are expensed as incurred. In accordance with our franchise agreements, we include an allocation of costs required to carry out marketing and reservation activities within marketing and reservation expenses.

Other service fees we derive from providing ancillary services to franchisees are primarily recognized as revenue upon completion of services. The majority of these fees are intended to reimburse us for direct expenses associated with providing these services.

We also provide management services for hotels under management contracts, which offer all the benefits of a global brand and a full range of management, marketing and reservation services. In addition to the standard franchise services described above, our hotel management business provides hotel owners with professional oversight and comprehensive operations support services such as hiring, training and supervising the managers and employees that operate the hotels as well as annual budget preparation, financial analysis and extensive food and beverage services. Our standard management agreement typically has a term of up to 20 years. Our management fees are comprised of base fees, which are typically calculated, based upon a specified percentage of gross revenues from hotel operations, and incentive fees, which are typically calculated based upon a specified percentage of a hotel’s gross operating profit. Management fee revenues are recognized when earned in accordance with the terms of the contract. We incur certain reimbursable costs on behalf of managed hotel properties and report reimbursements received from managed hotels as revenues and the costs incurred on their behalf as expenses. Management fee revenues are recorded as a component of franchise fee revenues and

 

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reimbursable revenues are recorded as a component of service and membership fees on the Consolidated Statements of Income. The costs, which principally relate to payroll costs for operational employees who work at the managed hotels, are reflected as a component of operating expenses on the Consolidated Statements of Income. The reimbursements from hotel owners are based upon the costs incurred with no added margin; as a result, these reimbursable costs have little to no effect on our operating income. Management fee revenues and revenues related to payroll reimbursements were $7 million and $79 million, respectively, during 2011, $5 million and $77 million, respectively, during 2010 and $4 million and $85 million, respectively, during 2009.

We also earn revenues from the Wyndham Rewards loyalty program when a member stays at a participating hotel. These revenues are derived from a fee we charge based upon a percentage of room revenues generated from such stay. These loyalty fees are intended to reimburse us for expenses associated with administering and marketing the program. These fees are recognized as revenue upon becoming due from the franchisee.

Within our Lodging segment, we measure operating performance using the following key operating statistics: (i) number of rooms, which represents the number of rooms at lodging properties at the end of the year and (ii) revenue per available room (RevPAR), which is calculated by multiplying the percentage of available rooms occupied during the year by the average rate charged for renting a lodging room for one day.

Vacation Exchange and Rentals

As a provider of vacation exchange services, we enter into affiliation agreements with developers of vacation ownership properties to allow owners of intervals to trade their intervals for certain other intervals within our vacation exchange business and, for some members, for other leisure-related services and products. Additionally, as a marketer of vacation rental properties, generally we enter into contracts for exclusive periods of time with property owners to market the rental of such properties to rental customers. Our vacation exchange business derives a majority of its revenues from annual membership dues and exchange fees from members trading their intervals. Annual dues revenues represents the annual membership fees from members who participate in our vacation exchange business and, for additional fees, have the right to exchange their intervals for certain other intervals within our vacation exchange business and, for certain members, for other leisure-related services and products. We recognize revenues from annual membership dues on a straight-line basis over the membership period during which delivery of publications, if applicable, and other services are provided to the members. Exchange fees are generated when members exchange their intervals for intervals at other properties within our vacation exchange business or for other leisure-related services and products. Exchange fees are recognized as revenues, net of expected cancellations, when the exchange requests have been confirmed to the member. Our vacation rentals business primarily derives its revenues from fees, which generally average between 20% and 50% of the gross booking fees for non-proprietary inventory, except for where we receive 100% of the revenues for properties that we manage, operate under long-term capital leases or own. The majority of the time, we act on behalf of the owners of the rental properties to generate our fees. We provide reservation services to the independent property owners and receive the agreed-upon fee for the service provided. We remit the gross rental fee received from the renter to the independent property owner, net of our agreed-upon fee. Revenues from such fees are recognized in the period that the rental reservation is made, net of expected cancellations. Cancellations for 2011, 2010 and 2009 each totaled less than 5% of rental transactions booked. Upon confirmation of the rental reservation, the rental customer and property owner generally have a direct relationship for additional services to be performed. We also earn rental fees in connection with properties we manage, operate under long-term capital leases or own and such fees are recognized ratably over the rental customer’s stay, as this is the point at which the service is rendered. Our revenues are earned when evidence of an arrangement exists, delivery has occurred or the services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured.

Within our Vacation Exchange and Rentals segment, we measure operating performance using the following key operating statistics: (i) average number of vacation exchange members, which represents members in our vacation exchange programs who pay annual membership dues and are entitled, for additional fees, to

 

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exchange their intervals for intervals at other properties affiliated within our vacation exchange business and, for certain members, for other leisure-related services and products; (ii) exchange revenue per member, which represents total revenue from fees associated with memberships, exchange transactions, member-related rentals and other services for the year divided by the average number of vacation exchange members during the year; (iii) vacation rental transactions, which represents the number of standard one-week rental transactions that are generated in connection with customers booking their vacation rental stays through us; and (iv) average net price per vacation rental, which represents the net rental price generated from renting vacation properties to customers and other related rental servicing fees divided by the number of vacation rental transactions.

Vacation Ownership

We develop, market and sell VOIs to individual consumers, provide property management services at resorts and provide consumer financing in connection with the sale of VOIs. Our vacation ownership business derives the majority of its revenues from sales of VOIs and derives other revenues from consumer financing and property management. Our sales of VOIs are either cash sales or developer-financed sales. In order for us to recognize revenues from VOI sales under the full accrual method of accounting described in the guidance for sales of real estate for fully constructed inventory, a binding sales contract must have been executed, the statutory rescission period must have expired (after which time the purchasers are not entitled to a refund except for non-delivery by us), receivables must have been deemed collectible and the remainder of our obligations must have been substantially completed. In addition, before we recognize any revenues from VOI sales, the purchaser of the VOI must have met the initial investment criteria and, as applicable, the continuing investment criteria, by executing a legally binding financing contract. A purchaser has met the initial investment criteria when a minimum down payment of 10% is received by us. In accordance with the guidance for accounting for real estate time-sharing transactions, we must also take into consideration the fair value of certain incentives provided to the purchaser when assessing the adequacy of the purchaser’s initial investment. In those cases where financing is provided to the purchaser by us, the purchaser is obligated to remit monthly payments under financing contracts that represent the purchaser’s continuing investment. If all of the criteria for a VOI sale to qualify under the full accrual method of accounting have been met, as discussed above, except that construction of the VOI purchased is not complete, we recognize revenues using the percentage-of-completion (“POC”) method of accounting provided that the preliminary construction phase is complete and that a minimum sales level has been met (to assure that the property will not revert to a rental property). The preliminary stage of development is deemed to be complete when the engineering and design work is complete, the construction contracts have been executed, the site has been cleared, prepared and excavated, and the building foundation is complete. The completion percentage is determined by the proportion of real estate inventory costs incurred to total estimated costs. These estimated costs are based upon historical experience and the related contractual terms. The remaining revenues and related costs of sales, including commissions and direct expenses, are deferred and recognized as the remaining costs are incurred.

We also offer consumer financing as an option to customers purchasing VOIs, which are typically collateralized by the underlying VOI. The contractual terms of Company-provided financing agreements require that the contractual level of annual principal payments be sufficient to amortize the loan over a customary period for the VOI being financed, which is generally ten years, and payments under the financing contracts begin within 45 days of the sale and receipt of the minimum down payment of 10%. An estimate of uncollectible amounts is recorded at the time of the sale with a charge to the provision for loan losses, which is classified as a reduction of vacation ownership interest sales on the Consolidated Statements of Income. The interest income earned from the financing arrangements is earned on the principal balance outstanding over the life of the arrangement and is recorded within consumer financing on the Consolidated Statements of Income.

We also provide day-to-day-management services, including oversight of housekeeping services, maintenance and certain accounting and administrative services for property owners’ associations and clubs. In some cases, our employees serve as officers and/or directors of these associations and clubs in accordance with their by-laws and associated regulations. We receive fees for such property management services which are

 

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generally based upon total costs to operate such resorts. Fees for property management services typically approximate 10% of budgeted operating expenses. Property management fee revenues are recognized when earned in accordance with the terms of the contract and are recorded as a component of service and membership fees on the Consolidated Statements of Income. Property management revenues, which are comprised of management fee revenue and reimbursable revenue, were $424 million, $405 million and $376 million, during 2011, 2010 and 2009, respectively. Management fee revenues were $198 million, $183 million and $170 million during 2011, 2010 and 2009, respectively. Reimbursable revenues, which are based upon certain reimbursable costs with no added margin, were $226 million, $222 million and $206 million, respectively, during 2011, 2010 and 2009. These reimbursable costs principally relate to the payroll costs for management of the associations, club and resort properties where the Company is the employer and are reflected as a component of operating expenses on the Consolidated Statements of Income. During each of 2011, 2010 and 2009, one of the associations that we manage paid Wyndham Exchange & Rentals $19 million for exchange services.

Within our Vacation Ownership segment, we measure operating performance using the following key metrics: (i) gross VOI sales (including tele-sales upgrades, which are a component of upgrade sales) before deferred sales and loan loss provisions; (ii) tours, which represents the number of tours taken by guests in our efforts to sell VOIs; and (iii) volume per guest, or VPG, which represents revenue per guest and is calculated by dividing the gross VOI sales, excluding tele-sales upgrades, which are a component of upgrade sales, by the number of tours.

Other Items

We record marketing and reservation revenues, Wyndham Rewards revenues, RCI Elite Rewards revenues and hotel/property management services revenues for our Lodging, Vacation Ownership and Vacation Exchange and Rentals segments, in accordance with the guidance for reporting revenues gross as a principal versus net as an agent, which requires that these revenues be recorded on a gross basis.

Discussed below are our consolidated results of operations and the results of operations for each of our reportable segments. The reportable segments presented below represent our operating segments for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our operating segments. Management evaluates the operating results of each of our reportable segments based upon revenues and “EBITDA,” which is defined as net income before depreciation and amortization, interest expense (excluding consumer financing interest), interest income (excluding consumer financing interest) and income taxes, each of which is presented on the Consolidated Statements of Income. We believe that EBITDA is a useful measure of performance for our industry segments which, when considered with GAAP measures, gives a more complete understanding of our operating performance. Our presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

 

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OPERATING STATISTICS

The following table presents our operating statistics for the years ended December 31, 2011 and 2010. See Results of Operations section for a discussion as to how these operating statistics affected our business for the periods presented.

 

     Year Ended December 31,  
     2011      2010      % Change  

Lodging

        

Number of rooms (a)

     613,100         612,700         0.1   

RevPAR (b)

   $ 33.34       $ 31.14         7.1   

Vacation Exchange and Rentals

        

Average number of members (in 000s) (c)

     3,750         3,753         (0.1

Exchange revenue per member (d)

   $ 179.59       $ 177.53         1.2   

Vacation rental transactions (in 000s) (e) (f)

     1,347         1,163         15.8   

Average net price per vacation rental (f) (g)

   $ 530.78       $ 425.38         24.8   

Vacation Ownership

        

Gross VOI sales (in 000s) (h) (i)

   $ 1,595,000       $ 1,464,000         8.9   

Tours (j)

     685,000         634,000         8.0   

Volume Per Guest (“VPG”) (k)

   $ 2,229       $ 2,183         2.1   

 

(a) 

Represents the number of rooms at lodging properties at the end of the period which are either (i) under franchise and/or management agreements and (ii) for the year ended December 31, 2010, properties managed under a joint venture. The amount in 2010 includes 200 affiliated rooms.

(b) 

Represents revenue per available room and is calculated by multiplying the percentage of available rooms occupied during the period by the average rate charged for renting a lodging room for one day. Includes the impact from the acquisition of the Tryp hotel brand, which was acquired on June 30, 2010; therefore, such operating statistics for 2011 are not presented on a comparable basis to the 2010 operating statistics.

(c) 

Represents members in our vacation exchange programs who pay annual membership dues. For additional fees, such participants are entitled to exchange intervals for intervals at other properties affiliated with our vacation exchange business. In addition, certain participants may exchange intervals for other leisure-related services and products.

(d) 

Represents total revenue generated from fees associated with memberships, exchange transactions, member-related rentals and other servicing for the year divided by the average number of vacation exchange members during the year.

(e) 

Represents the number of transactions that are generated in connection with customers booking their vacation rental stays through us. One rental transaction is recorded for each standard one-week rental.

(f) 

Includes the impact from the acquisitions of Hoseasons (March 1, 2010), ResortQuest (September 30, 2010), James Villa Holidays (November 30, 2010) and two tuck-in acquisitions (third quarter 2011); therefore, such operating statistics for 2011 are not presented on a comparable basis to the 2010 operating statistics.

(g) 

Represents the net rental price generated from renting vacation properties to customers and other related rental servicing fees divided by the number of vacation rental transactions. Excluding the impact of foreign exchange movements, the average net price per vacation rental increased 20%.

(h) 

Represents total sales of VOIs, including sales under the WAAM, before the net effect of percentage-of-completion accounting and loan loss provisions. We believe that Gross VOI sales provides 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.

(i) 

The following table provides a reconciliation of Gross VOI sales to Vacation ownership interest sales for the year ended December 31 (in millions):

 

     2011      2010  

Gross VOI sales

   $         1,595       $         1,464   

Less: WAAM sales (1)

     (106      (51
  

 

 

    

 

 

 

Gross VOI sales, net of WAAM sales

     1,489         1,413   

Less: Loan loss provision

     (339      (340
  

 

 

    

 

 

 

Vacation ownership interest sales (2)

   $ 1,150       $ 1,072   
  

 

 

    

 

 

 

 

  (1)

Represents total sales of third party VOIs through our fee-for-service vacation ownership sales model designed to offer turn-key solutions for developers or banks in possession of newly developed inventory, which we will sell for a commission fee through our extensive sales and marketing channels.

  (2)

Amounts may not foot due to rounding.

 

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(j) 

Represents the number of tours taken by guests in our efforts to sell VOIs.

(k) 

VPG is calculated by dividing Gross VOI sales (excluding tele-sales upgrades, which are non-tour upgrade sales) by the number of tours. Tele-sales upgrades were $68 million and $80 million during the year ended December 31, 2011 and 2010, respectively. We have excluded non-tour upgrade sales in the calculation of VPG because non-tour upgrade sales are generated by a different marketing channel. 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.

Year Ended December 31, 2011 vs. Year Ended December 31, 2010

Our consolidated results comprised the following:

 

     Year Ended December 31,  
     2011     2010     Change  

Net revenues

   $         4,254      $         3,851      $         403   

Expenses

     3,487        3,133        354   
  

 

 

   

 

 

   

 

 

 

Operating income

     767        718        49   

Other income, net

     (11     (7     (4

Interest expense

     152        167        (15

Interest income

     (24     (5     (19
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     650        563        87   

Provision for income taxes

     233        184        49   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 417      $ 379      $ 38   
  

 

 

   

 

 

   

 

 

 

Net revenues increased $403 million (10.5%) during 2011 compared with the same period last year primarily resulting from:

 

   

$195 million of incremental revenues primarily related to vacation rental acquisitions;

 

   

$98 million of higher revenues from our vacation ownership business primarily due to increased VOI sales, WAAM revenues and property management fees, partially offset by the impact of a change in the reporting of fees related to incidental VOI operations;

 

   

$56 million of higher revenues in our lodging business due primarily from higher royalty, marketing and reservation revenues (including Wyndham Rewards) resulting from stronger RevPAR and the impact of a change in the classification of third-party reservation fees from marketing expenses.

 

   

$35 million of a favorable impact from foreign exchange; and

 

   

$26 million of increased revenue from our exchange and rentals business primarily due to improved yield at our vacation rentals business and the impact of a change in the classification of third-party sales commission and credit card processing fees to operating expenses.

Total expenses increased by $354 million (11.3%) during 2011 compared with the same period last year principally reflecting:

 

   

$163 million of incremental expenses primarily related to vacation rental acquisitions;

 

   

$74 million of higher operating expenses resulting from the revenue increases (excluding acquisitions);

 

   

$57 million for non-cash impairment charges at our lodging business;

 

   

$42 million of net expenses from the resolution of and adjustment to certain contingent liabilities and assets;

 

   

$34 million of an unfavorable impact from foreign exchange; and

 

   

$13 million of increased costs for data security enhancements.

 

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Such expense increases were partially offset by (i) a $31 million net benefit resulting from a refund of value-added taxes at our vacation exchange and rentals business and (ii) $19 million of decreased litigation costs at our vacation ownership business.

Other income, net increased by $4 million during 2011 primarily due to a gain on the redemption of a preferred stock investment allocated to us in connection with our Separation.

Interest expense decreased $15 million during 2011 compared with the same period last year primarily as a result of (i) the absence of $16 million of costs incurred during 2010 resulting from the early termination of our term loan and revolving foreign credit facilities.

Interest income increased $19 million during 2011 primarily due to $16 million of interest received in the third quarter of 2011 related to a refund of value-added taxes at our vacation exchange and rentals business.

Our effective tax rate increased from 32.7% during 2010 to 35.8% during 2011 primarily due to the reduction of benefits recognized in 2011 relating to the utilization of certain cumulative foreign tax credits.

As a result of these items, our net income increased $38 million (10.0%) compared to 2010.

During 2012, we expect:

 

   

net revenues of approximately $4.4 billion to $4.6 billion;

 

   

depreciation and amortization of approximately $185 million to $190 million; and

 

   

interest expense, net (excluding early extinguishment of debt costs) of approximately $135 million to $140 million.

Following is a discussion of the 2011 results of each of our segments and Corporate and Other compared to 2010:

 

     Net Revenues      EBITDA  
     2011     2010     %
Change
     2011     2010     %
Change
 

Lodging

   $ 749      $ 688        8.9       $ 157      $     189        (16.9

Vacation Exchange and Rentals

     1,444        1,193        21.0         368        293        25.6   

Vacation Ownership

     2,077        1,979        5.0         515        440        17.0   
  

 

 

   

 

 

      

 

 

   

 

 

   

Total Reportable Segments

     4,270        3,860        10.6         1,040        922        12.8   

Corporate and Other (a)

     (16     (9     *         (84     (24     *   
  

 

 

   

 

 

      

 

 

   

 

 

   

Total Company

   $ 4,254      $ 3,851        10.5         956        898        6.5   
  

 

 

   

 

 

          

Less: Depreciation and amortization

            178        173     

Interest expense

            152        167     

Interest income

            (24     (5  
         

 

 

   

 

 

   

Income before income taxes

          $ 650      $ 563     
         

 

 

   

 

 

   

 

* Not meaningful.
(a) 

Includes the elimination of transactions between segments.

Lodging

Net revenues increased by $61 million (8.9%) and EBITDA decreased by $32 million (16.9%) during the year ended December 31, 2011 compared with the same period last year. Excluding the impact of $57 million of non-cash asset impairment charges, EBITDA increased $25 million (13.2%). The impairment charges consisted of a write-down of (i) $30 million of management agreements, development advance notes and other receivables

 

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which are primarily due to operating and cash flow difficulties at several managed properties within the Wyndham brand, (ii) $14 million of franchise and management agreements resulting from the loss of certain properties which were part of the 2005 acquisition of the Wyndham brand and (iii) a $13 million investment in an international joint venture due to an impairment of cash flows as a result of our partner’s indirect relationship with the Libyan government.

Net revenues and EBITDA were favorably impacted by $5 million and $3 million, respectively, as a result of the Tryp hotel brand acquisition in the second quarter of 2010.

Excluding the impact of the Tryp acquisition, net revenues reflects a $60 million increase in royalties and marketing and reservation fees (inclusive of Wyndham Rewards) primarily due to (i) a 6.1% increase in RevPAR resulting from stronger occupancy and daily rates, (ii) an increase in our international system size and (iii) the impact of a $28 million increase related to a change in the classification of third-party reservation fees to revenues from marketing expenses, which were misclassified as contra expenses in prior periods. This change in classification had no impact on EBITDA. Net revenue was also favorably impacted by $5 million related due to the opening of our Wyndham Grand hotel in Orlando in the fourth quarter of 2011. Such increases were partially offset by a $9 million decrease in ancillary services revenues and other franchise fees.

In addition, EBITDA was also unfavorably impacted by (i) $32 million of higher marketing and reservation expenses (inclusive of Wyndham Rewards) resulting primarily from higher revenues and (ii) $8 million of operating and pre-opening costs for our Wyndham Grand hotel in Orlando. Such increase in expenses were partially offset by (i) $24 million of lower costs principally associated with ancillary services and (ii) $10 million of lower bad debt expenses.

As of December 31, 2011, we had approximately 7,210 properties and 613,100 rooms in our system. Additionally, our hotel development pipeline included approximately 850 hotels and 111,900 rooms, of which 60% were international and 57% were new construction as of December 31, 2011.

We expect net revenues of approximately $835 million to $875 million during 2012. In addition, as compared to 2011, we expect our operating statistics during 2012 to perform as follows:

 

   

RevPAR to be up 5% to 8%; and

 

   

number of rooms to increase 1% to 3%.

Vacation Exchange and Rentals

Net revenues and EBITDA increased $251 million (21.0%) and $75 million (25.6%), respectively, during 2011 compared with 2010. EBITDA was favorably impacted by a $31 million net benefit resulting from a refund of value-added taxes and $3 million of lower costs related to organizational realignment initiatives, partially offset by a loss of $4 million related to the write-off of foreign exchange translation adjustments resulting from the liquidation of a foreign entity. A weaker U.S. dollar compared to other foreign currencies contributed $35 million and $9 million in net revenues and EBITDA, respectively.

During the third quarter of 2011, we completed the acquisitions of substantially all of the assets of two vacation rental businesses in Colorado and Florida. This resulted in the addition of over 1,500 units to our portfolio. Our vacation exchange and rentals business now offers its leisure travelers access to approximately 100,000 vacation properties worldwide.

Acquisitions contributed $190 million of incremental net revenues (inclusive of $25 million of ancillary revenues) and $23 million of incremental EBITDA. EBITDA was also favorably impacted by a decline of $6 million in costs incurred in connection with acquisitions.

 

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Excluding the impact of $165 million of incremental vacation rental revenues from acquisitions and the favorable impact of foreign exchange movements of $28 million, net revenues generated from rental transactions and related services increased $27 million primarily due to a 4.7% increase in average net price per vacation rental. The increase in average net price per vacation rental resulted from (i) higher yield at our Novasol and Landal GreenParks businesses and (ii) an $11 million impact primarily related to a change in the classification of third-party sales commission fees to operating expenses which were misclassified as contra revenue in the same period last year. This change in classification had no impact on EBITDA. Rental transaction volume remained relatively flat.

Exchange and related service revenues, which primarily consist of fees generated from memberships, exchange transactions, member-related rentals and other member servicing, increased $7 million. Excluding $7 million of a favorable impact from foreign exchange movements, exchange and related service revenues remained flat primarily due to an increase in other transaction fee revenue offset by lower exchange and member-rental transactions, which we believe are the result of the impact of growth in club memberships where there is a lower propensity to transact. Other transaction fee revenue increased from combining deposited timeshare intervals, which allows members the ability to transact into higher-valued vacations, and the impact of a $4 million increase related to a change in the classification of third-party credit card processing fees to operating expenses, which were misclassified as contra revenue in prior periods. This change in classification had no impact on EBITDA.

We expect net revenues of approximately $1.44 billion to $1.51 billion during 2012. In addition, as compared to 2011, we expect our operating statistics during 2012 to perform as follows:

 

   

vacation rental transactions to increase 4% to 7%;

 

   

average net price per vacation rental to be flat to down 3% due to the negative impact of foreign currency;

 

   

average number of members to be flat to down 2%; and

 

   

exchange revenue per member to be flat to up 2%.

During 2011, we generated approximately $725 million of revenues from our European businesses. As such, any adverse outcome resulting from the instability in the European debt and related financial markets and the associated volatility on foreign exchange and interest rates could potentially have an impact on our 2012 results.

Vacation Ownership

Net revenues and EBITDA increased $98 million (5.0%) and $75 million (17.0%), respectively, during 2011 compared with 2010.

Gross sales of VOIs, net of WAAM sales increased $76 million (5.4%) driven principally by an 8.0% increase in tour flow and a 2.1% increase in VPG. The increase in VPG is attributable to an increase in the average price per transaction, while the change in tour flow reflects our focus on marketing programs directed towards new owner generation. Our provision for loan losses decreased $1 million primarily as a result of improved portfolio performance, partially offset by higher gross VOI sales. In addition, net revenues were unfavorably impacted by a $22 million decrease in ancillary revenues, primarily associated with a misclassification of fees related to incidental VOI operations, partially offset by increased fees generated by other non-core operations. This change in classification from gross basis reporting in revenues to net basis reporting in operating expenses had no impact on EBITDA.

Net revenues and EBITDA generated by our WAAM increased by $34 million and $11 million, respectively, due to increased commissions earned on $55 million of higher VOI sales under our WAAM.

 

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Property management net revenues and EBITDA increased $19 million and $8 million, respectively, resulting primarily from higher reimbursement revenues and higher fees for additional services. The reimbursement revenues have no impact on EBITDA.

Net revenues were unfavorably impacted by $10 million and EBITDA was favorably impacted by $3 million due to lower consumer financing revenues attributable to a decline in our contract receivables portfolio which was more than offset in EBITDA by a $13 million decrease in interest expense on our securitized debt. Compared to last year, our net interest income margin increased to 78% from 75% due to (i) a reduction in our weighted average interest rate to 5.5% from 6.7% and (ii) higher weighted average interest rates earned on our contract receivable portfolio, partially offset by $158 million of increased average borrowings on our securitized debt facilities.

In addition to the items discussed above, EBITDA was unfavorably impacted by increased expenses primarily resulting from:

 

   

$40 million of increased marketing expenses due to increased tours for new owner generation;

 

   

$24 million of increased costs associated with maintenance fees on unsold inventory;

 

   

$14 million of increased sales costs;

 

   

$8 million of increased employee related expenses; and

 

   

$4 million of expenses related to the termination of an office building lease during 2011.

Such increases were partially offset by:

 

   

$32 million of lower cost of VOI sales due to product mix and relative sales value adjustments;

 

   

$19 million of decreased litigation related costs;

 

   

$8 million of decreased costs related to our trial membership marketing program; and

 

   

the absence of a $4 million non-cash impairment charge recorded during 2010.

We expect net revenues of approximately $2.15 billion to $2.23 billion during 2012. In addition, as compared to 2011, we expect our operating statistics during 2012 to perform as follows:

 

   

gross VOI sales to be $1.65 billion to $1.75 billion (including approximately $110 million to $130 million related to WAAM);

 

   

tours to increase 1% to 4%; and

 

   

VPG to increase 2% to 5%.

Corporate and Other

Corporate expenses increased $60 million in 2011 compared to 2010. Corporate expenses included a $12 million and $54 million net benefit related to the resolution of and adjustment to certain contingent liabilities and assets during 2011 and 2010, respectively. Excluding the impact of these net benefits, corporate expenses increased by $18 million.

The $18 million increase in expenses were primarily due to (i) $13 million of increased costs for data security enhancements, (ii) $7 million of higher employee-related costs and (iii) $4 million of an unfavorable impact from foreign exchange hedging contracts costs partially offset by a $4 million gain related to the redemption of a preferred stock investment allocated to us in connection with the Separation.

Other revenues decreased by $7 million with a corresponding decrease in expenses due to the elimination of the Wyndham trademark fee charged between the Lodging segment and the Vacation Ownership segment.

 

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We expect corporate expenses of approximately $93 million to $100 million during 2012. Such expenses primarily reflect continued investment in information technology and data security enhancements in response to the increasingly aggressive global threat from cyber-criminals.

OPERATING STATISTICS

The following table presents our operating statistics for the years ended December 31, 2010 and 2009. See Results of Operations section for a discussion as to how these operating statistics affected our business for the periods presented.

 

     Year Ended December 31,  
     2010      2009      % Change  

Lodging (*)

        

Number of rooms (a)

     612,700         597,700         3   

RevPAR (b)

   $ 31.14       $ 30.34         3   

Vacation Exchange and Rentals

        

Average number of members (in 000s) (c)

     3,753         3,782         (1

Exchange revenue per member (d)

   $ 177.53       $ 176.73           

Vacation rental transactions (in 000s) (e) (f)

     1,163         964         21   

Average net price per vacation rental (f) (g)

   $ 425.38       $ 477.38         (11

Vacation Ownership

        

Gross VOI sales (in 000s) (h) (i)

   $ 1,464,000       $ 1,315,000         11   

Tours (j)

     634,000         617,000         3   

Volume Per Guest (“VPG”) (k)

   $ 2,183       $ 1,964         11   

 

(*) 

Includes the impact from the acquisition of the Tryp hotel brand, which was acquired on June 30, 2010; therefore, such operating statistics for 2010 are not presented on a comparable basis to the 2009 operating statistics.

(a) 

Represents the number of rooms at lodging properties at the end of the period which are either (i) under franchise and/or management agreements, (ii) properties affiliated with the Wyndham Hotels and Resorts brand for which we received a fee for reservation and/or other services provided and (iii) properties managed under a joint venture. The amounts in 2010 and 2009 include 200 and 3,549 affiliated rooms, respectively.

(b) 

Represents revenue per available room and is calculated by multiplying the percentage of available rooms occupied during the period by the average rate charged for renting a lodging room for one day.

(c) 

Represents members in our vacation exchange programs who pay annual membership dues. For additional fees, such participants are entitled to exchange intervals for intervals at other properties affiliated with our vacation exchange business. In addition, certain participants may exchange intervals for other leisure-related services and products.

(d) 

Represents total revenue generated from fees associated with memberships, exchange transactions, member-related rentals and other servicing for the period divided by the average number of vacation exchange members during the period.

(e) 

Represents the number of transactions that are generated in connection with customers booking their vacation rental stays through us. One rental transaction is recorded for each standard one-week rental.

(f) 

Includes the impact from the acquisitions of Hoseasons (March 1, 2010), ResortQuest (September 30, 2010) and James Villa Holidays (November 30, 2010); therefore, such operating statistics for 2010 are not presented on a comparable basis to the 2009 operating statistics.

(g) 

Represents the net rental price generated from renting vacation properties to customers and other related rental servicing fees divided by the number of vacation rental transactions. Excluding the impact of foreign exchange movements, the average net price per vacation rental decreased 7%.

(h) 

Represents total sales of VOIs, including sales under the WAAM, before the net effect of percentage-of-completion accounting and loan loss provisions. We believe that Gross VOI sales provides 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.

 

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(i) 

The following table provides a reconciliation of Gross VOI sales to Vacation ownership interest sales for the year ended December 31 (in millions):

 

     2010      2009  

Gross VOI sales

   $         1,464       $         1,315   

Less: WAAM sales (1)

     (51        
  

 

 

    

 

 

 

Gross VOI sales, net of WAAM sales

     1,413         1,315   

Plus: Net effect of percentage-of-completion accounting

             187   

Less: Loan loss provision

     (340      (449
  

 

 

    

 

 

 

Vacation ownership interest sales (2)

   $ 1,072       $ 1,053   
  

 

 

    

 

 

 

 

  (1)

Represents total sales of third party VOIs through our fee-for-service vacation ownership sales model designed to offer turn-key solutions for developers or banks in possession of newly developed inventory, which we will sell for a commission fee through our extensive sales and marketing channels.

  (2)

Amounts may not foot due to rounding.

(j) 

Represents the number of tours taken by guests in our efforts to sell VOIs.

(k) 

VPG is calculated by dividing Gross VOI sales (excluding tele-sales upgrades, which are non-tour upgrade sales) by the number of tours. Tele-sales upgrades were $29 million and $104 million during the year ended December 31, 2010 and 2009, respectively. We have excluded non-tour upgrade sales in the calculation of VPG because non-tour upgrade sales are generated by a different marketing channel. 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.

Year Ended December 31, 2010 vs. Year Ended December 31, 2009

Our consolidated results comprised the following:

 

     Year Ended December 31,  
     2010     2009     Change  

Net revenues

   $         3,851      $         3,750      $         101   

Expenses

     3,133        3,156        (23
  

 

 

   

 

 

   

 

 

 

Operating income

     718        594        124   

Other income, net

     (7     (6     (1

Interest expense

     167        114        53   

Interest income

     (5     (7     2   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     563        493        70   

Provision for income taxes

     184        200        (16
  

 

 

   

 

 

   

 

 

 

Net income

   $ 379      $ 293      $ 86   
  

 

 

   

 

 

   

 

 

 

During 2010, our net revenues increased $101 million (3%) principally due to:

 

   

a $109 million decrease in our provision for loan losses primarily due to improved portfolio performance and mix, partially offset by the impact to the provision from higher gross VOI sales;

 

   

a $97 million increase in gross sales of VOIs, net of WAAM sales, reflecting higher VPG and tour flow;

 

   

a $35 million increase in net revenues from rental transactions and related services at our vacation exchange and rentals business due to incremental revenues contributed from our acquisitions of Hoseasons, ResortQuest and James Villa Holidays and favorable pricing at our Landal GreenParks and U.K. cottage businesses, partially offset by the unfavorable impact of foreign exchange movements of $22 million;

 

   

$31 million of commissions earned on VOI sales under our WAAM;

 

   

$29 million of incremental property management fees within our vacation ownership business primarily as a result of growth in the number of units under management;

 

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a $28 million increase in net revenues in our lodging business primarily due to a RevPAR increase of 3%, an increase in ancillary revenues and other franchise fees and incremental revenues contributed from the Tryp hotel brand acquisition, partially offset by a decline in reimbursable revenues; and

 

   

an $8 million increase in ancillary revenues in our vacation exchange and rentals business primarily due to incremental revenues contributed from our acquisition of ResortQuest.

Such increases were partially offset by:

 

   

a decrease of $187 million as a result of the absence of the recognition of revenues previously deferred under the POC method of accounting at our vacation ownership business;

 

   

a $35 million decrease in ancillary revenues at our vacation ownership business primarily associated with a change in the classification of revenues related to incidental operations, which were misclassified on a gross basis during periods prior to the third quarter of 2010, and classified on a net basis within operating expenses commencing in the third quarter of 2010; and

 

   

a $10 million reduction in consumer financing revenues due primarily to a decline in our contract receivable portfolio.

Total expenses decreased $23 million (1%) principally reflecting:

 

   

a decrease of $72 million of expenses related to the absence of the recognition of revenues previously deferred at our vacation ownership business, as discussed above;

 

   

a $54 million net benefit recorded during 2010 related to the resolution of and adjustment to certain contingent liabilities and assets primarily due to the settlement of the IRS examination of Cendant’s tax years 2003 through 2006 on July 15, 2010;

 

   

a $43 million decrease in marketing and reservation expenses due to the change in tour mix in our vacation ownership business and lower marketing overhead costs at our lodging business;

 

   

$38 million of decreased costs related to organizational realignment initiatives across our businesses (see Restructuring Plans for more details);

 

   

a $34 million decrease in consumer financing interest expense primarily related to a decrease in interest rates and lower average borrowings on our securitized debt facilities;

 

   

the absence of non-cash charges of $15 million in 2009 at our vacation ownership and lodging businesses to reduce the carrying value of certain assets based upon their revised estimated fair values;

 

   

the favorable impact of $15 million at our vacation exchange and rentals business from foreign exchange transactions and foreign currency hedging contracts;

 

   

$11 million of decreased expenses related to non-core vacation ownership businesses;

 

   

a $9 million favorable impact on expenses related to foreign currency translation at our vacation exchange and rentals business;

 

   

$8 million decrease in payroll costs paid on behalf of hotel owners in our lodging business;

 

   

$8 million primarily associated with a change in the classification of revenue related to incidental operations, which were misclassified on a gross basis during prior periods and classified on a net basis within operating expenses during the third and fourth quarters of 2010;

 

   

the absence of a $6 million net expense recorded during 2009 related to the resolution of and adjustment to certain contingent liabilities and assets; and

 

   

$5 million of lower volume-related and marketing costs at our vacation exchange and rentals business.

 

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These decreases were partially offset by:

 

   

$43 million of incremental costs incurred from acquisitions, of which $40 million is attributable to our vacation exchange and rentals business;

 

   

$43 million of increased employee and other related expenses primarily due to higher sales commission costs resulting from increased gross VOI sales and rates;

 

   

$40 million of increased cost of VOI sales related to the increase in gross VOI sales, net of WAAM sales;

 

   

$25 million of increased costs at our vacation ownership business associated with maintenance fees on unsold inventory;

 

   

$24 million of increased costs in our lodging business primarily associated with ancillary services provided to franchisees and to enhance the international infrastructure to support our growth strategies;

 

   

$22 million of costs at our vacation ownership business related to our WAAM;

 

   

$22 million of incremental property management expenses at our vacation ownership business primarily associated with the growth in the number of units under management;

 

   

$16 million of higher corporate costs primarily related to data security and information technology costs, employee-related fees, the funding of the Wyndham charitable foundation and higher professional fees, partially offset by the favorable impact from foreign exchange contracts;

 

   

$15 million of increased deed recording costs at our vacation ownership business;

 

   

$10 million of higher operating expenses at our lodging business related to higher employee-related costs, higher IT costs and higher bad debt expenses on franchisees that are no longer operating a hotel under one of our brands;

 

   

$10 million of increased litigation expenses primarily at our vacation ownership business;

 

   

$7 million of acquisition costs incurred in connection with our Hoseasons, Tryp hotel brand, ResortQuest and James Villa Holidays acquisitions;

 

   

$6 million of costs at our lodging business related to our strategic initiative to grow reservation contribution;

 

   

$5 million of higher operating expenses at our vacation exchange and rentals business, which includes an unfavorable impact from value-added taxes; and

 

   

a $4 million non-cash charge to impair the value of certain vacation ownership properties and related assets held for sale that were no longer consistent with our development plans during 2010.

Other income, net increased $1 million during 2010 compared to 2009. Interest expense increased $53 million during 2010 as compared to 2009 primarily as a result of (i) higher interest on our long-term debt facilities primarily as a result of our 2010 and May 2009 debt issuances (see Note 13 – Long-Term Debt and Borrowing Arrangements), (ii) $16 million of early extinguishment costs incurred during the first quarter of 2010 primarily related to our effective termination of an interest rate swap agreement in connection with the early extinguishment of our term loan facility, which resulted in the reclassification of a $14 million unrealized loss from accumulated other comprehensive income to interest expense on our Consolidated Statement of Income and (iii) $14 million of costs incurred for the repurchase of a portion of our convertible notes during the third and fourth quarters of 2010. Interest income decreased $2 million during 2010 compared to 2009 due to decreased interest earned on invested cash balances as a result of lower rates earned on investments.

Our effective tax rate declined from 40.6% during 2009 to 32.7% in 2010 primarily due to the benefit derived from the current utilization of certain cumulative foreign tax credits, which we were able to realize based on certain changes in our tax profile, as well as the settlement of the IRS examination.

 

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As a result of these items, our net income increased $86 million as compared to 2009.

Following is a discussion of the 2010 results of each of our segments and Corporate and Other compared to 2009:

 

     Net Revenues      EBITDA  
     2010     2009     %
Change
     2010     2009     %
Change
 

Lodging

   $ 688      $ 660        4       $    189      $    175        8   

Vacation Exchange and Rentals

     1,193        1,152        4         293        287        2   

Vacation Ownership

     1,979        1,945        2         440        387        14   
  

 

 

   

 

 

      

 

 

   

 

 

   

Total Reportable Segments

     3,860        3,757        3         922        849        9   

Corporate and Other (a)

     (9     (7     *         (24     (71     *   
  

 

 

   

 

 

      

 

 

   

 

 

   

Total Company

   $ 3,851      $ 3,750        3         898        778        15   
  

 

 

   

 

 

          

Less: Depreciation and amortization

            173        178     

Interest expense

            167        114     

Interest income

            (5     (7  
         

 

 

   

 

 

   

Income before income taxes

          $ 563      $ 493     
         

 

 

   

 

 

   

 

* Not meaningful.
(a) 

Includes the elimination of transactions between segments.

Lodging

Net revenues and EBITDA increased $28 million (4%) and $14 million (8%), respectively, during the year ended December 31, 2010 compared to the same period during 2009.

On June 30, 2010, we acquired the Tryp hotel brand, which resulted in the addition of 92 hotels and approximately 13,200 rooms in Europe and South America. Such acquisition contributed incremental revenues of $5 million and EBITDA of $1 million, which includes $1 million of costs incurred in connection with the acquisition.

Excluding the impact of this acquisition, net revenues increased $23 million reflecting:

 

   

a $10 million increase in international royalty, marketing and reservation revenues primarily due to a 7% increase in international rooms;

 

   

a $3 million increase in domestic royalty, marketing and reservation revenues primarily due to a RevPAR increase of 1% as a result of increased occupancy; and

 

   

an $18 million net increase in ancillary revenue primarily associated with additional services provided to franchisees.

Such increases were partially offset by $8 million of lower reimbursable revenues earned by our hotel management business in 2010. Although our portfolio of managed properties increased in 2010, these incremental revenues were more than offset by the negative impact on revenues resulting from the properties under management which left the system during 2009. The reimbursable revenues recorded by our hotel management business primarily relate to payroll costs that we pay on behalf of hotel owners, and for which we are entitled to be fully reimbursed by the hotel owner. As the reimbursements are made based upon cost with no added margin, the recorded revenues are offset by the associated expense and there is no resultant impact on EBITDA.

 

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Excluding the impact of the Tryp hotel brand acquisition, EBITDA further reflects an increase in expenses of $10 million (2%) primarily driven by:

 

   

$24 million of increased costs primarily associated with ancillary services provided to franchisees and to enhance the international infrastructure to support our growth strategies;

 

   

$6 million of costs incurred during 2010 relating to our strategic initiative to grow reservation contribution;

 

   

$5 million of higher employee compensation expenses compared to 2009;

 

   

$3 million of higher information technology costs; and

 

   

$2 million of higher bad debt expense primarily attributable to receivables relating to terminated franchisees.

Such cost increases were partially offset by:

 

   

a decrease of $13 million in marketing-related expenses primarily due to lower marketing overhead;

 

   

$8 million of lower payroll costs paid on behalf of hotel owners, as discussed above;

 

   

the absence of a $6 million non-cash charge in the fourth quarter of 2009 to impair the value of an underperforming joint venture in our hotel management business; and

 

   

the absence of $3 million of costs recorded during the first quarter of 2009 relating to organizational realignment initiatives (see Restructuring Plan for more details).

As of December 31, 2010, we had approximately 7,210 properties and approximately 612,700 rooms in our system. Additionally, our hotel development pipeline included over 900 hotels and approximately 102,700 rooms, of which 51% were international and 55% were new construction as of December 31, 2010.

Vacation Exchange and Rentals

Net revenues and EBITDA increased $41 million (4%) and $6 million (2%), respectively, during 2010 compared with 2009. A stronger U.S. dollar compared to other foreign currencies unfavorably impacted net revenues and EBITDA by $16 million and $7 million, respectively. Net revenues from rental transactions and related services increased $35 million primarily related to incremental contributions from our acquisitions and ancillary revenues increased $8 million, partially offset by a $2 million decline in exchange and related service revenues. EBITDA further reflects the favorable impact from foreign exchange transactions and foreign exchange hedging contracts, partially offset by incremental costs contributed from acquired businesses, an increase in costs related to organizational realignment initiatives and increased operating expenses.

On November 30, 2010, we acquired James Villa Holidays, which resulted in the addition of approximately 2,300 villas and unique vacation rental properties in over 50 destinations primarily across Mediterranean locations. In addition, we acquired ResortQuest during September 2010 and Hoseasons during March 2010 which resulted in the addition of approximately 6,000 and over 15,000 vacation rental properties, respectively. Such acquisitions contributed incremental net revenues of $43 million and an EBITDA loss of $3 million, which includes $6 million of costs incurred in connection with these acquisitions. Such contributions include $6 million of ancillary revenues generated from ResortQuest. ResortQuest and James Villa Holidays were purchased subsequent to the third quarter vacation season, which, based on historical seasonality, is the quarter in which results derived from these vacation rentals are most favorable.

Net revenues generated from rental transactions and related services increased $35 million (8%) during 2010 compared to 2009. Excluding the impact to net revenues from rental transactions from our acquisitions and the unfavorable impact of foreign exchange movements of $22 million, such increase was $20 million (4%) during 2010, which was driven by a 4% increase in average net price per vacation rental. Such increase resulted from (i) favorable pricing on bookings made close to arrival dates at our Landal GreenParks business,

 

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(ii) higher pricing at our U.K. and France destinations through our U.K. cottage business, (iii) increased commissions on new properties at our U.K. cottage business and (iv) a $10 million increase primarily related to a change in the classification of third-party sales commission fees to operating expenses, which were misclassified as contra revenue in prior periods. Rental transaction volume remained relatively flat during 2010 as compared to 2009 as the favorable impact at our Novasol business was offset by lower volume at our Landal GreenParks business.

Exchange and related service revenues, which primarily consist of fees generated from memberships, exchange transactions, member-related rentals and other member servicing, decreased $2 million during 2010 compared with 2009. Excluding the favorable impact of foreign exchange movements of $6 million, exchange and related service revenues decreased $8 million (1%) driven by a 1% decrease in the average number of members primarily due to lower enrollments from affiliated resort developers during 2010. Exchange revenue per member remained relatively flat as higher transaction revenues resulting from favorable pricing and the impact of a $4 million increase related to a change in the classification of third-party credit card processing fees to operating expenses, which were misclassified as contra revenue in prior periods, was offset by lower travel services fees resulting from the outsourcing of our European travel services to a third-party provider during the first quarter of 2010 and lower exchange and subscription revenues, which we believe is the result of the impact of club memberships and member retention programs offered at multi-year discounts.

Ancillary revenues increased $8 million during 2010 compared to 2009. Excluding the impact to ancillary revenues from the acquisition of ResortQuest, such increase was $2 million, which relates to higher fees generated from programs with affiliated resorts.

Excluding the impact from our acquisitions, EBITDA further reflects a decrease in expenses of $11 million (1%) primarily driven by:

 

   

the favorable impact of $15 million from foreign exchange transactions and foreign exchange hedging contracts;

 

   

the favorable impact of foreign currency translation on expenses of $9 million;

 

   

$5 million of lower volume-related and marketing costs; and

 

   

$4 million of lower bad debt expense.

Such decreases were partially offset by:

 

   

a $14 million increase in expenses primarily resulting from a change in the classification of third-party sales commission fees and credit card processing fees to operating expenses, which were misclassified as contra revenue in prior periods;

 

   

$5 million of increased operating expenses, which includes an unfavorable impact from value-added taxes; and

 

   

$3 million of higher costs related to organizational realignment initiatives (see Restructuring Plan for more details).

Vacation Ownership

Net revenues and EBITDA increased $34 million (2%) and $53 million (14%), respectively, during the year ended December 31, 2010 compared with the same period during 2009.

The increase in net revenues and EBITDA during the year ended December 31, 2010 primarily reflects a decline in our provision for loan losses, an increase in gross VOI sales, incremental revenues associated with commissions earned on VOI sales under our newly implemented WAAM and property management revenues, partially offset by the absence of the recognition of previously deferred revenues and related expenses during the year ended December 31, 2009 and lower ancillary revenues. The increase in EBITDA reflected the absence of

 

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costs incurred in 2009 related to organizational realignment initiatives, lower consumer financing interest expense, lower marketing expenses, a decline in expenses related to our non-core businesses and non-cash impairment charges. EBITDA was further impacted by higher employee related expenses, increased costs of VOI sales, increased costs associated with maintenance fees on unsold inventory, increased property management expenses, incremental WAAM related expenses, higher deed recording costs and higher litigation expenses.

Gross sales of VOIs, net of WAAM sales, at our vacation ownership business increased $97 million (7%) during the year ended December 31, 2010 compared to the same period during 2009, driven principally by an increase of 11% in VPG and an increase of 3% in tour flow. VPG was positively impacted by (i) a favorable tour flow mix resulting from the closure of underperforming sales offices as part of the organizational realignment and (ii) a higher percentage of sales coming from upgrades to existing owners during the year ended December 31, 2010 as compared to the same period during 2009 as a result of changes in the mix of tours. Tour flow reflects the favorable impact of growth in our in-house sales programs, partially offset by the negative impact of the closure of over 25 sales offices during 2009 primarily related to our organizational realignment initiatives. Our provision for loan losses declined $109 million during the year ended December 31, 2010 as compared to the same period during 2009. Such decline includes (i) $83 million primarily related to improved portfolio performance and mix during the year ended December 31, 2010 as compared to the same period during 2009, partially offset by the impact to the provision from higher gross VOI sales, and (ii) a $26 million impact on our provision for loan losses from the absence of the recognition of revenue previously deferred under the POC method of accounting during the year ended December 31, 2009. Such favorability was partially offset by a $35 million decrease in ancillary revenues primarily associated with a change in the classification of revenues related to incidental operations, which were misclassified on a gross basis during prior periods and classified on a net basis within operating expenses during the second half of 2010.

In addition, net revenues and EBITDA comparisons were favorably impacted by $31 million and $9 million, respectively, during the year ended December 31, 2010 due to commissions earned on VOI sales of $51 million under our WAAM. During the first quarter of 2010, we began our initial implementation of WAAM, which is our fee-for-service vacation ownership sales model designed to capitalize upon the large quantities of newly developed, nearly completed or recently finished condominium or hotel inventory within the current real estate market without assuming the investment that accompanies new construction. We offer turn-key solutions for developers or banks in possession of newly developed inventory, which we will sell for a commission fee through our extensive sales and marketing channels. This model enables us to expand our resort portfolio with little or no capital deployment, while providing additional channels for new owner acquisition. In addition, WAAM may allow us to grow our fee-for-service consumer finance servicing operations and property management business. The commission revenue earned on these sales is included in service and membership fees on the Consolidated Statement of Income.

Under the POC method of accounting, a portion of the total revenues associated with the sale of a VOI is deferred if the construction of the vacation resort has not yet been fully completed. Such revenues are recognized in future periods as construction of the vacation resort progresses. There was no impact from the POC method of accounting during the year ended December 31, 2010 as compared to the recognition of $187 million of previously deferred revenues during the year ended December 31, 2009. Accordingly, net revenues and EBITDA comparisons were negatively impacted by $161 million (including the impact of the provision for loan losses) and $89 million, respectively, as a result of the absence of the recognition of revenues previously deferred under the POC method of accounting.

Our net revenues and EBITDA comparisons associated with property management were positively impacted by $29 million and $7 million, respectively, during the year ended December 31, 2010 primarily due to growth in the number of units under management, partially offset in EBITDA by increased costs associated with such growth in the number of units under management.

Net revenues were unfavorably impacted by $10 million and EBITDA was favorably impacted by $24 million during the year ended December 31, 2010 due to lower consumer financing revenues attributable to a

 

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decline in our contract receivable portfolio, more than offset in EBITDA by lower interest costs during the year ended December 31, 2010 as compared to the same period during 2009. We incurred interest expense of $105 million on our securitized debt at a weighted average interest rate of 6.7% during the year ended December 31, 2010 compared to $139 million at a weighted average interest rate of 8.5% during the year ended December 31, 2009. Our net interest income margin increased from 68% during the year ended December 31, 2009 to 75% during the year ended December 31, 2010 due to:

 

   

a 179 basis point decrease in our weighted average interest rate on our securitized borrowings;

 

   

$62 million of decreased average borrowings on our securitized debt facilities; and

 

   

higher weighted average interest rates earned on our contract receivable portfolio.

In addition, EBITDA was negatively impacted by $43 million (4%) of increased expenses, exclusive of lower interest expense on our securitized debt, higher property management expenses and WAAM related expenses, primarily resulting from:

 

   

$43 million of increased employee and other related expenses primarily due to higher sales commission costs resulting from increased gross VOI sales and rates;

 

   

$40 million of increased cost of VOI sales related to the increase in gross VOI sales, net of WAAM sales;

 

   

$25 million of increased costs associated with maintenance fees on unsold inventory;

 

   

$15 million of increased deed recording costs; and

 

   

$10 million of increased litigation expenses.

Such increases were partially offset by:

 

   

the absence of $37 million of costs recorded during the year ended December 31, 2009 relating to organizational realignment initiatives (see Restructuring Plan for more details);

 

   

$30 million of decreased marketing expenses due to the change in tour mix;

 

   

$11 million of decreased expenses related to our non-core businesses;

 

   

$8 million primarily associated with a change in the classification of revenues related to incidental operations, which were misclassified on a gross basis during prior periods and classified on a net basis within operating expenses during the second half of 2010, partially offset by increased costs related to incentives awarded to owners; and

 

   

$5 million of lower non-cash charges to impair the value of certain vacation ownership properties and related assets held for sale that were no longer consistent with our development plans.

Corporate and Other

Corporate and Other expenses decreased $49 million in 2010 compared to 2009. Such decrease primarily resulted from:

 

   

a $54 million net benefit recorded during 2010 related to the resolution of and adjustment to certain contingent liabilities and assets primarily due to the settlement of the IRS examination of Cendant’s taxable years 2003 through 2006 on July 15, 2010;

 

   

the absence of a $6 million net expense recorded during 2009 related to the resolution of and adjustment to certain contingent liabilities and assets;

 

   

$3 million of favorable impact from foreign exchange hedging contracts;

 

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$2 million resulting from the absence of severance recorded during 2009; and

 

   

the absence of $1 million of costs recorded during 2009 relating to organizational realignment initiatives (see Restructuring Plan for more details).

Such decreases were partially offset by:

 

   

$9 million of higher data security and information technology costs;

 

   

$6 million of employee related expenses;

 

   

$3 million of funding for the Wyndham charitable foundation; and

 

   

$3 million of higher professional fees.

RESTRUCTURING PLANS

2010 RESTRUCTURING PLAN

During 2010, we committed to a strategic realignment initiative at our vacation exchange and rentals business targeted at reducing costs, primarily impacting the operations at certain vacation exchange call centers. During 2011, we incurred $7 million of costs and reduced our liability with $9 million of cash payments. The remaining liability of $7 million is expected to be paid in cash; $6 million of facility-related over the remaining lease term which expires in the first quarter of 2020 and $1 million of personnel-related by the third quarter of 2012. We anticipate annual net savings from such initiative of $8 million.

2008 RESTRUCTURING PLAN

During 2008, we committed to various strategic realignment initiatives targeted principally at reducing costs, enhancing organizational efficiency, reducing our need to access the asset-backed securities market and consolidating and rationalizing existing processes and facilities. During 2011, we reduced our liability with $7 million of cash payments and reversed $1 million of previously recorded facility-related expenses. The remaining liability of $3 million, all of which is facility-related, is expected to be paid in cash by December 2013. We anticipate net savings from such initiatives will continue annually.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

FINANCIAL CONDITION

 

     December 31,
2011
     December 31,
2010
     Change  

Total assets

   $         9,023       $         9,416       $         (393

Total liabilities

     6,791         6,499         292   

Total stockholders’ equity

     2,232         2,917         (685

Total assets decreased $393 million from December 31, 2010 to December 31, 2011 primarily due to:

 

   

a $195 million decrease in other non-current assets primarily due to the settlement of a portion of our call options in connection with the repurchase of a portion of our convertible notes;

 

   

a $134 million decrease in vacation ownership contract receivables, net primarily due to principal collections exceeding net loan originations;

 

   

a $71 million decrease in inventory primarily due to VOI sales, partially offset by development spending during 2011;

 

   

a $39 million decrease in franchise agreements and other intangibles primarily due to current year amortization and the impairment of certain franchise and management agreements, partially offset by increased intangibles resulting from our acquisitions during 2011;

 

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a $26 million decrease in deferred income taxes primarily attributable to a change in the expected timing of the resolution of our legacy tax issues; and

 

   

a decrease of $14 million in cash and cash equivalents.

Such decreases were partially offset by a $76 million increase in property and equipment primarily related to capital expenditures for information technology enhancements, construction of our Wyndham Grand hotel in Orlando and renovations on bungalows at our Landal GreenParks business, partially offset by current year depreciation of property and equipment and the impact of foreign currency translation.

Total liabilities increased $292 million from December 31, 2010 to December 31, 2011 primarily due to:

 

   

a $212 million net increase in our securitized vacation ownership debt resulting from higher advance rates on our 2011 securitizations;

 

   

a net increase of $59 million in our other long-term debt primarily reflecting the issuance of our $250 million 5.625% senior unsecured notes and a $64 million net increase in outstanding borrowings on our corporate revolver, partially offset by a $138 million net decrease in our derivative liability related to the bifurcated conversion feature associated with our convertible notes, a $95 million decrease related to the repurchase of a portion of our convertible notes and net principal payments on our other long-term debt of $33 million; and

 

   

a $44 million increase in deferred income taxes primarily attributable to the utilization of alternative minimum tax credits and depreciation.

Such increases were partially offset by (i) a $30 million decrease in due to former Parent and subsidiaries resulting from the payment and settlement of certain legacy liabilities and (ii) a $23 million decrease in deferred income primarily resulting from shorter membership terms at our vacation exchange and rentals business.

Total stockholders’ equity decreased $685 million from December 31, 2010 to December 31, 2011 primarily due to:

 

   

$902 million of share repurchases;

 

   

$112 million for the repurchase of warrants;

 

   

$99 million of dividends; and

 

   

$30 million of currency translation adjustments, net of tax.

Such decreases were partially offset by (i) $417 million of net income and (ii) an $18 million increase to our pool of excess tax benefits available to absorb tax deficiencies.

LIQUIDITY AND CAPITAL RESOURCES

Currently, our financing needs are supported by cash generated from operations and borrowings under our revolving credit facility. In addition, certain funding requirements of our vacation ownership business are met through the utilization of our bank conduit facility and the issuance of securitized debt to finance vacation ownership contract receivables. We believe that our net cash from operations, cash and cash equivalents, access to our revolving credit facility and continued access to the securitization and debt markets provide us with sufficient liquidity to meet our ongoing needs.

During July 2011, we replaced our $980 million revolving credit facility with a $1.0 billion five-year revolving credit facility that expires in July 2016. During June 2011, we renewed and extended our securitized vacation ownership bank conduit facility to a two-year conduit facility that expires in June 2013 and has a total capacity of $600 million.

 

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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.

CASH FLOWS

During 2011 and 2010, we had a net change in cash and cash equivalents of ($14) million and $1 million, respectively. The following table summarizes such changes:

 

     Year Ended December 31,  
     2011     2010     Change  

Cash provided by/(used in):

      

Operating activities

   $         1,003      $         635      $         1368   

Investing activities

     (256     (418     162   

Financing activities

     (753     (219     (534

Effects of changes in exchange rate on cash and cash equivalents

     (8     3        (11
  

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

   $ (14   $ 1      $ (15
  

 

 

   

 

 

   

 

 

 

Operating Activities

During the 2011, net cash provided by operating activities increased $368 million as compared to 2010 primarily reflecting better working capital (net change in assets and liabilities, excluding the impact of acquisitions) utilization resulting from:

 

   

the absence of a net payment of $145 million in 2010 relating to the IRS settlement, which was reflected within due to former Parent and subsidiaries;

 

   

$62 million of lower cash utilization resulting from the recognition of deferred ancillary revenues during 2010 at our vacation ownership business; and

 

   

the absence of a $51 million reduction in accrued liabilities recorded during the third quarter of 2010 related to the resolution of and adjustment to certain contingent liabilities and assets.

Also contributing to the increase in net cash from operating activities was $55 million of higher cash income which included a $67 million refund for value-added taxes and related interest income of which $27 million is included in net income and $40 million is in working capital.

Investing Activities

During 2011, net cash used in investing activities decreased $162 million as compared to 2010, principally reflecting $209 million of lower payments for acquisitions, partially offset by a $72 million increase in capital spending primarily for construction on our Wyndham Grand hotel in Orlando and information technology related initiatives.

Financing Activities

During 2011, net cash used in financing activities increased $534 million as compared to 2010, which principally reflects (i) $658 million of higher share repurchases and (ii) $249 million of lower proceeds from the issuance of notes.

Such increases in cash outflows were partially offset by (i) $342 million of higher net proceeds related to non-securitized borrowings and (ii) $69 million of higher net proceeds related to securitized vacation ownership debt resulting from higher advance rates on our 2011 securitizations.

 

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Convertible Debt. During 2011, we repurchased a portion of our remaining convertible notes with carrying value of $251 million primarily resulting from the completion of a cash tender offer ($95 million for the portion of convertible notes, including the unamortized discount, and $156 million for the related bifurcated conversion feature) for $262 million. Concurrent with the repurchases, we settled (i) a portion of the call options for proceeds of $155 million, which resulted in an additional loss of $1 million, and (ii) a portion of the warrants with payments of $112 million. As a result of these transactions, we made net payments of $219 million and incurred total losses of $12 million during 2011 and reduced the number of shares related to the warrants (“Warrants”) to approximately 1 million as of December 31, 2011.

During 2010, we utilized some of our cash flow to retire a portion of our convertible notes and settle a related portion of our call options and Warrants. We repurchased approximately 50%, or $114 million face value, of our $230 million convertible notes that had a carrying value of $239 million ($101 million for the portion of convertible notes, including the unamortized discount, and $138 million for the bifurcated conversion feature) for $250 million. Concurrent with the repurchase, we settled (i) a portion of our call options for proceeds of $136 million and (ii) a portion of our Warrants with payments of $98 million. As a result of these transactions, we made net payments of $212 million and incurred total losses of $14 million during 2010. This transaction reduced the number of Warrants related to the convertible transaction by approximately 9 million and, as such, we had approximately 9 million Warrants outstanding as of December 31, 2010.

Senior Unsecured Notes. During the first quarter of 2011, we issued senior unsecured debt for net proceeds of $245 million. We utilized the proceeds from this debt issuance to reduce our outstanding indebtedness, including the repurchase of a portion of our outstanding convertible notes and repayment of borrowings under the revolving credit facility, and for general corporate purposes. For further detailed information about such borrowings, see Note 13 – Long-Term Debt and Borrowing Arrangements.

Capital Deployment

We are focusing on optimizing cash flow and seeking to deploy capital for the highest possible returns. Ultimately, our business objective is to transform our cash and earnings profile, primarily by rebalancing our cash streams to achieve a greater proportion of EBITDA from our fee-for-service businesses. We intend to continue to invest in select capital and technological improvements across our business. In addition, we may seek to acquire additional franchise agreements, hotel/property management contracts and exclusive agreements for vacation rental properties on a strategic and selective basis, either directly or through investments in joint ventures.

During 2011, we spent $249 million on capital expenditures, equity investments and development advances primarily on (i) information technology enhancement projects, (ii) $46 million for construction of our Wyndham Grand hotel in Orlando, (iii) renovations of bungalows at our Landal GreenParks business and (iv) equity investments and development advances. During 2012, we anticipate spending approximately $195 million to $210 million on capital expenditures, equity investments and development advances. Additionally, in an effort to support growth in the Wyndham Hotels and Resorts brand, we plan on investing approximately $200 million in mezzanine and other financing over the next several years.

In addition, we spent $79 million relating to vacation ownership development projects (inventory) during 2011. We anticipate spending on average approximately $150 million annually from 2011 through 2015 on vacation ownership development projects (approximately $110 million to $120 million during 2012), including projects currently under development. We believe that our vacation ownership business currently has adequate finished inventory on our balance sheet to support vacation ownership sales. After factoring in the anticipated additional average spending of approximately $150 million annually from 2011 through 2015, we expect to have adequate inventory through at least 2016.

 

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We expect that the majority of the expenditures that will be required to pursue our capital spending programs, strategic investments and vacation ownership development projects will be financed with cash flow generated through operations. Additional expenditures are financed with general unsecured corporate borrowings, including through the use of available capacity under our revolving credit facility.

Share Repurchase Program

We expect to generate annual net cash provided by operating activities less capital expenditures, equity investments and development advances in the range of approximately $600 million to $700 million in 2012. A portion of this cash flow is expected to be returned to our shareholders in the form of share repurchases. On August 20, 2007, our Board of Directors (the “Board”) authorized a stock repurchase program that enabled us to purchase up to $200 million of our common stock. On July 22, 2010, the Board increased the authorization by $300 million and further increased the authorization by $500 million on both April 25, 2011 and August 11, 2011, bringing the total share authorization under our current program to $1.5 billion. From August 20, 2007 through December 31, 2010, we repurchased 11.4 million shares at an average price of $25.78 for a cost of $295 million and repurchase capacity increased $53 million from proceeds received from stock option exercises as of December 31, 2010. During 2011, we repurchased 28.7 million shares at an average price of $31.45 for a cost of $902 million and repurchase capacity increased $11 million from proceeds received from stock option exercises. Such repurchase capacity will continue to be increased by proceeds received from future stock option exercises. As of December 31, 2011, we repurchased a total of 40.1 million shares at an average price of $29.83 for a cost of $1.2 billion under our current authorization and had $367 million remaining availability under our program.

During the period January 1, 2012 through February 16, 2012, we repurchased an additional 2 million shares at an average price of $40.04 for a cost of $79 million. We currently have $295 million remaining availability in our program. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. Repurchases may be conducted in the open market or in privately negotiated transactions.

Contingent Tax Liabilities

On July 15, 2010, Cendant and the IRS agreed to settle the IRS examination of Cendant’s taxable years 2003 through 2006. During such period, we and Realogy were included in Cendant’s tax returns. The agreement with the IRS closes the IRS examination for tax periods prior to the date of Separation, July 31, 2006. During September 2010, we received $10 million in payment from Realogy and paid $155 million for all such tax liabilities, including the final interest payable, to Cendant who is the taxpayer. We made such payment from cash flow generated through operations and the use of available capacity under our $970 million revolving credit facility.

As a result of the agreement with the IRS, we (i) reversed $190 million in net deferred tax liabilities allocated from Cendant on the Separation Date with a corresponding increase to stockholders’ equity and (ii) recognized a $55 million gain ($42 million, net of tax) with a corresponding decrease to general and administrative expenses during the third quarter of 2010. During the fourth quarter of 2010, we recorded a $2 million reduction to deferred tax assets allocated from Cendant on the Separation Date with a corresponding decrease to stockholders’ equity (see Note 23 — Separation Adjustments and Transactions with Former Parent and Subsidiaries for more information).

 

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Financial Obligations

Our indebtedness consisted of:

 

     December 31,
2011
     December 31,
2010
 

Securitized vacation ownership debt: (a)

     

Term notes

   $         1,625       $         1,498   

Bank conduit facility (b)

     237         152   
  

 

 

    

 

 

 

Total securitized vacation ownership debt

   $ 1,862       $ 1,650   
  

 

 

    

 

 

 

Long-term debt:

     

Revolving credit facility (due July 2016) (c)

   $ 218       $ 154   

6.00% senior unsecured notes (due December 2016) (d)

     811         798   

9.875% senior unsecured notes (due May 2014) (e)

     243         241   

3.50% convertible notes (due May 2012) (f)

     36         266   

7.375% senior unsecured notes (due March 2020) (g)

     247         247   

5.75% senior unsecured notes (due February 2018) (h)

     247         247   

5.625% senior unsecured notes (due March 2021) (i)

     245           

Vacation rentals capital leases (j)

     102         115   

Other

     4         26   
  

 

 

    

 

 

 

Total long-term debt

   $ 2,153       $ 2,094   
  

 

 

    

 

 

 

 

(a) 

Represents non-recourse debt that currently is securitized through 13 bankruptcy-remote special purpose entities (“SPEs”), the creditors of which have no recourse to us for principal and interest.

(b) 

Represents a non-recourse vacation ownership bank conduit facility, with a term through June 2013, whose capacity is subject to our ability to provide additional assets to collateralize the facility. As of December 31, 2011, the total available capacity of the facility was $363 million.

(c) 

The revolving credit facility has a total capacity of $1.0 billion, which includes availability for letters of credit. As of December 31, 2011, we had $11 million of letters of credit outstanding and, as such, the total available capacity of the revolving credit facility was $771 million.

(d)

Represents senior unsecured notes we issued during December 2006. The balance as of December 31, 2011 represents $800 million aggregate principal less $2 million of unamortized discount, plus $13 million of unamortized gains from the settlement of a derivative.

(e)

Represents senior unsecured notes we issued during May 2009. The balance as of December 31, 2011 represents $250 million aggregate principal less $7 million of unamortized discount.

(f) 

Represents convertible notes issued by us during May 2009, which includes debt principal, less unamortized discount, and a liability related to a bifurcated conversion feature. During 2011, we repurchased a portion of our outstanding convertible notes (see Note 13 – Long-term Debt and Borrowing Arrangements for further details). The following table details the components of the convertible notes:

 

     December 31,
2011
     December 31,
2010
 

Debt principal

   $                 12       $                 116   

Unamortized discount

             (12
  

 

 

    

 

 

 

Debt less discount

     12         104   

Fair value of bifurcated conversion feature (*)

     24         162   
  

 

 

    

 

 

 

Convertible notes

   $ 36       $ 266   
  

 

 

    

 

 

 

 

  (*) 

We also have an asset with a fair value equal to the bifurcated conversion feature, which represents cash-settled call options that we purchased concurrent with the issuance of the convertible notes.

(g) 

Represents senior unsecured notes we issued during February 2010. The balance as of December 31, 2011 represents $250 million aggregate principal less $3 million of unamortized discount.

(h) 

Represents senior unsecured notes we issued during September 2010. The balance as of December 31, 2011 represents $250 million aggregate principal less $3 million of unamortized discount.

(i) 

Represents senior unsecured notes we issued during March 2011. The balance as of December 31, 2011 represents $250 million aggregate principal less $5 million of unamortized discount.

(j) 

Represents capital lease obligations with corresponding assets classified within property and equipment on our Consolidated Balance Sheets.

 

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2011 Debt Issuances

During 2011, we issued senior unsecured notes, closed three term securitizations, renewed our securitized bank conduit facility, repurchased a portion of our convertible notes and replaced our revolving credit facility. For further detailed information about such debt, see Note 13 — Long-term Debt and Borrowing Arrangements.

Capacity

As of December 31, 2011, available capacity under our borrowing arrangements was as follows:

 

     Securitized bank
conduit facility (a)
     Revolving credit
facility
 

Total capacity

   $                 600       $            1,000   

Less: Outstanding borrowings

     237         218   
  

 

 

    

 

 

 

Available capacity

   $ 363       $ 782 (b) 
  

 

 

    

 

 

 

 

(a) 

The capacity of this facility is subject to our ability to provide additional assets to collateralize additional securitized borrowings.

(b) 

The capacity under our revolving credit facility includes availability for letters of credit. As of December 31, 2011, the available capacity of $782 million was further reduced to $771 million due to the issuance of $11 million of letters of credit.

Transfer and Servicing of Financial Assets

We pool qualifying vacation ownership contract receivables and sell them to bankruptcy-remote entities. Vacation ownership contract receivables qualify for securitization based primarily on the credit strength of the VOI purchaser to whom financing has been extended. Vacation ownership contract receivables currently are securitized through 13 bankruptcy-remote SPEs that are consolidated within our Consolidated Financial Statements. As a result, we do not recognize gains or losses resulting from these securitizations at the time of sale to the SPEs. Interest income is recognized when earned over the contractual life of the vacation ownership contract receivables. We service the securitized vacation ownership contract receivables pursuant to servicing agreements negotiated on an arms-length basis based on market conditions. The activities of these SPEs are limited to (i) purchasing vacation ownership contract receivables from our vacation ownership subsidiaries; (ii) issuing debt securities and/or borrowing under a conduit facility to fund such purchases; and (iii) entering into derivatives to hedge interest rate exposure. The bankruptcy-remote SPEs are legally separate from us. The receivables held by the bankruptcy-remote SPEs are not available to our creditors and legally are not our assets. Additionally, the creditors of these SPEs have no recourse to us for principal and interest.

The assets and liabilities of these vacation ownership SPEs are as follows:

 

     December 31,
2011
     December 31,
2010
 

Securitized contract receivables, gross

   $         2,485       $         2,703   

Securitized restricted cash

     132         138   

Interest receivables on securitized contract receivables

     20         22   

Other assets (a)

     1         2   
  

 

 

    

 

 

 

Total SPE assets (b)

     2,638         2,865   
  

 

 

    

 

 

 

Securitized term notes

     1,625         1,498   

Securitized conduit facilities

     237         152   

Other liabilities (c)

     11         22   
  

 

 

    

 

 

 

Total SPE liabilities

     1,873         1,672   
  

 

 

    

 

 

 

SPE assets in excess of SPE liabilities

   $ 765       $ 1,193   
  

 

 

    

 

 

 

 

(a) 

Includes interest rate derivative contracts and related assets.

(b)

Excludes deferred financing costs of $26 million and $22 million as of December 31, 2011 and 2010, respectively, related to securitized debt.

(c) 

Primarily includes interest rate derivative contracts and accrued interest on securitized debt.

 

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In addition, we have vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $757 million and $641 million as of December 31, 2011 and 2010, respectively. A summary of total vacation ownership receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows:

 

     December 31,
2011
    December 31,
2010
 

SPE assets in excess of SPE liabilities

   $ 765      $ 1,193   

Non-securitized contract receivables

     757        641   

Allowance for loan losses

     (394     (362
  

 

 

   

 

 

 

Total, net

   $         1,128      $         1,472   
  

 

 

   

 

 

 

Covenants

The revolving credit facility is subject to covenants including the maintenance of specific financial ratios. The financial ratio covenants consist of a minimum consolidated interest coverage ratio of at least 3.0 to 1.0 as of the measurement date and a maximum consolidated leverage ratio not to exceed 3.75 to 1.0 as of the measurement date. The consolidated 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. As of December 31, 2011, our consolidated interest coverage ratio was 9.2 times. Consolidated interest expense excludes, among other things, interest expense on any securitization indebtedness (as defined in the credit agreement). The consolidated leverage ratio is calculated by dividing consolidated total indebtedness (as defined in the credit agreement and which excludes, among other things, securitization indebtedness) as of the measurement date by consolidated EBITDA as measured on a trailing 12 month basis preceding the measurement date. As of December 31, 2011, our consolidated leverage ratio was 2.1 times. Covenants in this credit facility also include limitations on indebtedness of material subsidiaries; liens; mergers, consolidations, liquidations and dissolutions; sale of all or substantially all of our assets; and sale and leaseback transactions. Events of default in this credit facility include failure to pay interest, principal and fees when due; breach of a covenant or warranty; acceleration of or failure to pay other debt in excess of $50 million (excluding securitization indebtedness); insolvency matters; and a change of control.

The 6.00% senior unsecured notes, 9.875% senior unsecured notes, 7.375% senior unsecured notes, 5.75% senior unsecured notes and 5.625% senior unsecured notes contain various covenants including limitations on liens, limitations on potential sale and leaseback transactions and change of control restrictions. In addition, there are limitations on mergers, consolidations and potential sale of all or substantially all of our assets. Events of default in the notes include failure to pay interest and principal when due, breach of a covenant or warranty, acceleration of other debt in excess of $50 million (excluding securitization indebtedness) and insolvency matters. The convertible notes do not contain affirmative or negative covenants, however, the limitations on mergers, consolidations and potential sale of all or substantially all of our assets and the events of default for our senior unsecured notes are applicable to such notes. Holders of the convertible notes have the right to require us to repurchase the convertible notes at 100% of principal plus accrued and unpaid interest in the event of a fundamental change, defined to include, among other things, a change of control, certain recapitalizations and if our common stock is no longer listed on a national securities exchange.

As of December 31, 2011, we were in compliance with all of the financial covenants described above.

Each of our non-recourse, securitized term notes and the bank conduit facility contain various triggers relating to the performance of the applicable loan pools. If the vacation ownership contract receivables 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

 

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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 of December 31, 2011, all of our securitized loan pools were in compliance with applicable contractual triggers.

LIQUIDITY RISK

Our vacation ownership business finances certain of its receivables through (i) an asset-backed bank conduit facility and (ii) periodically accessing the capital markets by issuing asset-backed securities. None of the currently outstanding asset-backed securities contains any recourse provisions to us other than interest rate risk related to swap counterparties (solely to the extent that the amount outstanding on our notes differs from the forecasted amortization schedule at the time of issuance).

We believe that our bank conduit facility, with a term through June 2013 and capacity of $600 million, combined 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.

Our $1.0 billion five-year revolving credit agreement, which expires in July 2016, contains a provision that is a condition of an extension of credit. The provision, which was standard market practice for issuers of our rating and industry at the time of our revolver renewal, allows the lenders to withhold an extension of credit if the representations and warranties we made at the time we executed the revolving credit facility agreement are not true and correct, in all material respects, at the time of the request of the extension of credit including if a development or event has or would reasonably be expected to have a material adverse effect on our business, assets, operations or condition, financial or otherwise. The application of the material adverse effect provision contains exclusions for the impact resulting from disruptions in, or the inability of companies engaged in businesses similar to those engaged in by us and our subsidiaries to consummate financings in, the asset backed securities or conduit market.

We primarily utilize surety bonds at 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 twelve surety providers in the amount of $1.2 billion, of which we had $296 million outstanding as of December 31, 2011. The availability, terms and conditions, and pricing of such bonding capacity is dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing such bonding capacity, the general availability of such capacity and our corporate credit rating. If such bonding capacity is unavailable or, alternatively, if the terms and conditions and pricing of such bonding capacity are unacceptable to us, our vacation ownership business could be negatively impacted.

Our liquidity position may also be negatively affected by unfavorable conditions in the capital markets in which we operate or if our vacation ownership contract receivables portfolios do not meet specified portfolio credit parameters. Our liquidity as it relates to our vacation ownership contract receivables securitization program could be adversely affected if we were to fail to renew or replace our conduit facility on its expiration date 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 vacation ownership contract receivables deteriorate. Our ability to sell securities backed by our vacation ownership contract receivables depends on the continued ability and willingness of capital market participants to invest in such securities.

As of December 31, 2011, we had $363 million of availability under our asset-backed bank conduit facility. Any disruption to the asset-backed or commercial paper markets could adversely impact our ability to obtain such financings.

Our senior unsecured debt is rated BBB- with a “stable outlook” by Standard and Poor’s. During October 2011, Moody’s Investors Service upgraded our senior unsecured debt rating to Baa3 with a “stable outlook”. 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

 

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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.

As a result of the sale of Realogy on April 10, 2007, Realogy’s senior debt credit rating was downgraded to below investment grade. Under the Separation Agreement, if Realogy experienced such a change of control and suffered such a ratings downgrade, it was required to post a letter of credit in an amount acceptable to us and Avis Budget Group to satisfy the fair value of Realogy’s indemnification obligations for the Cendant legacy contingent liabilities in the event Realogy does not otherwise satisfy such obligations to the extent they become due. On April 26, 2007, Realogy posted a $500 million irrevocable standby letter of credit from a major commercial bank in favor of Avis Budget Group and upon which demand may be made if Realogy does not otherwise satisfy its obligations for its share of the Cendant legacy contingent liabilities. The letter of credit can be adjusted from time to time based upon the outstanding contingent liabilities and has an expiration date of September 2013, subject to renewal and certain provisions. During December 2011, such letter of credit was reduced to $70 million. The posting of this letter of credit does not relieve or limit Realogy’s obligations for these liabilities.

SEASONALITY

We experience seasonal fluctuations in our net revenues and net income from our franchise and management fees, commission income earned from renting vacation properties, annual subscription fees or annual membership dues, as applicable, and exchange and member-related transaction fees and sales of VOIs. Revenues from franchise and management fees are generally higher in the second and third quarters than in the first or fourth quarters, because of increased leisure travel during the summer months. Revenues from vacation rentals are generally highest in the third quarter, when vacation rentals are highest. Revenues from vacation exchange and member-related transaction fees are generally highest in the first quarter, which is generally when members of our vacation exchange business plan and book their vacations for the year. Revenues from sales of VOIs are generally higher in the third quarter than in other quarters. 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.

SEPARATION ADJUSTMENTS AND TRANSACTIONS WITH FORMER PARENT AND SUBSIDIARIES

Transfer of Cendant Corporate Liabilities and Issuance of Guarantees to Cendant and Affiliates

Pursuant to the Separation and Distribution Agreement, upon the distribution of our common stock to Cendant shareholders, we entered into certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Realogy and Travelport for such liabilities) and guarantee commitments related to deferred compensation arrangements with each of Cendant and Realogy. These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and Cendant contingent and other corporate liabilities, of which we assumed and are responsible for 37.5% while Realogy is responsible for the remaining 62.5%. The remaining amount of liabilities which we assumed in connection with the Separation was $49 million and $78 million as of December 31, 2011 and 2010, respectively. These amounts were comprised of certain Cendant corporate liabilities which were recorded on the books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation related to certain unresolved contingent matters and certain others that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, we would be responsible for a portion of the defaulting party or parties’ obligation. We also provided a default guarantee related to certain deferred compensation arrangements related to certain current and former senior officers and directors of Cendant,

 

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Realogy and Travelport. These arrangements, which are discussed in more detail below, have been valued upon the Separation in accordance with the guidance for guarantees and recorded as liabilities on the Consolidated Balance Sheets. To the extent such recorded liabilities are not adequate to cover the ultimate payment amounts, such excess will be reflected as an expense to the results of operations in future periods.

As of December 31, 2011, the $49 million of Separation related liabilities is comprised of $41 million for tax liabilities, $3 million for liabilities of previously sold businesses of Cendant, $3 million for other contingent and corporate liabilities and $2 million of liabilities where the calculated guarantee amount exceeded the contingent liability assumed at the date of Separation. In connection with these liabilities, $10 million is recorded in current due to former Parent and subsidiaries and $37 million is recorded in long-term due to former Parent and subsidiaries as of December 31, 2011 on the Consolidated Balance Sheet. We will indemnify Cendant for these contingent liabilities and therefore any payments would be made to the third party through the former Parent. The $2 million relating to guarantees is recorded in other current liabilities as of December 31, 2011 on the Consolidated Balance Sheet. The actual timing of payments relating to these liabilities is dependent on a variety of factors beyond our control. See Contractual Obligations for the estimated timing of such payments. In addition, as of December 31, 2011, we had $3 million of receivables due from former Parent and subsidiaries primarily relating to income taxes, which is recorded in other current assets on the Consolidated Balance Sheet. Such receivables totaled $4 million as of December 31, 2010.

See Item 1A. Risk Factors for further information related to contingent liabilities.

CONTRACTUAL OBLIGATIONS

The following table summarizes our future contractual obligations for the twelve month periods beginning on January 1st of each of the years set forth below:

 

        2012             2013             2014             2015             2016             Thereafter             Total      

Securitized debt (a)

    $ 196          $ 249          $ 368          $ 205          $ 201          $ 643          $ 1,862     

Long-term debt

    46          11          255          12          1,041          788          2,153     

Interest on debt (b)

    212          207          187          176          170          156          1,108     

Operating leases

    83          57          46          45          41          294          566     

Other purchase commitments (c)

    181          45          28          20          19          142          435     

Contingent liabilities (d)

    10          39          —          —          —          —          49     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (e)

    $     728          $     608          $     884          $     458          $     1,472          $     2,023          $     6,173     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

Represents debt that currently is securitized through 13 bankruptcy-remote SPEs, the creditors to which have no recourse to us for principal and interest.

(b) 

Includes interest on both securitized and long-term debt; estimated using the stated interest rates on our long-term debt and the swapped interest rates on our securitized debt.

(c) 

Primarily represents commitments related to the development of vacation ownership properties and information technology. Total includes approximately $100 million of vacation ownership development commitments, which we may terminate at minimal to no cost.

(d) 

Primarily represents certain contingent litigation liabilities, contingent tax liabilities and 37.5% of Cendant contingent and other corporate liabilities, which we assumed and are responsible for pursuant to our separation from Cendant.

(e) 

Excludes (i) $29 million of our liability for unrecognized tax benefits associated with the guidance for uncertainty in income taxes since it is not reasonably estimatable to determine the periods in which such liability would be settled with the respective tax authorities and (ii) a $13 million net pension liability as it is not reasonably estimatable to determine the periods in which such liability would be settled.

In addition to the above and in connection with our separation from Cendant, we entered into certain guarantee commitments with Cendant (pursuant to our assumption of certain liabilities and our obligation to indemnify Cendant, Realogy and Travelport for such liabilities) and guarantee commitments related to deferred compensation arrangements with each of Cendant and Realogy. These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and Cendant contingent and other corporate liabilities, of which we assumed and are responsible for 37.5% of these Cendant liabilities. Additionally, if any of

 

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the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, we are responsible for a portion of the defaulting party or parties’ obligation. We also provide a default guarantee related to certain deferred compensation arrangements related to certain current and former senior officers and directors of Cendant and Realogy. These arrangements were valued upon our separation from Cendant with the assistance of third-party experts in accordance with guidance for guarantees and recorded as liabilities on our balance sheet. To the extent such recorded liabilities are not adequate to cover the ultimate payment amounts, such excess will be reflected as an expense to our results of operations in future periods. See Separation Adjustments and Transactions with former Parent and Subsidiaries discussion for details of guaranteed liabilities.

OTHER COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS

Purchase Commitments. In the normal course of business, we make various commitments to purchase goods or services from specific suppliers, including those related to vacation ownership resort development and other capital expenditures. Purchase commitments made by us as of December 31, 2011 aggregated $435 million. Individually, such commitments range as high as $97 million related to the development of a vacation ownership resort. Approximately $316 million of the commitments relate to the development of vacation ownership properties and information technology.

Standard Guarantees/Indemnifications. In the ordinary course of business, we enter into agreements that contain standard guarantees and indemnities whereby we indemnify another party for specified breaches of or third-party claims relating to an underlying agreement. Such underlying agreements are typically entered into by one of our subsidiaries. The various underlying agreements generally govern purchases, sales or outsourcing of products or services, leases of real estate, licensing of software and/or development of vacation ownership properties, access to credit facilities, derivatives and issuances of debt securities. While a majority of these guarantees and indemnifications extend only for the duration of the underlying agreement, some survive the expiration of the agreement. We are not able to estimate the maximum potential amount of future payments to be made under these guarantees and indemnifications as the triggering events are not predictable. In certain cases we maintain insurance coverage that may mitigate any potential payments.

Other Guarantees/Indemnifications. In the ordinary course of business, our vacation ownership business provides guarantees to certain owners’ associations for funds required to operate and maintain vacation ownership properties in excess of assessments collected from owners of the VOIs. We may be required to fund such excess as a result of unsold Company-owned VOIs or failure by owners to pay such assessments. In addition, from time to time, we will agree to reimburse certain owner associations up to 75% of their uncollected assessments. These guarantees extend for the duration of the underlying subsidy or similar agreement (which generally approximate one year and are renewable at our discretion on an annual basis) or until a stipulated percentage (typically 80% or higher) of related VOIs are sold. The maximum potential future payments that we could be required to make under these guarantees was approximately $372 million as of December 31, 2011. We would only be required to pay this maximum amount if none of the owners assessed paid their assessments. Any assessments collected from the owners of the VOIs would reduce the maximum potential amount of future payments to be made by us. Additionally, should we be required to fund the deficit through the payment of any owners’ assessments under these guarantees, we would be permitted access to the property for our own use and may use that property to engage in revenue-producing activities, such as rentals. During 2011, 2010 and 2009, we made payments related to these guarantees of $17 million, $12 million and $10 million, respectively. As of December 31, 2011 and 2010, we maintained a liability in connection with these guarantees of $24 million and $17 million, respectively, on our Consolidated Balance Sheets.

From time to time, we may enter into a hotel management agreement that provides the hotel owner with a minimum return. Under such agreement, we would be required to compensate for any shortfall over the life of the management agreement up to a specified aggregate amount. Our exposure under these guarantees is partially mitigated by our ability to terminate any such management agreement if certain targeted operating results are not

 

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met. Additionally, we are able to recapture a portion or all of the shortfall payments and any waived fees in the event that future operating results exceed targets. As of December 31, 2011, the maximum potential amount of future payments to be made under these guarantees was $16 million with an annual cap of $3 million or less. As of both December 31, 2011 and 2010, we maintained a liability in connection with these guarantees of less than $1 million on our Consolidated Balance Sheets.

As part of our WAAM, we may guarantee to reimburse the developer a certain payment or to purchase from the developer inventory associated with the developer’s resort property for a percentage of the original sale price if certain future conditions exist. The maximum potential future payments that we could be required to make under these guarantees was approximately $31 million as of December 31, 2011. As of both December 31, 2011 and 2010, we had no recognized liabilities in connection with these guarantees.

Securitizations. We pool qualifying vacation ownership contract receivables and sell them to bankruptcy-remote entities all of which are consolidated into the accompanying Consolidated Balance Sheet as of December 31, 2011.

Letters of Credit. As of December 31, 2011 and 2010, we had $11 million and $28 million, respectively, of irrevocable standby letters of credit outstanding, which mainly support development activity at our vacation ownership business.

CRITICAL ACCOUNTING POLICIES

In presenting our 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 financial statements were the most appropriate at that time. Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results. However, the majority of our businesses operate in environments where we are paid a fee for a service performed, and therefore the results of the majority of our recurring operations are recorded in our financial statements using accounting policies that are not particularly subjective, nor complex.

Vacation Ownership Revenue Recognition. Our sales of VOIs are either cash sales or seller-financed sales. In order for us to recognize revenues of VOI sales under the full accrual method of accounting described in the guidance for sales of real estate for fully constructed inventory, a binding sales contract must have been executed, the statutory rescission period must have expired (after which time the purchasers are not entitled to a refund except for non-delivery by us), receivables must have been deemed collectible and the remainder of our obligations must have been substantially completed. In addition, before we recognize any revenues on VOI sales, the purchaser of the VOI must have met the initial investment criteria and, as applicable, the continuing investment criteria, by executing a legally binding financing contract. A purchaser has met the initial investment criteria when a minimum down payment of 10% is received by us. In accordance with the requirements of the guidance for real estate time-sharing transactions we must also take into consideration the fair value of certain incentives provided to the purchaser when assessing the adequacy of the purchaser’s initial investment. In those cases where financing is provided to the purchaser by us, the purchaser is obligated to remit monthly payments under financing contracts that represent the purchaser’s continuing investment. The contractual terms of seller-provided financing arrangements require that the contractual level of annual principal payments be sufficient to amortize the loan over a customary period for the VOI being financed, which is generally ten years, and payments under the financing contracts begin within 45 days of the sale and receipt of the minimum down payment of 10%.

 

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If all of the criteria for a VOI sale to qualify under the full accrual method of accounting have been met, as discussed above, except that construction of the VOI purchased is not complete, we recognize revenues using the POC method of accounting provided that the preliminary construction phase is complete and that a minimum sales level has been met (to assure that the property will not revert to a rental property). The preliminary stage of development is deemed to be complete when the engineering and design work is complete, the construction contracts have been executed, the site has been cleared, prepared and excavated, and the building foundation is complete. The completion percentage is determined by the proportion of real estate inventory costs incurred to total estimated costs. These estimated costs are based upon historical experience and the related contractual terms. The remaining revenues and related costs of sales, including commissions and direct expenses, are deferred and recognized as the remaining costs are incurred. Until a contract for sale qualifies for revenue recognition, all payments received are accounted for as restricted cash and deposits within other current assets and deferred income, respectively, on the Consolidated Balance Sheets. Commissions and other direct costs related to the sale are deferred until the sale is recorded. If a contract is cancelled before qualifying as a sale, non-recoverable expenses are charged to the current period as part of operating expenses on the Consolidated Statements of Income. Changes in costs could lead to adjustments to the POC status of a project, which may result in differences in the timing and amount of revenues recognized from the construction of vacation ownership properties. This policy is discussed in greater detail in Note 2 to the Consolidated Financial Statements.

Allowance for Loan Losses. In our Vacation Ownership segment, we provide for estimated vacation ownership contract receivable cancellations at the time of VOI sales by recording a provision for loan losses as a reduction of VOI sales on the Consolidated Statements of Income. We assess the adequacy of the allowance for loan losses based on the historical performance of similar vacation ownership contract receivables. We use a technique referred to as static pool analysis, which tracks defaults for each year’s sales over the entire life of those contract receivables. We consider current defaults, past due aging, historical write-offs of contracts and consumer credit scores (FICO scores) in the assessment of borrower’s credit strength and expected loan performance. We also consider whether the historical economic conditions are comparable to current economic conditions. If current conditions differ from the conditions in effect when the historical experience was generated, we adjust the allowance for loan losses to reflect the expected effects of the current environment on the collectability of our vacation ownership contract receivables.

Impairment of Long-Lived Assets. With regard to the goodwill and other indefinite-lived intangible assets recorded in connection with business combinations, we annually (during the fourth quarter of each year subsequent to completing our annual forecasting process) or, more frequently if circumstances indicate impairment may have occurred that would more likely than not reduce the fair value of a reporting unit below its carrying amount, review the reporting units’ carrying values as required by the guidance for goodwill and other intangible assets. We evaluate goodwill for impairment using the two-step process prescribed in the guidance. The first step is to compare the estimated fair value of any reporting unit within the Company that has recorded goodwill with the recorded net book value (including the goodwill) of the reporting unit. If the estimated fair value of the reporting unit is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value of the reporting unit is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical acquisition of the reporting unit. Purchase business combination accounting rules are followed to determine a hypothetical purchase price allocation to the reporting unit’s assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared to the recorded amount of goodwill for the reporting unit, and if lower, the recorded amount is written down to the hypothetical amount. In accordance with the guidance, we have determined that our reporting units are the same as our reportable segments.

Quoted market prices for our reporting units are not available; therefore, management must apply judgment in determining the estimated fair value of these reporting units for purposes of performing the annual goodwill impairment test. Management uses all available information to make these fair value determinations, including

 

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the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. To the extent additional information arises, market conditions change or our strategies change, it is possible that our conclusion regarding whether existing goodwill is impaired could change and result in a material effect on our consolidated financial position or results of operations. In performing our impairment analysis, we develop our estimated fair values for our reporting units using a combination of the discounted cash flow methodology and the market multiple methodology.

The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses our projections of financial performance for a five-year period. The most significant assumptions used in the discounted cash flow methodology are the discount rate, the terminal value and expected future revenues, gross margins and operating margins, which vary among reporting units.

We use a market multiple methodology to estimate the terminal value of each reporting unit by comparing such reporting unit to other publicly traded companies that are similar from an operational and economic standpoint. The market multiple methodology compares each reporting unit to the comparable companies on the basis of risk characteristics in order to determine the risk profile relative to the comparable companies as a group. This analysis generally focuses on quantitative considerations, which include financial performance and other quantifiable data, and qualitative considerations, which include any factors which are expected to impact future financial performance. The most significant assumption affecting our estimate of the terminal value of each reporting unit is the multiple of the enterprise value to earnings before interest, tax, depreciation and amortization.

To support our estimate of the individual reporting unit fair values, a comparison is performed between the sum of the fair values of the reporting units and our market capitalization. We use an average of our market capitalization over a reasonable period preceding the impairment testing date as being more reflective of our stock price trend than a single day, point-in-time market price. The difference is an implied control premium, which represents the acknowledgment that the observed market prices of individual trades of a company’s stock may not be representative of the fair value of the company as a whole. Estimates of a company’s control premium are highly judgmental and depend on capital market and macro-economic conditions overall. We evaluate the implied control premium for reasonableness.

Based on the results of our impairment evaluation performed during the fourth quarter of 2011, we determined that no impairment charge of goodwill was required as the fair value of goodwill at our lodging and vacation exchange and rentals reporting units was substantially in excess of the carrying value.

We continue to monitor the goodwill recorded at our lodging and vacation exchange and rentals reporting units for indicators of impairment. If economic conditions were to deteriorate more than expected, or other significant assumptions such as estimates of terminal value were to change significantly, we may be required to record an impairment of the goodwill balance at our lodging and vacation and exchange and rentals reporting units.

We determine whether the carrying value of other indefinite-lived intangible assets is impaired on an annual basis or more frequently if indicators of potential impairment exist. Application of the other indefinite-lived intangible assets impairment test requires judgment in the assumptions underlying the approach used to determine fair value. The fair value of each other indefinite-lived intangible asset is estimated using a discounted cash flow methodology. This analysis requires significant judgments, including anticipated market conditions,

 

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operating expense trends, estimation of future cash flows, which are dependent on internal forecasts, and estimation of long-term rate of growth. The estimates used to calculate the fair value of an other indefinite-lived intangible asset change from year to year based on operating results and market conditions. Changes in these estimates and assumption could materially affect the determination of fair value and the other indefinite-lived intangible assets impairment.

We also evaluate the recoverability of our other long-lived assets, including property and equipment and amortizable intangible assets, if circumstances indicate impairment may have occurred, pursuant to guidance for impairment or disposal of long-lived assets. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. Property and equipment is evaluated separately within each segment. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value.

Business Combinations. A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations. We account for business combinations in accordance with the guidance for business combinations and related literature. Accordingly, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill.

In determining the fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods including present value modeling and referenced market values (where available). Further, we make assumptions within certain valuation techniques including discount rates and timing of future cash flows. Valuations are performed by management or independent valuation specialists under management’s supervision, where appropriate. We believe that the estimated fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates.

Accounting for Restructuring Activities. Restructuring actions require us to make significant estimates in several areas including: (i) expenses for severance and related benefit costs; (ii) the ability to generate sublease income, as well as our ability to terminate lease obligations; and (iii) contract terminations. The amounts that we have accrued as of December 31, 2011 represent our best estimate of the obligations that we incurred in connection with these actions, but could be subject to change due to various factors including market conditions and the outcome of negotiations with third parties. In the event actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.

Income Taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets to assess their potential realization and establish a valuation allowance for portions of such assets that we believe will not be ultimately realized. In performing this review, we make estimates and assumptions regarding projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions may increase or decrease our valuation allowance resulting in an increase or decrease in our effective tax rate, which could materially impact our results of operations.

For tax positions we have taken or expect to take in our tax return, we apply a more likely than not threshold, under which we must conclude a tax position is more likely than not to be sustained, assuming that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information, in order to recognize or continue to recognize the benefit. In determining our provision for income taxes, we use judgment, reflecting our estimates and assumptions, in applying the more likely than not threshold.

 

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Adoption of Accounting Pronouncements

During 2011, we adopted the guidance related to the accounting for multiple-deliverable revenue arrangements. Additionally, we early adopted recently issued guidance related to the presentation of comprehensive income. During 2012, we will adopt guidance related to the testing goodwill for impairment and fair value measurement. For detailed information regarding these standards and the impact thereof on our financial statements, see Note 2 to our Consolidated Financial Statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We use various financial instruments, particularly swap contracts and interest rate caps to manage and reduce the interest rate risk related to our debt. Foreign currency forwards and options are also used to manage and reduce the foreign currency exchange rate risk associated with our foreign currency denominated receivables, payables and forecasted royalties, forecasted earnings and cash flows of foreign subsidiaries and other transactions.

We are exclusively an end user of these instruments, which are commonly referred to as derivatives. We do not engage in trading, market making or other speculative activities in the derivatives markets. More detailed information about these financial instruments is provided in Note 16 to the Consolidated Financial Statements. Our principal market exposures are interest and foreign currency rate risks.

 

   

Our primary interest rate exposure as of December 31, 2011 was to interest rate fluctuations in the United States, specifically LIBOR and asset-backed commercial paper interest rates due to their impact on variable rate borrowings and other interest rate sensitive liabilities. In addition, interest rate movements in one country, as well as relative interest rate movements between countries can impact us. We anticipate that LIBOR and asset-backed commercial paper rates will remain a primary market risk exposure for the foreseeable future.

 

   

We have foreign currency rate exposure to exchange rate