2006 Annual Report

The following table summarizes the activity related to our
“Lodging senior loans” and “Lodging mezzanine and other loans”
notes receivable reserve for 2004, 2005 and 2006:
($ in millions) Notes Receivable Reserve
Year-end 2003 balance $130
Additions 3
Reversals (11)
Write-offs (44)
Transfers and other 14
Year-end 2004 balance 92
Additions 11
Reversals —
Write-offs (9)
Transfers and other 9
Year-end 2005 balance 103
Additions —
Reversals (5)
Write-offs (38)
Transfers and other 10
Year-end 2006 balance $ 70
Loans to Timeshare Owners
The weighted average interest rate for our “Loans to timeshare
owners” is 12.4 percent, and the interest rates associated with
these loans ranges to 19.5 percent. Interest income associated
with “Loans to timeshare owners” of $41 million, $38 million and
$23 million for 2006, 2005 and 2004, respectively, was reflected
in the accompanying Consolidated Statement of Income in the
“Timeshare sales and services” revenue caption. The recorded
investment in “Loans to timeshare owners” on nonaccrual status
at year-end 2006 and year-end 2005 totaled $67 million and
$49 million, respectively. As noted in the “New Accounting
Standards” caption of Footnote No. 1 “Summary of Significant
Accounting Policies,” we established the reserve for “Loans to
timeshare owners” notes receivable in 2006 in conjunction with
the adoption of SOP 04-2.
The following table summarizes the activity related to our
“Loans to timeshare owners” notes receivable reserve for 2006.
($ in millions) Notes Receivable Reserve
Year-end 2005 balance $ —
Establishment of reserve 25
Additions for current year sales 20
Write-offs (16)
Year-end 2006 balance $ 29
12 | ASSET SECURITIZATIONS
We periodically sell, without recourse, through special purpose
entities, notes receivable originated by our Timeshare segment in
connection with the sale of timeshare interval, fractional and
whole ownership products. We continue to service the notes and
transfer all proceeds collected to special purpose entities. We
retain servicing assets and other interests in the notes which are
accounted for as residual interests. The interests are limited to the
present value of cash available after paying financing expenses
and program fees, and absorbing credit losses. We have included
gains from the sales of timeshare notes receivable totaling
54 | MARRIOTT INTERNATIONAL, INC. 2006
$77 million in 2006 within the “Timeshare sales and services” revenue
caption in our Consolidated Statement of Income. Gains
from the sale of timeshare notes receivable of $69 million in 2005
and $64 million in 2004 are in the “Gains and other income” caption
in the accompanying Consolidated Statement of Income.
For additional information regarding the classification of gains
from the sale of timeshare notes receivable, see the “Basis of
Presentation” caption in Footnote No. 1,“Summary of Significant
Accounting Policies.”We had residual interests of $221 million and
$196 million, respectively, at year-end 2006 and year-end 2005
which are recorded in the accompanying Consolidated Balance
Sheet as other long-term receivables of $137 million and $125 million,
respectively, and other current assets of $84 million and
$71 million, respectively. In addition, in September 2006, we repurchased
notes receivable with a principal balance of $31 million
and in November 2006, sold those notes, along with $249 million
of additional notes in a $280 million note securitization.The gain
on the sale of these timeshare notes receivable is included in the
amount disclosed above.
At the date of sale and at the end of each reporting period, we
estimate the fair value of residual interests, excluding servicing
assets, using a discounted cash flow model. These transactions
may utilize interest rate swaps to protect the net interest margin
associated with the beneficial interest. We report in income
changes in the fair value of residual interests, excluding servicing
assets, as they are considered trading securities under the provisions
of FAS No. 115,“Accounting for Certain Investments in Debt
and Equity Securities.” During 2006, 2005 and 2004, we recorded
trading gains of $19 million, $2 million and $3 million, respectively.
We used the following key assumptions to measure the fair
value of the residual interests, excluding servicing assets, at the
date of sale during 2006, 2005, and 2004: average discount rate of
9.22 percent, 8.56 percent and 7.80 percent, respectively; average
expected annual prepayments, including defaults, of 25.22 percent,
23.56 percent and 18.61 percent, respectively; expected weighted
average life of prepayable notes receivable, excluding prepayments
and defaults, of 70 months, 79 months and 83 months, respectively;
and expected weighted average life of prepayable notes
receivable, including prepayments and defaults, of 32 months,
38 months and 42 months, respectively. Our key assumptions
are based on experience.
We used the following key assumptions in measuring the fair
value of the residual interests, excluding servicing assets, in our
nine outstanding note sales at year-end 2006: an average discount
rate of 9.21 percent; an average expected annual prepayment
rate, including defaults, of 19.78 percent; an expected
weighted average life of prepayable notes receivable, excluding
prepayments and defaults, of 63 months; and an expected
weighted average life of prepayable notes receivable, including
prepayments and defaults of 35 months.
At the date of sale, we measure servicing assets at their allocated
previous carrying amount based on relative fair value.
Servicing assets are classified as held to maturity under the provisions
of FAS No. 115 and are recorded at amortized cost.
Cash flows between us and third-party purchasers during 2006,
2005, and 2004, were as follows: net proceeds to us from new timeshare
note sales of $508 million, $399 million and $312 million,
respectively; repurchases by us of defaulted loans (over 150 days
overdue) of $24 million, $23 million and $18 million, respectively;
repurchases by us of other loans in 2006 of $31 million; servicing
fees received by us of $5 million in 2006, $4 million and $4 million,
respectively; and cash flows received from our retained interests of
$91 million, $86 million and $90 million, respectively.