Interval Leisure Group, Inc.

21 Pages·2016·0.36 MB·English

by  Joan Katter

February 29, 2016
Volume XLII, Issue II
Interval Leisure Group, Inc.
(Nasdaq: IILG)
Dow Jones Indus: 16,516.50 Initially Probed: Volume XXXVI, Issue I @ $12.79
S&P 500: 1,932.23 Last Probed: Volume XLI, Issue XI & XII @ $15.51
Russell 2000: 1,033.90 Trigger: Yes
Index Component: S&P 600 Small Cap Type of Situation: Business Value, Spinoff-Merger

Price: $ 12.95
Diluted Shares Outstanding (MM): 58.1
Pro Forma Diluted Shares (MM): 130.5
Average Daily Volume (MM): 0.6
Market Cap(MM): $ 752.6
Enterprise Value (MM): $ 1,075.2
Major Holders: Liberty Interactive (Ventures): 16.7MM
shares or 29%; 13% post-Vistana close
52-Week High/Low: $ 26.99/11.02
5-Year High/Low $ 31.88/10.40

Trailing Twelve Months
Overview
Price/Earnings: 10.3x
Interval Leisure Group (“IILG,” “Interval,” or the
Price/Stated Book Value: 1.7x
“Company”) is a diversified operator in the timeshare
Long-Term Debt (MM): $ 415.7
(vacation ownership) industry. Interval historically was
Upside to Estimate of
an independent timeshare exchange operator with a
Intrinsic Value: 38%
small resort management business. These asset-light
Dividend: $0.48 businesses produced high margins and stable free
cash flow but offered low growth prospects. Facing
TTM Payout: 38%
secular challenges driven by industry consolidation, in
Yield: 3.7%
2014 Interval decided to join the timeshare
Net Revenue Per Share: sales/development business via the acquisition of
2015 $ 10.30 Hyatt’s timeshare unit for $190 million. Then in October
2014 $ 10.60 2015, IILG announced the transformative acquisition of
20013 $ 8.67 Starwood’s Vistana timeshare business for $1.5 billion
2012 $ 8.27 in IILG stock (55.5% stake) and $132 million cash. The
Vistana transaction is expected to close in 2Q16, after
Earnings Per Share: which IILG will control over 40 timeshare resorts.
2015 $ 1.26
2014 $ 1.36 Investors have reacted unfavorably to Interval’s
2013 $ 1.40 entrance into the timeshare development business,
2012 $ 0.71 which is lower margin, cyclical, capital intensive, and
more opaque than the exchange and management
Fiscal Year Ends: December 31 business. The highly dilutive Vistana purchase price
Company Address: 6262 Sunset Drive (11.3x 2015E EV/EBITDA vs. IILG stock then trading
Miami, FL 33143 at 8.6x EBITDA) understandably upset shareholders.
Telephone: [phone] A resurgence of stock market volatility and
Chairman/CEO: Craig M. Nash macroeconomic concerns has only driven away more
shareholders. We also believe IILG has faced selling
Clients of Boyar Asset Management, Inc. own 45,049 shares of Interval
leisure Group, Inc. common stock at a cost of $11.71. pressure from arbitrageurs of the Marriott/Starwood
Analysts employed by Boyar’s Intrinsic Value Research LLC own shares transaction (18% of IILG float sold short). Despite the
of IILG common stock.
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Interval Leisure Group, Inc.

rally in recent weeks, IILG shares are still a whopping 38% below the recent November 2015 price prior to the
announcement of the Starwood transaction.
While we sympathize with some of the criticisms of IILG’s recent M&A, we believe there is attractive
long-term upside in IILG’s transformation and the current stock price drastically undervalues IILG. At the current
stock price, IILG’s purchase price for Vistana drops to just 7.4x 2015E EBITDA. The acquisition will also have
attractive synergies with the Hyatt business (leveraging a shared sales infrastructure and G&A savings) and the
exchange business (securing a long-term partner and high quality inventory). Importantly, Interval also obtained
a rich asset base including timeshare development projects and 5 hotel conversions from Starwood that could
add close to 50% capacity to the portfolio in the coming years. Taking into account some of the growth
prospects offered by the assets IILG is acquiring, the Vistana transaction multiple drops to 5.3x 2018E EBITDA
at the midpoint of Interval’s projections using the current stock price.
IILG shares currently trade at just 6.5x 2015E EV/EBITDA or 10x 2016E FCF (the latter including just 8
months of projected free cash flow from Vistana) pro forma for the Vistana acquisition. If Vistana produces
Interval’s targeted free cash flow of $122 million in 2017, and the existing business produces $105 million in free
cash flow (compared to $122 million in 2015), this would translate to a highly compelling 2017E free cash flow
yield of 13.4%. To reflect macroeconomic risks, our 8-year DCF-based valuation for Vistana conservatively
projects the business only achieves 50% of IILG’s targeted FCF over the coming 3 years and assumes a zero
percent terminal growth rate. Even under these conservative assumptions, we estimate the business’
intrinsic value is $1.5 billion or >$11/share. Valuing the more stable Exchange & Management business at
8x 2015 EBITDA and Hyatt at 7x 2015 EBITDA, we derive an intrinsic value estimate of nearly $18/share
(present value; ~$22/share looking out to 2018) or 38% above the current share price. Notably, our Vistana
valuation translates to just a 4.5x EV/EBITDA exit multiple at Interval’s projected 2024E EBITDA for Vistana.
If Vistana can actually achieve these projections and garners a 7x EV/EBITDA terminal multiple, our intrinsic
value estimate for IILG would climb to $21/share (present value).
Interval offers an attractive 3.7% dividend yield and with pro forma leverage at just 1.4x, the Company
could be in a position to repurchase shares following the close of the Vistana transaction. We believe M&A in
the timeshare development business also offers attractive synergy potential, and would note that 2 of the top 5
developers (Hilton and Diamond) are currently pursuing alternatives. A potential transaction with IILG’s largest
shareholder Liberty Interactive (29% IILG stake pre-Vistana) could also be a positive catalyst for IILG at the
current stock price—whether it be a repurchase of Liberty’s shares by IILG or incremental investment from
Liberty. Finally, we would note that CEO Craig Nash purchased over $1 million worth of IILG shares in the open
market at prices well above the current stock price (avg. ~$15/share) in late 2015 (subsequent to the Vistana
transaction announcement).
Background: Expanding Business Model
Asset Analysis Focus last devoted a full profile to Interval Leisure Group nearly 5 years ago, in March
2011 (at $16.30/share). At that time, Interval was still virtually a pure-play timeshare exchange operator via its
Interval International exchange business (also referred to as the Interval Network). Interval Network contributed
86% of revenue or 94% of EBITDA (FY 2010), with the remainder generated from its small hotel/resort property
management and rental businesses (Aston, Maui Condo & Home, and Trading Places). Since then, Interval has
accelerated its efforts to expand beyond its exchange business to become a diversified operator across the
timeshare (a.ka. shared vacation or “vacation ownership”) industry including resort management, rental, and
vacation ownership interest (VOI; essentially timeshare units) development, sales, marketing, and financing. As
illustrated, Interval’s pro forma revenue has quadrupled over the past 5 years and its new Vacation Ownership
segment generates ~2/3 of revenue.
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Interval Leisure Group, Inc.

IILG 2010 Consolidated Revenue ($MM) IILG 2015E Consolidated Revenue ($MM)
Management
and Rental Exchange and
$64.2 Rental
16% $501.3
31%
Membership Vacation
and Exchange Ownership*
$345.2 $1,118.1
84% 69%
Total Revenue: $409.4 MM Total Revenue: $1,619.4 MM

* Note: Vacation Ownership revenue pro forma for $922 MM
estimated 2015 revenue contribution from Vistana.

These diversification efforts have been driven by M&A. First, Interval expanded is resort management
business with the acquisitions of VRI Europe and Aqua Hospitality. Interval acquired a 75.5% stake in VRI
Europe for $95 million in a deal that closed in November 2013. VRI Europe managed 21 resorts in a fee-for-
service model. Interval paid $38 million to acquire Hawaii-based resort manager Aqua Hospitality in December
2013. The transaction promised synergies with Interval’s existing Hawaiian resort management business Aston
(now combined as Aqua-Aston) and doubled Interval’s rental inventory of available room nights. Both deals
were projected to be accretive to EBITDA.
Move into Vacation Ownership Development & Sales with Hyatt
In May 2014, Interval reached an agreement with Hyatt to acquire the latter’s Hyatt Residential Group
business unit (HRG; Interval refers to the business as Hyatt Vacation Ownership or HVO) for $190 million. HVO
managed Hyatt’s portfolio of 16 vacation ownership properties across the U.S. with 1,038 total units. HVO was
also in the process of developing a 131-unit property in Maui, the Hyatt Ka’anapali Beach in a 33% participation
JV with Host Hotels. (Interval reimbursed Hyatt ~$35 million for developmental expenses incurred between
announcement and close.) Interval also took over HVO’s Hyatt Residence Club, which provides its 30,000
members with a proprietary internal exchange system covering the HVO resorts as well as access to Hyatt hotel
properties. Interval Network was already Hyatt’s external vacation exchange partner of over 20 years, and HVO
senior management stayed on after the ownership transition. As part of the acquisition, Interval received
exclusive VOI rights to the Hyatt brand under a master license agreement (80 years plus renewal options) with
variable royalty rates across revenue streams based on a percentage of revenue (including 1.5% of VOI sales).
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Interval Leisure Group, Inc.

Gaining Real Scale with Vistana
The Hyatt acquisition provided Interval with a platform to expand beyond vacation exchange and move
directly into the vacation ownership development, sales, marketing, and financing businesses. However, it still
left Interval as a small player compared to the major developers. As we only learned much later, around the
same time that Interval was completing the Hyatt purchase, Interval and Starwood were also exploring a sale of
Starwood’s vacation ownership business (branded as Vistana; formerly named Starwood Vacation Ownership).
Vistana was significantly larger than HVO, operating 19 resorts and 3 fractional residence properties in the U.S.
and the Caribbean across the Westin, Sheraton, St. Regis, and The Luxury Collection brands with over 5,000
completed units and 220,000 fractional ownership members. The predominant Sheraton and Westin brands are
considered “upper-upscale” (second most premium of 5-6 category ratings after luxury; Hyatt is generally
considered upscale). Starwood and Interval held numerous discussions regarding Vistana beginning in January
2014. However, the two parties could not agree on price (Starwood initially proposed $975 million cash
while Interval countered with $850-$920 million including up to 50% IILG stock) and talks were shelved by
October 2014.
On February 10, 2015, Starwood CEO Frits van Paasschen announced plans to spin off Vistana to its
shareholders, while also noting the company remained open to alternatives. However, within days the Starwood
board’s dissatisfaction and investor unrest led to the dismissal of Mr. van Paasschen and an expanded plan to
pursue strategic alternatives for the parent company (Starwood’s much larger hotel business). This likely
accelerated Starwood’s timeline for divesting Vistana, and in mid-2015 the company advanced a dual-track
process for Vistana by simultaneously filing a Form 10 registration statement and initiating a formal auction
process. After several back-and-forth rounds, Interval ultimately prevailed in the bidding process for Vistana. On
October 27, 2015, Interval and Starwood reached an agreement for IILG to acquire Vistana in a principally
stock-based transaction. Interval will pay $132 million in cash to Starwood (in the form of a distribution payment
from Vistana; subject to adjustments based on Vistana’s free cash flow in the interim) and issue ~72.4 million
IILG shares representing ~55.5% ownership in the new Interval. The deal valued Vistana at ~$1.5 billion at the
time of the announcement (based on IILG’s trailing 20-day average trading price). Under an 80-year licensing
agreement, Interval will pay Starwood $30 million a year and 2% of VOI sales for exclusive rights to use the
Sheraton and Westin brands in the vacation ownership business.
Shortly after the Vistana announcement, on November 16, 2015 Starwood and Marriott reached a
merger agreement. Starwood shareholders will receive 0.92 Marriott shares and $2/share in cash. Vistana will
be merged into Interval and the new IILG shares distributed to Starwood shareholders (a Reverse Morris Trust
transaction) just prior to Starwood’s combination with Marriott, with both deals expected to close in mid-2016.
Starwood will appoint 4 directors to Interval’s expanded 13 member board, and senior Vistana management
including the COO and CFO will stay on after the merger. However, Starwood Vacation Ownership CEO Matt
Avril will not make the switch (presumably retiring again after rejoining Starwood in 2015 to lead Vistana through
a possible spinoff). Liberty Interactive (29% shareholder pre-merger) has agreed to vote in favor of the deal.
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Interval Leisure Group, Inc.

Vistana Resorts and Land
Primary Units
Location Experience Completed Planned Total
Vacation Ownership Resorts
Sheraton Vistana Resort Orlando, FL Theme park 1,566 — 1,566
Sheraton Vistana Villages Orlando, FL Theme park 892 734 1,626
Vistana's Beach Club Jensen Beach, FL Beach 76 — 76
Sheraton PGA Vacation Resort Port St. Lucie, FL Golf 30 — 30
Florida Total 2,564 734 3,298
The Westin Nanea Ocean Villas Maui, HI Beach — 390 390
The Westin Ka'anapali Ocean Resort Villas Maui, HI Beach 280 — 280
The Westin Ka'anapali Ocean Resort Villas North Maui, HI Beach 258 — 258
The Westin Princeville Ocean Resort Villas Kauai, HI Beach 173 — 173
Hawaii Total 711 390 1,101
The Westin Lagunamar Ocean Resort Villas & Spa Cancun, MX Beach 290 — 290
The Westin St. John Resort & Villas St. John, USVI Beach 200 52 252
Harborside Resort at Atlantis Nassau, Bahamas Beach/Casino 198 — 198
Mexico and The Caribbean Total 688 52 740
Sheraton Broadway Plantation Myrtle Beach, SC Golf/Beach 342 160 502
South Carolina Total 342 160 502
The Westin Mission Hills Resort Villas Rancho Mirage, CA Golf/Desert 158 — 158
The Westin Desert Willow Villas, Palm Desert Palm Desert, CA Golf/Desert 156 144 300
California Total 314 144 458
The Westin Kierland Villas Scottsdale, AZ Golf/Desert 149 — 149
Sheraton Desert Oasis Villas Scottsdale, AZ Golf/Desert 150 — 150
Arizona Total 299 0 299
Sheraton Mountain Vista Vail Valley, CO Ski/Mountain 78 — 78
The Westin Riverfront Mountain Villas Vail Valley, CO Ski/Mountain 34 — 34
Lakeside Terrace Villas Vail Valley, CO Ski/Mountain 23 — 23
Sheraton Steamboat Resort Steamboat Springs, CO Ski/Mountain 21 — 21
Colorado Total 156 0 156

Total Vacation Ownership Resorts, 19 Operating and 1 Under Development 5,074 1,480 6,554

Yield on Remaining Inventory Available for Sale $740 million

Fractional Residence Properties
The Phoenician Residences,
The Luxury Collection Residence Club Scottsdale, AZ Golf/Desert 6 — 6
The St. Regis Residence Club, Aspen Aspen, CO Ski/Mountain 25 — 25
The St. Regis Residence Club, New York New York, NY City/Cultural 31 — 31
Total, 3 Fractional Residence Properties 62 0 62

Total Properties, 22 Operating and 1 Under Development 5,136 1,480 6,616

Assessing the VOI Acquisitions
Based on Interval’s stock price performance over the past 2 years, Interval’s expansion into the VOI has
not been warmly received by Wall Street. Interval shares declined by 20% to $20.51 on May 8, 2014 in
response to the Hyatt acquisition announcement as well as the disclosure of weak 1Q 2014 results in the
exchange business (detailed later). Interval shares also traded sharply lower (down 13.8% to $17.90) on the
Vistana acquisition announcement. IILG shares have continued to plummet in the following months due to a
combination of macro risks and VOI industry-related concerns. The VOI development business is much more
capital intensive, cyclical, and lower margin than Interval’s core exchange business and it also faces significant
accounting/regulatory complexity (which we touch upon in greater detail later). Investors were also likely
underwhelmed by the valuation premiums Interval paid to acquire Hyatt and Starwood’s VOI businesses.
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Interval Leisure Group, Inc.

At $225 million, the HRG acquisition was completed at 10x forward EBITDA at the midpoint of the
$20-$25 million EBITDA that IILG forecasted for 2015 (both including the Maui JV). And based on Interval’s
closing price just prior to announcement, the Vistana deal was struck at $1.6 billion or an even richer
11.3x EBITDA at the midpoint of initial 2015 EBITDA projections of $140-$145 million. As we later learned, this
was significantly higher than the price initially contemplated in early 2014 negotiations. Furthermore, the Vistana
deal was highly dilutive to IILG shareholders by almost exclusively paying with IILG stock, which was then
trading at 8.6x EV/EBITDA (TTM June 30, 2015), to acquire Vistana at 13.1x TTM EBITDA and hand Starwood
shareholders a controlling 55% stake in the combined entity.
IILG vs. Vistana, TTM June 2015 ($MM)
Vistana
(in millions) IILG (Pro Forma)
Revenue $672 $923
Adjusted EBITDA $180 $125
EV/EBITDA @ IILG Pre-
Announcement Share Price 8.6x 13.1x

More Value than Meets the Eye
At first glance, Interval’s vacation ownership business acquisitions certainly look dilutive. Furthermore,
the vacation ownership business is much more complex and macro sensitive than vacation exchange and in
hindsight the deals appear less than ideally timed. On its 3Q15 earnings call in November, IILG also disclosed
performance at HRG properties had not met expectations to date and the Company would be overhauling its
VOI sales and marketing operations including hiring a new SVP of sales and local marketing. Interval’s stock is
now down 38% from its closing price immediately prior to the Vistana announcement ($20.77).
Interval management has suggested the sales reorganization at HVO was anticipated as the business
was not scaled up under Hyatt. The recent hiccups aside, the acquisition of HVO provided Interval with a
relatively robust VOI sales platform with 7 active sales offices generating close to $150 million in annual sales.
This entry into VOI sales expanded Interval’s addressable market from <$2 billion (vacation exchange) to
another ~$8 billion (annual U.S. VOI sales). CEO Craig Nash also revealed on the Company’s 3Q15 conference
call that they plan to introduce a “Pure Points Club” completely points-based VOI program for Hyatt (targeted for
late 2016 introduction). This will improve inventory management/yield and allow HRG to sell one product across
all of its resorts. It will also open opportunities to up-sell existing clients with new points add-on packages.
The Vistana business will greatly expand IILG’s VOI sales capabilities; Vistana operates 14 sales
centers and expects to add 6 more by 2018. This should also create meaningful synergies with HVO as well as
Interval Network. Approximately 75% or greater of Hyatt buyers are from new customers, far lower than the
average of large peers e.g. ~40% at Diamond Resorts. The addition of the Vistana member base should bring
this up over time. Selling to existing customers can be attractive as they tend to have higher conversion rates
and lower cost of sales/default rates although a lower average purchase price. Additionally, the VOI business
also feeds captive, higher margin recurring revenue streams from property management contracts and internal
club/exchange club fees. IILG projects $21 million of synergies by 2018 and $26 million by 2020 as illustrated in
the following table.
Estimated Adjusted EBITDA Synergies (in millions)
Type Year 1 Year 2 Year 3 Year 4 Year 5
Adjusted EBITDA Impact of Revenue Synergies $ 3.2 $ 4.7 $ 5.0 $ 5.3 $ 5.5
General & Administrative Savings $ 3.6 $ 7.1 $ 16.4 $ 16.2 $ 20.5

Estimated Net Synergies (Adjusted EBITDA) $ 6.8 $ 11.8 $ 21.4 $ 21.5 $ 26.0

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Interval Leisure Group, Inc.

Investors also appear to be overlooking several key details of both the Hyatt and Vistana acquisitions,
principally related to the value of transferred assets:
Hyatt: Priced at NAV
The Hyatt acquisition brought with it an estimated $185 million in tangible assets, excluding the
Ka’anapali Beach JV property. This included $60 million estimated fair value of built inventory, $85 million in
plant, property, and other, and $40 million in VOI receivables. Including inventory at Ka’anapali Beach as part of
the JV and additional projects under construction at the property, Interval estimated HRG held inventory with
$600-$700 million of sales value at the time of the acquisition. As of November 2015, IILG estimated
~$500-$550 million (sales value) in VOI inventory still remained, equivalent to 4-5 years of sales. HVO also held
land at existing resorts that could support 400 or more additional units (versus 1,038 units acquired). While
incremental expansion beyond the acquired asset base will require significant investment, the exclusive right to
use the Hyatt brand name in VOI development also represents a valuable intangible asset. The acquisition also
added strong recurring revenue streams from management contracts on the 16 resorts and Hyatt Residence
Club fees. Interval estimated club fees (~24%) and resort management fees (17%) would contribute ~43% of
HVO’s projected EBITDA in 2015. Finally, Interval expects to generate $15-$20 million in present value from a
tax shield related to the stepped-up cost basis of HVO’s assets. Considering all these factors, it appears Interval
paid a fairly reasonable purchase price to gain entry into the vacation ownership business.

Hyatt Vacation Ownership EBITDA Sources (2015E, $MM)

Source: Interval presentation

Vistana: Revising Initial Purchase Multiple
Of course, the Vistana acquisition is far more consequential for IILG shareholders. But a more nuanced
look at this acquisition also appears to support a more favorable viewpoint for this acquisition than implied by
the initial valuation multiple. First of all, the drastic decline in IILG’s share price over the past 4 months has the
counter-effect of also substantially reducing the price paid for Vistana. Based on IILG’s current share price, the
multiple drops by almost 4 turns, from 11.1x 2015E EV/EBITDA to just 7.4x at the midpoint of Interval
management’s projected $140-$145 million range. The total consideration paid drops from $1.6 billion to under
$1.1 billion. Of course, this is little consolation for long-term IILG shareholders and it does not change the fact
that their stake is being diluted by 55%.
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Interval Leisure Group, Inc.

Vistana Implied Transaction Multiples ($MM)
2/29/16
10/27/15 2/29/16 Ex. Receivables
IILG shares issued 72.4 72.4 72.4
IILG share price $ 20.77 $ 12.95 $ 12.95
Value $ 1,503 $ 937 $ 937
plus cash distribution $ 132 $ 132 $ 132
less securitized receivables @$350MM $ (350)
Implied Value $ 1,635 $ 1,069 $ 719

EV/EBITDA (TTM 2Q15) 13.1x 8.6x 5.8x
EV/EBITDA (midpoint FY15 guidance) 11.3x 7.4x 5.0x
EV/EBITDA (midpoint FY18 guidance) 8.1x 5.3x 3.6x

Putting aside the impact of IILG’s subsequent stock price declines, the initially cited double-digit deal
multiple also doesn’t fully reflect the asset rich nature of the Vistana business acquired with an estimated book
value of ~$1 billion. This includes $415 million of net unsecuritized VOI receivables at the time of the
announcement which Interval expects to securitize shortly after the acquisition. Recent highly-rated, branded
timeshare securitization transactions have been completed at average 90%-plus advance rates with avg. ~3%
interest rates payable. On the Company’s 4Q15 earnings call on February 25, Interval disclosed that Vistana’s
unsecuritized receivable balance stood at $443 million as of Dec. 31, 2015 and the Company currently
anticipates monetizing $350 million via the securitization market this summer. The Company expects this should
fund capital needs for Vistana’s development projects through mid-2017. Interval management has suggested
this should be taken into account when evaluating the Vistana purchase price. Assuming Interval securitizes
$350 million and backing out the proceeds from the purchase price, this implies IILG is paying a bargain
5.0x 2015E EBITDA for Vistana at the current share price. Even using IILG’s pre-announcement stock price, the
multiple still falls to a fairly reasonable 8.9x. However, we do not view the deal this way as the securitization
proceeds are necessary in order to internally fund Vistana’s capex requirements to produce the sales and free
cash flow growth rates IILG projects for the business in the coming years (as detailed shortly).
In terms of resort inventory, Vistana holds unsold VOI inventory at existing villa-style resorts valued at
$240 million as well as undeveloped land valued at $30 million. Vistana has 1,480 additional units in
development, planning, or evaluation stage, equivalent to ~30% growth from Vistana’s current portfolio of
~5,000 completed units. Starwood will also transfer 5 Sheraton and Westin hotel properties to Interval as part of
the transaction. The hotels are high quality properties located in prime vacation/timeshare locations including
three Westin properties in Mexico, the Sheraton Kaua'i Resort in Hawaii, and the Sheraton Steamboat Resort in
Colorado. The hotels are valued at ~$200 million and will require various levels of development to convert to
timeshares. The Westin Los Cabos, Mexico hotel was badly damaged by hurricane Odile in September 2014
and is undergoing a complete renovation with a currently anticipated reopening date in January 2017. These 5
properties collectively have 1,560 hotel rooms. If converted to just half the number of timeshare units, this would
translate to another ~15% capacity addition to Vistana’s portfolio.
Inventory Under Development, Planning, or Evaluation
Units
Resort Name Location Completed Planned Total
The Westin Nanea Ocean Villas Maui, HI — 390 390
The Westin St. John Resort & Villas St. John, U.S. VI 200 52 252
Sheraton Vistana Villages Orlando, FL 892 734 1,626
Sheraton Broadway Plantation Myrtle Beach, SC 342 160 502
The Westin Desert Willow Villas, Palm Desert Palm Desert, CA 156 144 300
Total 1,590 1,480 3,070

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Interval Leisure Group, Inc.

Transferred Starwood Hotel Properties
Transferred Properties Location Experience Hotel Rooms
The Westin Resort & Spa, Cancun Cancun, MX Beach 379
The Westin Resort & Spa, Puerto Vallarta Puerto Vallarta, MX Beach 280
The Westin Resort & Spa, Los Cabos Los Cabos, MX Beach 243
Sheraton Kauai Resort Kauai, HI Beach 394
Sheraton Steamboat Resort Steamboat Springs, CO Ski/Mountain 264
Total 1,560

Overall, Interval management sees $5.5 billion in future inventory yield (VOI sales) available from the
acquired assets. This includes $1.2 billion from existing units, composed of $740 million from inventory on hand
at completed units and the remainder from projected yield on recycled inventory acquired via defaulted
mortgages and third party sellers. Interval sees another $3.1 billion in potential VOI sales from ongoing/future
development projects, and $1.3 billion from the transferred hotels. Vistana’s originated sales were $323 million
in 2014, implying multiple years supply of VOI sales from existing inventory. IILG expects Vistana’s VOI sales to
grow to $350-$355 million in 2015 (final total not disclosed in 4Q15 conference call) and $440-$550 million by
2018. The pace of sales is highly macro sensitive, which is reflected in the wide guidance for 2018. But there
could be plenty of upside if the macro environment cooperates; for reference, Vistana VOI sales peaked at
$739 million in 2006. It should also be emphasized that, like the Hyatt vacation ownership business, Vistana
generates only a minority of revenue (although a higher percentage of EBITDA) directly from VOI sales. As
illustrated below, VOI sales and related consumer financing activities contributed a combined 46% of Vistana
revenue TTM 2Q15. The other revenue sources help smooth out results over a full economic cycle. Resort and
vacation network management fees (9% of revenue) are generated from 51 managed timeshare properties and
26 residence club homeowners’ associations on a cost-plus fee basis averaging 9% of operating costs. This
also includes membership and exchange fees from Starwood’s internal exchange network (Starwood Vacation
Network).
Interval vs. Vistana Revenue Sources, TTM June 2015 ($MM)

Source: Company presentation
In terms of profitability, Interval projects Vistana’s modified adjusted EBITDA to grow from $115 million
in 2014 (pro forma for royalty fees to Starwood under the new royalty structure and other expenses) to
$140-$145 million in 2015 and $185-$220 million by 2018 depending on the pace of sales growth and resort
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Interval Leisure Group, Inc.

development and including $21 million in targeted synergies. At the mid-point of 2018E EBITDA guidance and
the current IILG share price, the Vistana transaction multiple falls all the way to 5.3x EV/EBITDA.
Interval also provided 10-year financial projections for Vistana in the deal proxy. Of course, we tend to
view these ever-rosy outlooks very skeptically. To assume the U.S. expansion currently in its seventh year will
last another 10 years without a recession requires a very creative imagination…nonetheless, they provide a
good glimpse into how Interval/Vistana views the cadence of timeshare construction and other capital
expenditures versus free cash flow generation going forward. The large portfolio of acquired inventory and the 5
acquired hotels are essential in limiting projected construction costs and ramping free cash flow beyond 2016.
Interval projects timeshare construction costs to decline from $231 million in 2016 to $132 million by 2018 and
only to begin to meaningfully ramp up again in 2022. In this scenario, free cash flow accelerates from $48 million
in 2015 and $58 million in 2016 (impacted by one-time capex to rebuild the Los Cabos property) to an average
of ~$200 million over the next 8 years. Overall, Interval projects $1.755 billion in unlevered free cash flow from
2015-2024 and $197 million normalized free cash flow in the terminal year.
Interval’s Financial Projections for Vistana ($MM)
Terminal
2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E FCF (a)
Revenue (Including
Pass-Through) $922 998 1,126 1,280 1,376 1,487 1,564 1,597 1,643 1,722 —
Adjusted EBITDA (b ) $134 148 170 192 221 251 286 313 325 349 —
Capital Expenditures (c) $58 107 48 43 37 36 77 81 64 64 —
Timeshare Construction
Costs $103 231 209 132 102 105 117 169 270 218 245
Unlevered Free
Cash Flow (d) $48 58 122 107 223 260 256 163 292 226 197
(a) Terminal unlevered FCF represents 2024E projection, as adjusted to set projected timeshare construction spend equal to 2024E cost of goods
sold, in order to sustain 2024E vacation ownership interest sales.
(b )Calculated as net income attributable to common stockholders, excluding, without duplication, if applicable: (1) non-operating interest income
and interest expense, (2) income taxes, (3) depreciation expense, (4) amortization expense of intangibles, (5) non-cash compensation
expense, (6) goodwill and asset impairments, (7) restructuring costs, (8) loss or gain on asset dispositions, (9) the deferral adjustment
associated with the POC accounting guidelines reflecting its impact on GAAP revenues and expenses, (10) the operations at the residential
business and (11) other special items. Adjusted EBITDA excludes adjustment for purchase accounting.
(c) Represents capital expenditures for fixed assets, which excludes timeshare construction costs, but includes capital spend adjustments for the
Los Cabos property.
(d) Calculated as after-tax cash flows from operations less timeshare construction spend and capital expenditures, plus net proceeds from
receivables financings

Not surprisingly, these projections imply a very favorable purchase price for Interval. Conservatively
assuming a 10% discount rate and a terminal growth rate of zero (i.e. 10x FCF exit multiple), the future cash
flows are worth approximately $2.0 billion in present value. This translates to a NPV anywhere between 20% (at
IILG’s pre-deal share price) and >80% (current share price) in excess of Interval’s purchase price. In order to
account for the likelihood (we would say certainty) that macro conditions will disrupt Interval’s projected cadence
of sales and FCF growth for Vistana, we modified the FCF projections as detailed below. We assume a
moderate economic recession reduces Vistana FCF to just 50% of Interval management’s projections from 2017
through 2019, before slowly rising to 90% of IILG’s forecasts by 2023. (Note: AAF is not forecasting a recession,
but we model a recession at an earlier stage here for purposes of conservatism.) We also assume terminal free
cash flow is just 80% of Interval’s projected $197 million, and apply a 10% discount rate and a terminal growth
rate of zero. As illustrated in the following table, these projections imply a $1.5 billion present value of Vistana’s
free cash flow stream or >$11/share after dilution. This implies Vistana alone is worth nearly as much IILG’s
current share price.
There is clearly a high degree of uncertainty as to the required capital expenditures over time, the
sensitivity of sales and FCF to macroeconomic disruptions, and the terminal value of the timeshare business.
Nonetheless, we believe these relatively conservative projections reflect those uncertainties. After the real
estate bubble burst, the timeshare industry moved away from overreliance on large development projects
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