Travel + Leisure Co. (TNL) Q3 2022 Earnings Report, Transcript and Summary

Greetings and welcome to Travel + Leisure Company’s Third Quarter 2022 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Agnew, Senior Vice President of Financial Planning and Analysis and Investor Relations. Thank you. You may begin.

Thank you, Doug and good morning. Before we begin, we would like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements and the forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings and you can find a reconciliation of the non-GAAP financial measures discussed in today’s call in the earnings press release available on our website at travelandleisureco.com/investors. This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our third quarter results and Mike Hug, our Chief Financial Officer will then provide greater detail on the quarter, our balance sheet and liquidity position. Following these remarks, we look forward to answering your questions. With that, I am pleased to turn the call over to Michael Brown.

Thank you, Chris. Good morning and welcome to our third quarter earnings call. This morning, we reported adjusted EBITDA of $234 million and adjusted earnings per share of $1.28. Strong leisure demand continued throughout the third quarter and our key indicators point to continued strong travel demand heading into next year. In September, we reaffirmed our $230 million to $240 million adjusted EBITDA guidance, with the expectation that we would be at the high end of that range. However, at the conclusion of the quarter, Hurricane Ian and a weakening Australian dollar impacted our Q3 results by an estimated $4 million of EBITDA. In the quarter, we returned $148 million to shareholders through a quarterly dividend and the repurchase of shares. Of the $148 million, $115 million was dedicated to share repurchases, up from $83 million in Q2. In the third quarter, repurchases accounted for 3.2% of outstanding shares. Full year, through the end of Q3, repurchases have accounted for 6% of outstanding shares. The key metrics in our business performed well during the quarter, with tours increasing 22% year-over-year and VPG maintaining the near record levels from the second quarter, up 5% year-over-year. New owner transaction mix increased to 33%, up nearly 300 basis points year-over-year and 100 basis points sequentially. While increasing new owner mix normally puts downward pressure on VPG, the strength in VPG goes to highlight the consistency in closing rates and how strongly the value proposition of our products is resonating with our customers. We also saw solid growth in our Travel and Membership segment, with revenues up 5% year-over-year, despite the drag from the hurricane at the end of the quarter. Shifting to booking trends, in the third quarter, room nights ended 8% ahead of 2019 at our Vacation Ownership clubs. In the fourth quarter, the strong leisure travel trends have continued, and forward bookings remain above 2019 levels. Room nights on the books are now pacing 9% above 2019. Strong VPGs in the quarter helped deliver $555 million of gross VOI sales, above the top end of our guidance range of $530 million to $550 million. At $3,393, VPG for the third quarter was 45% above 2019, with the performance being driven by increased close rates. The strength in close rates reflects the elevated quality of our marketing criteria and the value our customers see relative to hotel stays and alternative accommodations. Recent surveys of our owner base show at 13% increase in the perceived value in their ownership compared to before this period of elevated inflation. Our consumer finance portfolio is growing, which helps to offset the increased borrowing costs we have seen in the ABS market. Our portfolio is stronger today because of the changes implemented during COVID to raise credit quality, as Mike will discuss in more detail. I would also like to reinforce how our strategic approach on elevated FICOs is fundamentally changing our business. As a company, our exposure to lower in FICOs has reduced dramatically. In fact, if you consider average FICOs with new originations across the public timeshare companies, we are now in line with our branded peers. The last few years have shown once again that vacations are not purely discretionary. Most of our customers may change how they vacation, but they rarely forgo their vacation. As an example, during COVID, we saw many of our owners choose to drive to destinations rather than fly, and they utilize their in-suite kitchens instead of dining out which reinforces once again what we always understood, people prioritize vacations and have a strong desire to travel. Despite some recent moderation in general consumer indices, intention to travel remains high. According to a mid-September survey by Tourism Market research firm destinations analysts, excitement to travel in the next 12 months remains elevated and near the highs of the last few years. We believe our owners are among the most committed travelers and experience – and our experience during the Great Recession and COVID showed us that most of our owners will use their prepaid vacations. Timeshare resort occupancy, according to ARDA, the Timeshare Industry Trade Association, was little changed from 2007 at just under 80% in 2009 when hotel occupancy dropped over 800 basis points over the same period. It is clear that our Cornerstone Vacation Ownership business is performing well and given the resiliency of our business model with predictable and recurring revenue streams, we believe we have good visibility for the remainder of the year and are confident heading into 2023. Shifting to our Travel and Membership business, despite the impact of the hurricane at the end of the quarter, exchange transactions still increased 8% year-over-year, including a 13% improvement in international transactions. Exchange revenue per transaction was up 3% in North America, but was offset by declines internationally primarily due to currency impacts. Our exchange business continues to perform at a high level, with year-to-date operating profit ahead of last year and just below 2019. Our travel clubs continue to add the building blocks for success, and we are making steady progress on many fronts. We added 38 affiliate partners in the third quarter, including some great organizations like Reader’s Digest UK and Silversurfers. The lead time for signing an affiliate to ramp-up has taken longer than originally expected. With that said, we are ramping up our B2B transactions, which increased 27% year-over-year in the third quarter. Before I hand the call over to our CFO, Mike Hug, let me provide an update on the impact of Hurricane Ian and also make a few final comments related to guidance and cash generation. First, our thoughts go out to everyone impacted by the storm, and we thank all of our associates who worked tirelessly to ensure the safety of our owners and guests. While none of our managed vacation ownership resorts experienced major damage, there was water intrusion at several resorts in Orlando and Daytona Beach, Florida and a number of resorts in coastal South Carolina. Sales operations, bookings and travel were impacted around the time of the storm, and we lost some capacity for a short period. RCI has a strong portfolio of resorts along the Gulf Coast of Florida, particularly in Fort Myers and Naples as well as Marco, Sanibel and Captiva Islands. In late September, 114 resorts along the Gulf Coast of Florida and Central Florida as well as Coastal Carolina were impacted by the hurricane. The damage caused units to be placed out of service and future bookings in those locations temporarily suspended. This area represents 6% of our U.S. supply in terms of resort count. Most have provided reopening dates within the next few months, but over 40 resorts are not expecting to take arrivals until the start of 2023, and 7 are not expected to reopen next year. As a result of Hurricane Ian and foreign currency impacts, we are adjusting and tightening our full year adjusted EBITDA guidance to $855 million to $865 million. The $10 million adjustment to the midpoint of our guidance reflects the $4 million impact in the third quarter, lost RCI bookings due to out-of-service inventory in the fourth quarter and foreign currency headwinds. We expect VPG to be at the high end of our previous guidance at around $3,400. We expect gross VOI sales to be between $1.95 billion and $2 billion, and loan loss provision for the full year to be around 17%. Between buybacks and dividends, we are increasing our full year capital return forecast from a range of $350 million to $400 million to approximately $475 million or 14% of our market cap. We expect full year adjusted EBITDA cash conversion from adjusted EBITDA to be closer to 50% this year as a few timing items, primarily the placing of receivables and term ABS transactions, will see cash flow shift to the first quarter of 2023. As of yesterday’s market close, our current adjusted free cash flow yield is approximately 13% based on our full year expectation. For more detail on our performance, I would now like to hand the call over to Mike Hug.

Thanks, Michael and good morning to everyone. As well as discussing our third quarter results, I will provide more color on our balance sheet, liquidity position and cash flow. All of my comments reflect EBITDA, EPS and cash flow on a non-GAAP adjusted basis. Please see our tables to the earnings release or our website for reconciliations. We reported total company third quarter EBITDA of $234 million and diluted earnings per share of $1.28 compared to $228 million in EBITDA and $1.19 in EPS one year ago. EBITDA margin at Travel + Leisure Co. was 25% compared to 24.2% in 2019. Looking at the performance in our two business segments, in the third quarter, Vacation Ownership reported segment revenue of $754 million and EBITDA of $188 million, increases of 13% and 4%, respectively, over the third quarter of 2021. And remember, the prior year period included a $13 million EBITDA benefit from the COVID reserve release. In the third quarter, we delivered 158,000 tours and a VPG of $3,393, representing increases of 22% and 5%, respectively over the prior year. In looking at our portfolio, the quality has improved since the great financial crisis, with sub 640 borrowers making up only 10% of our portfolio at the end of the third quarter compared to over 30% at December 31, 2008. And the increased marketing criteria we have put in place has driven more originations in the higher FICO bands, resulting in borrowers with a FICO above 700, making up 64% of portfolio at the end of the third quarter compared to 42% at the end of 2008. As it relates to portfolio performance, we are seeing some increases in our delinquencies back to normalized levels primarily on our lower credit quality borrowers as they are the ones most impacted by inflation. But more importantly, we are now growing the portfolio. And as a reminder, the dynamics of a growing portfolio is higher delinquencies compared to an aging portfolio. This is the right thing to do because as we increase the percentage of sales finance, we are also increasing future recurring and high interest – high-margin interest income streams in exchange for a higher provision as a percentage of sales. Revenue in our Travel Membership segment was $183 million in the quarter compared to $175 million in the prior year. EBITDA for Travel Membership was $65 million compared to $64 million in the prior year, increases of 5% and 2% respectively over the third quarter of 2021. Travel Membership transactions increased 9% over the prior year, and transaction revenue increased 6% as revenue per transaction for RPT was impacted by channel mix. Travel Club transactions now represent 43% of total transactions for travel membership. Our balance sheet remains strong, and we are returning capital to shareholders. In October, we closed on our third ABS transaction of the year, a $250 million transaction with an advance rate of 88% and a weighted average interest rate of 6.9%. We were encouraged by the strength of demand, even during a time of market volatility. In regards to capital allocation, through September 30, we had repurchased $243 million of common stock and paid $103 million in dividends. At our upcoming Board meeting, we will recommend that our Board of Directors continue our dividend at $0.40 per share in the fourth quarter. Our net corporate leverage ratio for covenant purposes was 3.7x at the end of the quarter and we expect to delever through EBITDA growth. Having summarized our strong third quarter let me provide more detail about our expectations for the fourth quarter and full year. In the fourth quarter, we expect gross VOI sales to be in the range of $490 million to $540 million, a 13% to 25% increase over the prior year, and full year gross VOI sales to be in the range of $1.95 billion to $2 billion. For the full year, we expect VPG to be at the high end of our $3,300 to $3,400 guidance range. Also for the full year, we expect adjusted EBITDA of between $855 million and $865 million. In summary, our results demonstrate our ability to capitalize on the strong leisure travel market to drive earnings and free cash flow and maximize return of capital to shareholders. With that, Doug, can you please open up the call to take questions?

Thank you. [Operator Instructions] Our first question comes from the line of Joe Greff with JPMorgan. Please proceed with your question.

Good morning, everybody.

Good morning, Joe.

Seems everything these days revolves around the macro, which obviously is more downbeat today than it was 6 months ago or 12 months ago, so my question reflects that attention. Can you talk about, as you sit here today and think about next year in vacation ownership, how your thoughts have evolved in terms of tour flow channels, the propensity to finance at different FICO bands? How are you thinking about the mix maybe more directionally than with precision between new and existing owners for next year? And maybe how those thoughts have evolved as the macro environment got more challenging? Thank you.

Thanks, Joe. This is Mike Brown. When we look at our Vacation Ownership business, which as you can note from our comments this morning, despite all of that macro news that’s out there, even today, the demand, the sentiment and the forward bookings very clearly show that leisure travel demand is still very strong. So as we think about next year, we do have a perspective on what our strategy is going to be. We’re going to continue to grow our new owner mix. We’ve placed that high yield target in the 35% to 40% range. We’re 33% in the third quarter. We believe that our owner bookings are very clearly going to continue to deliver strong owner demand and strong owner VPGs into next year. We’ve already have an early look into 1Q of 2023 owner bookings, which are up 2%, and that’s an early and very positive sign. What I would say, what we’re watching most closely is our volume per guest. Our volume per guest is driven by higher close rates. Transaction sizes are very similar. So as we head into next year, we had long range guided toward $2,700 to $3,000. So the $3,400, between a combination of new owner mix and maybe a weakening economy, we will see might pull VPG back. But the level that they could come back would still be at or above our long-term outlook on VPGs we would expect. So fundamentally, our strategy doesn’t change, continue to increase new owner mix, continue to drive heavily to our relationship with Wyndham Hotels in the Blue Thread, monitor VPGs and close rates and continue to support and invest in that VO business, which we know will generate future revenue and EBITDA streams. The one other question you asked was financing propensity. We will remain committed to growing our portfolio next year because, really, the primary delta between us today and 2019 is the size of our consumer finance portfolio, in effect the NII. So we will remain urgent to growing our portfolio back in 2023.

And Joe, just one thing on that portfolio growth, it will come from the higher FICO bands, which is what we’re seeing now. And the reason for that is, if you think about a 650 FICO, there is a highlight that they are probably already putting only 15% down. So as we lowered down payment requirements, it was those higher FICOs, they were being 25% and 35% and 40% down. So that’s why you see the higher FICO is making up a larger percentage of our mix today as compared to the past. And that’s why, in the future, the growth will continue to come from those higher FICOs because they are the ones that had some room between the minimum down payment and what they were actually paying.

Great. And sort of on those – the last couple of topics you guys talked about, it was nice to see the consumer financing revenue line grow year-over-year. I guess, that’s the first time since the pandemic. Going forward, how do you think about that for next year in terms of that consumer financing revenue growth rate, ‘23 versus ‘22 or, kind of, I guess, as you think about it more medium-term?

Yes. I mean, I think we will see the portfolio – as we’ve talked about, when we think about the portfolio, right, the – it actually declines about $1 billion a year through principal payments primarily and then some defaults. And so when we think about portfolio growth, you take the VOI sales and with our percentage of sales finance now being at up around 60%, that’s how we can think about growth in the future is a natural reduction of about $1 billion we placed to buy new originations at 60% of VOI sales.

Thank you.

Sure.

Thank you, Joe.

Our next question comes from the line of Patrick Scholes with Truist. Please proceed with your question.

Hi, thank you. Good morning, Michael and Mike.

Good morning, Patrick.

Good morning.

Michael, I just want to go back to some of the targets that were laid out for your B2B and B2C travel clubs at the Investor Day a year ago. I just want to touch base whether those are still on track. Some of the percentages you laid out specifically from my notes I had at that time between ‘21 and – 2021 and 2025, expecting revenues up 27% to 30% and adjusted EBITDA of 13% to 17% annually. Are you still on track for those Investor Day figures?

So a lot has happened in a year, and the short answer on the travel on membership for this year, especially as it relates to the Travel Clubs is we have, and we talked about on the last call, and the case is still true today is the ramp-up of those clubs is more protracted than we anticipated. Initially, the idea of ramping up the clubs from signing to actual execution is months longer than we originally anticipated. So those 2022 numbers have come down from our original expectation. With that said, I would add to this, and I think these are the critical long-term points that we’re really focused on, is you need to sign up affiliates to develop and grow your new travel clubs B2B, and we are doing that consistently. Our pipeline is clearly ahead of what we thought it would be at this time in October of 2022. So that part is ahead for sure. The transition from affiliate sign-ups to transactions is the part that’s been delayed and, therefore, is impacting our transaction growth. What I would say and what I mentioned on the last call was we would expect transactions to grow in the latter half of 2022, and that’s what we’re starting to see, transactions were up 27% in the quarter from prior year. Those two leading indicators, being affiliate sign-ups and year-on-year growth on transactions, gives me a lot of confidence on where we’re going with these travel clubs and that the market’s there, the market has demand for it. It is a new business, so there is more variability than we anticipated. But we know what needs to be done now is take the affiliates who’ve said, we want this, and make sure that they can start to deliver the higher transactions that we originally forecasted. And if I can just take it up one level, for us, the really encouraging part is we said at the outset related to the Travel and Membership business, we wanted to ultimately take this from a 0% to 2% business – growth business and add a growth component to it by adding travel clubs. That’s exactly what we will be doing, and that supports an already and consistently strong VO business. So you wrap all of this together, the ultimate goal here is increased growth rate from Travel and Leisure Co. And I think all the leading indicators point to that and fully acknowledge that one component of that being transactions and therefore, the revenue associated with them is delayed in its ramp-up. But again, the leading indicators we see as being there for future success.

Okay, thank you. And a question for Mike Hug, I saw the loan loss provision was up a bit in the most recent quarter. Is that just the seasonality related? Is there anything else related to that?

Yes. Patrick, you’re right. So when we had talked about on the last call that we expected the provision to be up a little bit this quarter. Seasonality as well as the continued increase in percent of sales finance, which can add 150 to 200 basis points to the provision. So as I mentioned in my comments, right, growing the portfolio, you do take the provision hit in the current period as a percent of sales, but helps get that interest income stream growing again. And obviously, with margins as well, that’s nice interest margin. But not at all surprised by where the provision came in. Right on with expectations and really, as I mentioned, what we’ve talked about on the second quarter call.

Okay, thank you. And then one last question for you, Mike, in the current increasing interest rate environment, have you been raising your lending interest rates this year? How do you think about that? And where are you currently lending at? And is there sort of a cap or a maximum that you would go up to as interest – underlying interest rates continue to rise? Thank you.

Yes, a couple of things. When we think about pricing for our consumer, we look at the cost of the product or the price we charge the consumer for the product as well as the interest rate. And what we’ve done this year is chosen to really drive the pricing through price increases on the product itself. We’re – depending on the product, mid to high single-digit price increases, which is probably about twice as high as we do on a regular basis. We haven’t moved interest rates up yet. We’re in that 14.5% to 15% range that we charge on average, something that we look at. But this year, really, the pricing increases have come through the cost we charge and the price we charge the consumer, which is one of the reasons that the VPGs are as strong as they are. The value proposition is incredibly strong, and that’s allowed us to take pricing there as opposed to interest rates at the current time.

Yes, Patrick, if I could just add one other component to that. We get the question often about how much are these interest rates affecting your bottom line. And if we had not changed our percent finance to drive incremental NII, we would probably be facing about a $7 million headwind this year, and we’ve cut that at least in half, if not 75% by the increase in NII generated by our additional percent finance. So I think it’s another example of if you just look at one variable and people raising interest rates, you say, well, that’s a $7 million headwind. And we found ways to offset that and overcome it through just underlying operating performance of the business. And it’s been a real positive result for us this year by increasing our percent of finance.

Okay, thank you, both for the color and update.

Thanks, Patrick.

Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

Thanks, everyone. Good morning.

Good morning, David.

I wanted to just go into the ABS financing market. I know it’s – I may be asking unanswerable questions, but I’m hoping you could provide a little insight on where you think where we might, best guess, this is headed this year in terms of what kind of terms we could see and where your tolerance for those things are? And I know you’ve talked about this in the past, but it might be helpful and instructive to just revisit the calibration for how those benefit or impact earnings, please.

Yes. So with, let’s say, roughly $800 million in securitization, right, a 5% interest increase represents about $4 million, right? So really, when we think about the interest rates that we’re currently getting charged in the ABS markets, they are the highest they have been really since back in 2009. So when we think about where they’ll go, we would like to think that in the future, they start to trend back down. Obviously, we were in a cycle for the last few years where the rates were incredibly low. As Michael mentioned, we’re doing what we can to grow the portfolio in the higher FICO bands to offset the higher expense that we’re seeing. But the benefit we get from the ABS transaction, at least the last transaction, was a $43 million increasing our cash. So moving it from the conduit to the ABS transactions generates $43 million. And with our share price, where it was at, that’s one of the big reasons we were able to accelerate share repurchases. So we would like to think that they will move back down. One unusual trend we’ve seen this year is as rates have gone up, spreads had widened as well, and usually it goes the other way as rates go up, spreads tighten a little bit. So can’t predict the future, but they are, like I said, at really high levels right now when you look back historically and would like to think that they start to trend back down. The other thing on the advance rate, even though our advance rate is coming in a little bit lower, in the 12 months following the date of the transaction, we recover about 40% of the cash that didn’t get captured in the bigger advance rate. So it is a small timing issue. It’s not like the cash disappear spreader but we recover almost half of it in the first 12 months. So that cash will be coming back to us very quickly throughout 2023, which is why we’re confident in our free cash flow generation next year. And one of the reasons we talked about the timing, the timing that we’ve talked about from the cash flow standpoint is the lower advance rate pushes cash collections to next year. And then secondly, as of the end of the third quarter, we have over $100 million more in receivables this year than we did at the end of last year, that won’t get in an ABS transaction until next year. So when you look at it on a cumulative basis, it kind of all works out. But in the short-term, when you mentioned on a calendar year, the buildup in the receivables portfolio is taking our cash conversion down this year, but like I say, it gives us confidence in our cash conversion next year.

Understood. And if I can just follow-up, I think you may have given us in the past a bit of a – and I know it’s not always cut and dry, but a bit of calibration as to 100 basis points in coupon impacts EBITDA by Y numbers, right? Haven’t you given us that? And would you mind just sort of going back to a onetime for us?

Well, let me just give you the impact of this year, and I alluded to it on Patrick’s question. But we’ve had a net impact between increase in net interest income and borrowing of $3 million to $4 million this year. So when you look at the change from the start to the finish of this year and our transactions, it was a headwind of $3 million to $4 million after we responded to with increased percent finance.

Okay, that will do. Thank you very much.

Thanks, David.

Our next question comes from the line of Brandt Montour with Barclays. Please proceed with your question.

Hey. Good morning everybody. Thanks for taking the questions. Maybe switching gears back to VPG and timeshare sales. I think investors sometimes struggle just with the staggering magnitude of the VPG lift we are seeing across the industry and with you guys. And sort of just trying to get a sense for how much of it is sustainable. I know you guys get this question a lot. And you mentioned and referred back to your long-term guide. And if I am doing my math correctly, that sort of implies something like a 20% lift above ‘19. And so if I assume that – or if we assume that, that’s the base case, and anything above that is something you don’t want to necessarily hang your hat on or there is mix – there is new repeat mix shift there that could give some back, how much of that 20% base case is channel mix, right, which is permanent? And how much is – would you look at as sort of like a same channel close rate-related lift, if that makes sense?

It does. And let me come at it from both sides. Let me come at it from where we are today, the approximately $3,400 of VPG. I would first say that across the timeshare industry, there is a very clear message that’s playing out, which is prepaid vacations that show tremendous value lead to industry-wide success on volume per guest. And it has continued in our vacation ownership business. As we came out of COVID, we had guided last September to a number, and those numbers have been exceeded. I think the combination of an incredible sales and marketing organization, channel mix and the additional lift that’s created by this inflationary environment. So, I would say, in general, our first observation is we came out higher than we originally expected, and I see that as sustainable. The $3,400, especially in Q3, and I will put a real finer point on it, we increased our new order mix to 33%, and that usually puts $100, $150 of VPG pressure on that $3,400 that we finished Q2 with. It stayed consistent, which I do believe there is an element of the inflationary value creation between vacation ownership and hotels and alternative accommodation that’s providing that incremental benefit today. So, I would expect it to come back as we stabilize at a 35% to 40% new owner mix. I think there is a mixed component of it. And I think it will come back a little bit due to inflation – once inflation starts to cool, my growing belief is that that range that we are staying at today, of $2,700 to $3,000 maybe more sustainable at the high end of that range, simply based off the performance that we have seen post COVID and when we adjust for the new owner mix. So, I believe there is a lot of cushion between where we are performing today in the high end of our range that would reflect a stabilized great performance by our sales and marketing team and the value that’s being created for our consumers in prepaid vacations. So, did that answer your question, I put a lot out there, but I wanted to make sure that addresses your specific question.

No, it did. It did. And I appreciate those thoughts, Mike. And maybe for Mike Hug, just to clarify some points in your script about the delinquency uptick that you saw and relating that to the growing consumer loan volumes. I am just – I just want to make sure I understand the connection there just because – is there a lot of – is there delinquencies that are typical of new sales? I guess I mean – and I guess I could ask it a different way and just ask how are delinquencies looking for the seasoned portion of your loan book and that pool of consumers?

Yes. So, the seasoned portion, where we are seeing the pressure like a lot of consumer lenders is really with the lower FICO bands. So, we are starting to see that normalize to levels they had historically been at primarily because of various financial support they got, whether it’s from government or rent relief or whatever it might have been. And so as those go away, as we expected, those lower bands are starting to normalize a little bit, not like you have heard from everybody else that has a consumer portfolio. The other point that I was trying to get across in my script was a younger portfolio, as we grow the portfolio, it’s less seasoned, which means it’s going to have more defaults in the future. If you have a portfolio that’s 3 years old, it’s already experienced the majority of these defaults. So, as we grow the portfolio, naturally, our provision goes up to provide for those defaults in the future, more than offset by the increase in interest income that we have. So, that’s the real dynamic that we want to make sure people understand is as that portfolio gets back to growing, your provision as a percent of sales is higher because a younger portfolio has more defaults. There is one other minor item that’s driving our defaults up about 70 bps, and we did convert our consumer finance system this quarter to basically replace a 20-year-old mainframe system. We had less than 1%, about 1,500 of our accounts or less that were impacted by some data conversion. And so as we have talked to those consumers, get the data updated or as they call and make reservations and get that updated, we will be able to collect those payments from them. But that’s a pretty small impact, but it will be shown in the numbers. But overall, the portfolio quality when compared to 2018, as I talked about, is much better sub-645 goes below 10%. They are real the ones that are feeling the most pressure. And one other thing going back to David’s question, David, I think I misspoke, and I understand what you are asking as it relates to a couple of the drivers that we had mentioned. A 50 bps increase in the interest rates equates to about $4 million in interest on the $800 million securitization that we do. And when we look at that compared to VPG lift, it takes about a $14 VPG lift to cover that. So, I think those are the stats that you were looking for that I misspoke when I said 5% equates to $4 million such as that 50 bps. And Brandt, did that answer your question?

Yes. It did. Very clear. Thanks everyone.

[Operator Instructions] Our next question comes from the line of Stephen Grambling with Morgan Stanley. Please proceed with your question.

Hey. Good morning. You mentioned the 33% mix in new orders and expectations for that to continue to ramp into next year. Can you just walk through some of the – how different sources are performing to drive new owner mix as we think about Blue Thread versus recovering direct marketing channels or even splitting it by call transfer versus digital versus other channels? Thanks.

Thanks Stephen. Well, what is back to 2019 already is the Blue Thread relationship. And when you look at the overall umbrella of new owner sales, that’s our highest VPG, best margin new owner channel. It makes sense because it’s affinity. That now represents 16% of our new owner sales. And although we won’t quite get to $100 million this year, we are going to be really close, which is back right at, if not slightly above our peak pre-COVID. So, our relationship with Wyndham Hotels remains as strong as ever. The performance of those leads and, ultimately, our ability to drive new owners is right back on track. And our objective is to double that over the next few years. As it relates to non-affinity, basically market-by-market, we have different marketing partnerships. We invested heavily in that this summer. We saw the benefits of our new owner investments by restarting a number of non-affinity channels that we have out in each of the individual markets. That’s what drove the 33% new owner mix in the last quarter. And now that we have seen that and the team has been able to hold the VPGs and close rates on the new owner mix across the board, Q4 and Q1 are more owner quarters. It really reaffirms what we will be doing next year, which we will be investing even further into increasing our new owner mix in 2023.

And sorry, one clarification there. I think you said that your objective is to double the Blue Thread percentage of new owner sales. Is that right?

Absolute volumes. So, let me round up to $100 million this year. We see that potential to be over $200 million over the next few years.

Great. And then one other quick follow-up to David’s earlier questions on rates. How are you thinking about the higher ABS and likely corporate borrowings longer term in evaluating capital allocation, the right leverage for the business, particularly in a maybe less certain economic environment? Thank you.

Yes. I mean, I think we have talked about and still believe the right leverage rate is 2.25x to 3x. And our intention remains to continue to de-lever through growing EBITDA. So, at this point, we haven’t changed that view in terms of using cash to de-lever at this point. Once again, grow the EBITDA, leverage comes down. We have got a $400 million maturity next March. Take care of that at the right time and push that out to sometime in the future. We have a minimum, about only $12 million outstanding on our $1 billion conduit. So, if we did have to carry that $400 million on the conduit for some period of time, we can do that. Pre-COVID, we usually carried a $250 million to $300 million balance on that conduit. So, not unusual for us to do that, but we will just see what the markets do over the next four months and be ready to take care of that at the right time.

Excellent. Thank you.

Sure.

Our last question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Hey. Good morning guys. Thanks for taking the question. I know you covered a lot of ground already. So, I kind of want to go in a slightly different direction, which is, I guess is there any thought to maybe altering kind of – or creating a new kind of VOI products where maybe you can focus less, maybe it’s a shorter term or a lower dollar value, but it doesn’t have the finance risk? In other words, maybe ask somebody to pay $2,500, but they get a very limited number of points. Is there any way to think about that? And is that a possibility to kind of get more first-timers in and without bringing on incremental finance risk?

The very short answer is yes. When we moved our FICO band marketing qualifications up to 640, the people that we previously market to that were below that FICO band definitely did not stop vacationing. And what we ended up doing, Chris, once we made that shift coming out of COVID, we spent some months and really developed a short-term product. And we have launched that short-term product and are in the process of testing it in a number of different markets. We have already opened it in two of our bigger markets. It is completely a complementary or incremental opportunity for us, for exactly the nature of your question, which is to grow new members. The reception to that has been fantastic at – well, in most cases, above what we expected from an acceptance. But we want to see it play out over 6 months to 12 months on travel patterns, how they use it, what they like and don’t like, which is why we have chosen to roll it out in some of our bigger markets. We haven’t spoken about it yet simply because we want a little more traction to know how we will ultimately land on a final short-term product. But what we rolled out on the East Coast first was well received by consumers. We have since taken it to a second market at the beginning of October. It’s already been received there as well. So, very encouraging for us. And if the success continues, that will ultimately end up into a national program and be a very nice either feeder to our eventual timeshare product or simply a great product, which aligns to our mission to put the world on vacation, which is a leisure travel product. And this is a – we believe, the right product for that consumer, which is shorter duration and lower financial commitment.

Great. Very helpful. And then just as a follow-up, I know that Wyndham is expanding the ultra-inclusive brand in a lot of the Caribbean markets, which I guess will bring a lot of new owners into an affiliation with them. Are you aware of any possible or expect there to be any possible opportunities to source inventory from some of those all-inclusive resorts in the future? Is that on the radar?

So – well, first of all, I think the hotel group is doing a phenomenal job in the development side and growing their brands, and that is a direct benefit to our owner base. And their ability to access via Wyndham Rewards, the Wyndham product, it’s just a great benefit. So, really impressed with what they are doing and very happy of what that in turn does for our owner base. For us on an inventory basis, we have a very clear objective. We have, without any inventory coming back to us, about 4 years of inventory on hand, which means we are – we will strategically be minimizing our cash outlay for new product, unless – it doesn’t mean that we won’t do anything. It just means that we don’t have an imperative to do anything related to new projects. And therefore, we have the ability to preserve a lot of cash and deploy it in different forms. The example that – Q3 is a great example where our prices are very attractive, we can deploy more capital. And I think as we get into 2023, where our inventory commitments are even less than they were this year. We are going to be very sure in preserving cash and deploying it back to shareholders, either through our dividend growth, our share repurchases and obviously the continued evaluation of M&A opportunity.

Okay. Very helpful. Thanks Michael.

Thank you, Chris.

There are no further questions in the queue. I would like to hand the call back to management for closing remarks. End of Q&A:

Thank you, Doug. Our third quarter results and full year outlook underscore the persistent strength of leisure travel, people’s commitment to vacations and the consistent performance of our timeshare model. This is all thanks to our owners, members, guests and associates who make it happen every day. Thank you, and have a great day.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.