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Wyndham Worldwide (NYSE:WYN)

Q4 2010 Earnings Call

February 09, 2011 8:30 am ET

Executives

Thomas Conforti - Chief Financial Officer and Executive Vice President

Stephen Holmes - Chairman, Chief Executive Officer and Chairman of Executive Committee

Margo Happer - Senior Vice President of Investor Relations

Analysts

Michael Millman - Millman Research Associates

Christopher Agnew - MKM Partners LLC

Robert LaFleur - Hudson Securities Inc.

Amanda Bryant - Susquehanna Financial Group, LLLP

Chris Woronka - Deutsche Bank AG

Joseph Greff - JP Morgan Chase & Co

Steven Kent - Goldman Sachs Group Inc.

Operator

Welcome to the Wyndham Worldwide Fourth Quarter Earnings Conference Call. [Operator Instructions] I will now turn the call over to Margo Happer, Senior Vice President of Investor Relations. Thank you, you may begin.

Margo Happer

Good morning. Thank you for joining us. With me today are Steve Holmes, our CEO; and Tom Conforti, our CFO.

Before we get started, I want to remind you that our remarks today contain forward-looking information that are subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our Form 10-Q filed October 28, 2010, with the SEC.

We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to the comparable GAAP measure is provided in the table to the press release and is available on the Investor Relations section of our website at wyndhamworldwide.com. Steve?

Stephen Holmes

Thank you, Margo. Good morning, everyone, and thank you for joining us today. We ended the year a high note with fourth quarter adjusted EPS coming in $0.02 ahead of the top end of our guidance range. For the year, excluding the benefit of deferred revenues we had in the 2009, revenues increased 8% and adjusted EBITDA increased 17%, demonstrating continued strong execution across our businesses.

2010 was a great year at Wyndham Worldwide. We generated $603 million in free cash flow just above the top end of our range. We used that cash to both grow our businesses and return capital to shareholders.

A year ago, we tripled our dividend, and today, we announced another 25% increase, reflecting the real growth of our businesses, our confidence in the future and our continued commitment to return cash to shareholders.

In 2010, we utilized $237 million to repurchase approximately 9.3 million shares of our common stock. We used another $212 million to repurchase approximately 50% of our convertible notes and related warrants, reducing current and potential future share dilution. And we invested $232 million in our businesses before acquisitions for Fee-for-Service businesses that will drive higher EBITDA and cash flow for years to come.

So for those keeping score, we returned 42% of our available cash flow to shareholders through dividend and share repurchases, 30% to acquire complementary businesses to fuel future growth and 28% to retired convertible debt.

On the operating front, each of our three business units exceeded its 2010 plan and made significant progress towards its strategic goals. At Wyndham Vacation Ownership, we drove VPG to new levels and launched our Asset Affiliation Model, signing three deals and generating sales ahead of our expectations.

In our Exchange and Rental business, we enhanced our leadership position in service rentals with three terrific acquisitions. RCI signed 74 new long-term affiliations and renewed its affiliation with the Disney Vacation Club in a multi-year agreement. Also in exchange, we achieved 29% online Web share, more than doubling our online shares since we began our initiative to enhance RCI.com in 2008. To capture similar success in our Lodging business, we launched the Apollo initiative, which will improve our value proposition to franchisees and consumers and enable us to capture incremental RevPAR and room growth.

I'll bring you up-to-date on the most recent achievements in a moment, but first, let me spend a minute on what we're seeing across our businesses and around the world. In general, we continue to see signs of gradual economic recovery. In Lodging, the outlook in the hotel owner community has significantly improved, and we expect asset trading to increase in 2011 as the credit markets continue to improve. The RevPAR rebound that we experienced in the U.S. in 2010 continues to gain momentum globally.

Our European Rentals business was also off to a great start in 2011. We believe the significant decline in unemployment in Germany and pent-up demand from December's inclement weather are two contributing factors supporting broad demand, as evidenced by a year-over-year increase of 11% in rental volume, excluding the acquisitions that we made in January of 2011.

RCI recently held its annual affiliate event in New York. The event brought together more than 55 Timeshare developers and industry leaders to celebrate a year of collaboration and success and to learn more about how RCI can continue to help their businesses.

While credit markets for Timeshare developers are still in the recovery process, sentiment among the developers who attended the event was markedly positive. Of course, nowhere is the health of the Timeshare industry more evident than at Wyndham Vacation Ownership, where we ended the year with adjusted EBITDA of 32% above 2009, excluding the impact of deferred revenue. So against that backdrop of improving economic conditions, we're focused on ensuring we capture more than our fair share of the recovery and that we continue to fuel our growth for many years to come.

Today, I want to discuss four themes that will help ensure we achieve these goals: First, our emphasis on innovation; second, rebound single portfolio towards Fee-for-Service businesses; third, expanding brand presence; and finally, our customer service and associates engagement culture.

First, let's discuss innovation, a central theme here at Wyndham Worldwide. We're deploying technology in new and creative ways to provide more innovative interfaces and service delivery for business partners and consumers. As you know, RCI has been leading the way on this front and in November, we implemented our most significant technology upgrade ever. These enhancements give members the ability to combine deposits to trade up and to receive change back from an exchange when the trading power of their Timeshare is greater than the trading power of the Timeshare they're trading into.

These are transformational changes in the vacation exchange industry. We went live with these improvements in November, on schedule and without a hitch.

Member and affiliate response has been positive. Members love the ability to combine deposits and receive change back and they view these options as fair and member-friendly. Through January, over 75% of exchange transactions resulted in members receiving change back that they can use for future exchanges and approximately 10% of exchange transactions resulted from combined deposits, meaning members were able to exchange into a better unit by combining the Timeshare that they owned.

The Hotel Group is also leveraging innovative technology to enhance the customer experience. As part of our Apollo initiative, during the fourth quarter, we launched enhanced outsell, which enabled cross selling functionality for all brands across all Wyndham Hotel Group websites. We are also upgrading all of our brand websites. We recently completed test designs for Baymont, Super 8, Days Inn and the Ramada and are in the process of soliciting content from over 6,000 franchisee sites. We expect to launch these sites with mobile website functionality in the summer of 2011 and will follow shortly, thereafter, with the remainder of our brands.

Our focus on innovation extends beyond technology to product development as evidenced by the significant process we've made with our Asset Affiliation Model at Wyndham Vacation Ownership. We also introduced product innovations in our RCI business with our premium membership product, RCI Points Platinum, which offers many benefits including opportunities for last-minute upgrades and priority viewing of specialty inventory.

Next, let me share the progress we've made on rebounds in our portfolio to emphasize Fee-for-Service businesses. Last month, we announced our third WAAM deal at Smuggler's Notch near Stowe, Vermont. Smuggler's Notch is consistently recognized as a top-rated destination for family-friendly vacations. This affiliation aligns with our business model providing vacation experiences for families, facilitates our expansion in New England and provides our owners with another world-class vacation property. And today, we're announcing our fourth WAAM deal at Emerald Grande in Destin, Florida, which adds yet another world-class luxury resort on Florida's Gulf Coast through our Vacation Ownership. The four deals we've announced in the last 12 months including our option to take additional units within these resorts would provide enough inventory to meet our current WAAM target of 15% to 20% of gross vacation ownership sales over the next five years. As importantly, in addition to executing our Fee-for-Service model, these are brand-enhancing product additions, adding valuable infrastructure in important geographic locations to our portfolio.

As I mentioned earlier, we also successfully completed four acquisitions of Fee-for-Service businesses in 2010. Hoseasons added meaningful inventory to our highly successful U.K. Vacational business. The Tryp brand was a tuck-in opportunity for the Wyndham Hotel Group that significantly enhanced our international presence. The third, ResortQuest, is serving us our platform to enter the U.S. full-service vacation rentals business, which is estimated to be a $10 billion-industry.

And in late November, we added James Villa Holidays, a leading and highly recognized brand in the U.K. to Mediterranean villa holiday market for consumers and property owners. James Villa Holidays is second only to Hoseasons in customer and consumer awareness in the U.K. self-catering category. With the addition of approximately 2,300 properties and an excellent reputation, the acquisition gives us geographic and product expansion, growth opportunities in Europe. It provides scale in Spain and Portugal and gives us good representation in Greece. We're happy to welcome James Villa Holidays to the Wyndham Worldwide family. This brings me to our third focus area: expanding brand presence.

A key goal of ours has been to continue to grow the Wyndham Hotels and Resort brand. Wyndham brand openings were up over 60% in 2010. In the fourth quarter, we opened over 2,000 rooms, reflecting property additions in Orlando, Chicago, Baltimore and Hawaii, as well as international openings, including Los Cabos, Mexico; Panama City, Panama and Surfer's Paradise down in Australia.

Wyndham Hotel Group has always been focused on growing its system and increasing overall revenues through brand affiliations. These arrangements allow us to increase our overall presence with little or no capital investments. Last quarter, I told you about our alliance with Planet Hollywood. And just last month, we entered into an exclusive agreement with Chatwal Hotels & Resorts to franchise and manage its Dream and Night boutique hotel brands globally. We will position the Dream brand as a full-service lifestyle brand for gateway cities and resort destinations and the Night brand as an affordable chic full-service or limited-service hotel in primary and secondary markets. Adding these complementary brands to Wyndham Hotel Group's portfolio supports our objective of meeting guest needs with our hotel product for every kind of traveler.

Of course, innovation and the best products in the world are meaningless without a base of loyal customers and a team of engaged employees. So let me conclude by spending a few moments on our culture. Our Count On Me! service culture and associate engagement are central to everything we do. Wyndham Worldwide’s culture, family-friendly benefits and programs earned us a spot on the highly regarded Working Mother's magazine 100 Best Companies list. Several of our offices including Mexico City, Indianapolis, Orlando, Las Vegas and the New Jersey office here received prestigious 2010 Best Places to Work Awards. In recent, Landal GreenParks was named the most customer-friendly company in the Netherlands based on ratings by the Dutch public. Landal was invited to ring the opening bell on the Amsterdam Stock Exchange, an incredible and well-deserved honor and a great example of the power of our associates living Wyndham Worldwide's Count on Me! values every day.

Before turning the call over to Tom, I'd like to note that excluding the tax benefit we enjoyed in 2010, which were a positive for us in 2010, our guidance this year reflects approximately a 15% EPS growth, which is at the top end of our guidance range. This EPS growth does not assume the application of any free cash flow in 2011 to reduce our shares outstanding. We expect continued improvement in the fundamentals of each of our businesses. And we have great confidence in Wyndham Worldwide's near and long-term prospects.

And now I'll turn it over to Tom to review the financials. Tom?

Thomas Conforti

Thank you, Steve. The fourth quarter was another strong quarter with earnings coming in $0.02 above the top end of our guidance range. In constant dollars and excluding the benefit of deferred revenues in the 2009, adjusted EBITDA increased 11%, reflecting double-digit RevPAR growth and strengthen our Vacation Ownership business. In addition, our earnings per share benefited from a lower effective tax rate and lower interest expense, partially due to a reduction of value-added tax accruals.

Our adjusted results exclude a $9 million pretax charge predominantly related to the elimination of RCI activity in our call center in St. John, Canada. This structural cost reduction is the result of ongoing success in moving more transactions to the Web for our RCI Exchange business.

We expect another charge of approximately $2 million in the second quarter of 2011 related to RCI exiting this center. And we anticipate approximately $9 million in annual cost savings as a result of the restructuring beginning in 2012. Also excluded from adjusted EBITDA is the $3 million pretax loss associated with the repurchase of an additional 10% of our convertible notes and related warrants in the fourth quarter of 2010.

Now, as you know, the convertible bond structure, which includes warrants, generates dilution for share prices above $20. Today, we have repurchased approximately 50% of the notes and this morning, we announced the tender offer for the remaining notes. Following the tender offer, retirement of the warrants could reduce what we believe will be significant future dilution. At year end, share dilution associated with the warrants was approximately 3 million shares.

Free cash flow increased over 11% to $603 million for the full year compared with $541 million for 2009. And just as a reminder, we define free cash flow as net cash from operating activities less CapEx, equity investments and development advances, and excluding the cash payment related to contingent IRS tax liabilities.

We believe that cash is the great enabler of our long-term business goals and that our sustainable annual free cash flow was $600 million to $700 million will accelerate our EPS growth and enhance shareholder value by supporting further investment in the business, paying dividends and through share repurchase.

As Steve said, we remain committed to returning cash to shareholders. Consistent with the dividend policy we established last year, which was to grow our dividend at least in line with earnings. The Board of Directors has authorized an increase in the quarterly dividend to $0.15 per share, approximately a 28% payout at the midpoint of our 2011 net income guidance range.

Now, this growth approximates what we believe was our true underlying growth in 2010, adjusting for deferred revenues in 2009 and the extraordinary tax benefits we achieved last year.

Now, we also continue to repurchase shares. From the reinstatement of our program last February through yesterday, we have bought 9.7 million shares at an average price of $25.71 a share. We have $246 million remaining on our current share repurchase authorization.

Now moving to operating performance for the quarter. Let's begin the segment review with the Wyndham Hotel Group. Revenues were up 9%, EBITDA increased 25% and margins improved over 300 basis points. This reflected higher RevPAR and corresponding royalty fees, lower bad debt expense and the absence of a $6 million asset impairment charge in the fourth quarter of 2009.

As Steve mentioned earlier, RevPAR recovery has been strong across the globe. Systemwide RevPAR increased over 10% in the fourth quarter. In the U.S., RevPAR improved 8% versus a year ago with the vast majority coming from occupancy gain. In constant currency, RevPAR in China and the U.K. grew 18% and 13%, respectively. These three countries represent 84% of our total system.

Excluding the Tryp acquisition, we opened over 54,000 rooms in 2010 and terminated approximately 52,000. Now apart from the 3,145 rooms related to the expiration of a low-margin contract for unbranded, affiliated room, which we chose not to review in the first quarter of 2010, we estimate that approximately half of the terminated rooms were due to financial difficulties for our franchisees. We expect these types of terminations to moderate over time as the economy continues to recover. In general, retaining our strong franchisees remains a key priority for our Lodging business.

In the fourth quarter, we opened nearly 19,000 rooms. The franchise sales team did a great job of replenishing the pipeline, which approximated 103,000 rooms at year end. For the year, contract signings were up 9% compared with last year and we executed 363 conversion deals compared with 308 in the 2009, an 18% increase. On the new construction front, the international pipeline increased. However, the tight credit markets continued to suppress the domestic pipeline for new construction.

Wyndham Exchange & Rentals had a strong year in delivering their financial results, as expected, while completing three separate acquisitions. Revenue in constant currency was up 12% in the fourth quarter, reflecting the acquisitions of Hoseasons, ResortQuest and James Villa Holidays, which contributed $21 million in incremental revenues, as well as higher rental revenues in our Novasol and Landal GreenParks businesses.

Adjusted EBITDA decreased 13% in the fourth quarter, primarily reflecting the seasonal effects on profits from the three acquisitions, which incurred costs that exceeded revenues by $6 million. Now excluding the impacts from these acquisitions, adjusted EBITDA for WER was flat. Windham Exchange and Rentals performance drivers were consistent with our expectations. The average number of exchange members and exchange revenue per member were relatively flat. Vacation rental transactions were up and average net price per vacation rental was down, primarily reflecting the effects of the acquisitions.

Steve mentioned our progress in migrating transactions to the web at RCI. Since the launch of this initiative in 2008, we have captured approximately 130 basis points of margin improvement in the Wyndham Exchange & Rentals business segments. We expect another approximately 120 basis points over the next four years as we continue our technology and program enhancement initiatives. Remember, however, that the impact of this improvement may be obscured a bit in the overall segment performance due to a make shift taking place with our lower margin Rentals businesses, growing more rapidly than the RCI Exchange business.

Now moving on to Wyndham Vacation Ownership. This business once again delivered outstanding results. Revenues and EBITDA in the fourth quarter of 2010 increased 8% and 19%, respectively, excluding the fourth quarter 2009 benefits associated with deferred revenue roll-in.

These increases reflect strong execution in the business with volume per guests and tours in line with expectations, and tours considerably better than the fourth quarter of 2009. Fourth quarter 2010 results also reflected a lower provision for loan losses and higher EBITDA from consumer finance operations. We made good progress in building our pool of lifetime buyers of Vacation Ownership, with over 22,000 new owners being added in 2010. Within WVO, our recurring Fee-for-Service Property Management business, increased revenue 6% in the fourth quarter, primarily reflecting an increase in the number of managed units.

Consumer finance revenues were down approximately 2%, due to a decline in our contract receivable portfolio, while interest expense declined 32%, reflecting lower interest rates on our securitized debt. Delinquency and default rates in the portfolio continue to improve. Write-offs during the fourth quarter declined to 2.51% of the overall portfolio from 3% in the fourth quarter of 2009. The provision for loan losses was $82 million or 22.8% of gross VOI sales net of WAAM sales, down from 26.4% in the fourth quarter of 2009.

Now posted on our investor website is the comprehensive presentation that highlights the terrific attributes of our Vacation Ownership business, the significant improvements we've made to this business over the past few years and the strength of our asset-like, go-forward business model. In the coming months, you'll be happy to hear that WVO management team will be meeting with the financial community, so you can hear from them firsthand, why we continue be so excited about this business.

Moving to corporate expenses briefly. Excluding legacy-related items, corporate expenses were up, primarily reflecting foreign exchange, increased data security and IT expenses and tax consulting charges. Now information security enhancements will continue to be an important spending priority for us in 2011 as we face, like many other companies, an increasingly aggressive threat from hackers.

Our fourth quarter adjusted effective tax rate was 27%, reflecting the tax credits we discussed last quarter.

Now let's turn to 2011 guidance. We'll post the full guidance including cash flow details to our Investor Relations website following the call. To give you the highlights, revenue guidance remains between $4 billion and $4.2 billion, up 5% to 9% from 2010 and EBITDA guidance is $925 million to $955 million, up 8% to 11% from 2010. Also, we expect annual free cash flow of $600 million to $700 million in 2011 and beyond. As we've discussed in prior quarters, we estimate that the effect of that cash properly deployed, could meaningfully increase our baseline EBITDA and earnings growth on a per share basis.

Now let's look at each business unit starting with our Hotel group. We expect RevPAR growth to be up 5% to 7% and a 1% to 3% increase in system size. We expect revenues to be between $675 million to $725 million and EBITDA in the range of $200 million and $250 million.

Moving to Wyndham Exchange and Rentals. Drivers are expected to be up slightly for our Exchange business and significantly higher for our Rentals business. Specifically, in exchange, we expect the average number of members to be flat and exchange revenue per member to be up 1% to 3%, reflecting higher transaction pricing and other member-related revenue.

In rentals, we expect transactions to be up 18% to 20%, and average net price per vacation rental to increased 18% to 20%, reflecting our recent acquisitions. Now, based on these drivers, we expect Wyndham Exchange and Rentals revenue of $1.375 billion and $1.475 billion and EBITDA of $325 million to $345 million.

At Wyndham Vacation Ownership, remember that we are concentrating on cash flow generation and a return profile of this business. So based on those objectives, we expect growth VOI sales to be up slightly from 2010 to $1.5 billion to $1.6 billion, which includes, by the way, approximately $150 million in gross WAAM sales. We expected 2% to 5% increase in Tours as we target more new owners and a 2% to 5% increase in volume per guest. We expect total segment revenues of between $1.9 billion and $2.1 billion and EBITDA of $470 million to $500 million in 2011.

Now based on the improvements we've made to credit standards and the improved performance of the portfolio, we are projecting that the provision for loan losses will continue to decline modestly in 2011 to approximately 22% of gross VOI sales, excluding WAAM sales. We expect corporate expenses for the year of approximately $75 million to $85 million, primarily reflecting continued investment in information, security and IT, in general.

We expect depreciation and amortization to be between $180 million and $190 million, somewhat higher than 2010, reflecting the recent acquisitions and our technology upgrades at Wyndham Exchange and Rentals.

We expect interest expense of approximately $135 million to $145 million reflecting our current debt levels. Now remember our intention is to maintain a stable leverage ratio, which means we will likely add debt as we increase EBITDA.

In addition, we expect some charges for the early extinguishment of debt related to the convert tender that I mentioned earlier. These charges are excluded from our guidance and will be excluded from our adjusted results.

We expect our effective tax rate for the year to be 39% compared with 34% in 2010. Now remember, the 2010 tax rate was lower due to the benefits from the utilization of multiple years of foreign tax credits.

We expect to spend $200 million to $225 million in CapEx and hotel development advancements. This is in higher than the recent years, reflecting approximately $50 million to complete the Bonnet Creek hotel near Walt Disney World. However, we expect spending for Timeshare inventory to be between $80 million and $90 million, a significant reduction from the $130 million we spent in 2010.

We expect earnings per share for the year of $2.05 to $2.15 with a diluted share count of approximately 181 million shares, which assumes no share buybacks. This translates to approximately 15% EPS growth at the top end of our guidance range, excluding the tax benefit in 2010. Finally, for the first quarter, we expect earnings per share of between $0.37 and $0.41 per share.

So with that, I'll turn the call back to Steve.

Stephen Holmes

Thanks, Tom. While Wyndham Worldwide solid results for the fourth quarter and 2010 reflect the strength of our business model and our team's exceptional execution throughout the company, although the general economic environment is improving, the degree of recovery still remains somewhat uncertain. Nevertheless, we are very confident about our near-term and long-term prospects. We aim to continue to deliver strong results and cash flow and to generate substantial shareholder value.

And now, Caroline, we'll take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Robert Lafleur from Hudson Securities.

Robert LaFleur - Hudson Securities Inc.

I was wondering if you could, Steve or Tom, give us your thoughts about the Cerberus acquisition of Silverleaf and what sort of the valuation implications are for the Timeshare industry as well as your niche of it? And then also sort of related, if you could update us on your longer-term capital or plan for finding capital partners in your Timeshare business sort of beyond what you're doing currently now with WAAM?

Stephen Holmes

I actually we saw your note that went out yesterday on that transaction, maybe the day before. We think it's a great deal for the Timeshare industry. There have been quite a few smart money players who have entered this industry over the last 12 months and we expect that to continue. The business performs exceedingly well even during downtime. So I think people have seen the resiliency of the business, so we're seeing new investors come into the market. We're also seeing investors looking to lend money in this marketplace who are new entrants into the market. So overall, this is very good. With respect to the value, I looked at what you did. We've got a calculation that probably shows the multiple as a little bit higher, but I don't know their business well enough, frankly, to be able to comment on it. It's a great company. It's a terrific customer of RCI and we're very happy for the team there.

Thomas Conforti

And then the second question, Bob, was on WAAM?

Robert LaFleur - Hudson Securities Inc.

Actually you've talked in the past about your desire to find longer-term capital partners in the Timeshare business sort of beyond when WAAM runs its course in the distressed inventory sort of works its way through the system.

Stephen Holmes

Sure. Well, I think we may have called that a programmatic approach in the past. Well, one of the things that we're doing and I did mention it briefly in the script is, we are entering into option agreements with the people that we've cut deals with so far in the four groups, not everybody, but most of them, actually, where we can either -- we have the option to either purchase more or actually have them develop more for us at a set cost. So we do have, as I said, with those options about five years worth of product already lined up for us and so we think that's a part of it. We may still look for a programmatic partner to be a non-developer who buys inventory as we’ve talked about in the past, but the economics are going to have to be right for us on that.

Thomas Conforti

Yes. Bob, we said, we were going to target 15% to 20% of our sales coming from the business. As I said in my comment, or I think Steve said in his, with the takedown of the options, we've already reached those targets. We have to think sort of incrementally about where we go from here, I think to Steve's point. And as great opportunities present themselves, we'll definitely be open minded to it.

Operator

Our next question comes from Joe Greff from JPMorgan.

Joseph Greff - JP Morgan Chase & Co

Steve, the free cash flow guidance is $600 million to $700 million for this year and I think your comment was that's also a sustainable growth rate beyond, what get's you this year to $700 million versus $600 million? What happens within the business from a working capital perspective? If you can help me understand that, that will be great.

Stephen Holmes

Obviously, we exceeded the top end of our $500 million to $600 million range this year that we have originally put in place. And we always love to be at the top end of all of our ranges and exceed them if possible. Getting to the $600 million to $700 million, it requires good working capital management and that's something that the company is very focused on. As you know, we put in place a program for focusing everyone on cash flow this past year and it will continue to be a focal point. And I think the other kind of the basic or fundamental thing is just pushing EBITDA growth and getting the fundamental to grow. If we can grow EBITDA, that's going to fall down to our cash flow.

Thomas Conforti

Joe, besides EBITDA and working capital, this year, we are incurring a slightly higher CapEx number because of the development of the Bonnet Creek Hotel outside of Walt Disney World. And so, if we had a more normalized year in CapEx, we’d probably be closer to the $700 million than the $600 million, but also -- and I think we did this in part purposely, we also have lower investment spending over at WVO for inventory. So that probably be another way that we could squeak out another $20 million to $30 million of free cash flow if we sort of had a normalized CapEx year probably.

Joseph Greff - JP Morgan Chase & Co

And then looking at the fourth quarter at Vacation Ownership, what percentage of buyers were new buyers?

Thomas Conforti

I think we added about 5,000 new owners in the fourth quarter. The full-year number was close to 22,000.

Joseph Greff - JP Morgan Chase & Co

And then final question on Vacation Ownership. In the fourth quarter, the loan loss reserve was, as a percentage of gross VOI sales, was percentage-wise higher in the fourth quarter than the third quarter. Can you give us help understand that, that geography? Is that customer mix? Is that something else going on? Can you help us understand that?

Thomas Conforti

Yes, Joe, I think it's been a fact here historically and I don't have enough historical perspective on it. But I think it's been a factor. I've been educated to understand that in the fourth quarter, because of seasonality considerations that we've always kind of picked it up just a bit incrementally. And so in spite of the fact that there are very positive trends on default rates and such, I think that's a practice that history is born out into the right way to reserve for potential loan loss.

Stephen Holmes

And Joe, I wouldn't interpret it as anything changing direction and the momentum that we've seen in improvement there.

Operator

Our next question or comment comes from Chris Woronka from Deutsche Bank.

Chris Woronka - Deutsche Bank AG

Can we get a little bit more color on the impact that your acquisitions, WER had on the margins in the fourth quarter in terms of seasonality? Is what you acquired this year look a little bit different from a margin perspective in the fourth quarter relative to the legacy stuff?

Thomas Conforti

Yes, absolutely. There is a huge seasonality factor and our ResortQuest business is -- of the three businesses that we've bought in WER, the ResortQuest business has the most significant seasonality component to it and so of that $6 million loss we had for the quarter, ResortQuest is a large percentage of that, almost 70% of it. And that just has to do with the seasonal nature of the business, Chris, but it's a business that generates EBITDA. It just doesn't generate it in the fourth quarter.

Chris Woronka - Deutsche Bank AG

And just in terms of your thinking about acquisitions this year, is there any kind of implicit change in your priorities? You did a lot on the E&R side last year. I know you expect generally more transactional activity in Lodging, I mean, should we read anything through to that in terms of your priorities or is it still everything kind of gets a look on its own?

Stephen Holmes

No, Chris, the priorities remain the same. The ability to execute transaction is really a function of what's out in the marketplace, do we have a willing partner to come to a deal, to close a deal. And so it's -- but our priorities have not changed.

Operator

Our next question or comment comes from Amanda Bryant from Susquehanna.

Amanda Bryant - Susquehanna Financial Group, LLLP

Given your adjusted EBITDA guidance of about a 9% growth in 2011 at the midpoint, how much of that is attributable to your four acquisitions that you completed in 2010 versus your Legacy businesses? That will be my first question and my second question would be on your reported RevPAR growth of 10% in the fourth quarter. Is that on a constant-currency basis or is that on an as-reported basis?

Thomas Conforti

So your question about the incremental contribution of acquisitions, we haven't given specific mention of numbers on...

Stephen Holmes

It's not a large amount for 2011. It's probably less than 2% of our overall EBITDA.

Amanda Bryant - Susquehanna Financial Group, LLLP

Overall growth?

Stephen Holmes

Not overall growth, overall EBITDA. Less than 2%, a very small portion of the overall growth.

Amanda Bryant - Susquehanna Financial Group, LLLP

And then on the RevPAR? On the 10% growth in the fourth quarter, was that in constant currency or on an as-reported basis?

Thomas Conforti

Constant currency, yes.

Operator

[Operator Instructions] Our next question or comment comes from Steven Kent from Goldman Sachs.

Steven Kent - Goldman Sachs Group Inc.

Could you just give a little bit more color on the margins in the Lodging and Vacation Exchange Rental business in the quarter? As you move more and more to Web bookings, I guess I thought I would see higher margins start to come about. So could you just talk about that, sort of where you are in that process?

Thomas Conforti

So on Lodging, we had a dramatic margin improvement for the quarter, largely associated with RevPAR, but also some other impairment that we didn't take in the fourth quarter that we took in the fourth quarter of 2009, and some bad debt stuff that went our way. So at WHG, the margin story in the fourth quarter or the Hotel Group was really very positive.

At WER, we have two, sort of, macro factors at work here. We have the positive incremental movement and margin improvement in our Exchange business because of this movement to the Web and our announcement today of restructuring in our call center in Canada will yield a structural improvement, further structural improvement in margins and our Exchange business. The issue is, there are two factors that are offsetting that somewhat. Factor number one is that the Rental business just has lower margins than the Exchange business and the Rentals business will grow faster especially with the aid of acquisition than the Exchange business. But there's a second factor related to Rental and it's a seasonal factor and that is that when you look at the business on a quarterly basis, which we try not to do, but we know that we need to speak to it, we had seasonal effects. The fact is that in Europe, in our U.S. Vacation Rental business, we just don't have as much revenue in the winter then we do in the summer and the spring. So we have an added compounding effect. It's a seasonal factor that works against us. So that's when you're looking at it on a quarterly basis, but sort of at a macro level, we have these two competing trends of margin improvement and exchange, but faster growth in our lower margin Rentals business.

Operator

Our next question or comment comes from Chris Agnew from MKM Partners.

Christopher Agnew - MKM Partners LLC

I wanted to ask about the Rentals business. I think you said you're off to a great start in January, up 11%. First of all, just confirm I think you said excluded acquisitions, and then maybe just to ask, what regions are contributing to the growth? Are you seeing any impact from austerity measures in Europe, any countries, U.K, in particular?

Stephen Holmes

To answer your first question, it did exclude acquisition. That was kind of same-store growth that we're seeing in the Rentals. I think that to answer your question about what are we seeing kind of geographically and do we see any austerity measures kicking in and impacting people's travel, we don't. We continue to see strength in the northern regions, in particular. Germany is really strengthening as their unemployment has reached a new low for, I guess, the last 16 years or something like that. So it's definitely in a better place than it was and it's been a difficult market in Germany for quite some time. So that's an improvement. And I think also if you just, Chris, go back up and look at what happened in 2009, frankly, in this business, when people were worried about the world falling apart, and this business performed exceedingly well. And that's the result of the fact that we've got terrific brands, but also terrific products in locations of very high demand. So even when demand may sag in general, the product that we have is still very highly sought after. So it performed well during a really tough downturn and we continue to see it do well now.

Christopher Agnew - MKM Partners LLC

How should we think about the seasonality of free cash flow in 2011? Is there anything, in particular, to note with respect to timing through the year?

Stephen Holmes

It should be relatively similar to what it was this past year from a seasonal standpoint. The things that affect our overall cash flow, such as ABS financing and everything, that doesn't work into the free cash flow. That's kind of working into what we would have as available cash flow. So I don't know of any events that I would consider...

Thomas Conforti

Bonnet Creek Hotel, which we're going to have to spend the money by the quarter, so that might have an effect, that might distort free cash flow just a bit, but nothing else that comes to mind, Chris.

Operator

[Operator Instructions] Our next question or comment comes from a Michael Millman from Millman Research Associates.

Michael Millman - Millman Research Associates

Considering all the discussion that's been going on with America and the GDSs, can you talk about where the percentage of your business that goes to the GDSs in the different businesses? And if you're moving towards or why you're not moving towards more direct connect and what this might mean on the bottom line? And sort of related, you mentioned your Apollo initiative. I'm not sure that's the Apollo GDS you're talking about or related to that, but maybe you can bring that in as well. And I guess related to that, I suppose this is stretching the definition of one question. Google Maps, what that might mean in terms of the use of GDSs or OTAs?

Stephen Holmes

We worked very well with the GDSs. We've had them as partners and worked very closely with them. So if you're talking about the situation that airlines may have with the GDSs, that's not the situation that at least we have. With respect to Apollo, the Apollo is referring to was our own internal project. It's a name for our program we're going through to improve our connectivity with the consumers as well as with our franchisee customers to improve our value proposition to the franchisee customers. So it's things like improving our central res system improving our brand.com websites, which kind of went back to your first question as well. The brand.com websites, you said are we trying to go more direct connect? We have always tried to make our sites as good and as efficient as they can possibly be. Because clearly, the most efficient booking for our hotel franchisees, if we can drive it through our own brand website. But it doesn't mean that that's in conflict at all with the GDSs. We still look to move product through to the OTAs and the GDSs. So I don't think our position there has changed at all. We want to have better sites. Finally, on Google Map, which is a real stretch to getting that to the first one, we do use Google Maps in some of our applications if you go in the new, I'll make a plug for the RCI app on iPad and iPhone, you'll see the way you navigate there is with Google Map. So we do use them and it's a great platform.

Operator

And I'd like to turn it back over to our speakers for closing comments at this time.

Thomas Conforti

Okay. Thanks very much, Caroline. Well, thank you, all, for joining us on the call and we look forward to seeing you and speaking to you again at the first quarter call. Thank you.

Operator

That concludes today’s conference call. Thank you for your participation. You may disconnect at this time.

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