Our businesses are structured to be free-cash-flow positive, so we don’t have to retain any cash on the balance sheet. We’re happy where we are with our credit rating. We’re BBB-. That’s the optimal capital structure for us.
That’s right on the edge.
We’re happy with being on the last rung of investment grade. If something were to happen, we could easily manage to a higher rung by using cash in different ways. So we feel like we have a very conservative financial position.
How do you decide how much stock to repurchase?
Every quarter Steve [Stephen Holmes, CEO] and I sit with our board of directors and go through our “football field.” A football field is a list of conventional valuation methodologies that put a value on our company to justify continued share-repurchase activities. Every quarter we look at things like multiples on EBITDA, multiples on cash flow, multiples on earnings. We look at discounted cash flow, we look at what the market is saying we should be priced at, what the research community is saying we should be priced at. It gives us a good compass for our share-repurchase activity.
In fact, just before our second-quarter earnings release, we received authorization from our board for another $750 million of share repurchase.
What operating metrics do you pay particular attention to?
The standard in the hotel business is RevPAR — revenue per available room. It measures the year-to-year performance of revenue for each room that flies under your flag. We also look at net unit growth — how many new rooms are we adding? And one of the measures that I look at particularly is days sales outstanding, because I want to understand how effectively we’re collecting cash from our franchisees.
In our exchange and rental business we look at the overall number of members we have and how much each member spends, so we call it dollar per member or revenue per member. In our rental business we also look at the number of transactions that are done in a given year and the amount of revenue per transaction.
In the time-share business there are four or so important operating metrics. What is the number of tours that we’re organizing every year? The more people who are taking tours, the greater the possibility that they’ll buy. That’s a measure of how effective our marketing effort has been. We have a measure called volume per guest, which stands for the effectiveness of taking a tour and converting it into a sale. And then we’re looking at other things like how many new owners are we adding, and how is our loan portfolio doing. So we have certain portfolio measures.