You should read the following discussion and analysis together with our consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. The following discussion contains forward-looking statements, including those that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, without limitation, those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Such reports and other information filed by the Company with theSEC are available free of charge on our website at www.bluegreenvacations.com and on theSEC's website at www.sec.gov.
Executive Overview
We are a leading vacation ownership company that markets and sells VOIs and manages resorts in popular leisure and urban destinations. Our resort network includes 45Club Resorts (resorts in which owners in ourVacation Club have the right to use most of the units in connection with their VOI ownership) and 23Club Associate Resorts (resorts in which owners in ourVacation Club have the right to use a limited number of units in connection with their VOI ownership). OurClub Resorts andClub Associate Resorts are primarily located in high-volume, "drive-to" vacation locations, includingOrlando ,Las Vegas ,Myrtle Beach ,Charleston andNew Orleans , among others. Through our points-based system, the approximately 218,000 owners in ourVacation Club have the flexibility to stay at units 50
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available at any of our resorts and have access to over 11,300 other hotels and resorts through partnerships and exchange networks. We have a robust sales and marketing platform supported by exclusive marketing relationships with nationally-recognized consumer brands, such asBass Pro and Choice Hotels. These marketing relationships drive sales within our core demographic.
Bluegreen Vacations Holding Corporation ("BVH"), formerly
Impact of the COVID-19 Pandemic
Initial Impact and Response
The COVID-19 pandemic has resulted in an unprecedented disruption in theU.S. economy and the travel, hospitality and vacation ownership industries due to, among other things, resort closures, travel restrictions and restrictions on business operations, including government guidance and restrictions with respect to travel, public accommodations, social gatherings and related matters. Our operations have been and continue to be adversely impacted by the pandemic. OnMarch 23, 2020 , we temporarily closed all of our VOI sales centers, our retail marketing operations atBass Pro Shops andCabela's stores and outlet malls, and our Choice Hotels call transfer program. In connection with these actions we canceled existing owner reservations throughMay 15, 2020 and new prospect guest tours throughJune 30, 2020 . Further, some of ourClub Resorts andClub Associate Resorts were closed in accordance with government mandates and advisories. Beginning inmid-May 2020 , we recommenced our sales and marketing operations and our closed resorts began to welcome guests as government mandates were lifted. ByDecember 31, 2020 , we were operating in a total of 98 Bass Pro andCabela's stores, we reactivated our Choice Hotels call transfer program, all of our resorts were open, and all but two of our VOI sales centers were open. However, there is no assurance that our marketing operations at Bass Pro orCabela's stores, or our VOI sales centers will remain open, including in the event of an increase in COVID-19 cases. Additionally, reflecting our temporary cessation of marketing activities in the beginning months of the COVID-19 pandemic in general, our pipeline of vacation packages was 121,900 atDecember 31, 2020 compared to 169,300 atDecember 31, 2019 . However, utilization of the packages has been significantly lower as purchasers have not traveled at the same pace as was traveled pre-pandemic. For more detailed information please see "Results of Operations" included in Part II-Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations. As a result of the effect of the pandemic, we implemented steps to mitigate our costs beginning inMarch 2020 , including reductions in workforce of over 1,700 positions and the placement of another approximate 3,200 of our associates on temporary furlough or reduced work hours. As ofDecember 31, 2020 , approximately 3,200 associates had returned to work on a full-time basis for a total of approximately 4,600 full-time associates compared to approximately 5,900 full-time associates as ofDecember 31, 2019 . As a result of the effect of the COVID-19 pandemic, during the year endedDecember 31, 2020 , we incurred$5.0 million in severance and$14.3 million of payroll and payroll benefit expense relating to employees on temporary furlough or reduced work hours. These payments and expenses are included in selling, general and administrative expenses in our consolidated statements of operations and comprehensive income for the year endedDecember 31, 2020 . While we paid a special cash dividend of$1.19 per share duringAugust 2020 , we suspended the payment of regular quarterly cash dividends during the second quarter of 2020 and there is no assurance that we will recommence paying regular dividends or pay any additional special dividends in the future. As a precautionary measure to provide additional liquidity if needed, inMarch 2020 , we drew down$60.0 million under our lines-of-credit and pledged or sold receivables under certain of our receivable backed facilities to increase our cash position. As ofDecember 31, 2020 , we repaid the$60.0 million borrowed under our lines-of-credit. Also, inJune 2020 , we amended our Liberty Bank Facility to extend the advance period and maturity date, reduced the outstanding borrowings from$50.0 million to$40.0 million , decreased the advance rate from 85% for qualified conforming receivables to 80% effectiveSeptember 2020 and, commencingJuly 1, 2020 , changed the interest rate from the Prime Rate with a floor of 4.00% to the Prime Rate minus 0.10% with a floor of 3.40%. InSeptember 2020 , we amended our NBA Receivables Facility to extend the advance period and maturity date, decreased the advance
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rate from 85% for qualified receivables to 80%, and changed the interest rate from one month LIBOR plus 2.75% (with an interest rate floor of 3.50%) to one month LIBOR plus 2.25% (with an interest rate floor of 3.00%). InOctober 2020 , we completed the 2020-A Term Securitization, a private offering and sale of approximately$131.0 million of investment-grade, VOI receivable backed notes (the "Notes") at an overall blended interest rate of approximately 2.60%. The gross advance rate for this transaction was 88.0% and the Notes mature inFebruary 2036 . Proceeds from the 2020-A Term Securitization were used to paydown approximately$82.1 million owed on existing receivable-backed facilities, (thus creating additional availability on those facilities), to capitalize a reserve fund, to pay fees and expenses associated with the transaction, and for general corporate purposes. InDecember 2020 , we amended our Quorum Purchase Facility to extend the advance period fromDecember 2020 toDecember 2022 and extend the maturity date fromDecember 2032 toDecember 2034 . We continue to actively pursue additional credit facility capacity and capital market transactions. For more detailed information please see "Liquidity and Capital Resources" included in Part II -Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations. We have historically provided financing to customers for a majority of our sales of VOIs, and accordingly, are subject to the risk of defaults by our customers. GAAP requires that we reduce sales of VOIs by our estimate of uncollectible VOI notes receivable. The COVID-19 pandemic has had a material adverse impact on unemployment inthe United States and economic conditions in general and the impact may continue for some time. We believe that the COVID-19 pandemic will continue to have an impact on the collectibility of our VOI notes receivable. Accordingly, the estimate of defaults for the 2021 year was increased by approximately$6.0 million , based on historical experience, forbearance requests received from customers, and other factors, including, but not limited to, the seasoning of the notes receivable and FICO scores of the customers. The impact of the COVID-19 pandemic on default or delinquency rates is rapidly changing and highly uncertain. The Coronavirus Aid, Relief, and Economic Securities Act ("CARES Act") was signed into law onMarch 27, 2020 in response to the COVID-19 pandemic. As ofDecember 31, 2020 , we evaluated the income tax provisions of the CARES Act and determined they had no significant effect on the computation of our estimated effective tax rate for the year endedDecember 31, 2020 . However, we have taken advantage of the deferral of the employer portion of the tax withholding amounts and the employee retention tax credits provided for in the CARES Act. During the year endedDecember 31, 2020 , we recorded a tax withholding deferral of$8.6 million and employee retention tax credits of$7.1 million , which is included in selling, general and administrative expenses in our consolidated statements of operations and comprehensive income for the year endedDecember 31, 2020 .
Continued Impact of COVID-19 on our Business
We continue to experience lower travel rates especially to high traffic destinations such asOrlando andLas Vegas . The occupancy rates at resorts with sales centers during the fourth quarter of 2020 was approximately 71% as compared to 80% during the fourth quarter of 2019. This trend of reduced travel was also reflected in utilization of vacation packages especially for vacation packages sold prior to the COVID-19 pandemic.
VOI Sales and Financing
Our primary business is the marketing and selling of deeded VOIs, developed either by us or third parties. Customers who purchase these VOIs receive an annual allotment of points, which can be redeemed for stays at one of our resorts or at 11,300 other hotels and resorts available through partnerships and exchange networks. Historically, VOI companies have funded the majority of the capital investment in connection with resort development with internal resources and acquisition and development financing. In 2009, we began selling VOIs on behalf of third-party developers and successfully diversified from a business model focused on capital-intensive resort development to a flexible model with a balanced mix of developed and capital-light inventory as determined by management to be appropriate from time to time based on market and economic conditions, available cash, and other factors. Our relationships with third-party developers enable us to generate fees from the sales and marketing of their VOIs without incurring the significant upfront capital investment generally associated with resort acquisition or development. While sales of acquired or developed inventory typically result in a greater contribution to EBITDA and Adjusted EBITDA, 52
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fee-based sales typically do not require an initial investment or involve development financing risk. Both acquired or developed VOI sales and fee-based VOI sales drive recurring, incremental and long-term fee streams by adding owners to ourVacation Club and new resort management contracts. Fee-based sales of VOIs comprised 37% and 50% of system-wide sales of VOIs during the year endedDecember 31, 2020 and 2019, respectively. While we intend to remain flexible with respect to our sales of the different categories of our VOI inventory in the future based on economic conditions, business initiatives and other considerations, we currently expect that our percentage of fee-based sales will continue to decrease over time. In conjunction with our VOI sales, we also generate interest income by providing financing to qualified purchasers. Collateralized by the underlying VOIs, our loans are generally structured as 10-year, fully-amortizing loans with a fixed interest rate ranging from approximately 12% to approximately 18% per annum. As ofDecember 31, 2020 , the weighted-average interest rate on our VOI notes receivable was 15%. In addition, we earn fees for various other services, including title and escrow services in connection with the closing of VOI sales, and mortgage servicing.
Resort Operations and Club Management
We enter into management agreements with the homeowner associations ("HOAs") that maintain most of the resorts and earn fees for providing management services to those HOAs and our approximately 218,000Vacation Club owners. These resort management services include oversight of housekeeping services, maintenance, and certain accounting and administration functions. Our management contracts yield highly predictable, recurring cash flows and do not have the traditional risks associated with hotel management contracts that are linked to daily rate or occupancy. Our management contracts are typically structured as "cost-plus," with an initial term of three years and automatic one year renewals. In connection with the management services provided to theVacation Club , we manage the reservation system and provide owner, billing and collection services. In addition to resort and club management services, we earn fees for various other services that produce recurring, predictable and long term-revenue, including construction management services to third-party developers. As described above, while some of ourClub Resorts andClub Associate Resorts were closed duringMarch 2020 in response to the COVID-19 pandemic, all were subsequently reopened as ofDecember 31, 2020 and currently remain open.
Principal Components Affecting our Results of Operations
Principal Components of Revenue
Fee-Based Sales. Represent sales of third-party VOIs where we are paid a commission.
JIT Sales. Represent sales of VOIs acquired from third parties in close proximity to when we intend to sell such VOIs.
Secondary Market Sales. Represent sales of VOIs acquired from HOAs or other owners, typically in connection with maintenance fee defaults. This inventory is generally purchased at a greater discount to retail price compared to developed VOI sales and VOIs purchased by us for sale as part of our JIT sales activities. Developed VOI Sales. Represent sales of VOIs in resorts that we have developed or acquired (not including inventory acquired through JIT and secondary market arrangements). Financing Revenue. Represents revenue from the financing of VOI sales, which includes interest income and loan servicing fees. We also earn fees from providing mortgage servicing to certain third-party developers relating to VOIs sold by them. Resort Operations and Club Management Revenue. Represents recurring fees from managing theVacation Club and transaction fees for Traveler Plus and other member services. We also earn recurring management fees under our management agreements with HOAs for day-to-day management services, including oversight of housekeeping services, maintenance, and certain accounting and administrative functions.
Other Fee-Based Services. Represents revenue earned from various other services that produce recurring, predictable and long-term revenue, such as title services.
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Principal Components of Expenses
Cost of VOIs Sold. Represents the cost at which our owned VOIs sold during the period were relieved from inventory. In addition to inventory from our VOI business, our owned VOIs also include those that were acquired by us under JIT and secondary market arrangements. Compared to the cost of our developed VOI inventory, VOIs acquired in connection with JIT arrangements typically have a relatively higher associated cost of sales as a percentage of sales while those acquired in connection with secondary market arrangements typically have a lower cost of sales as a percentage of sales as secondary market inventory is generally obtained from HOAs at a significant discount to retail price. Cost of VOIs sold as a percentage of sales of VOIs varies between periods based on the relative costs of the specific VOIs sold in each period and the size of the point packages of the VOIs sold (primarily due to offered volume discounts, and taking into account consideration of cumulative sales to existing owners). Additionally, the effect of changes in estimates under the relative sales value method, including estimates of projected sales, future defaults, upgrades and incremental revenue from the resale of repossessed VOI inventory, are reflected on a retrospective basis in the period the change occurs. Cost of sales is typically favorably impacted in periods where a significant amount of secondary market VOI inventory is acquired and actual defaults and equity trades are higher and the resulting change in estimate is recognized. While we believe that there is additional inventory that can be obtained through the secondary market at favorable prices to us in the future, there is no assurance that such inventory will be available. Net Carrying Cost of VOI Inventory. Represents the maintenance fees and developer subsidies for unsold VOI inventory paid or accrued to the HOAs that maintain the resorts. We attempt to offset this expense, to the extent possible, by generating revenue from renting our VOIs and through utilizing them in our sampler programs. We net such revenue from this expense item. Selling and Marketing Expense. Represents costs incurred to sell and market VOIs, including costs relating to marketing and incentive programs, tours, and related wages and sales commissions. Revenue from vacation package sales are netted against selling and marketing expenses. Financing Expense. Represents financing interest expense related to our receivable-backed debt, amortization of the related debt issuance costs and other expenses incurred in providing financing and servicing loans, including administrative costs associated with mortgage servicing activities for our loans and the loans of certain third-party developers. Mortgage servicing activities include, among other things, payment processing, reporting and collection services. Resort Operations and Club Management Expense. Represents costs incurred to manage resorts and theVacation Club , including payroll and related costs and other administrative costs to the extent not reimbursed by theVacation Club or HOAs. General and Administrative Expense. Primarily represents compensation expense for personnel supporting our business and operations, professional fees (including consulting, audit and legal fees), and administrative and related expenses.
Key Business and Financial Metrics Used by Management
Operating Metrics
Sales of VOIs. Represent sales of our owned VOIs, including developed VOIs and those acquired through JIT and secondary market arrangements, reduced by equity trade allowances and an estimate of uncollectible VOI notes receivable. In addition to the factors impacting system-wide sales of VOIs (as described below), sales of VOIs are impacted by the proportion of system-wide sales of VOIs sold on behalf of third-parties on a commission basis, which are not included in sales of VOIs.
System-wide Sales of VOIs. Represents all sales of VOIs, whether owned by us or
a third party immediately prior to the sale. Sales of VOIs owned by third
parties are transacted as sales of VOIs in our
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selling and marketing process we use to sell our VOI inventory. We consider system-wide sales of VOIs to be an important operating measure because it reflects all sales of VOIs by our sales and marketing operations without regard to whether we or a third party owned such VOI inventory at the time of sale. System-wide sales of VOIs is not a recognized term under GAAP and should not be considered as an alternative to sales of VOIs or any other measure of financial performance derived in accordance with GAAP or to any other method of analyzing our results as reported under GAAP.
Guest Tours. Represents the number of sales presentations given at our sales centers during the period.
Sale to Tour Conversion Ratio. Represents the rate at which guest tours are converted to sales of VOIs and is calculated by dividing guest tours by number of VOI sales transactions.
Average Sales Volume Per Guest ("VPG"). Represents the sales attributable to tours at our sales locations and is calculated by dividing VOI sales by guest tours. We consider VPG to be an important operating measure because it measures the effectiveness of our sales process, combining the average transaction price with the sale-to-tour conversion ratio.
For further information see Item 8. Financial Statements and Supplementary Data - Note 2: Basis of Presentation and Recently Issued Accounting Pronouncements
EBITDA and Adjusted EBITDA
EBITDA, Adjusted EBITDA and Adjusted EBITDA Attributable to Shareholders. We define EBITDA as earnings, or net income, before taking into account interest income (excluding interest earned on VOI notes receivable), interest expense (excluding interest expense incurred on debt secured by our VOI notes receivable), income and franchise taxes and depreciation and amortization. Adjusted EBITDA is defined as our EBITDA, adjusted to exclude amounts of loss (gain) on assets held for sale, and other items that we believe are not representative of ongoing operating results. Accordingly, we exclude certain items such as severance charges net of employee retention tax credits, incremental costs associated with the COVID-19 pandemic, and amounts accrued or incurred in connection with the Bass Pro settlement inJune 2019 . We define Adjusted EBITDA Attributable to Shareholders as our Adjusted EBITDA excluding amounts attributable to the non-controlling interest inBluegreen/Big Cedar Vacations (in which we own a 51% interest). For purposes of the calculation of EBITDA, Adjusted EBITDA and Adjusted EBITDA Attributable to Shareholders calculations for each period presented, no adjustments were made for interest income earned on our VOI notes receivable or the interest expense incurred on debt that is secured by such notes receivable because they are both considered to be part of the ordinary operations of our business. We consider our EBITDA, Adjusted EBITDA, Adjusted EBITDA Attributable to Shareholders and Segment Adjusted EBITDA to be indicators of our operating performance, and they are used by us to measure our ability to service debt, fund capital expenditures and expand our business. EBITDA and Adjusted EBITDA are also used by companies, lenders, investors and others because they exclude certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company's capital structure, debt levels and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. EBITDA, Adjusted EBITDA and Adjusted EBITDA Attributable to Shareholders also exclude depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. EBITDA, Adjusted EBITDA and Adjusted EBITDA Attributable to Shareholders are not recognized terms under GAAP and should not be considered as an alternative to net income (loss) or any other measure of financial performance or liquidity, including cash flow, derived in accordance with GAAP, or to any other method or analyzing our results as reported under GAAP. The limitations of using EBITDA, Adjusted EBITDA or Adjusted EBITDA
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Attributable to Shareholders as an analytical tool include, without limitation, that EBITDA, Adjusted EBITDA and Adjusted EBITDA Attributable to Shareholders do not reflect (i) changes in, or cash requirements for, our working capital needs; (ii) our interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness (other than as noted above); (iii) our tax expense or the cash requirements to pay our taxes; (iv) historical cash expenditures or future requirements for capital expenditures or contractual commitments; or (v) the effect on earnings or changes resulting from matters that we do not believe to be indicative of our future operations or performance. Further, although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITD EBITDA, Adjusted EBITDA and Adjusted EBITDA Attributable to Shareholders A do not reflect any cash that may be required for such replacements. In addition, the definition of Adjusted EBITDA or Adjusted EBITDA Attributable to Shareholders may not be comparable to definitions of Adjusted EBITDA, Adjusted EBITDA Attributable to Shareholders or other similarly titled measures used by other companies.
Results of Operations
Adjusted EBITDA Attributable to Shareholders for the years ended
We consider Segment Adjusted EBITDA in connection with our evaluation of the operating performance of our business segments as described in Note 17: Segment Reporting to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. See above for a discussion of our definition of Adjusted EBITDA Attributable to Shareholders, how management uses it to manage our business and material limitations on its usefulness. The following tables set forth Segment Adjusted EBITDA, Adjusted EBITDA, Adjusted EBITDA Attributable to Shareholders, EBITDA and a reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA Attributable to Shareholders to net income, our most comparable GAAP financial measure: For the Years Ended December 31, 2020 2019 2018 (in thousands) Adjusted EBITDA - sales of VOIs and financing$ 46,909 $ 143,581 $ 170,668 Adjusted EBITDA - resort operations and club management 65,435 59,878 53,561 Total Segment Adjusted EBITDA 112,344 203,459 224,229 Less: Corporate and other (55,331) (70,000) (69,941) Less: Adjusted EBITDA attributable to non-controlling ?interest in Bluegreen/Big Cedar Vacations (7,596) (11,670) (12,468) Total Adjusted EBITDA attributable ?to shareholders$ 49,417 $ 121,789 $ 141,820 ? 56
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For the Years Ended December 31, 2020 2019 2018 (in thousands) Net income attributable to shareholders$ 8,225 $ 34,851 $ 87,962 Net income attributable to the non-controlling interest in Bluegreen/Big Cedar Vacations 7,392 11,273 12,390 Net Income 15,617 46,124 100,352 Add: Depreciation and amortization 15,563 14,114 12,392 Less: Interest income (other than interest earned on VOI notes receivable) (3,484) (7,191) (6,044) Add: Interest expense - corporate and other 15,030 19,035 15,195 Add: Franchise taxes 169 193 199 Add: Provision for income taxes 3,212 12,140 28,541 EBITDA 46,107 84,415 150,635 Loss on assets held for sale 1,247 3,656 3 Add: Severance and other (1) 9,659 6,267 3,650 Add: Bass Pro settlement - 39,121 - Adjusted EBITDA 57,013 133,459 154,288 Adjusted EBITDA attributable to the non-controlling interest in Bluegreen/Big Cedar Vacations (7,596) (11,670) (12,468) Adjusted EBITDA attributable to shareholders$ 49,417 $
121,789
(1)Severance and other for the year endedDecember 31, 2020 consisted of severance, net of employee retention credits, of$5.5 million , a special bonus paid to all non-executive employees of$3.3 million and COVID-19 incremental costs of$0.9 million . Amounts for the years endedDecember 31, 2019 andDecember 31, 2018 consisted of severance costs.
The following tables reconcile system-wide sales of VOIs to gross sales of VOIs, the most comparable GAAP financial measure.
For the Years Ended December 31, 2020 2019 2018 (in thousands) Gross sales of VOIs$ 230,938 $ 311,076 $ 305,530 Add: Fee-based sales 136,060 308,032 318,540 System-wide sales of VOIs$ 366,998 $ 619,108 $ 624,070 ? 57
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For the year ended
Sales of VOIs and Financing
For the Years Ended December 31, 2020 2019 % of % of ?System- ?System- ?wide sales ?wide sales Amount ?of VOIs(5) Amount ?of VOIs(5) (dollars in thousands) Developed VOI sales (1)$ 177,508 48%$ 355,353 57% Secondary Market sales 117,023 32 234,883 38 Fee-Based sales 136,060 37 308,032 50 JIT sales 25,911 7 11,641 2 Less: Equity trade allowances (6) (89,504) (24) (290,801) (47) System-wide sales of VOIs 366,998 100% 619,108 100% Less: Fee-Based sales (136,060) (37) (308,032) (50) Gross sales of VOIs 230,938 63 311,076 50 Provision for loan losses (2) (56,941) (25) (55,701) (18) Sales of VOIs 173,997 47 255,375 41 Cost of VOIs sold (3) (13,597) (8) (21,845) (9) Gross profit (3) 160,400 92 233,530 91 Fee-Based sales commission revenue (4) 89,965 66 207,832 67 Financing revenue, net of financing expense 61,883 17 60,454 10 Other (expense) income, net (942) - 3,068 - Other fee-based services, title operations and ? other, net 3,745 1 7,274 1 Net carrying cost of VOI inventory (34,626) (9) (23,816) (4) Selling and marketing expenses (217,408) (59) (321,216) (52) General and administrative expenses - sales ? and marketing (27,347) (7) (70,258) (11) Operating profit - sales of VOIs and financing 35,670 10% 96,868 16% Add: Depreciation and amortization 5,852 6,118 Add: Severance and other 4,445 1,416 Add: Bass Pro Settlement - 39,121 Add: Loss on assets held for sale 942
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Adjusted EBITDA - sales of VOIs ? and financing$ 46,909 $
143,581
(1)Developed VOI sales represent sales of VOIs acquired or developed by us. Developed VOI sales do not include Secondary Market sales, Fee-Based sales or JIT sales.
(2)Percentages for provision for loan losses are calculated as a percentage of gross sales of VOIs, which excludes Fee-Based sales (and not of system-wide sales of VOIs).
(3)Percentages for costs of VOIs sold and gross profit are calculated as a percentage of sales of VOIs (and not based on system-wide sales of VOIs).
(4)Percentages for Fee-Based sales commission revenue are calculated as a percentage of Fee-Based sales (and not based on system-wide sales of VOIs).
(5)Represents the applicable line item, calculated as a percentage of system-wide sales of VOIs, unless otherwise indicated in the above footnotes.
(6)Equity trade allowances are amounts granted to customers upon trading in their existing VOIs in connection with the purchase of additional VOIs. Subject to certain exceptions, equity trade allowances were generally eliminated inJune 2020 . ? 58
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Sales of VOIs. Sales of VOIs were$174.0 million and$255.4 million during the years endedDecember 31, 2020 and 2019, respectively. Sales of VOIs were impacted by the factors described in the discussion of system-wide sales of VOIs below, primarily the adverse impact of the COVID-19 pandemic. Gross sales of VOIs were reduced by$56.9 million and$55.7 million during the years endedDecember 31, 2020 and 2019, respectively, for the provision for loan losses. The provision for loan losses varies based on the amount of financed, non-fee based sales during the period and changes in our estimates regarding the performance of future notes receivable. Our provision for loan losses as a percentage of gross sales of VOIs was 25% and 18% during the years endedDecember 31, 2020 and 2019, respectively. The percentage of our sales which were realized in cash within 30 days from sale was 42% during the years endedDecember 31, 2020 and 2019. The increase in the provision for loan losses during the year endedDecember 31, 2020 as compared to 2019 was primarily due to an increase in defaults experienced during the 2020 year and the increased defaults expected to result based on the COVID-19 pandemic. We believe that the COVID-19 pandemic will continue to have an impact on the collectibilty of our VOI notes receivable. Accordingly, the estimate of defaults for the 2021 year was increased by approximately$6 million , after consideration of historical experience, forbearance requests received from customers, and other factors, including, but not limited to, the seasoning of the notes receivable and FICO scores of the customers. The impact of the COVID-19 pandemic on default and delinquency rates is rapidly changing and highly uncertain. InMarch 2020 , we began receiving requests from borrowers requesting modifications of their VOI notes receivable due to financial hardship resulting from the economic impacts of the COVID-19 pandemic. Hardship requests declined inJune 2020 and the program was discontinued onJune 30, 2020 . Prior to discontinuing the program, approximately 4.1% of our portfolio was granted up to a three-month deferral or extension of payments, approximately 86% of which as ofDecember 31, 2020 had resumed payments under the newly modified terms. In addition to the COVID-19 pandemic, the provision for loan losses continues to be impacted by defaults which we believe are attributable to the receipt of letters from third parties and attorneys who purport to represent certain VOI owners and who have encouraged such owners to become delinquent and ultimately default on their obligations. Defaults associated with such letters during the year endedDecember 31, 2020 remained consistent with 2019. See Note 12: Commitments and Contingencies to our consolidated financial statements included in Item 8 of this report for additional information regarding such letters and actions we have taken in connection with such letters. The impact of the COVID-19 pandemic and the continued impact of actions taken by timeshare exit firms are highly uncertain and there is no assurance that our steps taken to mitigate the impact of the pandemic or actions taken by timeshare exit firms will be successful. As a result, actual defaults may differ from our estimates and the allowance for loan losses may not prove to be adequate. In addition to the factors described below impacting system-wide sales of VOIs, sales of VOIs are also impacted by the number of system-wide sales of VOIs sold on behalf of third parties on a commission basis, which are not included in sales of VOIs.
The average annual default rates and delinquency rates (more than 30 days past due) on our VOI notes receivable were as follows:
Year Ended December 31, 2020 2019 Average annual default rates (1) 9.79% 8.73% As of December 31, 2020 2019 Delinquency rates (1) 3.26% 3.62% (1)The Average Default Rates in the table above includes VOIs which have been defaulted but had not yet charged off due to the provisions of certain of our receivable-backed notes payable transactions, as well as certain third-party and attorney represented cease and desist loans over 127 days delinquent. Accordingly, these have been removed from the Delinquency Rates above.
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System-wide sales of VOIs. System-wide sales of VOIs were$367.0 million and$619.1 million during the years endedDecember 31, 2020 and 2019, respectively. System-wide sales of VOIs depend on the number of guests who attend a timeshare sale presentation, with each such guest counted as a "tour", that we can potentially convert into a sale of VOI. The number of guest tours is driven by the number of existing owner guests we have staying at a resort with a sales center and the number of new guest arrivals that agree to attend a sales presentation. As a result of COVID-19 pandemic, the number of guests and owners willing to travel decreased significantly, which lowered the number of tours completed. Further, the temporary closure of all marketing operations and VOI sales centers as a result of the COVID-19 pandemic and other adverse impacts of the pandemic is expected to continue to significantly impact system-wide sales of VOIs in the near-term and possibly longer. The ultimate impact, including the extent and duration of the impact, cannot be predicted at this time. Included in system-wide sales are Fee-Based Sales, JIT Sales, Secondary Market Sales and developed VOI sales. Sales by category are tracked based on which deeded VOI is conveyed in each transaction. The individual VOIs sold is based on several factors, including the needs of fee-based clients, our debt service requirements and default resale requirements under term securitizations and similar transactions. These factors and business initiatives contribute to fluctuations in the amount of sales by category from period to period. Fee-Based Sales comprised 37% and 50% of system-wide sales of VOIs during the year endedDecember 31, 2020 and 2019, respectively. While we intend to remain flexible with respect to our sales of the different categories of our VOI inventory in the future based on economic conditions, business initiatives and other considerations, we currently expect that our percentage of fee-based sales will continue to decrease over time as we increase efforts to generate our developed VOI sales and secondary market VOI sales. Actual trends may differ from current expectations. The following table sets forth certain information for system-wide sales of VOIs for 2020 and 2019: For the Year Ended December 31, 2020 2019 % Change Number of sales centers open at period-end (1) 24 26
(8)
Number of active sales arrangements with ? third-party clients at period-end 15 15
-
Total number of VOI sales transactions 22,188 40,703
(45)
Average sales price per transaction
8
Number of total guest tours 120,801 235,842
(49)
Sale-to-tour conversion ratio- total marketing guests 18.4% 17.3%
6
Number of new guest tours 59,469 142,130
(58)
Sale-to-tour conversion ratio- new marketing guests 14.6% 14.1%
4
Percentage of sales to existing owners 63.6% 54.5%
17
Average sales volume per guest$ 3,046 $ 2,642
15
(1)Due to the COVID-19 pandemic in 2020, two sales centers were consolidated and one has not reopened.
Cost of VOIs Sold. During the years endedDecember 31, 2020 and 2019, cost of VOIs sold was$13.6 million and$21.8 million , respectively, and represented 8% and 9%, respectively, of sales of VOIs. Cost of VOIs sold as a percentage of sales of VOIs varies between periods based on the relative costs of the specific VOIs sold in each period and the size of the point packages of the VOIs sold (due to offered volume discounts, including consideration of cumulative sales to existing owners). Additionally, the effect of changes in estimates under the relative sales value method, including estimates of sales, future defaults, upgrades and incremental revenue from the resale of repossessed VOI inventory, are reflected on a retrospective basis in the period the change occurs. Therefore, cost of sales is typically favorably impacted in periods where a significant amount of Secondary Market VOI inventory is acquired or actual defaults and equity trades are higher than anticipated and the resulting change in estimate is recognized. Cost of VOIs sold as a percentage of sales of VOIs decreased during the year endedDecember 31, 2020 , as compared to 2019, primarily due to the impact of anticipated higher future defaults partially offset by lower cost secondary market purchases.
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Fee-Based Sales Commission Revenue. During the years endedDecember 31, 2020 and 2019, we sold$136.1 million and$308.0 million , respectively, of third-party VOI inventory under commission arrangements and earned sales and marketing commissions of$90.0 million and$207.8 million , respectively, in connection with those sales. The decreases in sales of third-party developer inventory on a commission basis during 2020 was due primarily to the temporary closure of VOI sales centers as a result of the COVID-19 pandemic and other factors described above. We earned an average sales and marketing commission of 66% and 67% during the years endedDecember 31, 2020 and 2019, respectively, which is net of a reserve for commission refunds in connection with early defaults and cancellations pursuant to the terms of certain of our fee-based service arrangements. The decrease in sales and marketing commissions as a percentage of fee-based sales for the year endedDecember 31, 2020 as compared to 2019 was primarily related to an increase in our reserve for cancellations coupled with the decrease in fee-based sales described above. Financing Revenue, Net of Financing Expense - Sales of VOIs. Interest income on VOIs notes receivable was$77.5 million and$80.0 million during the years endedDecember 31, 2020 and 2019, respectively, which was partially offset by interest expense on receivable backed debt of$17.0 million and$20.5 million , respectively. The increase in finance revenue, net of finance expense during 2020 as compared to 2019 is primarily due to lower outstanding receivable-backed debt balances and a lower weighted-average cost of borrowings attributable to the lower interest rates in 2020 partially offset by lower notes receivable balances as a result of lower VOI sales due to the COVID-19 pandemic and other factors described above. Revenue from mortgage servicing during the years endedDecember 31, 2020 and 2019 of$5.9 million and$6.2 million , respectively, are included in financing revenue, net of mortgage servicing expenses of$4.6 million and$5.3 million , respectively. Other Fee-Based Services - Title Operations, net. During the years endedDecember 31, 2020 and 2019, revenue from our title operations was$7.6 million and$14.2 million , respectively, which was partially offset by expenses directly related to our title operations of$3.8 million and$7.0 million , respectively. Resort title fee revenue varies based on VOI sales volumes as well as the relative title costs in the jurisdictions where the inventory being sold is located. The decrease in 2020 is due to lower VOI sales as a result of the COVID-19 pandemic and other factors described above. Net Carrying Cost of VOI Inventory. The carrying cost of our inventory was$40.8 million and$35.6 million during the years endedDecember 31, 2020 and 2019, respectively, which was partially offset by rental and sampler revenue of$6.2 million and$11.8 million , respectively. The increase in net carrying costs of VOI inventory was primarily related to decreased rentals of developer inventory and decreased sampler stays due to, among other things, reduced travel associated with the COVID-19 pandemic as well as increased maintenance fees and developer subsidies associated with the increase in VOI inventory. In certain circumstances, we offset marketing costs by using inventory for marketing guest stays. Selling and Marketing Expenses. Selling and marketing expenses were$217.4 million and$321.2 million during the years endedDecember 31, 2020 and 2019, respectively. As a percentage of system-wide sales of VOIs, selling and marketing expenses were 59% and 52% during the years endedDecember 31, 2020 and 2019. The increase in selling and marketing expenses as a percentage of system-wide sales of VOIs during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , is primarily attributable to certain fixed costs inherent in Bluegreen's sales and marketing operations and the costs of maintaining certain sales and marketing associates on furlough despite the temporary closure of our VOI sales sites and marketing operations in connection with the COVID-19 pandemic as discussed above. During the year endedDecember 31, 2020 , we incurred$3.2 million in severance and$13.6 million of payroll and benefits expenses relating to employees on temporary furlough or reduced work hours as a result of the impact of the COVID-19 pandemic. In addition, since reopening activities commenced, we incurred costs associated with the reopening of 88 Bass Pro andCabela's stores that were open prior to the COVID-19 pandemic and the commencement of marketing operations at 10 additionalCabela's stores. We utilize these stores to sell mini-vacation packages to customers for future travel which require the customers to attend a timeshare presentation. During 2020 we incurred costs associated with redesigning our sales and marketing platform including updating our sales offices, refreshing our marketing collateral and adding new sales and marketing senior leadership positions. Further, we have invested in various local and national marketing programs to attract new customers. These programs may not be successful or generate a sufficient number of prospects to offset the program costs incurred. 61
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The following table sets forth certain new customer marketing information, excluding sampler and other returning owner vacation packages, for 2020 and 2019 For the Year Ended December 31, 2020 2019 % Change Number of Bass Pro andCabela's marketing ?locations at period-end 98 83
18
Number of vacation packages outstanding, ? beginning of the period (1) 169,294 163,100
4
Number of vacation packages sold 131,970 205,161
(36)
Number of vacation packages outstanding, ? end of the period (1) 121,915 169,294
(28)
% of Bass Pro vacation packages at period end 53% 43%
23
% ofCabela's vacation packages at period end 15% 3%
400
% of Choice Hotel vacation packages at period end 20% 29%
(31)
% of Other vacation packages at period end 12% 25%
(52)
(1)Excludes vacation packages sold to customers more than one year prior to the period presented and vacation packages sold to customers who had already toured but purchased an additional vacation package. During 2020, we eliminated certain of our lower performing mini-vacation programs, including a lead generation operation at various malls. While the elimination of this program did result in lower sales of mini-vacation packages in 2020 and in the short-term, we believe our expansion intoCabela's and other programs will make up for the lost mini-vacation packages in the future. Additionally, package sales generated through our Choice call transfer program declined 50% compared to 2019, reflecting lower occupancy throughout Choice's system. Our agreement with Bass Pro previously provided for the payment of a variable commission upon the sale of a VOI to a marketing prospect obtained through the Bass Pro marketing channels. As previously disclosed, duringJune 2019 , we entered into a settlement agreement and amended marketing agreement with Bass Pro. Pursuant to the settlement agreement and amended marketing arrangement with Bass Pro the settlement payment and a portion of the ongoing annual marketing fees are fixed costs and/or are subject to annual minimums regardless of the volume of VOI sales produced from the resulting marketing prospects generated from the amended agreement. If our marketing operations pursuant to the amended agreement with Bass Pro do not generate a sufficient number of prospects and leads or is terminated or limited, we may not be able to successfully market and sell our products and services at anticipated levels or at levels required in order to offset the costs associated with our marketing efforts. In addition, the amended arrangement with Bass Pro has resulted in an increase in our marketing costs as a percentage of sales from the program, based on increases in program fixed costs and anticipated VOI sales volumes from this marketing channel. In light of the decrease in sales due to the COVID-19 pandemic, the increase in cost of this marketing program has adversely impacted our results of operations and cash flow and may continue to have an adverse impact if sales continue to be below expected levels. See Note 12: Commitments and Contingencies to our consolidated financial statements included in Item 8 of this report for additional information regarding the terms of the Bass Pro settlement and amended marketing agreement.
In addition to vacation packages sold we also sell to new prospects, to
customers packages who already toured and indicated they would tour again. As of
General and Administrative Expenses - Sales and Marketing Operations. General and administrative expenses, representing expenses directly attributable to sales and marketing operations, were$27.3 million and$70.3 million during the years endedDecember 31, 2020 and 2019, respectively. As a percentage of system-wide sales of VOIs, general and administrative expenses directly attributable to sales and marketing operations were 7% and 11% during the years endedDecember 31, 2020 and 2019, respectively. Included in general and administrative expenses attributable to sales and marketing operations for the year endedDecember 31, 2019 was approximately$39.1 million related to the settlement of the dispute with Bass Pro inJune 2019 . Net of theJune 2019 Bass Pro settlement, general and administrative expenses attributable to sales and marketing operations decreased during the year ended
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December 31, 2020 compared to the year endedDecember 31, 2019 primarily as a result of lower branding, licensing, and marketing fees forBluegreen/Big Cedar Vacations as a result of decreased sales of VOIs described above.
Resort Operations and Club Management
For the Years Ended December 31, 2020 2019 (dollars in thousands) Resort operations and club management revenue$ 168,560 $ 174,887 Resort operations and club management expense (105,320)
(122,428)
Operating profit - resort operations ? and club management 63,240 38% 52,459 30% Add: Depreciation and amortization 796
1,294
Add: Severance 1,369 238 Add: Loss on assets held for sale 30
5,887
Adjusted EBITDA - resort operations ? and club management $ 65,435
Resort Operations and Club Management Revenue. Resort operations and club management revenue decreased 4% during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . Cost reimbursement revenue, which consists of payroll and other expenses which we incur and pass to the HOAs to operate, was flat during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 reflecting the temporary closure of many resorts related to the COVID-19 pandemic, as described above. Net of cost reimbursement revenue, resort operations and club management revenues decreased 6% during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 primarily as a result of decreases in revenues from our Traveler Plus program, other owner programs, resort retail operations and third-party rental commissions as a result of lower activity due to the COVID-19 pandemic. Our resort network includes 68 Club andClub Associate Resorts as of bothDecember 31, 2020 andDecember 31, 2019 . We managed 49 resort properties as of bothDecember 31, 2020 andDecember 31, 2019 . Resort Operations and Club Management Expense. During 2020, resort operations and club management expense decreased 14% compared to 2019. The decrease was primarily due to steps taken to reduce costs in the first quarter of 2020 in addition to lower costs related to the Traveler Plus program, other owner programs and resort retail operations in 2020 as compared to 2019, in each case, as a result of or in response to the COVID-19 pandemic. Additionally, inDecember 2019 we conveyed the ski and golf operations and related property at one of our resorts to the HOA, which resulted in a non-cash loss on the disposal of approximately$5.6 million . Corporate and Other For the Years Ended ?December 31, 2020 2019 (in thousands) General and administrative expenses - corporate ? and other$ (68,165) $ (81,128) Other (expense) income, net (370) 1,909 Franchise taxes 169 193 Loss (gain) on assets held for sale 275 (2,289) Add: Depreciation and amortization 8,915 6,702 Add: Severance and other 3,845 4,613 Adjusted EBITDA - Corporate and other$ (55,331) $ (70,000)
General and Administrative Expenses - Corporate and Other. General and
administrative expenses directly attributable to corporate overhead were
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and 2019, respectively. The decrease was primarily due to a$7.1 million employee retention credit earned in 2020 under the CARES Act ($2.2 million of which was earned on severance) and an overall$7.7 million in reduction in payroll expense due to lower headcount as a result of steps taken to reduce costs in the first quarter. These decreases were partially offset by$1.9 million in severance cost for corporate employees during the year endedDecember 31, 2020 ($1.2 million was due to severance related to steps taken to reduce costs in the first quarter due to the COVID-19 pandemic) and a$3.3 million special bonus paid to all non-executive employees during 2020. Other (Expense) Income, net. Other (expense) income, net was($0.4) million and$1.9 million during the years endedDecember 31, 2020 and 2019, respectively. This decrease was primarily related to a land sale duringJune 2019 resulting in a gain of$2.0 million , with no such transaction in 2020. Interest Expense Interest expense not related to receivable-backed debt was$15.0 million and$19.0 million during the years endedDecember 31, 2020 and 2019, respectively. The decrease in interest expense during the year endedDecember 31, 2020 was primarily due to a lower weighted-average cost of borrowing, partially offset by higher outstanding debt balances as compared to the year endedDecember 31, 2019 . Provision for Income Taxes Provision for income taxes was$3.2 million and$12.1 million during the years endedDecember 31, 2020 and 2019, respectively. Our effective income tax rate was approximately 28% and 26% for the years endedDecember 31, 2020 and 2019, respectively. Adjusted EBITDA Attributable to Non-Controlling Interest inBluegreen/Big Cedar Vacations . We include in our consolidated financial statements the results of operations and financial condition ofBluegreen/Big Cedar Vacations , our 51%-owned subsidiary. The non-controlling interest in Adjusted EBITDA ofBluegreen/Big Cedar Vacations is the portion ofBluegreen/Big Cedar Vacations' Adjusted EBITDA that is attributable toBig Cedar LLC , which holds the remaining 49% interest inBluegreen/Big Cedar Vacations . Adjusted EBITDA attributable to the non-controlling interest inBluegreen/Big Cedar Vacations was$7.6 million and$11.7 million during the years endedDecember 31, 2020 and 2019, respectively. The decrease in Adjusted EBITDA attributable to the non-controlling interest inBluegreen/Big Cedar Vacations for the year endedDecember 31, 2020 was primarily related to the impact of the COVID-19 pandemic, including the temporary closure of our VOI sales centers in connection with the COVID-19 pandemic as described above.
Changes in Financial Condition
The following table summarizes our cash flows for the years ended
For the Years Ended
2020
2019
Net cash provided by operating activities $ 78,552$ 70,558 Net cash provided by (used in) investing activities 72,486
(19,595)
Net cash used in financing activities (151,288)
(84,451)
Net decrease in cash and cash equivalents $ (250)
Cash Flows from Operating Activities
The increase of
?a
?
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?
?lower payments of interest on debt of
?decreases in cash proceeds from sales and marketing activities due to the initial and continuing impact of the COVID-19 pandemic, on our operations.
Cash Flows from Investing Activities
Cash provided by investing activities increased$92.1 million during the year endedDecember 31, 2020 compared to 2019, reflecting theAugust 2020 repayment in full by BVH of the$80.0 million loan we previously made to BVH (as described in Note 16 to the Consolidated Financial Statements) and decreased expenditures for property and equipment in 2020, partially offset by$4.9 million in net proceeds received for the sale of land during 2019.
Cash Flows from Financing Activities
Cash used in financing activities increased$66.8 million during the year endedDecember 31, 2020 compared to 2019 due to a$10.9 million repurchase of our common stock in a private transaction during 2020, increased net repayments on lines-of-credit and notes payable and receivable-backed notes payable during 2020 compared to 2019 and (despite the suspension of regular quarterly cash dividends during the second quarter of 2020) increased dividend payments of$48.3 million as a result of a special cash dividend of$1.19 per share of our common stock paid in 2020. BVH, which holds approximately 93% of our common stock, utilized its proceeds from this special cash dividend to repay the$80.0 million loan we previously made to BVH, as described above. The increases in cash used in financing activities during 2020 compared to 2019 were partially offset by a$2.5 million decrease in distributions paid in respect of the non-controlling interest inBluegreen/Big Cedar Vacations in 2020 as compared to 2019. All amounts borrowed on our line-of credit in connection with the COVID-19 pandemic has been repaid as ofDecember 31, 2020 .
For additional information on the availability of cash from existing credit facilities, as well as repayment obligations, see "Liquidity and Capital Resources" below.
Seasonality We have historically experienced, and expect to continue to experience, seasonal fluctuations in our revenues and results of operations. This seasonality has resulted, and may continue to result, in fluctuations in our quarterly operating results. Due to consumer travel patterns, we typically have seen more tours and experience higher VOI sales during the second and third quarters. However, due to the impact of the COVID-19 pandemic, including the temporary closures of our marketing operations and VOI sales centers as described above, we experienced significantly decreased sales of VOIs in the second, third and fourth quarters of 2020 as compared to prior years and currently expect such adverse impact to continue in the near-term and possibly longer.
Liquidity and Capital Resources
Our primary sources of funds from internal operations are: (i) cash sales; (ii) down payments on VOI sales which are financed; (iii) proceeds from the sale of, or borrowings collateralized by, notes receivable; (iv) cash from finance operations, including mortgage servicing fees and principal and interest payments received on the purchase money mortgage loans arising from sales of VOIs; and (v) net cash generated from sales and marketing fee-based services and other fee-based services, including resort management operations. While the vacation ownership business has historically been capital intensive and we have in the past and may in the future pursue transactions or activities which may require significant capital investment, we have sought to focus on the generation of "free cash flow" (defined as cash flow from operating activities, less capital expenditures) by: (i) incentivizing our sales associates and creating programs with third-party credit card companies to generate a higher percentage of sales in cash; (ii) maintaining sales volumes that focus on efficient marketing channels; (iii) limiting our capital and inventory expenditures; (iv) utilizing sales and marketing, mortgage servicing, resort management services, 65
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title and construction expertise to pursue fee-based-service business relationships that generally require minimal up-front capital investment and have the potential to produce incremental cash flows; and (v) by selling VOIs obtained through secondary market or JIT arrangements. We consider free cash flow to be a measure of cash generated by operating activities that can be used for future investing and financing activities, however, it is not a guarantee that we will use excess cash flows for such purposes. While we intend to remain flexible with our sales of different categories of VOI inventory in the future, we currently expect that our mix of fee-based inventory will decrease over time. We have$20.1 million of required contractual obligations due to be paid within one year, as well as two financing facilities with advance periods that will expire in 2021. While there is no assurance that we will be successful, we intend to seek to renew or extend our debt and extend our advance periods on certain facilities. The ability to sell and/or borrow against notes receivable from VOI buyers has been critical to our continued liquidity. A financed VOI buyer is generally only required to pay a minimum of 10% to 20% of the purchase price in cash at the time of sale; however, selling, marketing and administrative expenses attributable to the sale are primarily cash expenses that generally exceed a buyer's minimum required down payment. Accordingly, having financing facilities available for the hypothecation, sale or transfer of our VOI notes receivable has been critical to our ability to meet our short and long-term cash needs. We have attempted to maintain a number of diverse financing facilities. Historically, we have relied on our ability to sell receivables in the term securitization market in order to generate liquidity and create capacity in our receivable facilities. We have historically financed a majority of our sales of VOIs, and accordingly, are subject to the risk of defaults by our customers. While we do not believe that the full impact of COVID - 19 is reflected in our default or delinquency rates as ofDecember 31, 2020 , we believe that the COVID-19 pandemic will continue to have an impact on the collectbility of our VOI notes receivable. Further, the COVID-19 pandemic has resulted in instability and volatility in the financial markets. As described above, our ability to borrow against or sell our VOI notes receivable has historically been a critical factor in our liquidity. If we are unable to renew credit facilities or obtain new credit facilities, our business, results of operations, liquidity, or financial condition would be materially, adversely impacted. In connection with our capital-light business activities, we have entered into agreements with third-party developers that allow us to buy VOI inventory, typically on a non-committed basis, prior to when we intend to sell such VOIs, although there is no assurance that these third party developers will be in a position to deliver that inventory in the future. Our capital-light business strategy also includes secondary market sales, pursuant to which we enter into secondary market arrangements with certain HOAs and others on a non-committed basis, which allows us to acquire VOIs generally at a significant discount, as such VOIs are typically obtained by the HOAs through foreclosure in connection with maintenance fee defaults. Acquisition of JIT and secondary market inventory in 2021 is expected to range between$10.0 million to$15.0 million . During 2019, we paid quarterly cash dividends on our common stock of$0.17 per share during the first, second, and third quarters of 2019 and$0.13 per share during the fourth quarter of 2019, which totaled$47.6 million in the aggregate. During the first quarter of 2020, we paid a cash dividend of$0.13 per share on our common stock which totaled$9.7 million . OnApril 22, 2020 , our board of directors suspended regular quarterly cash dividends on our common stock due to the impact of the COVID-19 pandemic. During August, 2020, we paid a special cash dividend of$1.19 per share on our common stock, or$86.3 million in the aggregate. There is no assurance that regular or any other special cash dividends will be paid in the future. InApril 2015 , one of our wholly owned subsidiaries provided an$80.0 million loan to BVH. BVH currently owns approximately 93% or our outstanding common stock. Amounts outstanding bore interest at a rate of 6% per annum untilApril 17, 2020 , at which time the interest rate was reduced to 4% per annum. Interest only payments were required on a quarterly basis, with all outstanding amounts becoming due and payable at maturity. During the year endedDecember 31, 2020 and 2019, we recognized$2.5 million and$4.8 million , respectively, of interest income on the loan to BVH. BVH used its proceeds from the special cash dividend paid duringAugust 2020 , described above, to repay the loan in full. 66
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InOctober 2020 , we completed the 2020-A Term Securitization, a private offering and sale of approximately$131.0 million of investment-grade, VOI receivable backed notes (the "Notes"), including approximately$48.6 million of Class A Notes, approximately$47.9 million of ClassB Notes and approximately$34.5 million of ClassC Notes with interest rates of 1.55%, 2.49%, and 4.22%, respectively, which blends to an overall interest rate of approximately 2.60%. The gross advance rate for this transaction was 88.0%. The Notes mature inFebruary 2036 .KeyBanc Capital Markets Inc. ("KeyCM") andBarclays Capital Inc. acted as co-lead managers and were the initial purchasers of the Notes. KeyCM also acted as structuring agent for the transaction. Subject to the performance of the collateral, we will receive any excess cash flows generated by the receivables transferred under the 2020-A Term Securitization (excess meaning after payments of customary fees, interest, and principal under the 2020-A Term Securitization) on a pro-rata basis as borrowers make payments on their VOI loans. While ownership of the VOI receivables included in the 2020-A Term Securitization is transferred and sold for legal purposes, the transfer of these receivables is accounted for as a secured borrowing for financial accounting purposes. Accordingly, no gain or loss was recognized as a result of this transaction. InOctober 2020 , we repaid in full the notes payable issued in connection with the 2012 Term Securitization. Accordingly, the related unamortized debt issuance costs of$0.1 million were written off during the fourth quarter of 2020. Our level of debt and debt service requirements have several important effects on our operations, including that: (i) significant debt service cash requirements reduce the funds available for operations and future business opportunities and increase our vulnerability to adverse economic and industry conditions, as well as conditions in the credit markets, generally; (ii) our leverage position increases our vulnerability to economic and competitive pressures; (iii) the financial covenants and other restrictions contained in indentures, credit agreements and other agreements relating to our indebtedness require us to meet certain financial tests and may restrict our ability to, among other things, pay dividends, borrow additional funds, dispose of assets or make investments; and (iv) our leverage position may limit funds available for acquisitions, working capital, capital expenditures, dividends and other general corporate purposes. Certain of our competitors operate on a less leveraged basis and have greater operating and financial flexibility than we do.
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Credit Facilities for Receivables with Future Availability
We maintain various credit facilities with financial institutions which allow us to borrow against or sell our VOI notes receivable. As ofDecember 31, 2020 , we had the following credit facilities with future availability, all of which are subject to revolving availability terms during the advance period and therefore provide for additional availability as the facility is paid down, subject in each case to compliance with covenants, eligible collateral and applicable terms and conditions during the advance period (dollars in thousands): Advance Period Outstanding ?Expiration; Borrowing Borrowing ?Balance Availability ?Borrowing Rate; ?Limit ?as of ?as of ?Maturity ?Rate as of ?as of ?December 31, ? December 31, ?as of ?December 31, ?December 31, 2020 ?2020 ?2020 ?December 31, 2020 ?2020 Prime Rate - 0.10%; floor Liberty Bank June 2021; of 3.40%; Facility $ 40,000$ 12,316 $ 27,684 ?June 2024 3.40% 30 day LIBOR+2.25% to 2.75%; ?floor of 3.00% to NBA Receivables September 2023; 3.50%; Facility 70,000 31,862 38,138 ?March 2028 ? 3.32% (1) 30 day LIBOR+2.75% Pacific Western September 2021; to 3.00%; Facility 40,000 8,623 31,377 ?September 2024 3.15% KeyBank/DZ 30 day LIBOR Purchase December 2022; or CP +2.25% Facility 80,000 - 80,000 ?December 2024 (2) Quorum Purchase December 2022; Facility 50,000 29,788 20,212 ?December 2034 (3) $ 280,000$ 82,589 $ 197,411 (1)As described in further detail below, borrowings prior toSeptember 25, 2020 accrue interest at a rate equal to one month LIBOR plus 2.75% (with an interest rate floor of 3.50%), provided that the rate shall decrease to one-month LIBOR plus 2.25% (with an interest rate floor of 3.00%) on the then remaining balance of borrowing prior toSeptember 25, 2020 if new advances subsequent toSeptember 25, 2020 are at least$25.0 million byJune 30, 2021 . Borrowings afterSeptember 25, 2020 accrue interest at one-month LIBOR plus 2.25% (with an interest rate floor of 3.00%). (2)Borrowings accrue interest at a rate equal to either LIBOR, a "Cost of Funds" rate or commercial paper ("CP") rates plus 2.25%. As described in further detail below, the interest rate will increase to the applicable rate plus 3.25% upon the expiration of the advance period. (3)Of the amounts outstanding under the Quorum Purchase Facility atDecember 31, 2020 ,$2.2 million accrues interest at a rate per annum of 4.75%,$15.3 million accrues interest at a fixed rate of 4.95%, and$12.3 million accrues interest at a fixed rate of 5.10%. Liberty Bank Facility. Since 2008, we have maintained a revolving VOI notes receivable hypothecation facility (the "Liberty Bank Facility") with Liberty Bank which provides for advances on eligible receivables pledged under the Liberty Bank Facility, subject to specified terms and conditions, during the revolving credit period. OnJune 25, 2020 , we amended the Liberty Bank Facility to extend the revolving credit period fromJune 2020 toJune 2021 , and the maturity fromMarch 2023 toJune 2024 . In addition, the amendment decreased the advance rate with respect to Qualified Timeshare Loans from 85% to 80% of the unpaid principal balance of the Qualified Timeshare Loans. The advance rate is 60% of the unpaid principal balance of Non-Conforming Qualified Timeshare Loans. The amendment also reduced the maximum permitted outstanding borrowings from$50.0 million to$40.0 million , subject to the terms of the facility, and effectiveJuly 1, 2020 , decreased the interest rate to the Prime Rate minus 0.10% with a floor of 3.40% from the Prime Rate with a floor of 4.00%. In addition, recourse to us under the amended facility was reduced to$10.0 million , with certain exceptions set forth in the facility. Subject to the terms of the facility, principal and interest due under the Liberty Bank Facility are paid as cash is collected on the pledged receivables, with the remaining balance being due by maturity.
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NBA Receivables Facility.Bluegreen/Big Cedar Vacations has a revolving VOI hypothecation facility (the "NBA Receivables Facility") withNational Bank of Arizona ("NBA") which was amended and restated onSeptember 25, 2020 . The Amended and Restated NBA Receivables Facility extended the revolving advance period fromSeptember 2020 toSeptember 2023 and the maturity date fromMarch 2025 toMarch 2028 . In addition, the interest rate on all new advances made under the facility will be one month LIBOR plus 2.25% (with an interest rate floor of 3.00%). Further, if new advances of at least$25.0 million are made byJune 30, 2021 , the interest rate on borrowings under the facility atSeptember 25, 2020 , to the extent then remaining outstanding, will be reduced from the current rate of one month LIBOR plus 2.75% (with an interest rate floor of 3.50%) to one month LIBOR plus 2.25% (with an interest rate floor of 3.00%). The Amended and Restated NBA Receivables Facility provides for advances at a rate of 80% on eligible receivables pledged under the facility (decreased from the prior rate of 85%), subject to eligible collateral and specified terms and conditions, during the revolving credit period. The maximum borrowings allowed under the facility remains at$70.0 million . In addition, recourse to Bluegreen/Big Cedar under the amended facility was reduced to$19.9 million as ofDecember 31, 2020 and will be reduced by$1.3 million per month until it reaches a floor of$10.0 million . Subject to the terms of the facility, principal and interest payments received on pledged receivables are applied to principal and interest due under the facility, with the remaining outstanding balance being due by maturity. Pacific Western Facility. We have a revolving VOI notes receivable hypothecation facility (the "Pacific Western Facility") withPacific Western Bank , which provides for advances on eligible VOI notes receivable pledged under the facility, subject to specified terms and conditions, during a revolving credit period. Maximum outstanding borrowings under the Pacific Western Facility are$40.0 million subject to eligible collateral and customary terms and conditions. The revolving advance period expires inSeptember 2021 and the Pacific Western Facility matures inSeptember 2024 (in each case, subject to an additional 12-month extension at the option ofPacific Western Bank ). Eligible "A" VOI notes receivable that meet certain eligibility and FICO score requirements, which we believe are typically consistent with loans originated under our current credit underwriting standards, are subject to an 85% advance rate. The Pacific Western Facility also allows for certain eligible "B" VOI notes receivable (which have less stringent FICO score requirements) to be funded at a 53% advance rate. Borrowings outstanding under the Pacific Western Facility accrue interest at an annual rate equal to 30-day LIBOR plus 3.00%; provided, however, that a portion of the borrowings, to the extent such borrowings are in excess of established debt minimums, will accrue interest at 30-day LIBOR plus 2.75%. Subject to the terms of the facility, principal repayments and interest on borrowings under the Pacific Western Facility are paid as cash is collected on the pledged VOI notes receivable, subject to future required decreases in the advance rates after the end of the revolving advance period, with the remaining outstanding balance being due by maturity. The facility has limited recourse not to exceed$10.0 million .KeyBank /DZ Purchase Facility. We have a VOI notes receivable purchase facility (the "KeyBank /DZ Purchase Facility") withDZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main ("DZ"), andKeyBank National Association ("KeyBank") which permits maximum outstanding financings of up to$80.0 million and provides for an advance rate of 80% with respect to VOI receivables securing amounts financed. TheKeyBank /DZ Purchase Facility's advance period will expire inDecember 2022 and will mature and all outstanding amounts will become due 24 months after the revolving advance period has expired, or earlier under certain circumstances set forth in the facility. Interest on amounts outstanding under the facility is tied to an applicable index rate of the LIBOR rate, in the case of amounts funded byKeyBank , and a cost of funds rate or commercial paper rates, in the case of amounts funded by or through DZ. The interest rate under the facility is the applicable index rate plus 2.25% (with an interest rate floor of 0.25%) until the expiration of the revolving advance period and thereafter will equal the applicable index rate plus 3.25% (with an interest rate index floor of 0.25%). Subject to the terms of the facility, we will receive the excess cash flows generated by the VOI notes receivable sold (excess meaning after payments of customary fees, interest and principal under the facility) until the expiration of the VOI notes receivable advance period, at which point all of the excess cash flow will be paid to the note holders until the outstanding balance is reduced to zero. While ownership of the VOI notes receivable included in the facility is transferred and sold for legal purposes, the transfer of these VOI notes receivable is accounted for as a secured borrowing for financial reporting purposes. The facility is nonrecourse.
Quorum Purchase Facility.
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to purchase eligible VOI notes receivable in an amount of up to an aggregate$50.0 million purchase price, subject to certain conditions precedent and other terms of the facility. OnDecember 18, 2020 , the Quorum Purchase Facility was amended to extend the advance period toDecember 2022 fromDecember 2020 and the maturity date toDecember 2034 fromDecember 2032 . The interest rate on each advance is set at the time of funding based on rates mutually agreed upon by the parties. Of the amounts outstanding under the Quorum Purchase Facility atDecember 31, 2020 ,$2.2 million accrues interest at a rate per annum of 4.75%,$15.3 million accrues interest at a fixed rate of 4.95%, and$12.3 million accrues interest at a fixed rate of 5.10%. The Quorum Purchase Facility provides for an 85% advance rate on eligible receivables sold under the facility, however Quorum can modify this advance rate on future purchases subject to the terms and conditions of the Quorum Purchase Facility. Eligibility requirements for VOI notes receivable sold include, among others, that the obligors under the VOI notes receivable sold be members of Quorum at the time of the note sale. Subject to performance of the collateral, we orBluegreen/Big Cedar Vacations , as applicable, will receive any excess cash flows generated by the VOI notes receivable transferred to Quorum under the facility (excess meaning after payment of customary fees, interest and principal under the facility) on a pro-rata basis as borrowers make payments on their VOI notes receivable. While ownership of the VOI notes receivable included in the Quorum Purchase Facility is transferred and sold for legal purposes, the transfer of these VOI notes receivable is accounted for as a secured borrowing for financial reporting purposes. The facility is nonrecourse.
Other Credit Facilities
Fifth Third Syndicated Line-of-Credit and Fifth Third Syndicated Term Loan. InDecember 2016 , we entered into a$100.0 million syndicated credit facility withFifth Third Bank , as administrative agent and lead arranger, and certain other bank participants as lenders. InOctober 2019 , we amended the facility and increased the facility to$225.0 million . The amended facility includes a$100.0 million term loan (the "Fifth Third Syndicated Term Loan") with quarterly amortization requirements and a$125.0 million revolving line of credit (the "Fifth Third Syndicated Line-of-Credit"). Borrowings under the amended facility generally bear interest at LIBOR plus 2.00% - 2.50% (with a LIBOR floor of 0.25%), depending on our leverage ratio, are collateralized by certain of our VOI inventory, sales center buildings, management fees, short-term receivables and cash flows from residual interests relating to certain term securitizations, and will mature inOctober 2024 . DuringMarch 2020 , in an effort to assure adequate liquidity for a sustained period given the effect and uncertainties associated with the COVID-19 pandemic, we drew down$60.0 million under our line-of credit which we have repaid as ofDecember 31, 2020 . As ofDecember 31, 2020 , outstanding borrowings under the facility totaled$123.8 million , including$93.8 million under the Fifth Third Syndicated Term Loan with an interest rate of 2.25%, and$30.0 million under the Fifth Third Syndicated Line of Credit with an interest rate of 2.25%.
We also have outstanding obligations under various credit facilities and securitizations that have no remaining future availability as the advance periods have expired.
Commitments
Our material commitments include the required payments due on receivable-backed debt, lines-of-credit and other notes payable, junior subordinated debentures, commitments to complete certain projects based on our sales contracts with customers, subsidy advances to certain HOAs, inventory purchase commitments under JIT arrangements and commitments under non-cancelable operating leases. 70
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The following table summarizes the contractual minimum principal and interest payments required on all of our outstanding debt, non-cancelable operating leases and inventory purchase commitments by period due date, as ofDecember 31, 2020 (in thousands): Payments Due by Period Unamortized ?Debt Contractual Less than 1 - 3 4 - 5 After 5 ? Issuance Obligations ?1 year ?Years ?Years ?Years ?Costs Total Receivable-backed notes payable $ - $ -$ 33,843 $ 366,484 $ (5,994) $ 394,333 Lines-of-credit and notes payable 12,200 24,953 102,500 - (1,267) 138,386 Jr. subordinated debentures (1) - - - 110,827 - 110,827 Noncancelable operating leases (2) 3,904 12,561 5,770 25,435 - 47,670 Bass Pro Settlement (3) 4,000 8,000 4,000 - - 16,000 Total contractual obligations 20,104 45,514 146,113 502,746 (7,261) 707,216 Interest Obligations (4) Receivable-backed notes payable 13,229 26,458 25,108 92,245 - 157,040 Lines-of-credit and notes payable 3,320 5,276 1,871 - - 10,467 Jr. subordinated debentures 5,615 11,229 11,229 56,836 - 84,909 Total contractual interest 22,164 42,963 38,208 149,081 - 252,416 Total contractual obligations$ 42,268 $ 88,477 $ 184,321 $ 651,827 $ (7,261) $ 959,632
(1)Amounts do not include purchase accounting adjustments for junior
subordinated debentures of
(2)Amounts represent the cash payment for leases and includes interest of
(3)Amounts represent the
(4)Assumes that the scheduled minimum principal payments are made in accordance with the table above and the interest rate on variable rate debt remains the same as the rate atDecember 31, 2020 .
In
In lieu of paying maintenance fees for unsold VOI inventory, we may enter into subsidy agreements with certain HOAs. During the years endedDecember 31, 2020 and 2019, we made payments related to such subsidies of$24.0 million and$24.9 million , respectively, which are included within cost of other fee-based services. As ofDecember 31, 2020 andDecember 31, 2019 , we had no accrued liabilities for such subsidies. We intend to use cash on hand and cash flow from operations, including cash received from the sale or pledge of VOI notes receivable, and cash received from new borrowings under existing or future credit facilities in order to satisfy the principal and interest payments required on contractual obligations. We believe that our existing cash, anticipated cash generated from operations, anticipated future permitted borrowings under existing or future credit facilities, and anticipated future sales of notes receivable under existing, future or replacement purchase facilities will be sufficient to meet our anticipated working capital, capital expenditure and debt service requirements, including the contractual payment of the obligations set forth above, for the foreseeable future, subject to the success of our ongoing business strategies, the ongoing availability of credit and the impact of the COVID-19 pandemic and success of the actions we have taken in response thereto. We will continue our efforts to renew, extend or replace any credit and receivables purchase facilities that have expired or that will expire in the near term. We may, in the future, also obtain additional credit facilities and may issue corporate debt or equity securities. Any debt incurred or issued may be secured or unsecured, bear interest at fixed or variable rates and may be subject to such terms as the lender may require and management believes acceptable. There can be no assurance that our 71
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efforts to renew or replace credit facilities or receivables purchase facilities which have expired or which are scheduled to expire in the near term will be successful or that sufficient funds will be available from operations or under existing, proposed or future revolving credit or other borrowing arrangements or receivables purchase facilities to meet our cash needs, including debt service obligations. To the extent we are unable to sell notes receivable or borrow under such facilities, our ability to satisfy our obligations would be materially adversely affected. Our receivables purchase facilities, credit facilities, indentures and other outstanding debt instruments include what we believe to be customary conditions to funding, eligibility requirements for collateral, cross-default and other acceleration provisions and certain financial and other affirmative and negative covenants, including, among others, limits on the incurrence of indebtedness, payment of dividends, investments in joint ventures and other restricted payments, the incurrence of liens and transactions with affiliates, as well as covenants concerning net worth, fixed charge coverage requirements, debt-to-equity ratios, portfolio performance requirements and cash balances, and events of default or termination. In the future, we may be required to seek waivers of such covenants, but may not be successful in obtaining waivers, and such covenants may limit our ability to raise funds, sell receivables or satisfy or refinance our obligations, or otherwise adversely affect our financial condition and results of operations, as well as our ability to pay dividends. DuringApril 2020 , our board of directors suspended regular quarterly cash dividends on our common stock due to the impact of the COVID-19 pandemic. While we paid a special dividend duringAugust 2020 , no regular or any other special cash dividends are currently anticipated. Our future operating performance and ability to meet our financial obligations will be subject to future economic conditions and to financial, business and other factors, many of which may be beyond our control. Pursuant to a settlement agreement we entered into with Bass Pro and its affiliates duringJune 2019 , we paid Bass Pro$20.0 million and agreed to make five annual payments to Bass Pro of$4.0 million , which commenced inJanuary 2020 . Additionally, in lieu of the previous commission arrangement, we agreed to pay Bass Pro a fixed annual fee of$70,000 for each Bass Pro andCabela's retail store that we are accessing (excluding sales at retail stores which are designated to provide tours toBluegreen/Big Cedar Vacations , or "Bluegreen/Big Cedar feeder stores"), plus$32.00 per net vacation package sold (less cancellations or refunds within 45 days of sale). We also agreed to contribute to theWonders of Wildlife Foundation $5.00 per net package sold (less certain cancellations and refunds within 45 days of sale), subject to an annual minimum of$700,000 . Subject to the terms and conditions of the settlement agreement, we are generally required to pay the fixed annual fee with respect to at least 59 Bass Pro retail stores and a minimum number ofCabela's retail stores that increases over time to a total of at least 60Cabela's retail stores by the end of 2021. During 2020, we paid$5.7 million for this fixed fee, which is included in selling, general and administrative expenses within our consolidated statement of operations and comprehensive income. Notwithstanding the foregoing, the minimum number of Bass Pro andCabela's retail stores for purposes of the fixed annual fee may be reduced under certain circumstances set forth in the agreement, including as a result of a reduction of traffic in the stores in excess of 25% year-over-year. InMarch 2020 as a result of the COVID-19 pandemic, we temporarily closed our retail marketing operations atBass Pro Shops andCabela's stores. Beginning inmid-May 2020 , we started the process of recommencing our sales and marketing operations and byDecember 31, 2020 , we had recommenced operating marketing kiosks at 88Bass Pro Shops andCabela's stores (out of a total of 89 stores prior to the closures) and commenced operating marketing kiosks at 10 newCabela's stores, for a total of 98Bass Pro Shops andCabela's stores.
Off-balance-sheet Arrangements
As of
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of commitments and contingencies. On an ongoing basis, we evaluate our estimates, including those that relate to the estimated future sales value of inventory; the recognition of revenue; our allowance for loan losses; the recovery of the carrying value of real estate inventories; the fair value of assets measured at, or
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compared to, fair value on a non-recurring basis such as assets held for sale, intangible assets and other long-lived assets; the estimate of contingent liabilities related to litigation and other claims and assessments; and deferred income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates if different assumptions and conditions were utilized. If actual results differ significantly from our estimates, our results of operations and financial condition could be materially, adversely impacted.
Revenue Recognition for Sales of VOIs
We generally offer qualified purchasers financing for up to 90% of the purchase price of VOIs. The typical financing provides for a term of ten years and a fixed interest rate, is fully amortizing in equal installments and may be prepaid without penalty. For sales of VOIs for which we provide financing, we have reduced the transaction price for expected loan losses, which we consider to be variable consideration. To the extent we determine that it is probable that a significant reversal of cumulative revenue recognized may occur, we record an estimate of variable consideration as a reduction to the transaction price of the sales of VOIs until the uncertainty associated with the variable consideration is resolved. Our estimate of variable consideration is based on the results of its static pool analysis, which relies on historical payment data for similar VOI notes receivable and tracks uncollectibles for each period's sales over the entire life of the VOI notes receivable. We also consider whether historical economic conditions are comparable to then current economic conditions, as well as variations in underwriting standards. Our policies regarding the estimation of variable consideration on our notes receivable are discussed in further detail under "Allowance for Loan Losses on VOI Notes Receivable" below.
Allowance for Loan Losses on VOI Notes Receivable
The allowance for loan losses is related to notes receivable generated in connection with financing our VOI sales. We hold large amounts of homogeneous VOI notes receivable and assess uncollectibility based on pools of receivables as there are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. In estimating future loan losses, we do not use a single primary indicator of credit quality but instead evaluate our VOI notes receivable based upon a static pool analysis that incorporates the aging of the respective receivables, default trends and prepayment rates by origination year, as well as the FICO scores of the borrowers.
Inventory and Cost of Sales
We carry our completed inventory at the lower of: (i) cost, including costs of improvements and amenities incurred subsequent to acquisition, capitalized interest, real estate taxes and other costs incurred during construction, or (ii) estimated fair market value, less costs to sell. We use the relative sales value method for establishing the cost of our VOI sales and relieving inventory, which requires us to make estimates subject to significant uncertainty. Under the relative sales value method required by timeshare accounting rules, cost of sales is calculated as a percentage of net sales using a cost-of-sales percentage based on the ratio of total estimated development costs to total estimated VOI revenue, including the estimated incremental revenue from the resale of VOI inventory repossessed, generally as a result of the default of the related receivable. Also, pursuant to timeshare accounting rules, we do not relieve inventory for VOI cost of sales related to anticipated loan losses. Accordingly, no adjustment is made when inventory is reacquired upon default of the related receivable. The effect of changes in estimates under the relative sales value method, including estimates of projected sales, future defaults, upgrades and incremental revenue from the resale of repossessed VOI inventory, are reflected on a retrospective basis in the period the change occurs.
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