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Hilton Grand Vacations Inc. - Quarter Report: 2019 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_________ to ________

Commission file number 001-37794

 

 

Hilton Grand Vacations Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

81-2545345

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

 

6355 MetroWest Boulevard, Suite 180,

 

Orlando, Florida

32835

(Address of Principal Executive Offices)

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code (407) 613-3100

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value per share

 

HGV

 

New York Stock Exchange

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

 

 

 

 

 

 

 

 

 

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 26, 2019 was 85,911,860.

 

 

 


 

HILTON GRAND VACATIONS INC.

FORM 10-Q TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

2

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

45

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3.

Defaults Upon Senior Securities

46

Item 4.

Mine Safety Disclosures

46

Item 5.

Other Information

46

Item 6.

Exhibits

47

 

Signatures

48

 

 

 

1


 

PART I FINANCIAL INFORMATION

Item 1.

Financial Statements

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

120

 

 

$

108

 

Restricted cash

 

 

67

 

 

 

72

 

Accounts receivable, net of allowance for doubtful accounts of $17 and $14

 

 

156

 

 

 

153

 

Timeshare financing receivables, net

 

 

1,125

 

 

 

1,120

 

Inventory

 

 

536

 

 

 

527

 

Property and equipment, net

 

 

673

 

 

 

559

 

Operating lease right-of-use assets, net

 

 

63

 

 

 

 

Investments in unconsolidated affiliates

 

 

43

 

 

 

38

 

Intangible assets, net

 

 

84

 

 

 

81

 

Other assets

 

 

122

 

 

 

95

 

TOTAL ASSETS (variable interest entities - $571 and $647)

 

$

2,989

 

 

$

2,753

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

312

 

 

$

324

 

Advanced deposits

 

 

108

 

 

 

101

 

Debt, net

 

 

937

 

 

 

604

 

Non-recourse debt, net

 

 

696

 

 

 

759

 

Operating lease liabilities

 

 

76

 

 

 

 

Deferred revenues

 

 

163

 

 

 

95

 

Deferred income tax liabilities

 

 

247

 

 

 

254

 

Total liabilities (variable interest entities - $562 and $640)

 

 

2,539

 

 

 

2,137

 

Commitments and contingencies - see Note 19

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 300,000,000 authorized shares, none

   issued or outstanding as of June 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.01 par value; 3,000,000,000 authorized shares,

   85,910,022 issued and outstanding as of June 30, 2019 and

   94,558,086 issued and outstanding as of December 31, 2018

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

169

 

 

 

174

 

Accumulated retained earnings

 

 

280

 

 

 

441

 

Total equity

 

 

450

 

 

 

616

 

TOTAL LIABILITIES AND EQUITY

 

$

2,989

 

 

$

2,753

 

 

See notes to unaudited condensed consolidated financial statements.

2


 

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

120

 

 

$

250

 

 

$

245

 

 

$

328

 

Sales, marketing, brand and other fees

 

 

145

 

 

 

146

 

 

 

286

 

 

 

271

 

Financing

 

 

43

 

 

 

39

 

 

 

84

 

 

 

77

 

Resort and club management

 

 

43

 

 

 

37

 

 

 

85

 

 

 

76

 

Rental and ancillary services

 

 

60

 

 

 

53

 

 

 

119

 

 

 

104

 

Cost reimbursements

 

 

43

 

 

 

38

 

 

 

85

 

 

 

74

 

Total revenues

 

 

454

 

 

 

563

 

 

 

904

 

 

 

930

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

32

 

 

 

61

 

 

 

68

 

 

 

80

 

Sales and marketing

 

 

186

 

 

 

193

 

 

 

356

 

 

 

354

 

Financing

 

 

12

 

 

 

12

 

 

 

25

 

 

 

23

 

Resort and club management

 

 

12

 

 

 

11

 

 

 

23

 

 

 

22

 

Rental and ancillary services

 

 

37

 

 

 

30

 

 

 

72

 

 

 

58

 

General and administrative

 

 

29

 

 

 

30

 

 

 

54

 

 

 

53

 

Depreciation and amortization

 

 

13

 

 

 

8

 

 

 

23

 

 

 

16

 

License fee expense

 

 

26

 

 

 

25

 

 

 

49

 

 

 

48

 

Cost reimbursements

 

 

43

 

 

 

38

 

 

 

85

 

 

 

74

 

Total operating expenses

 

 

390

 

 

 

408

 

 

 

755

 

 

 

728

 

Interest expense

 

 

(11

)

 

 

(8

)

 

 

(21

)

 

 

(15

)

Equity in earnings (losses) from unconsolidated affiliates

 

 

2

 

 

 

(2

)

 

 

3

 

 

 

(1

)

Other (loss) gain, net

 

 

(1

)

 

 

1

 

 

 

(2

)

 

 

 

Income before income taxes

 

 

54

 

 

 

146

 

 

 

129

 

 

 

186

 

Income tax expense

 

 

(15

)

 

 

(39

)

 

 

(35

)

 

 

(49

)

Net income

 

$

39

 

 

$

107

 

 

$

94

 

 

$

137

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.43

 

 

$

1.10

 

 

$

1.02

 

 

$

1.40

 

Diluted

 

$

0.43

 

 

$

1.10

 

 

$

1.01

 

 

$

1.39

 

 

See notes to unaudited condensed consolidated financial statements.

3


 

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

94

 

 

$

137

 

Adjustments to reconcile net income to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

23

 

 

 

16

 

Amortization of deferred financing costs and other

 

 

5

 

 

 

3

 

Provision for financing receivables losses

 

 

38

 

 

 

30

 

Other loss, net

 

 

2

 

 

 

 

Share-based compensation

 

 

12

 

 

 

8

 

Deferred income tax benefit

 

 

(9

)

 

 

(6

)

Equity in (earnings) losses from unconsolidated affiliates

 

 

(3

)

 

 

1

 

Distributions received from unconsolidated affiliates

 

 

 

 

 

2

 

Net changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(3

)

 

 

(26

)

Timeshare financing receivables, net

 

 

(42

)

 

 

(48

)

Inventory

 

 

(11

)

 

 

11

 

Purchases and development of real estate for future conversion to inventory

 

 

(80

)

 

 

(176

)

Other assets

 

 

(26

)

 

 

(58

)

Accounts payable, accrued expenses and other

 

 

(3

)

 

 

(42

)

Advanced deposits

 

 

7

 

 

 

8

 

Deferred revenues

 

 

68

 

 

 

4

 

Other

 

 

 

 

 

2

 

Net cash provided by (used in) operating activities

 

 

72

 

 

 

(134

)

Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(17

)

 

 

(20

)

Software capitalization costs

 

 

(11

)

 

 

(9

)

Return of investment from unconsolidated affiliates

 

 

 

 

 

11

 

Investments in unconsolidated affiliates

 

 

(2

)

 

 

(5

)

Net cash used in investing activities

 

 

(30

)

 

 

(23

)

Financing Activities

 

 

 

 

 

 

 

 

Issuance of debt

 

 

410

 

 

 

160

 

Issuance of non-recourse debt

 

 

15

 

 

 

100

 

Repayment of debt

 

 

(105

)

 

 

(5

)

Repayment of non-recourse debt

 

 

(79

)

 

 

(80

)

Debt issuance costs

 

 

(2

)

 

 

(2

)

Repurchase and retirement of common stock

 

 

(271

)

 

 

(112

)

Payment of withholding taxes on vesting of restricted stock units

 

 

(3

)

 

 

(1

)

Proceeds from employee stock plan purchases

 

 

2

 

 

 

 

Capital contribution

 

 

 

 

 

3

 

Other financing activity

 

 

(2

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(35

)

 

 

63

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

7

 

 

 

(94

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

180

 

 

 

297

 

Cash, cash equivalents and restricted cash, end of period

 

$

187

 

 

$

203

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash operating activities:

 

 

 

 

 

 

 

 

Cumulative effect of adoption of new accounting standard

 

$

 

 

$

38

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

Issuance of other debt

 

$

23

 

 

$

 

 

See notes to unaudited condensed consolidated financial statements.

4


 

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balance as of December 31, 2018

 

 

94

 

 

$

1

 

 

$

174

 

 

$

441

 

 

$

616

 

Net income

 

 

 

 

 

 

 

 

 

 

 

55

 

 

 

55

 

Activity related to share-based compensation

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Repurchase and retirement of common stock

 

 

(3

)

 

 

 

 

 

(5

)

 

 

(92

)

 

 

(97

)

Balance as of March 31, 2019

 

 

91

 

 

 

1

 

 

 

170

 

 

 

404

 

 

 

575

 

Net income

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

39

 

Activity related to share-based compensation

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

10

 

Repurchase and retirement of common stock

 

 

(5

)

 

 

 

 

 

(11

)

 

 

(163

)

 

 

(174

)

Balance as of June 30, 2019

 

 

86

 

 

$

1

 

 

$

169

 

 

$

280

 

 

$

450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balance as of December 31, 2017

 

 

99

 

 

$

1

 

 

$

162

 

 

$

355

 

 

$

518

 

Net income

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

30

 

Activity related to share-based compensation

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Repurchase and retirement of common stock

 

 

(2

)

 

 

 

 

 

(3

)

 

 

(109

)

 

 

(112

)

Revenue recognition cumulative-effect adjustment

 

 

 

 

 

 

 

 

 

 

 

(38

)

 

 

(38

)

Capital contribution

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Balance as of March 31, 2018

 

 

97

 

 

 

1

 

 

 

161

 

 

 

238

 

 

 

400

 

Net income

 

 

 

 

 

 

 

 

 

 

 

107

 

 

 

107

 

Activity related to share-based compensation

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

Other

 

 

 

 

 

 

 

 

3

 

 

 

1

 

 

 

4

 

Balance as of June 30, 2018

 

 

97

 

 

$

1

 

 

$

170

 

 

$

346

 

 

$

517

 

 

See notes to unaudited condensed consolidated financial statements.

5


 

HILTON GRAND VACATIONS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization

Our Business

Hilton Grand Vacations Inc. (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”) is a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. Our operations primarily consist of: selling vacation ownership intervals (“VOIs”) for us and third parties; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts; and managing our points-based Hilton Grand Vacations Club exchange program (the “Club”). As of June 30, 2019, we had 57 properties, comprised of 9,177 units, located in the United States (“U.S.”), Japan and Europe.

In connection with the completion of the spin-off in January 2017, we entered into agreements with Hilton Worldwide (“Hilton”) (who at the time was a related party) and other third parties, including licenses to use the Hilton Grand Vacations brand. The unaudited condensed consolidated financial statements reflect the effect of these agreements. For the three months ended June 30, 2019 and 2018, we incurred $36 million and $38 million, respectively, and for each of the six months ended June 30, 2019 and 2018, we incurred $92 million and $97 million, respectively, in costs relating to the agreements entered with Hilton. See Key Agreements Related to the Spin-Off section in Part I - Item 1. Business of our Annual Report on Form 10-K for the year ended December 31, 2018 for further information.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements presented herein include 100 percent of our assets, liabilities, revenues, expenses and cash flows as well as all entities in which we have a controlling financial interest.  In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods.  All material intercompany transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2018, included in our Annual Report on Form 10-K filed with the SEC on February 28, 2019.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance.

 

Summary of Significant Accounting Policies

Leases

We lease sales centers, office space and equipment under operating leases. We determine if an arrangement is a lease at inception. Amounts related to operating leases are included in Operating lease right-of-use (“ROU”) assets, net and Operating lease liabilities in our condensed consolidated balance sheets. Operating lease ROU assets are adjusted for lease incentives received.

ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term as of the commencement date. Because most of our leases do not provide an explicit or implicit rate of return, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments on an individual lease basis. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments for the asset under similar terms.

6


 

We have lease agreements with lease and non-lease components. Our operating leases may require minimum rent payments, contingent rent payments based on a percentage of revenue or income or rental payments adjusted periodically for inflation, or rent payments equal to the greater of a minimum rent or contingent rent. Our leases do not contain any residual value guarantees or material restrictive covenants. Leases with a lease term of 12 months or less are not recorded on the condensed consolidated balance sheets and lease expense is recognized on a straight-line basis over the lease term.

We monitor events or changes in circumstances that change the timing or amount of future lease payments which results in the remeasurement of a lease liability, with a corresponding adjustment to the ROU asset. ROU assets for operating and financing leases are periodically reviewed for impairment losses under ASC 360-10, Property, Plant, and Equipment, to determine whether an ROU asset is impaired, and if so, the amount of the impairment loss to recognize.

Recently Issued Accounting Pronouncements

Adopted Accounting Standards

 

On January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) as amended, using the modified retrospective approach permitted under ASU No. 2018-11, Targeted Improvements, collectively Accounting Standards Codification Topic 842 (“ASC 842”). Accordingly, previously reported financial information has not been restated to reflect the application of the new standard to the comparative periods presented. As permitted under the transition guidance in ASC 842, we have made an accounting policy election to adopt the following package of practical expedients:  

 

i.

to not reassess whether expired or existing contracts are or contain leases;

 

ii.

to not reassess lease classification for expired or existing leases;

 

iii.

to not reassess any initial direct costs for any existing leases;  

 

iv.

to not reassess the existence of a lease for existing or expired land easements that were not previously accounted for as leases;

 

v.

to record short-term lease payments (less than 12 months) in profit and loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred; and

 

vi.

to not prospectively, and upon adoption, separate lease and non-lease components.

 

ROU assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ASC 842 had no impact on our condensed consolidated statements of operations or on our condensed consolidated statements of cash flows. Upon adoption, we recognized ROU assets of $68 million and operating lease liabilities of $80 million for our real estate and equipment operating leases on the condensed consolidated balance sheets.

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, (“ASU 2016-13”), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses. Subsequent to ASU 2016-13, the FASB has issued several related ASUs amending the original ASU. The updates are intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The update is effective for annual periods beginning after December 15, 2019. We are currently evaluating the effect of this ASU but we do not expect it to have a material impact on our unaudited condensed consolidated financial statements.

7


 

Note 3: Revenue from Contracts with Customers

Disaggregation of Revenue

The following tables show our disaggregated revenues by segment from contracts with customers. We operate our business in the following two segments: (i) Real estate sales and financing and (ii) Resort operations and club management. Please refer to Note 18: Business Segments below for more details related to our segments.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Real Estate and Financing Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

120

 

 

$

250

 

 

$

245

 

 

$

328

 

Sales, marketing, brand and other fees

 

 

145

 

 

 

146

 

 

 

286

 

 

 

271

 

Interest income

 

 

36

 

 

 

34

 

 

 

72

 

 

 

68

 

Other financing revenue

 

 

7

 

 

 

5

 

 

 

12

 

 

 

9

 

Real estate and financing segment revenues

 

$

308

 

 

$

435

 

 

$

615

 

 

$

676

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Resort Operations and Club Management

   Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Club management

 

$

26

 

 

$

23

 

 

$

52

 

 

$

46

 

Resort management

 

 

17

 

 

 

14

 

 

 

33

 

 

 

30

 

Rental (1)

 

 

53

 

 

 

46

 

 

 

105

 

 

 

91

 

Ancillary services

 

 

7

 

 

 

7

 

 

 

14

 

 

 

13

 

Resort operations and club management

   segment revenues

 

$

103

 

 

$

90

 

 

$

204

 

 

$

180

 

 

(1)

Includes intersegment eliminations. See Note 18:  Business Segments for additional information.

 

Contract Balances

The following table provides information on our accounts receivable and contract asset from contracts with customers which are included in Accounts receivable, net on our condensed consolidated balance sheets:

 

($ in millions)

 

June 30, 2019

 

 

December 31, 2018

 

Receivables

 

$

128

 

 

$

122

 

Contract asset

 

 

3

 

 

 

 

 

The following table presents the composition of our contract liabilities for the six months ended June 30, 2019.

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

June 30, 2019

 

 

December 31, 2018

 

Contract liabilities:

 

 

 

 

 

 

 

 

Advanced deposits

 

$

108

 

 

$

101

 

Deferred revenues(1)

 

 

145

 

 

 

72

 

Club Bonus Point incentive liability(2)

 

 

61

 

 

 

56

 

 

(1)

The deferred revenues balance is primarily comprised of (i) sales of VOIs under construction and not yet acquired under a just-in-time arrangement, (ii) club activation fees that are paid at the closing of a VOI purchase, which grants access to our points-based Club and (iii) annual dues for Club membership renewals.

(2)

Amounts related to the Club Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our condensed consolidated balance sheets. This liability is comprised of revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.

 

8


 

Revenue earned during the three and six months ended June 30, 2019 that was included in the contract liabilities balance at December 31, 2018 was approximately $39 million and $78 million, respectively.

Our accounts receivables that relate to our contracts with customers includes amounts associated with our contractual right to consideration for completed performance obligations related primarily to our fee-for-service arrangements and homeowners’ associations (“HOA”) management agreements and are settled when the related cash is received. Accounts receivable are recorded when the right to consideration becomes unconditional and is only contingent on the passage of time. Refer to Note 5: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our timeshare financing receivables.

Contract assets relate to incentive fees that can be earned for meeting certain target on sales of VOIs at properties under our fee-for-service arrangements; however, our right to consideration is conditional upon completing the requirements of the annual incentive fee period.  

Contract liabilities include payments received or due in advance of satisfying our performance obligations. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues and the liability for Club Bonus Points awarded to our customers for purchase of VOIs at our properties or properties under our fee-for-service arrangements that may be redeemed in the future.

 

Transaction Price Allocated to Remaining Performance Obligations

 

Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Club Bonus Points that may be redeemed in the future. As of June 30, 2019, we deferred $34 million of revenue and $5 million of direct selling costs from sales of VOIs under construction that will be acquired under a just-in-time arrangement once construction is complete.  We expect to recognize the revenue and direct selling costs during the second quarter of 2020.  Upon acquisition, we expect to recognize $11 million in costs of VOI sales related to these sales.  As of December 31, 2018, we had no remaining performance obligations on sales of VOIs under construction.

 

The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Club Bonus Points as of June 30, 2019:

 

($ in millions)

 

Remaining

Transaction Price

 

 

Recognition Period

 

Recognition Method

Advanced deposits

 

$

108

 

 

18 months

 

Upon customer stays

Club activation fees

 

 

67

 

 

7 years

 

Straight-line basis over average inventory holding

   period

Club Bonus Points

 

 

61

 

 

24 months

 

Upon redemption

 

Note 4: Restricted Cash

Restricted cash was as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2019

 

 

2018

 

Escrow deposits on VOI sales

 

$

41

 

 

$

45

 

Reserves related to non-recourse debt(1)

 

 

26

 

 

 

27

 

 

 

$

67

 

 

$

72

 

 

(1)

See Note 11: Debt & Non-recourse Debt for further discussion.

9


 

Note 5: Timeshare Financing Receivables

Timeshare financing receivables were as follows:

 

 

 

June 30, 2019

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized(1)

 

 

Total

 

Timeshare financing receivables

 

$

579

 

 

$

720

 

 

$

1,299

 

Less: allowance for financing receivables losses

 

 

(35

)

 

 

(139

)

 

 

(174

)

 

 

$

544

 

 

$

581

 

 

$

1,125

 

 

 

 

December 31, 2018

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized(1)

 

 

Total

 

Timeshare financing receivables

 

$

660

 

 

$

632

 

 

$

1,292

 

Less: allowance for financing receivables losses

 

 

(43

)

 

 

(129

)

 

 

(172

)

 

 

$

617

 

 

$

503

 

 

$

1,120

 

 

(1)

Includes amounts used as collateral to secure a non-recourse revolving timeshare receivable credit facility ("Timeshare Facility") as well as amounts held as future collateral for upcoming securitization activities.

As of June 30, 2019 and December 31, 2018, we had $279 million and $190 million, respectively, of gross timeshare financing receivables securing the outstanding debt balance of our Timeshare Facility. We record an estimate of variable consideration for estimated defaults as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale.

Our timeshare financing receivables as of June 30, 2019 mature as follows:

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

2019 (remaining)

 

$

40

 

 

$

39

 

 

$

79

 

2020

 

 

81

 

 

 

58

 

 

 

139

 

2021

 

 

80

 

 

 

64

 

 

 

144

 

2022

 

 

77

 

 

 

70

 

 

 

147

 

2023

 

 

75

 

 

 

75

 

 

 

150

 

Thereafter

 

 

226

 

 

 

414

 

 

 

640

 

 

 

 

579

 

 

 

720

 

 

 

1,299

 

Less: allowance for financing receivables losses

 

 

(35

)

 

 

(139

)

 

 

(174

)

 

 

$

544

 

 

$

581

 

 

$

1,125

 

 

We evaluate this portfolio collectively for purposes of estimating variable consideration, since we hold a large group of homogeneous timeshare financing receivables which are individually immaterial. We monitor the credit quality of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for determining our allowance for financing receivables losses on our timeshare financing receivables. For static pool analysis, we use certain key dimensions to stratify our portfolio, including FICO scores, equity percentage at the time of sale and certain other factors. The adequacy of the related allowance is determined by management through analysis of several factors, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio including assumed default rates, aging and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio.

10


 

We recognize interest income on our timeshare financing receivables as earned. The interest rate charged on the notes correlates to the risk profile of the customer at the time of purchase and the percentage of the purchase that is financed, among other factors. As of June 30, 2019, our timeshare financing receivables had interest rates ranging from 5.25 percent to 20.50 percent, a weighted-average interest rate of 12.36 percent, a weighted-average remaining term of 7.7 years and maturities through 2031.

Our gross timeshare financing receivables balances by FICO score were as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2019

 

 

2018

 

FICO score

 

 

 

 

 

 

 

 

700+

 

$

853

 

 

$

843

 

600-699

 

 

234

 

 

 

237

 

<600

 

 

27

 

 

 

27

 

No score(1)

 

 

185

 

 

 

185

 

 

 

$

1,299

 

 

$

1,292

 

 

(1)

Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.

We apply payments we receive for timeshare financing receivables, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a receivable is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for receivables for which we had previously ceased accruing interest once the receivable is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the receivable is 121 days past due and, subsequently, we write off the uncollectible balance against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.

As of June 30, 2019 and December 31, 2018, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $70 million and $69 million, respectively. The following tables detail an aged analysis of our gross timeshare financing receivables balance:

 

 

 

June 30, 2019

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Current

 

$

566

 

 

$

644

 

 

$

1,210

 

31 - 90 days past due

 

 

8

 

 

 

11

 

 

 

19

 

91 - 120 days past due

 

 

2

 

 

 

4

 

 

 

6

 

121 days and greater past due

 

 

3

 

 

 

61

 

 

 

64

 

 

 

$

579

 

 

$

720

 

 

$

1,299

 

 

 

 

December 31, 2018

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Current

 

$

648

 

 

$

556

 

 

$

1,204

 

31 - 90 days past due

 

 

8

 

 

 

11

 

 

 

19

 

91 - 120 days past due

 

 

3

 

 

 

3

 

 

 

6

 

121 days and greater past due

 

 

1

 

 

 

62

 

 

 

63

 

 

 

$

660

 

 

$

632

 

 

$

1,292

 

 

11


 

The changes in our allowance for financing receivables losses were as follows:

 

 

 

June 30, 2019

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Balance as of December 31, 2018

 

$

43

 

 

$

129

 

 

$

172

 

Write-offs

 

 

 

 

 

(36

)

 

 

(36

)

Provision for financing receivables losses(1)

 

 

(8

)

 

 

46

 

 

 

38

 

Balance as of June 30, 2019

 

$

35

 

 

$

139

 

 

$

174

 

 

 

 

June 30, 2018

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Balance as of December 31, 2017

 

$

27

 

 

$

114

 

 

$

141

 

Write-offs

 

 

 

 

 

(14

)

 

 

(14

)

Provision for financing receivables losses(1)

 

 

(7

)

 

 

37

 

 

 

30

 

Balance as of June 30, 2018

 

$

20

 

 

$

137

 

 

$

157

 

 

(1)

Includes incremental provision for financing receivables losses, net of activity related to the repurchase of defaulted and upgraded securitized timeshare financing receivables.

Note 6: Inventory

Inventory was as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2019

 

 

2018

 

Completed unsold VOIs

 

$

249

 

 

$

243

 

Construction in process

 

 

11

 

 

 

9

 

Land, infrastructure and other

 

 

276

 

 

 

275

 

 

 

$

536

 

 

$

527

 

 

We benefited from $5 million in costs of sales true-ups relating to VOI products for the six months ended June 30, 2019, which resulted in a $5 million increase to the carrying value of inventory as of June 30, 2019. We benefited from $10 million in costs of sales true-ups relating to VOI products for the year ended December 31, 2018, which resulted in a $10 million increase to the carrying value of inventory as of December 31, 2018. Shown below are expenses incurred, recorded in Cost of VOI sales, related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cost of VOI sales related to fee-for-service upgrades

 

$

7

 

 

$

9

 

 

$

16

 

 

$

15

 

 

Note 7: Property and Equipment

 

Property and equipment was as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2019

 

 

2018

 

Land

 

$

335

 

 

$

268

 

Building and leasehold improvements

 

 

300

 

 

 

295

 

Furniture and equipment

 

 

68

 

 

 

54

 

Construction in progress

 

 

66

 

 

 

25

 

 

 

 

769

 

 

 

642

 

Accumulated depreciation

 

 

(96

)

 

 

(83

)

 

 

$

673

 

 

$

559

 

 

12


 

Note 8: Consolidated Variable Interest Entities

As of June 30, 2019 and December 31, 2018, we consolidated four variable interest entities (“VIEs”) that issued non-recourse debt backed by pledged assets consisting primarily of a pool of timeshare financing receivables which is without recourse to us. We are the primary beneficiaries of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we are required to replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. Only the assets of our VIEs are available to settle the obligations of the respective entities.

Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2019

 

 

2018

 

Restricted cash

 

$

20

 

 

$

23

 

Timeshare financing receivables, net

 

 

544

 

 

 

617

 

Non-recourse debt(1)

 

 

561

 

 

 

639

 

 

(1)

Net of deferred financing costs.

During the six months ended June 30, 2019 and 2018, we did not provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.

 

Note 9: Investments in Unconsolidated Affiliates

 

As of June 30, 2019, we have 25 percent and 50 percent ownership interests in BRE Ace LLC and 1776 Holdings LLC, respectively, that are deemed as VIEs. We do not consolidate BRE Ace LLC and 1776 Holdings LLC because we are not the primary beneficiary. Our investment interests in and equity earned from both VIEs are included in the consolidated balance sheets as Investments in unconsolidated affiliates and in the consolidated statements of operations as Equity in earnings (losses) from unconsolidated affiliates, respectively.

 

We held investments in our two unconsolidated affiliates with aggregated debt balances of $478 million and $490 million as of June 30, 2019 and December 31, 2018, respectively. The debt is secured by their assets and is without recourse to us. Our maximum exposure to loss as a result of our investment interests in the two unconsolidated affiliates is primarily limited to (i) the carrying amount of the investments which totals $43 million and $38 million as of June 30, 2019 and December 31, 2018, respectively and (ii) receivables for commission and other fees earned under a fee-for-service arrangement.  See Note 17:  Related Party Transactions for additional information.  

 

Note 10: Other Assets

 

Other assets were as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2019

 

 

2018

 

Inventory deposits

 

$

44

 

 

$

46

 

Prepaid expenses

 

 

34

 

 

 

18

 

Other

 

 

44

 

 

 

31

 

 

 

$

122

 

 

$

95

 

 

13


 

Note 11: Debt & Non-recourse Debt

Debt

The following table details our outstanding debt balance and its associated interest rates:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2019

 

 

2018

 

Debt(1)

 

 

 

 

 

 

 

 

Senior secured credit facilities:

 

 

 

 

 

 

 

 

Term loan with an average rate of 3.898%, due 2023

 

$

192

 

 

$

197

 

Revolver with an average rate of 3.898%, due 2023

 

 

425

 

 

 

115

 

Senior notes with a rate of 6.125%, due 2024

 

 

300

 

 

 

300

 

Other debt

 

 

27

 

 

 

 

 

 

 

944

 

 

 

612

 

Less: unamortized deferred financing costs and discount(2)(3)

 

 

(7

)

 

 

(8

)

 

 

$

937

 

 

$

604

 

 

(1)

For the six months ended June 30, 2019 and year ended December 31, 2018, weighted-average interest rates were 4.699 percent and 5.170 percent, respectively.

(2)

Amount includes deferred financing costs related to our term loan and senior notes of $2 million and $5 million both as of June 30, 2019 and $2 million and $6 million as of December 31, 2018.

(3)

Amount does not include deferred financing costs of $6 million as of June 30, 2019 and December 31, 2018, relating to our revolving facility included in Other Assets in our condensed consolidated balance sheets.

During the six months ended June 30, 2019, we borrowed $410 million and repaid $105 million (including recurring payments) under the senior secured credit facilities with an interest rate based on one month LIBOR plus 1.5 percent.  

As of June 30, 2019 and December 31, 2018, we had $1 million of outstanding letter of credit under the revolving credit facility.  We were in compliance with all applicable financial covenants as of June 30, 2019.

Non-recourse Debt

The following table details our outstanding non-recourse debt balance and its associated interest rates:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2019

 

 

2018

 

Non-recourse debt(1)

 

 

 

 

 

 

 

 

Timeshare Facility with an average rate of 3.337%, due 2021

 

$

135

 

 

$

120

 

Securitized Debt with a rate of 2.280%, due 2026

 

 

25

 

 

 

33

 

Securitized Debt with an average rate of 1.810%, due 2026

 

 

59

 

 

 

74

 

Securitized Debt with an average rate of 2.711%, due 2028

 

 

176

 

 

 

206

 

Securitized Debt with an average rate of 3.602%, due 2032

 

 

307

 

 

 

333

 

 

 

 

702

 

 

 

766

 

Less: unamortized deferred financing costs(2)

 

 

(6

)

 

 

(7

)

 

 

$

696

 

 

$

759

 

 

(1)

For the six months ended June 30, 2019 and year ended December 31, 2018, weighted-average interest rates were 3.130 percent and 3.126 percent, respectively.

(2)

Amount relates to securitized debt only and does not include deferred financing costs of $4 million and $3 million as of June 30, 2019 and December 31, 2018, respectively, relating to our Timeshare Facility which are included in Other Assets in our condensed consolidated balance sheets.

 

14


 

The Timeshare Facility is a non-recourse obligation with a borrowing capacity of $450 million and is payable solely from the pool of timeshare financing receivables pledged as collateral and related assets. In April 2019, we amended the Timeshare Facility, excluding the end of the commitment period, from March 2020 to April 2021. All other terms and borrowing capacity remained the same. 

 

We are required to deposit payments received from customers on the timeshare financing receivables securing the Timeshare Facility and Securitized Debt into depository accounts maintained by third parties. On a monthly basis, the depository accounts are utilized to make required principal, interest and other payments due under the respective loan agreements. The balances in the depository accounts were $26 million and $27 million as of June 30, 2019 and December 31, 2018, respectively, and were included in Restricted cash in our condensed consolidated balance sheets.

Debt Maturities

The contractual maturities of our debt and non-recourse debt as of June 30, 2019 were as follows:

 

($ in millions)

 

Debt

 

 

Non-recourse

Debt

 

 

Total

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

2019 (remaining)

 

$

6

 

 

$

110

 

 

$

116

 

2020

 

 

12

 

 

 

167

 

 

 

179

 

2021

 

 

11

 

 

 

88

 

 

 

99

 

2022

 

 

10

 

 

 

200

 

 

 

210

 

2023

 

 

582

 

 

 

76

 

 

 

658

 

Thereafter

 

 

323

 

 

 

61

 

 

 

384

 

 

 

$

944

 

 

$

702

 

 

$

1,646

 

 

Note 12: Fair Value Measurements

The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:

 

 

 

June 30, 2019

 

 

 

 

 

 

 

Hierarchy Level

 

($ in millions)

 

Carrying

Amount

 

 

Level 1

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Timeshare financing receivables, net(1)

 

$

1,125

 

 

$

 

 

$

1,387

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Debt, net(2)

 

 

937

 

 

 

320

 

 

 

649

 

Non-recourse debt, net(2)

 

 

696

 

 

 

 

 

 

707

 

 

(1)

Carrying amount net of allowance for financing receivables losses.

(2)

Carrying amount net of unamortized deferred financing costs and discount.

 

 

 

December 31, 2018

 

 

 

 

 

 

 

Hierarchy Level

 

($ in millions)

 

Carrying

Amount

 

 

Level 1

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Timeshare financing receivables, net(1)

 

$

1,120

 

 

$

 

 

$

1,339

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Debt, net(2)

 

 

604

 

 

 

302

 

 

 

309

 

Non-recourse debt, net(2)

 

 

759

 

 

 

 

 

 

753

 

 

(1)

Carrying amount net of allowance for financing receivables losses.

(2)

Carrying amount net of unamortized deferred financing costs and discount.

15


 

Our estimates of the fair values were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values. The table above excludes cash and cash equivalents, restricted cash, accounts receivable, accounts payable, advance deposits and accrued liabilities, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.

The estimated fair values of our timeshare financing receivables were determined using a discounted cash flow model. Our model incorporates default rates, coupon rates, credit quality and borrowing terms respective to the portfolio based on current market assumptions for similar types of arrangements.

The estimated fair values of our Level 1 debt was based on prices in active debt markets. The estimated fair value of our Level 3 debt and non-recourse debt were as follows:

 

Debt - based on indicative quotes obtained for similar issuances and projected future cash flows discounted at risk-adjusted rates.

 

Non-recourse debt - based on projected future cash flows discounted at risk-adjusted rates.

We do not have any assets or liabilities measured at fair value on a recurring basis as of June 30, 2019.

Note 13: Leases

We lease sales centers, office space and equipment under operating leases. Our leases expire at various dates from 2019 through 2030, with varying renewal and termination options. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Rent expense for lease payments is recognized on a straight-line basis over the lease term. Rental expense for all operating leases was $4 million and $10 million for the three and six months ended June 30, 2019 respectively. This amount includes immaterial short-term leases and variable lease costs. Rent expense for all operating leases for the year ended December 31, 2018 was as follows:

 

($ in millions)

 

 

 

 

Minimum rentals

 

$

21

 

Contingent rentals

 

 

3

 

 

 

$

24

 

 

Supplemental information related to operating leases for the six months ending June 30, 2019:

 

($ in millions)

 

 

 

 

Cash paid for amounts included in the measurement of operating lease liabilities:

 

 

 

 

Operating cash flows from operating leases

 

$

8

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

1

 

Weighted-average remaining lease term of operating leases

 

6.6 years

 

Weighted-average discount rate of operating leases

 

 

5.33

%

 

 

 

 

 

 

16


 

Future minimum lease payments under noncancelable operating leases, due in each of the next five years and thereafter as of June 30, 2019, are as follows:

 

($ in millions)

 

Operating

Leases (1)

 

Year

 

 

 

 

2019 (remaining)

 

$

8

 

2020

 

 

16

 

2021

 

 

15

 

2022

 

 

10

 

2023

 

 

10

 

Thereafter

 

 

32

 

Total future minimum lease payments

 

$

91

 

Less: interest

 

 

(15

)

Present value of lease liabilities

 

$

76

 

 

(1)

Operating lease payments exclude $1 million of legally binding minimum lease payments for leases signed but not yet commenced.

Future minimum lease payments under noncancelable operating leases, due in each of the next five years and thereafter as of December 31, 2018, are as follows:

 

($ in millions)

 

Operating

Leases

 

Year

 

 

 

 

2019

 

$

16

 

2020

 

 

15

 

2021

 

 

14

 

2022

 

 

10

 

2023

 

 

10

 

Thereafter

 

 

29

 

Total future minimum lease payments

 

$

94

 

 

 

Note 14: Income Taxes

At the end of each quarter, we estimate the effective tax rate expected to be applied for the full year. The effective tax rate is determined by the level and composition of pre-tax income or loss, which is subject to federal, foreign and state and local income taxes. The effective tax rate for the six months ended June 30, 2019 and 2018 was approximately 27 percent and 26 percent, respectively, which increased primarily due to a reduction in the tax benefit related to share-based compensation awards exercised or vested during the six months ended June 30, 2019.

Note 15: Share-Based Compensation

Stock Plan

We issue service-based restricted stock units (“Service RSUs”), service and performance-based restricted stock units (“Performance RSUs”) and nonqualified stock options (“Options”) to certain employees and directors. We recognized share-based compensation expense of $7 million and $5 million during the three months ended June 30, 2019 and 2018, respectively, and $12 million and $8 million for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, unrecognized compensation costs for unvested awards were approximately $34 million, which is expected to be recognized over a weighted average period of 1.9 years. As of June 30, 2019, there were 6,386,657 shares of common stock available for future issuance.

Service RSUs

During the six months ended June 30, 2019, we issued 500,925 Service RSUs with a weighted-average grant date fair value of $33.07, which generally vest in equal annual installments over three years from the date of grant.

17


 

Options

During the six months ended June 30, 2019, we issued 544,209 Options with a weighted-average exercise price of $33.32, which vest over three years from the date of the grant.

The weighted-average grant date fair value of these options was $12.29, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:

 

Expected volatility

 

 

33.1

%

Dividend yield

 

 

%

Risk-free rate

 

 

2.6

%

Expected term (in years)

 

 

6.0

 

 

As of June 30, 2019, we had 648,617 Options outstanding that were exercisable.

Performance Shares

During the six months ended June 30, 2019, we issued 133,660 Performance RSUs with a weighted-average grant date fair value of $33.32. The Performance RSUs are settled at the end of a three-year performance period, with 70 percent of the Performance RSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization further adjusted for net impacts and recognitions of revenues and expenses related to sales of VOIs of projects under construction. The remaining 30 percent of the Performance RSUs are subject to the achievement of certain contract sales targets.  We determined that the performance conditions for these awards are probable of achievement and, as of June 30, 2019, we recognized compensation expense based on the number of Performance RSUs we expect to vest.

Note 16: Earnings Per Share

The following table presents the calculation of our basic and diluted earnings per share (“EPS”).  The weighted- average shares outstanding used to compute basic EPS and diluted EPS for the three months ended June 30, 2019 is 89,849,803 and 90,271,976, respectively, and for the six months ended June 30, 2019 is 91,959,041 and 92,421,752, respectively.  The weighted-average shares outstanding used to compute basic EPS and diluted EPS for the three months ended June 30, 2018 was 96,774,130 and 97,463,820, respectively, and six months ended June 30, 2018 was 97,692,558 and 98,474,971, respectively.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ and shares outstanding in millions, except per share amounts)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income(1)

 

$

39

 

 

$

107

 

 

$

94

 

 

$

137

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

90

 

 

 

97

 

 

 

92

 

 

 

98

 

Basic EPS

 

$

0.43

 

 

$

1.10

 

 

$

1.02

 

 

$

1.40

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income(1)

 

$

39

 

 

$

107

 

 

$

94

 

 

$

137

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

90

 

 

 

97

 

 

 

92

 

 

 

98

 

Diluted EPS

 

$

0.43

 

 

$

1.10

 

 

$

1.01

 

 

$

1.39

 

 

(1)

Net income for the three months ended June 30, 2019 and 2018 was $38,624,856 and $106,861,230, respectively, and for the six months ended June 30, 2019 and 2018 was $93,692,657 and $137,031,259, respectively.

The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period.

18


 

For the three and six months ended June 30, 2019, we excluded 1,433,833 and 1,168,159, respectively, and for the three and six months ended June 30, 2018, we excluded 533,609 and 341,246 share-based compensation awards, respectively, because their effect would have been anti-dilutive under the treasury stock method.

Note 17: Related Party Transactions

BRE Ace LLC

 

In July 2017, we acquired a 25 percent ownership interest in BRE Ace LLC, a VIE, which owns a timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations.” During the three and six months ended June 30, 2019, we recorded $2 million and $3 million, respectively, of Equity in earnings from unconsolidated affiliates in our condensed consolidated statements of operations. During the three and six months ended June 30, 2018, we recorded $2 million and $1 million, respectively, of Equity in losses from unconsolidated affiliates in our condensed consolidated statements of operations. Additionally, we earn commissions and other fees related to a fee-for-service agreement with the investee to sell VOIs at Elara, by Hilton Grand Vacations.  These amounts are summarized in the following table and are included in our condensed consolidated statements of operations as of the date they became a related party.  

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Commission and other fees

 

$

32

 

 

$

32

 

 

$

68

 

 

$

64

 

 

We also have $27 million of outstanding receivables related to the fee-for-service agreement as of June 30, 2019.   

 

1776 Holding, LLC

 

In March 2018, we entered into an agreement with SCG 1776, LLC to form 1776 Holding, LLC.  In conjunction with this agreement, we contributed $5 million in cash for a 50 percent ownership interest in 1776 Holding, LLC.  In May 2019, the agreement was amended to assign the interest of SCG 1776, LLC in 1776 Holding, LLC to 1776 Investment Group, LLC. In May 2019, we also contributed an additional $2 million in cash to 1776 Holding, LLC. During each of the three and six months ended June 30, 2019 and 2018, we recorded less than $1 million, respectively, of Equity in earnings (losses) from unconsolidated affiliates included in our condensed consolidated statements of operations. See Note 9: Investments in Unconsolidated Affiliates for additional information.

 

 

HNA Tourism Group Co., Ltd (“HNA”)

 

On March 13, 2018, HNA entered into an underwriting agreement with several underwriters to sell 22,250,000 shares of our common stock. In connection with the underwriting offer, we elected to purchase 2,500,000 shares at a price of approximately $44.75 per share. The transactions were completed on March 19, 2018 and HNA ceased to be a related party.

Note 18: Business Segments

We operate our business through the following two segments:

 

Real estate sales and financing – We market and sell VOIs that we own. We also source VOIs through fee-for-service agreements with third-party developers. Related to the sales of the VOIs that we own, we provide consumer financing, which includes interest income generated from the origination of consumer receivables to customers to finance their purchase of VOIs and revenue from servicing the timeshare financing receivables. We also generate fee revenue from servicing the timeshare financing receivables provided by third-party developers to purchasers of their VOIs.

 

Resort operations and club management – We manage the Club, earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We earn fees for managing the timeshare properties. We generate rental revenue from unit rentals of unsold inventory and inventory made available due to ownership exchanges under our Club program. We also earn revenue from food and beverage, retail and spa outlets at our timeshare properties.

19


 

The performance of our operating segments is evaluated primarily based on adjusted earnings before interest expense (excluding non-recourse debt), taxes, depreciation and amortization (“EBITDA”). We define Adjusted EBITDA as EBITDA which has been further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.

We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment revenues. The following table presents revenues for our reportable segments reconciled to consolidated amounts:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing

 

$

308

 

 

$

435

 

 

$

615

 

 

$

676

 

Resort operations and club management(1)(2)

 

 

114

 

 

 

98

 

 

 

224

 

 

 

196

 

Total segment revenues

 

 

422

 

 

 

533

 

 

 

839

 

 

 

872

 

Cost reimbursements

 

 

43

 

 

 

38

 

 

 

85

 

 

 

74

 

Intersegment eliminations(1)(2)

 

 

(11

)

 

 

(8

)

 

 

(20

)

 

 

(16

)

Total revenues

 

$

454

 

 

$

563

 

 

$

904

 

 

$

930

 

 

 

(1)

Includes charges to the real estate sales and financing segment from the resort operations and club management segment for discounted stays at properties resulting from marketing packages. These charges totaled $11 million and $8 million for the three months ended June 30, 2019 and 2018, respectively, and $20 million and $16 million for the six months ended June 30, 2019 and 2018, respectively

(2)

Includes charges to the real estate sales and financing segment from the resort operations and club management segment for the rental of model units to show prospective buyers. These charges totaled less than $1 million for each of the three and six months ended June 30, 2019 and 2018.

The following table presents Adjusted EBITDA for our reportable segments reconciled to net income:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing(1)

 

$

69

 

 

$

163

 

 

$

149

 

 

$

207

 

Resort operations and club management(1)

 

 

66

 

 

 

58

 

 

 

131

 

 

 

117

 

Segment Adjusted EBITDA

 

 

135

 

 

 

221

 

 

 

280

 

 

 

324

 

General and administrative

 

 

(29

)

 

 

(30

)

 

 

(54

)

 

 

(53

)

Depreciation and amortization

 

 

(13

)

 

 

(8

)

 

 

(23

)

 

 

(16

)

License fee expense

 

 

(26

)

 

 

(25

)

 

 

(49

)

 

 

(48

)

Other (loss) gain, net

 

 

(1

)

 

 

1

 

 

 

(2

)

 

 

 

Interest expense

 

 

(11

)

 

 

(8

)

 

 

(21

)

 

 

(15

)

Income tax expense

 

 

(15

)

 

 

(39

)

 

 

(35

)

 

 

(49

)

Equity in earnings (losses) from unconsolidated affiliates

 

 

2

 

 

 

(2

)

 

 

3

 

 

 

(1

)

Other adjustment items

 

 

(3

)

 

 

(3

)

 

 

(5

)

 

 

(5

)

Net income

 

$

39

 

 

$

107

 

 

$

94

 

 

$

137

 

 

(1)

Includes intersegment eliminations. Refer to our table presenting revenues by reportable segment above for additional discussion.

20


 

Note 19: Commitments and Contingencies

We have entered into certain arrangements with developers to commit to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of June 30, 2019, we were committed to purchase approximately $511 million of inventory and land over a period of 12 years. The actual amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. During the six months ended June 30, 2019 and 2018, we purchased $28 million and $4 million, respectively, of VOI inventory as required under our commitments. As of June 30, 2019, our remaining obligation pursuant to these arrangements were expected to be incurred as follows:

 

($ in millions)

 

Purchase

Obligations

 

Year

 

 

 

 

2019 (remaining)

 

$

38

 

2020

 

 

220

 

2021

 

 

87

 

2022

 

 

57

 

2023

 

 

54

 

Thereafter

 

 

55

 

Total

 

$

511

 

 

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has evaluated these legal matters and we believe that possible losses derived from an unfavorable outcome that is reasonably possible or remote is not reasonably estimable. While the actual results of claims and litigation cannot be predicted with certainty, we expect that the resolution of all pending or threatened claims and litigation as of June 30, 2019, will not materially affect our unaudited condensed consolidated financial statements.

21


 

Note 20: Condensed Consolidating Guarantor Financial Information

The following schedules present the unaudited condensed consolidating financial information as of June 30, 2019 and December 31, 2018 and for the three and six months ended June 30, 2019 and 2018 for the Parent, Subsidiary Issuers, Guarantors and Non-Guarantors.

 

 

 

June 30, 2019

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7

 

 

$

 

 

$

93

 

 

$

20

 

 

$

 

 

$

120

 

Restricted cash

 

 

 

 

 

 

 

 

41

 

 

 

26

 

 

 

 

 

 

67

 

Accounts receivable, net

 

 

 

 

 

 

 

 

156

 

 

 

20

 

 

 

(20

)

 

 

156

 

Timeshare financing receivables, net

 

 

 

 

 

 

 

 

332

 

 

 

793

 

 

 

 

 

 

1,125

 

Inventory

 

 

 

 

 

 

 

 

496

 

 

 

40

 

 

 

 

 

 

536

 

Property and equipment, net

 

 

 

 

 

 

 

 

666

 

 

 

7

 

 

 

 

 

 

673

 

Operating lease right-of-use assets, net

 

 

 

 

 

 

 

 

 

 

63

 

 

 

 

 

 

 

 

 

63

 

Investments in unconsolidated affiliates

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

 

43

 

Intangible assets, net

 

 

 

 

 

 

 

 

84

 

 

 

 

 

 

 

 

 

84

 

Other assets

 

 

 

 

 

6

 

 

 

67

 

 

 

49

 

 

 

 

 

 

122

 

Investments in subsidiaries

 

 

443

 

 

 

1,347

 

 

 

243

 

 

 

 

 

 

(2,033

)

 

 

 

TOTAL ASSETS

 

$

450

 

 

$

1,353

 

 

$

2,284

 

 

$

955

 

 

$

(2,053

)

 

$

2,989

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued

   expenses and other

 

$

 

 

$

 

 

$

317

 

 

$

15

 

 

$

(20

)

 

$

312

 

Advanced deposits

 

 

 

 

 

 

 

 

108

 

 

 

 

 

 

 

 

 

108

 

Debt, net

 

 

 

 

 

910

 

 

 

27

 

 

 

 

 

 

 

 

 

937

 

Non-recourse debt, net

 

 

 

 

 

 

 

 

 

 

 

696

 

 

 

 

 

 

696

 

Operating lease liabilities

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

 

 

 

76

 

Deferred revenues

 

 

 

 

 

 

 

 

163

 

 

 

 

 

 

 

 

 

163

 

Deferred income tax liabilities

 

 

 

 

 

 

 

 

246

 

 

 

1

 

 

 

 

 

 

247

 

Total equity

 

 

450

 

 

 

443

 

 

 

1,347

 

 

 

243

 

 

 

(2,033

)

 

 

450

 

TOTAL LIABILITIES AND EQUITY

 

$

450

 

 

$

1,353

 

 

$

2,284

 

 

$

955

 

 

$

(2,053

)

 

$

2,989

 

22


 

 

 

 

December 31, 2018

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4

 

 

$

 

 

$

89

 

 

$

15

 

 

$

 

 

$

108

 

Restricted cash

 

 

 

 

 

 

 

 

45

 

 

 

27

 

 

 

 

 

 

72

 

Accounts receivable, net

 

 

 

 

 

 

 

 

157

 

 

 

17

 

 

 

(21

)

 

 

153

 

Timeshare financing receivables, net

 

 

 

 

 

 

 

 

209

 

 

 

911

 

 

 

 

 

 

1,120

 

Inventory

 

 

 

 

 

 

 

 

502

 

 

 

25

 

 

 

 

 

 

527

 

Property and equipment, net

 

 

 

 

 

 

 

 

553

 

 

 

6

 

 

 

 

 

 

559

 

Investments in unconsolidated affiliate

 

 

 

 

 

 

 

 

38

 

 

 

 

 

 

 

 

 

38

 

Intangible assets, net

 

 

 

 

 

 

 

 

81

 

 

 

 

 

 

 

 

 

81

 

Other assets

 

 

 

 

 

6

 

 

 

41

 

 

 

48

 

 

 

 

 

 

95

 

Investments in subsidiaries

 

 

612

 

 

 

1,210

 

 

 

277

 

 

 

 

 

 

(2,099

)

 

 

 

TOTAL ASSETS

 

$

616

 

 

$

1,216

 

 

$

1,992

 

 

$

1,049

 

 

$

(2,120

)

 

$

2,753

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued

   expenses and other

 

$

 

 

$

 

 

$

332

 

 

$

13

 

 

$

(21

)

 

$

324

 

Advanced deposits

 

 

 

 

 

 

 

 

101

 

 

 

 

 

 

 

 

 

101

 

Debt, net

 

 

 

 

 

604

 

 

 

 

 

 

 

 

 

 

 

 

604

 

Non-recourse debt, net

 

 

 

 

 

 

 

 

 

 

 

759

 

 

 

 

 

 

759

 

Deferred revenues

 

 

 

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

95

 

Deferred income tax liabilities

 

 

 

 

 

 

 

 

254

 

 

 

 

 

 

 

 

 

254

 

Total equity

 

 

616

 

 

 

612

 

 

 

1,210

 

 

 

277

 

 

 

(2,099

)

 

 

616

 

TOTAL LIABILITIES AND EQUITY

 

$

616

 

 

$

1,216

 

 

$

1,992

 

 

$

1,049

 

 

$

(2,120

)

 

$

2,753

 

23


 

 

 

 

For the Three Months Ended June 30, 2019

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

 

 

$

 

 

$

103

 

 

$

17

 

 

$

 

 

$

120

 

Sales, marketing, license and other fees

 

 

 

 

 

 

 

 

154

 

 

 

3

 

 

 

(12

)

 

 

145

 

Financing

 

 

 

 

 

 

 

 

20

 

 

 

25

 

 

 

(2

)

 

 

43

 

Resort and club management

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

 

43

 

Rental and ancillary services

 

 

 

 

 

 

 

 

60

 

 

 

 

 

 

 

 

 

60

 

Cost reimbursements

 

 

 

 

 

 

 

 

42

 

 

 

1

 

 

 

 

 

 

43

 

Total revenues

 

 

 

 

 

 

 

 

422

 

 

 

46

 

 

 

(14

)

 

 

454

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

28

 

 

 

4

 

 

 

 

 

 

32

 

Sales and marketing

 

 

 

 

 

 

 

 

187

 

 

 

11

 

 

 

(12

)

 

 

186

 

Financing

 

 

 

 

 

 

 

 

4

 

 

 

10

 

 

 

(2

)

 

 

12

 

Resort and club management

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Rental and ancillary services

 

 

 

 

 

 

 

 

36

 

 

 

1

 

 

 

 

 

 

37

 

General and administrative

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

 

 

 

29

 

Depreciation and amortization

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

License fee expense

 

 

 

 

 

 

 

 

25

 

 

 

1

 

 

 

 

 

 

26

 

Cost reimbursements

 

 

 

 

 

 

 

 

42

 

 

 

1

 

 

 

 

 

 

43

 

Total operating expenses

 

 

 

 

 

 

 

 

376

 

 

 

28

 

 

 

(14

)

 

 

390

 

Interest expense

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

(11

)

Dividends from subsidiary

 

 

150

 

 

 

150

 

 

 

 

 

 

 

 

 

(300

)

 

 

 

Equity in earnings from unconsolidated

   affiliates

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Other loss, net

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Income before income taxes

 

 

150

 

 

 

139

 

 

 

47

 

 

 

18

 

 

 

(300

)

 

 

54

 

Income tax expense

 

 

 

 

 

 

 

 

(14

)

 

 

(1

)

 

 

 

 

 

(15

)

Income before equity in earnings

   from subsidiaries

 

 

150

 

 

 

139

 

 

 

33

 

 

 

17

 

 

 

(300

)

 

 

39

 

Equity in (losses) earnings from subsidiaries

 

 

(111

)

 

 

50

 

 

 

17

 

 

 

 

 

 

44

 

 

 

 

Net income

 

$

39

 

 

$

189

 

 

$

50

 

 

$

17

 

 

$

(256

)

 

$

39

 

24


 

 

 

 

For the Three Months Ended June 30, 2018

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

 

 

$

 

 

$

248

 

 

$

2

 

 

$

 

 

$

250

 

Sales, marketing, license and other fees

 

 

 

 

 

 

 

 

147

 

 

 

1

 

 

 

(2

)

 

 

146

 

Financing

 

 

 

 

 

 

 

 

17

 

 

 

23

 

 

 

(1

)

 

 

39

 

Resort and club management

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Rental and ancillary services

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

53

 

Cost reimbursements

 

 

 

 

 

 

 

 

37

 

 

 

1

 

 

 

 

 

 

38

 

Total revenues

 

 

 

 

 

 

 

 

539

 

 

 

27

 

 

 

(3

)

 

 

563

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

61

 

Sales and marketing

 

 

 

 

 

 

 

 

193

 

 

 

2

 

 

 

(2

)

 

 

193

 

Financing

 

 

 

 

 

 

 

 

5

 

 

 

8

 

 

 

(1

)

 

 

12

 

Resort and club management

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Rental and ancillary services

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

30

 

General and administrative

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

30

 

Depreciation and amortization

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

License fee expense

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Cost reimbursements

 

 

 

 

 

 

 

 

37

 

 

 

1

 

 

 

 

 

 

38

 

Total operating expenses

 

 

 

 

 

 

 

 

400

 

 

 

11

 

 

 

(3

)

 

 

408

 

Interest expense

 

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

(8

)

Equity in losses from unconsolidated

   affiliates

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

Other gain, net

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Income (loss) before income taxes

 

 

 

 

 

(8

)

 

 

138

 

 

 

16

 

 

 

 

 

 

146

 

Income tax expense

 

 

 

 

 

 

 

 

(39

)

 

 

 

 

 

 

 

 

(39

)

Income (loss) before equity in earnings

   (loss) from subsidiaries

 

 

 

 

 

(8

)

 

 

99

 

 

 

16

 

 

 

 

 

 

107

 

Equity in earnings from subsidiaries

 

 

107

 

 

 

115

 

 

 

16

 

 

 

 

 

 

(238

)

 

 

 

Net income

 

$

107

 

 

$

107

 

 

$

115

 

 

$

16

 

 

$

(238

)

 

$

107

 

25


 

 

 

 

For the Six Months Ended June 30, 2019

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

 

 

$

 

 

$

210

 

 

$

35

 

 

$

 

 

$

245

 

Sales, marketing, license and other fees

 

 

 

 

 

 

 

 

305

 

 

 

4

 

 

 

(23

)

 

 

286

 

Financing

 

 

 

 

 

 

 

 

38

 

 

 

50

 

 

 

(4

)

 

 

84

 

Resort and club management

 

 

 

 

 

 

 

 

85

 

 

 

 

 

 

 

 

 

85

 

Rental and ancillary services

 

 

 

 

 

 

 

 

118

 

 

 

1

 

 

 

 

 

 

119

 

Cost reimbursements

 

 

 

 

 

 

 

 

83

 

 

 

2

 

 

 

 

 

 

85

 

Total revenues

 

 

 

 

 

 

 

 

839

 

 

 

92

 

 

 

(27

)

 

 

904

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

61

 

 

 

7

 

 

 

 

 

 

68

 

Sales and marketing

 

 

 

 

 

 

 

 

357

 

 

 

22

 

 

 

(23

)

 

 

356

 

Financing

 

 

 

 

 

 

 

 

8

 

 

 

21

 

 

 

(4

)

 

 

25

 

Resort and club management

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

23

 

Rental and ancillary services

 

 

 

 

 

 

 

 

70

 

 

 

2

 

 

 

 

 

 

72

 

General and administrative

 

 

 

 

 

 

 

 

54

 

 

 

 

 

 

 

 

 

54

 

Depreciation and amortization

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

23

 

License fee expense

 

 

 

 

 

 

 

 

47

 

 

 

2

 

 

 

 

 

 

49

 

Cost reimbursements

 

 

 

 

 

 

 

 

83

 

 

 

2

 

 

 

 

 

 

85

 

Total operating expenses

 

 

 

 

 

 

 

 

726

 

 

 

56

 

 

 

(27

)

 

 

755

 

Interest expense

 

 

 

 

 

(21

)

 

 

 

 

 

 

 

 

 

 

 

(21

)

Dividends from subsidiary

 

 

275

 

 

 

275

 

 

 

 

 

 

 

 

 

(550

)

 

 

 

Equity in earnings from unconsolidated

   affiliates

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Other loss, net

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

Income before income taxes

 

 

275

 

 

 

254

 

 

 

114

 

 

 

36

 

 

 

(550

)

 

 

129

 

Income tax expense

 

 

 

 

 

 

 

 

(34

)

 

 

(1

)

 

 

 

 

 

(35

)

Income before equity in earnings

   from subsidiaries

 

 

275

 

 

 

254

 

 

 

80

 

 

 

35

 

 

 

(550

)

 

 

94

 

Equity in (losses) earnings from subsidiaries

 

 

(181

)

 

 

115

 

 

 

35

 

 

 

 

 

 

31

 

 

 

 

Net income

 

$

94

 

 

$

369

 

 

$

115

 

 

$

35

 

 

$

(519

)

 

$

94

 

26


 

 

 

 

 

For the Six Months Ended June 30, 2018

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

 

 

$

 

 

$

325

 

 

$

3

 

 

$

 

 

$

328

 

Sales, marketing, license and other fees

 

 

 

 

 

 

 

 

273

 

 

 

2

 

 

 

(4

)

 

 

271

 

Financing

 

 

 

 

 

 

 

 

37

 

 

 

42

 

 

 

(2

)

 

 

77

 

Resort and club management

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

 

 

 

76

 

Rental and ancillary services

 

 

 

 

 

 

 

 

103

 

 

 

1

 

 

 

 

 

 

104

 

Cost reimbursements

 

 

 

 

 

 

 

 

72

 

 

 

2

 

 

 

 

 

 

74

 

Total revenues

 

 

 

 

 

 

 

 

886

 

 

 

50

 

 

 

(6

)

 

 

930

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

80

 

Sales and marketing

 

 

 

 

 

 

 

 

354

 

 

 

4

 

 

 

(4

)

 

 

354

 

Financing

 

 

 

 

 

 

 

 

10

 

 

 

15

 

 

 

(2

)

 

 

23

 

Resort and club management

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Rental and ancillary services

 

 

 

 

 

 

 

 

57

 

 

 

1

 

 

 

 

 

 

58

 

General and administrative

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

53

 

Depreciation and amortization

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

16

 

License fee expense

 

 

 

 

 

 

 

 

48

 

 

 

 

 

 

 

 

 

48

 

Cost reimbursements

 

 

 

 

 

 

 

 

72

 

 

 

2

 

 

 

 

 

 

74

 

Total operating expenses

 

 

 

 

 

 

 

 

712

 

 

 

22

 

 

 

(6

)

 

 

728

 

Interest expense

 

 

 

 

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

(15

)

Equity in losses from unconsolidated

   affiliates

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Income (loss) before income taxes

 

 

 

 

 

(15

)

 

 

173

 

 

 

28

 

 

 

 

 

 

186

 

Income tax expense

 

 

 

 

 

 

 

 

(49

)

 

 

 

 

 

 

 

 

(49

)

Income (loss) before equity in earnings

   (loss) from subsidiaries

 

 

 

 

 

(15

)

 

 

124

 

 

 

28

 

 

 

 

 

 

137

 

Equity in earnings from subsidiaries

 

 

137

 

 

 

152

 

 

 

28

 

 

 

 

 

 

(317

)

 

 

 

Net income

 

$

137

 

 

$

137

 

 

$

152

 

 

$

28

 

 

$

(317

)

 

$

137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


27


 

 

 

 

For the Six Months Ended June 30, 2019

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating

   activities

 

$

 

 

$

254

 

 

$

(43

)

 

$

136

 

 

$

(275

)

 

$

72

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for property and

   equipment

 

 

 

 

 

 

 

 

(17

)

 

 

 

 

 

 

 

 

(17

)

Software capitalization costs

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

(11

)

Investments in unconsolidated affiliates

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

Dividends from subsidiary

 

 

275

 

 

 

275

 

 

 

 

 

 

 

 

 

(550

)

 

 

 

Net cash used in (provided by) investing activities

 

 

275

 

 

 

275

 

 

 

(30

)

 

 

 

 

 

(550

)

 

 

(30

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of debt

 

 

 

 

 

410

 

 

 

 

 

 

 

 

 

 

 

 

410

 

Issuance of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

15

 

Repayment of debt

 

 

 

 

 

(100

)

 

 

(5

)

 

 

 

 

 

 

 

 

(105

)

Repayment of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

(79

)

 

 

 

 

 

(79

)

Debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Repurchase and retirement of common stock

 

 

(271

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(271

)

Payment of withholding taxes on vesting of

   restricted stock units

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

(3

)

Proceeds from employee stock plan purchases

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Other financing activity

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

Intercompany transfers

 

 

(1

)

 

 

(839

)

 

 

81

 

 

 

(66

)

 

 

825

 

 

 

 

Net cash used in (provided by) financing

   activities

 

 

(272

)

 

 

(529

)

 

 

73

 

 

 

(132

)

 

 

825

 

 

 

(35

)

Net increase in cash, cash equivalents and

   restricted cash

 

 

3

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

7

 

Cash, cash equivalents and restricted cash,

   beginning of period

 

 

4

 

 

 

 

 

 

134

 

 

 

42

 

 

 

 

 

 

180

 

Cash, cash equivalents and restricted cash,

   end of period

 

$

7

 

 

$

 

 

$

134

 

 

$

46

 

 

$

 

 

$

187

 

 

28


 

 

 

For the Six Months Ended June 30, 2018

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating

   activities

 

$

 

 

$

(14

)

 

$

42

 

 

$

(205

)

 

$

43

 

 

$

(134

)

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for property and

   equipment

 

 

 

 

 

 

 

 

(18

)

 

 

(2

)

 

 

 

 

 

(20

)

Software capitalization costs

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

 

 

 

(9

)

Return of investment from unconsolidated affiliates

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Investment in unconsolidated affiliates

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

(5

)

Net cash used in investing activities

 

 

 

 

 

 

 

 

(21

)

 

 

(2

)

 

 

 

 

 

(23

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of debt

 

 

 

 

 

160

 

 

 

 

 

 

 

 

 

 

 

 

160

 

Issuance of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

100

 

Repurchase and retirement of common stock

 

 

 

 

 

(112

)

 

 

 

 

 

 

 

 

 

 

 

(112

)

Repayment of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

 

 

 

(80

)

Repayment of debt

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

(5

)

Debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Payment of withholding taxes on vesting of restricted stock units

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

(1

)

Capital contribution

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Intercompany transfers

 

 

 

 

 

(31

)

 

 

(111

)

 

 

185

 

 

 

(43

)

 

 

 

Net cash provided by (used in) financing

   activities

 

 

 

 

 

14

 

 

 

(111

)

 

 

203

 

 

 

(43

)

 

 

63

 

Net decrease in cash, cash equivalents and

   restricted cash

 

 

 

 

 

 

 

 

(90

)

 

 

(4

)

 

 

 

 

 

(94

)

Cash, cash equivalents and restricted cash,

   beginning of period

 

 

 

 

 

 

 

 

259

 

 

 

38

 

 

 

 

 

 

297

 

Cash, cash equivalents and restricted cash,

   end of period

 

$

 

 

$

 

 

$

169

 

 

$

34

 

 

$

 

 

$

203

 

 

Note 21: Subsequent Events

 

In July 2019, we executed the following transactions:

 

 

we completed the purchase of 87 hotel units for future conversion to 74 timeshare units located in Los Cabos, Mexico for $37 million;

 

 

we borrowed $20 million and repaid $5 million, respectively, under our revolving credit facility; and

 

 

we repaid $15 million under our Timeshare Facility.

 

29


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements convey management’s expectations as to our future, and are based on management’s beliefs, expectations, assumptions and such plans, estimates, projections and other information available to management at the time we make such statements. Forward-looking statements include all statements that are not historical facts and may be identified by terminology such as the words “outlook,” “believe,” “expect,” “potential,” “goal,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” predicts,” “intends,” “plans,” “estimates,” “anticipates” “future,” “guidance,” “target,” or the negative version of these words or other comparable words. The forward-looking statements contained in this Report include statements related to our revenues, earnings, taxes, cash flow and related financial and operating measures, and expectations with respect to future operating, financial and business performance, and other anticipated future events and expectations that are not historical facts.

 

We caution you that our forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, business performance or achievements expressed in or implied by such statements. The forward-looking statements in this Report are not guarantees of our future performance, and you should not place undue reliance on such statements. Factors that could cause our actual results to differ materially from those contemplated by our forward-looking statements include: risks associated with the inherent business, financial and operating risks of the timeshare industry, including limited underwriting standards due to the real-time nature of industry sales practices, and the intense competition associated with the industry; our ability successfully market and sell VOIs; our development and other activities to source inventory for VOI sales; significant increases in defaults on HGV’s vacation ownership mortgage receivables; the ability of managed homeowner associations to collect sufficient maintenance fees; general volatility in the economy and/or the financial and credit markets; adverse economic or market conditions and trends in the tourism and hospitality industry, which may impact the purchasing and vacationing decisions of consumers; our actions or the occurrence of other events that could cause a breach under or termination of our license agreement with Hilton that could affect or terminate our access to the Hilton brands and programs, or actions of Hilton that affect the reputation of the licensed marks or Hilton’s programs; economic and operational uncertainties related to our expanding global operations, including our ability to manage the outcome and timing of such operations and compliance with anti-corruption, data privacy and other applicable laws and regulations affecting our international operations; the effects of foreign currency exchange; changes in tax rates and exposure to additional tax liabilities; the impact of future changes in legislation, regulations or accounting pronouncements; HGV’s acquisitions, joint ventures, and strategic alliances that that may not result in expected benefits, including the termination of material fee-for-service agreements; our dependence on third-party development activities to secure just-in-time inventory; our use of social media platforms; cyber-attacks, security vulnerabilities, and information technology system failures resulting in disclosure of personal data, company data loss, system outages or disruptions of our online services, which could lead to reduced revenue, increased costs, liability claims, harm to user engagement, and harm to our reputation or competitive position; the impact of claims against us that may result in adverse outcomes, including regulatory proceedings or litigation; our credit facilities, indenture and other debt agreements and instruments, including variable interest rates, operating and financial restrictions, our ability to make scheduled payments, and our ability to refinance our debt on acceptable terms; the continued service and availability of key executives and employees; and catastrophic events or geo-political conditions including war, terrorist activity, political strife or natural disasters that may disrupt our operations in key vacation destinations. Any one or more of the foregoing factors could adversely impact our operations, revenue, operating margins, financial condition and/or credit rating.

 

For additional information regarding factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements in this Report, please see the risk factors discussed in “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and those described from time to time other periodic reports that we file with the SEC. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, changes in management’s expectations, or otherwise.

30


 

Terms Used in this Quarterly Report on Form 10-Q

 

Except where the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Hilton Grand Vacations,” “HGV,” “the Company,” “we,” “us” and “our” refer to Hilton Grand Vacations Inc., together with its consolidated subsidiaries. Except where the context requires otherwise, references to our “properties” and “rooms” refer to the timeshare properties managed, franchised, owned or leased by us. Of these properties and rooms, a portion are directly owned or leased by us or joint ventures in which we have an interest and the remaining properties and rooms are owned by third-party owners.

 

“Developed” refers VOI inventory that is sourced from projects developed by HGV.

 

“Fee for service” refers to VOI inventory that we sell and manage on behalf of third-party developers.

 

“Just-in-time” refers to VOI inventory that is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.

 

“VOI” refers to vacation ownership intervals.

 

Non-GAAP Financial Measures

 

This Quarterly Report on Form 10-Q includes discussion of terms that are not recognized terms under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), and financial measures that are not calculated in accordance with U.S. GAAP, including contract sales, sales revenue, real estate margin, earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and segment Adjusted EBITDA.

 

Operational Metrics

 

This Quarterly Report on Form 10-Q includes discussion of key business operational metrics including tour flow, volume per guest and transient rate.  

 

See “Key Business and Financial Metrics and Terms Used by Management” and “-Results of Operations” for a discussion of the meanings of these terms, the Company’s reasons for providing non-GAAP financial measures, and reconciliations of non-GAAP financial measures to measures calculated in accordance with U.S. GAAP.

Overview

Our Business

We are a growing timeshare company that markets and sells VOIs, manages resorts in top leisure and urban destinations, and operates a points-based vacation club. As of June 30, 2019, we have 57 properties, representing 9,177 units, which are located in iconic vacation destinations such as the Hawaiian Islands, New York City, Orlando and Las Vegas, and feature spacious, condominium-style accommodations with superior amenities and quality service. As of June 30, 2019, we have approximately 317,000 Hilton Grand Vacations Club (the “Club”) members. Club members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 17 industry-leading brands across more than 5,700 properties, as well as numerous experiential vacation options, such as cruises and guided tours.

We operate our business across two segments: (1) real estate sales and financing; and (2) resort operations and club management.

Real Estate Sales and Financing

Our primary product is the marketing and selling of fee-simple VOIs deeded in perpetuity, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week annually at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In 2010, we began sourcing VOIs through fee-for-service and just-in-time agreements with third-party developers and have successfully transformed from a capital-intensive business to one that is highly capital-efficient. The fee-for-service agreements enable us to generate fees from the sales and marketing of the VOIs and Club memberships and from the management of the timeshare properties without requiring us to

31


 

fund acquisition and construction costs. The just-in-time agreements enable us to source VOI inventory in a manner that allows us to correlate the timing of acquisition of the inventory with the sale to purchasers. Sales of owned, including just-in-time inventory, generally result in greater Adjusted EBITDA contributions, while fee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory and fee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital.

For the six months ended June 30, 2019, sales from fee-for-service, just-in-time and developed inventory sources were 55 percent, 17 percent and 28 percent, respectively, of contract sales. See “Key Business and Financial Metrics and Terms Used by Management——Real Estate Sales Metrics” for additional discussion of contract sales. Based on our trailing twelve months sales pace, we have access to approximately seven years of future inventory, with capital efficient arrangements representing approximately 56 percent of that supply. We believe that the visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales, reduce capital investments, minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering into new markets.

We provide financing for members purchasing our developed and acquired inventory and generate interest income. Our timeshare financing receivables are collateralized by the underlying VOIs and are generally structured as 10-year, fully-amortizing receivables that bear a fixed interest rate typically ranging from nine percent to 18 percent per annum.

The interest rate on our timeshare financing receivables is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the receivable term. The weighted average FICO score for new timeshare financing receivables to U.S. and Canadian borrowers at the time of origination were as follows:  

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Weighted-average FICO score

 

 

750

 

 

 

749

 

 

Prepayment is permitted without penalty. When a member defaults, we ultimately return their VOI to inventory for resale and that member no longer participates in our Club.

Some of our timeshare financing receivables have been pledged as collateral in our securitization transactions, which have in the past and may in the future provide funding for our business activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and related cash deposits. For additional information see Note 5: Timeshare Financing Receivables in our unaudited condensed consolidated financial statements.

In addition, we earn fees from servicing our securitized timeshare financing receivables and the timeshare financing receivables provided by third-party developers of our fee-for-service projects to purchasers of their VOIs.

Resort Operations and Club Management

We enter into management agreements with the HOA of the VOI owners for timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprising owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services include day-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The initial term of our management agreements typically ranges from three to five years and the agreements are subject to periodic renewal for one to three year periods. Many of these agreements renew automatically unless either party provides advance notice of termination before the expiration of the term.

We also manage and operate the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Club members. When owners purchase a VOI, they are generally enrolled in the Club and given an annual allotment of points that allow the member to exchange their annual usage rights in the VOI that they own for a number of vacation and travel options. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system.

32


 

We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges through our club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.

Key Business and Financial Metrics and Terms Used by Management

Real Estate Sales Metrics

The following are not recognized terms under U.S. GAAP:

 

Contract sales represents the total amount of VOI products (fee-for-service and developed) under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales is not a recognized term under U.S. GAAP and should not be considered in isolation or as an alternative to Sales of VOIs, net or any other comparable operating measure derived in accordance with U.S. GAAP. Contract sales differ from revenues from the Sales of VOIs, net that we report in our condensed consolidated statements of operations due to the requirements for revenue recognition, as well as adjustments for incentives and other administrative fee revenues. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our audited consolidated financial statements included in Item 8 in our Annual Report on form 10-K for the year ended December 31, 2018, for additional information on Sales of VOI, net.  

 

Sales revenue represents Sale of VOIs, net and commissions and brand fees earned from the sale of fee-for-service intervals.

 

Real estate margin represents sales revenue less the cost of VOI sales and sales and marketing costs, net of marketing revenue. Real estate margin percentage is calculated by dividing real estate margin by sales revenue. We consider this to be an important operating measure because it measures the efficiency of our sales and marketing spending and management of inventory costs.

 

Tour flow represents the number of sales presentations given at our sales centers during the period.

 

Volume per guest (“VPG”) represents the sales attributable to tours at our sales locations and is calculated by dividing Contract sales, excluding telesales, by tour flow. 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 closing rate.

Resort and Club Management and Rental Metrics

 

Transient rate represents the total rental room revenue for transient guests divided by total number of transient room nights sold in a given period and excludes room rentals associated with marketing programs, owner usage and the redemption of Club Bonus Points.

For further information see Item 8. Financial Statements and Supplementary Data - Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2018.

EBITDA and Adjusted EBITDA

EBITDA, presented herein, is a financial measure that is not recognized under U.S. GAAP that reflects net income (loss), before interest expense (excluding non-recourse debt), a provision for income taxes and depreciation and amortization.

Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and certain other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

33


 

We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under U.S. GAAP. Some of these limitations are:

 

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

EBITDA and Adjusted EBITDA do not reflect our interest expense (excluding interest expense on non-recourse debt), or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;

 

EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

 

EBITDA and Adjusted EBITDA do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and

 

EBITDA and Adjusted EBITDA may be calculated differently from other companies in our industry limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

Results of Operations

Three and Six Months Ended June 30, 2019 Compared with the Three and Six Months Ended June 30, 2018  

Segment Results

We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 18: Business Segments in our unaudited condensed consolidated financial statements. We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment revenues. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses them to manage our business and material limitations on their usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” The following tables set forth revenues and Adjusted EBITDA by segment:

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing

 

$

308

 

 

$

435

 

 

$

(127

)

 

 

(29.2

)%

 

$

615

 

 

$

676

 

 

$

(61

)

 

 

(9.0

)%

Resort operations and club

   management

 

 

114

 

 

 

98

 

 

 

16

 

 

 

16.3

 

 

 

224

 

 

 

196

 

 

 

28

 

 

 

14.3

 

Segment revenues

 

 

422

 

 

 

533

 

 

 

(111

)

 

 

(20.8

)

 

 

839

 

 

 

872

 

 

 

(33

)

 

 

(3.8

)

Cost reimbursements

 

 

43

 

 

 

38

 

 

 

5

 

 

 

13.2

 

 

 

85

 

 

 

74

 

 

 

11

 

 

 

14.9

 

Intersegment eliminations(1)

 

 

(11

)

 

 

(8

)

 

 

(3

)

 

 

37.5

 

 

 

(20

)

 

 

(16

)

 

 

(4

)

 

 

25.0

 

Total revenues

 

$

454

 

 

$

563

 

 

$

(109

)

 

 

(19.4

)

 

$

904

 

 

$

930

 

 

$

(26

)

 

 

(2.8

)

 

(1)

Refer to Note 18: Business Segments in our unaudited condensed consolidated financial statements for details on the intersegment eliminations.

34


 

The following table reconciles net income, our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Net Income

 

$

39

 

 

$

107

 

 

$

(68

)

 

 

(63.6

)%

 

$

94

 

 

$

137

 

 

$

(43

)

 

 

(31.4

)%

Interest expense

 

 

11

 

 

 

8

 

 

 

3

 

 

 

37.5

 

 

 

21

 

 

 

15

 

 

 

6

 

 

 

40.0

 

Income tax expense

 

 

15

 

 

 

39

 

 

 

(24

)

 

 

(61.5

)

 

 

35

 

 

 

49

 

 

 

(14

)

 

 

(28.6

)

Depreciation and amortization

 

 

13

 

 

 

8

 

 

 

5

 

 

 

62.5

 

 

 

23

 

 

 

16

 

 

 

7

 

 

 

43.8

 

Interest expense, depreciation and

   amortization included in equity in

   earnings (losses) from

   unconsolidated affiliates

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

 

 

 

 

 

 

EBITDA

 

 

79

 

 

 

163

 

 

 

(84

)

 

 

(51.5

)

 

 

175

 

 

 

219

 

 

 

(44

)

 

 

(20.1

)

Other loss (gain)

 

 

1

 

 

 

(1

)

 

 

2

 

 

NM(1)

 

 

 

2

 

 

 

 

 

 

2

 

 

NM(1)

 

Share-based compensation expense

 

 

7

 

 

 

5

 

 

 

2

 

 

 

40.0

 

 

 

12

 

 

 

8

 

 

 

4

 

 

 

50.0

 

Other adjustment items(2)

 

 

3

 

 

 

8

 

 

 

(5

)

 

 

(62.5

)

 

 

3

 

 

 

10

 

 

 

(7

)

 

 

(70.0

)

Adjusted EBITDA

 

$

90

 

 

$

175

 

 

$

(85

)

 

 

(48.6

)

 

$

192

 

 

$

237

 

 

$

(45

)

 

 

(19.0

)

 

(1)

Fluctuation in terms of percentage change is not meaningful.

(2)

Includes costs associated with the spin-off transaction and severance costs of $2 million and $5 million for the three months ended June 30, 2019 and 2018, respectively, and $2 million and $7 million for the six months ended June 30, 2019 and 2018, respectively.  

 

The following table shows our segment Adjusted EBITDA to Adjusted EBITDA:

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing(2)

 

$

69

 

 

$

163

 

 

$

(94

)

 

 

(57.7

)%

 

$

149

 

 

$

207

 

 

$

(58

)

 

 

(28.0

)%

Resort operations and club

   management(2)

 

 

66

 

 

 

58

 

 

 

8

 

 

 

13.8

 

 

 

131

 

 

 

117

 

 

 

14

 

 

 

12.0

 

Segment Adjusted EBITDA

 

 

135

 

 

 

221

 

 

 

(86

)

 

 

(38.9

)

 

 

280

 

 

 

324

 

 

 

(44

)

 

 

(13.6

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from

   unconsolidated affiliates

 

 

3

 

 

 

(1

)

 

 

4

 

 

NM(1)

 

 

 

5

 

 

 

1

 

 

 

4

 

 

NM(1)

 

License fee expense

 

 

(26

)

 

 

(25

)

 

 

(1

)

 

 

4.0

 

 

 

(49

)

 

 

(48

)

 

 

(1

)

 

 

2.1

 

General and administrative(3)

 

 

(22

)

 

 

(20

)

 

 

(2

)

 

 

10.0

 

 

 

(44

)

 

 

(40

)

 

 

(4

)

 

 

10.0

 

Adjusted EBITDA

 

$

90

 

 

$

175

 

 

$

(85

)

 

 

(48.6

)

 

$

192

 

 

$

237

 

 

$

(45

)

 

 

(19.0

)

 

(1)

Fluctuation in terms of percentage change is not meaningful.

(2)

Includes intersegment eliminations, share-based compensation attributable to the segment and other adjustments.

(3)

Excludes segment related share-based compensation and other adjustment items.

Real Estate Sales and Financing

Real estate sales and financing segment revenues decreased by $127 million for the three months ended June 30, 2019, compared to the same period in 2018, primarily due to a $136 million decrease in sales revenue, partially offset by a $5 million increase in marketing revenue and other fees mainly associated with higher vacation package sales and a $4 million increase in financing revenue related to an increase in interest income from higher outstanding timeshare receivables balance and an increase in servicing fees.  Sales revenue decreased for the three months ended June 30, 2019, compared to the same period in 2018, primarily due to a $34 million decrease in revenue recognition from sales of VOIs on one property under construction compared to a $91 million net increase in revenue recognition from the completion of a timeshare resort under construction during the same period in 2018.  Real estate sales and financing segment Adjusted EBITDA decreased by $94 million for the three months ended June 30, 2019, compared to the same period in 2018, primarily due to the decreases in revenue associated with the segment discussed above.

35


 

Real estate sales and financing segment revenues decreased by $61 million for the six months ended June 30, 2019, compared to the same period in 2018, primarily due to a $76 million decrease in sales revenue, partially offset by (i) an $8 million increase in marketing revenue and other fees mainly associated with higher vacation package sales, (ii) an increase in commission and brand fees due to higher fee-for-service sales at existing fee-for-service properties, and (iii) a $7 million increase in financing revenue related to an increase in interest income from higher outstanding timeshare receivables balance and an increase in servicing fees.  Sales revenue decreased for the six months ended June 30, 2019, compared to the same period in 2018, primarily due to a $34 million decrease in revenue recognition from sales of VOIs on one property under construction compared to a $25 million net increase in revenue recognition from the completion of a timeshare resort under construction during the same period in 2018. Real estate sales and financing segment Adjusted EBITDA decreased by $58 million for the six months ended June 30, 2019, compared to the same period in 2018, primarily due to the decreases in revenue associated with the segment discussed above.

Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.

Resort Operations and Club Management

Resort operations and club management segment revenues increased by $16 million for the three months ended June 30, 2019, compared to the same period in 2018, primarily due to (i) an increase of $6 million in resort and club management revenues due to an increase in Club members as well as higher resort management revenue from the launch of new properties subsequent to the second quarter of 2018 and (ii) an increase of $7 million in rental and ancillary services revenues.  Rental and ancillary services revenue increased due to higher transient rental room revenue, primarily due to the June 2018 acquisition of an operating hotel and higher club inventory rentals at our developed and fee-for-service properties.  Resort operations and club management segment Adjusted EBITDA increased by $8 million for the three months ended June 30, 2019, compared to the same period in 2018, primarily due to the increases in revenues associated with the segment, partially offset by an increase of $8 million in segment expenses primarily due to the June 2018 acquisition of an operating hotel.

Resort operations and club management segment revenues increased by $28 million for the six months ended June 30, 2019, compared to the same period in 2018, primarily due to (i) an increase of $9 million in resort and club management revenues primarily due to an increase in Club members and (ii) an increase of $15 million in rental and ancillary services revenues.  Rental and ancillary services revenue increased primarily due to higher transient rental room revenue, primarily due to the June 2018 acquisition of an operating hotel and higher club inventory rentals at our developed and fee-for-service properties.  Resort operations and club management segment Adjusted EBITDA increased by $14 million for the six months ended June 30, 2019, compared to the same period in 2018, primarily due to the increases in revenues associated with the segment, partially offset by an increase of $15 million in segment expenses primarily due to the June 2018 acquisition of an operating hotel.

Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.

36


 

Real Estate Sales and Financing Segment

Real Estate

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions, except Tour flow and VPG)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Sales of VOIs, net

 

$

120

 

 

$

250

 

 

$

(130

)

 

 

(52.0

)%

 

$

245

 

 

$

328

 

 

$

(83

)

 

 

(25.3

)%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee-for-service sales(2)

 

 

185

 

 

 

193

 

 

 

(8

)

 

 

(4.1

)

 

 

375

 

 

 

363

 

 

 

12

 

 

 

3.3

 

Provision for financing receivables

   losses

 

 

24

 

 

 

18

 

 

 

6

 

 

 

33.3

 

 

 

38

 

 

 

30

 

 

 

8

 

 

 

26.7

 

Reportability and other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferral (recognition) of sales

   of VOIs under construction(3)

 

 

34

 

 

 

(91

)

 

 

125

 

 

NM(1)

 

 

 

34

 

 

 

(25

)

 

 

59

 

 

NM(1)

 

Fee-for-service sales upgrades, net

 

 

(10

)

 

 

(11

)

 

 

1

 

 

 

(9.1

)

 

 

(24

)

 

 

(19

)

 

 

(5

)

 

 

26.3

 

Other(4)

 

 

10

 

 

 

(2

)

 

 

12

 

 

NM(1)

 

 

 

17

 

 

 

9

 

 

 

8

 

 

 

88.9

 

Contract sales

 

$

363

 

 

$

357

 

 

$

6

 

 

 

1.7

 

 

$

685

 

 

$

686

 

 

$

(1

)

 

 

(0.1

)

Tour flow

 

 

101,712

 

 

 

94,269

 

 

 

7,443

 

 

 

7.9

 

 

 

184,356

 

 

 

171,969

 

 

 

12,387

 

 

 

7.2

 

VPG

 

$

3,393

 

 

$

3,597

 

 

$

(204

)

 

 

(5.7

)

 

$

3,520

 

 

$

3,778

 

 

$

(258

)

 

 

(6.8

)

 

(1)

Fluctuation in terms of percentage change is not meaningful.

(2)

Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.

(3)

Represents the net impact of deferred revenues related to the Sales of VOIs under construction that are recognized when construction is complete.

(4)

Includes adjustments for revenue recognition, including amounts in rescission and sales incentives.

Contract sales increased for the three months ended June 30, 2019, compared to the same period in 2018, primarily due to eight percent growth in tour flow, partially offset by lower VPG from both a 50-basis point decline in close rate and average transaction price reduction. Contract sales was relatively flat for the six months ended June 30, 2019, compared to the same period in 2018, primarily due to lower VPG from both an 80-basis point decline in close rate and average transaction price reduction, offset by a seven percent improvement in tour flow.

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Sales of VOIs, net

 

$

120

 

 

$

250

 

 

$

(130

)

 

 

(52.0

)%

 

$

245

 

 

$

328

 

 

$

(83

)

 

 

(25.3

)%

Sales, marketing, brand and other fees

 

 

145

 

 

 

146

 

 

 

(1

)

 

 

(0.7

)

 

 

286

 

 

 

271

 

 

 

15

 

 

 

5.5

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing revenue and other fees

 

 

38

 

 

 

33

 

 

 

5

 

 

 

15.2

 

 

 

68

 

 

 

60

 

 

 

8

 

 

 

13.3

 

Sales revenue

 

 

227

 

 

 

363

 

 

 

(136

)

 

 

(37.5

)

 

 

463

 

 

 

539

 

 

 

(76

)

 

 

(14.1

)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

32

 

 

 

61

 

 

 

(29

)

 

 

(47.5

)

 

 

68

 

 

 

80

 

 

 

(12

)

 

 

(15.0

)

Sales and marketing expense, net(1)

 

 

139

 

 

 

152

 

 

 

(13

)

 

 

(8.6

)

 

 

270

 

 

 

278

 

 

 

(8

)

 

 

(2.9

)

Real estate margin

 

$

56

 

 

$

150

 

 

$

(94

)

 

 

(62.7

)

 

$

125

 

 

$

181

 

 

$

(56

)

 

 

(30.9

)

Real estate margin percentage

 

 

24.7

%

 

 

41.3

%

 

 

 

 

 

 

 

 

 

 

27.0

%

 

 

33.6

%

 

 

 

 

 

 

 

 

 

(1)

Includes revenue recognized through our marketing programs for existing owners and prospective first-time buyers and revenue associated with sales incentives, title service and document compliance.

Sales revenue decreased for the three months ended June 30, 2019, compared to the same period in 2018, primarily due to (i) a $34 million decrease in revenue recognition from sales of VOIs on one property under construction compared to a $91 million net increase in revenue recognition from the completion of a timeshare resort under construction during the same period in 2018 and (ii) a decrease in VPG driven by a decrease in the close rate and a reduction in the average transaction price, and (iii) a decrease of $5 million in commission and brand fees due to lower fee-for-service VOI sales driven by a shift in inventory mix.  The decrease in sales revenue was partially offset by a $5 million increase in marketing revenue and other fees mainly associated with higher vacation package sales. The decrease in real estate margin and margin percentage for the three months ended June 30, 2019, compared to 2018, was primarily due the reduction in sales revenue, partially offset by deferred expenses from the sales of one property under construction.

37


 

Sales revenue decreased for the six months ended June 30, 2019, compared to the same period in 2018, primarily due to (i) a $34 million decrease in revenue recognition from sales of VOIs on one property under construction compared to a $25 million net increase in revenue recognition from the completion of a timeshare resort under construction during the same period in 2018.  The decrease in sales revenue was partially offset by (i) an increase of $8 million in commission and brand fees due to higher fee-for-service sales at our existing fee-for-service properties and (ii) an $8 million increase in marketing revenue and other fees mainly associated with higher vacation package sales.  The decrease in real estate margin and margin percentage for the six months ended June 30, 2019, compared to the same period in 2018, was primarily due to the reduction in sales revenue, partially offset by deferred expenses from the sales of one property under construction.

Financing

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Interest income

 

$

36

 

 

$

34

 

 

$

2

 

 

 

5.9

%

 

$

72

 

 

$

68

 

 

$

4

 

 

 

5.9

%

Other financing revenue

 

 

7

 

 

 

5

 

 

 

2

 

 

 

40.0

 

 

 

12

 

 

 

9

 

 

 

3

 

 

 

33.3

 

Financing revenue

 

 

43

 

 

 

39

 

 

 

4

 

 

 

10.3

 

 

 

84

 

 

 

77

 

 

 

7

 

 

 

9.1

 

Consumer financing interest expense

 

 

7

 

 

 

6

 

 

 

1

 

 

 

16.7

 

 

 

14

 

 

 

10

 

 

 

4

 

 

 

40.0

 

Other financing expense

 

 

5

 

 

 

6

 

 

 

(1

)

 

 

(16.7

)

 

 

11

 

 

 

13

 

 

 

(2

)

 

 

(15.4

)

Financing expense

 

 

12

 

 

 

12

 

 

 

 

 

 

 

 

 

25

 

 

 

23

 

 

 

2

 

 

 

8.7

 

Financing margin

 

$

31

 

 

$

27

 

 

$

4

 

 

 

14.8

 

 

$

59

 

 

$

54

 

 

$

5

 

 

 

9.3

 

Financing margin percentage

 

 

72.1

%

 

 

69.2

%

 

 

 

 

 

 

 

 

 

 

70.2

%

 

 

70.1

%

 

 

 

 

 

 

 

 

 

Financing revenue increased by $4 million and $7 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018, is due to higher interest income resulting from higher average outstanding timeshare financing receivables balance during those respective periods and loan servicing revenues. Financing margin and margin percentage increased for the three months ended June 30, 2019, compared to the same period in 2018, primarily due increases in financing revenue.  Financing margin increased for the three and six months ended June 30, 2019, compared to the same periods in 2018, due to an increase in interest income as well as loan servicing revenue. Financing margin percentage increased for the three months ended June 30, 2019, primarily due to the increases in the segment revenue.

Resort Operations and Club Management Segment

Resort and Club Management

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Club management revenue

 

$

26

 

 

$

23

 

 

$

3

 

 

 

13.0

%

 

$

52

 

 

$

46

 

 

$

6

 

 

 

13.0

%

Resort management revenue

 

 

17

 

 

 

14

 

 

 

3

 

 

 

21.4

 

 

 

33

 

 

 

30

 

 

 

3

 

 

 

10.0

 

Resort and club management revenues

 

 

43

 

 

 

37

 

 

 

6

 

 

 

16.2

 

 

 

85

 

 

 

76

 

 

 

9

 

 

 

11.8

 

Club management expense

 

 

7

 

 

 

7

 

 

 

 

 

 

 

 

 

14

 

 

 

13

 

 

 

1

 

 

 

7.7

 

Resort management expense

 

 

5

 

 

 

4

 

 

 

1

 

 

 

25.0

 

 

 

9

 

 

 

9

 

 

 

 

 

 

 

Resort and club management expenses

 

 

12

 

 

 

11

 

 

 

1

 

 

 

9.1

 

 

 

23

 

 

 

22

 

 

 

1

 

 

 

4.5

 

Resort and club management margin

 

$

31

 

 

$

26

 

 

$

5

 

 

 

19.2

 

 

$

62

 

 

$

54

 

 

$

8

 

 

 

14.8

 

Resort and club management

   margin percentage

 

 

72.1

%

 

 

70.3

%

 

 

 

 

 

 

 

 

 

 

72.9

%

 

 

71.1

%

 

 

 

 

 

 

 

 

 

38


 

Resort and club management revenues increased for the three and six months ended June 30, 2019, compared to the same periods in 2018, primarily due to (i) an increase of approximately 18,000 Club members and higher rates pertaining to annual dues and transaction fees and (ii) an increase in resort management revenue from the launch of new properties subsequent to second quarter of 2018.  Resort and club management margin and margin percentage increased for the three and six months ended June 30, 2019, compared to the same periods in 2018, primarily due to increases in segment revenues.

Rental and Ancillary Services

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Rental revenues

 

$

53

 

 

$

46

 

 

$

7

 

 

 

15.2

%

 

$

105

 

 

$

91

 

 

$

14

 

 

 

15.4

%

Ancillary services revenues

 

 

7

 

 

 

7

 

 

 

 

 

 

 

 

 

14

 

 

 

13

 

 

 

1

 

 

 

7.7

 

Rental and ancillary services revenues

 

 

60

 

 

 

53

 

 

 

7

 

 

 

13.2

 

 

 

119

 

 

 

104

 

 

 

15

 

 

 

14.4

 

Rental expenses

 

 

30

 

 

 

25

 

 

 

5

 

 

 

20.0

 

 

 

59

 

 

 

48

 

 

 

11

 

 

 

22.9

 

Ancillary services expense

 

 

7

 

 

 

5

 

 

 

2

 

 

 

40.0

 

 

 

13

 

 

 

10

 

 

 

3

 

 

 

30.0

 

Rental and ancillary services

   expenses

 

 

37

 

 

 

30

 

 

 

7

 

 

 

23.3

 

 

 

72

 

 

 

58

 

 

 

14

 

 

 

24.1

 

Rental and ancillary services margin

 

$

23

 

 

$

23

 

 

$

 

 

 

 

 

$

47

 

 

$

46

 

 

$

1

 

 

 

2.2

 

Rental and ancillary services

   margin percentage

 

 

38.3

%

 

 

43.4

%

 

 

 

 

 

 

 

 

 

 

39.5

%

 

 

44.2

%

 

 

 

 

 

 

 

 

 

Rental and ancillary services revenues and expenses each increased by $7 million for the three months ended June 30, 2019 and increased by $15 million and $14 million for the six months ended June 30, 2019, respectively, compared to the same periods in 2018.  The increase in revenues and expenses is primarily due to  the acquisition of an operating hotel in June 2018.  In addition, we had higher club inventory rentals at our developed and fee-for-service properties.  Rental and ancillary services margin percentage decreased for the three and six months ended June 30, 2019, compared to the same periods in 2018 primarily due to increases in segment revenues and expenses discussed above.

Other Operating Expenses

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

General and administrative

 

$

29

 

 

$

30

 

 

$

(1

)

 

 

(3.3

)%

 

$

54

 

 

$

53

 

 

$

1

 

 

 

1.9

%

Depreciation and amortization

 

 

13

 

 

 

8

 

 

 

5

 

 

 

62.5

 

 

 

23

 

 

 

16

 

 

 

7

 

 

 

43.8

 

License fee expense

 

 

26

 

 

 

25

 

 

 

1

 

 

 

4.0

 

 

 

49

 

 

 

48

 

 

 

1

 

 

 

2.1

 

 

The change in other operating expenses for the three and six months ended June 30, 2019, compared to the same periods in 2018, primarily due to higher depreciation and amortization expense as a result of additional software placed into service primarily related to the Oracle cloud-based information system implementation during the second half of 2018 as well as additional depreciation on building and building leasehold improvements.  

 

Non-Operating Expenses

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Interest expense

 

$

11

 

 

$

8

 

 

$

3

 

 

 

37.5

%

 

$

21

 

 

$

15

 

 

$

6

 

 

 

40.0

%

Equity in (earnings) losses from

   unconsolidated affiliates

 

 

(2

)

 

 

2

 

 

 

(4

)

 

NM(1)

 

 

 

(3

)

 

 

1

 

 

 

(4

)

 

NM(1)

 

Other loss (gain), net

 

 

1

 

 

 

(1

)

 

 

2

 

 

NM(1)

 

 

 

2

 

 

 

 

 

 

2

 

 

NM(1)

 

Income tax expense

 

 

15

 

 

 

39

 

 

 

(24

)

 

 

(61.5

)

 

 

35

 

 

 

49

 

 

 

(14

)

 

 

(28.6

)

 

(1)

Fluctuation in terms of percentage change is not meaningful

39


 

 

The change in non-operating expenses for the three and six months ended June 30, 2019, compared to the same periods in 2018, is primarily due to (i) an increase in interest expense due to higher average outstanding balance on our senior secured credit facilities and (ii) a decrease in income tax expense primarily due to lower pre-tax income.

Liquidity and Capital Resources

Overview

 

Our cash management objectives are to maintain the availability of liquidity, minimize operational costs, make debt payments and fund future acquisitions and development projects. Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including payroll and related benefits, legal costs, operating costs associated with the operation of our resorts and sales centers, interest and scheduled principal payments on our outstanding indebtedness, inventory-related purchase commitments, and capital expenditures for renovations and maintenance at our offices and sales centers. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, inventory-related purchase commitments and costs associated with potential acquisitions and development projects.

We finance our short- and long-term liquidity needs primarily by cash and cash equivalents, cash generated from our operations, draws on our senior secured credit facility and our non-recourse revolving timeshare credit facility (“Timeshare Facility”), and through periodic securitizations of our timeshare financing receivables.  

 

As of June 30, 2019, we had total cash and cash equivalents of $187 million, including $67 million of restricted cash. The restricted cash balance relates to escrowed cash from our sales of our VOIs and reserves related to our non-recourse debt.  

 

As of June 30, 2019, we have $374 million remaining borrowing capacity under the revolver facility (“Revolver”) which includes $29 million of undrawn borrowing capacity available for letters of credit and $10 million available under short-term borrowings. In addition, we have $315 million remaining borrowing capacity under our Timeshare Facility.  See Note 11: Debt and Non-Recourse Debt for additional information.

We believe these sources of capital will be adequate to meet our short- and long-term liquidity requirements for operating expenses and other expenditures, including payroll and related benefits, legal costs, and to finance our long-term growth plan and capital expenditures for the foreseeable future.

We believe that our capital allocation strategy provides adequate funding for our operations, is flexible enough to fund our development pipeline, securitizes the optimal level of receivables at metrics setting the benchmark for the industry, and provides the ability to be strategically opportunistic in the marketplace, while providing returns to our shareholders.  We have made commitments with developers to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand.  As of June 30, 2019, our inventory-related purchase commitment was $511 million over twelve years of which we expect to purchase $38 million for the remaining of 2019.  

Sources and Uses of Our Cash

The following table summarizes our net cash flows and key metrics related to our liquidity:

 

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

72

 

 

$

(134

)

 

$

206

 

 

NM(1)

 

Investing activities

 

 

(30

)

 

 

(23

)

 

 

(7

)

 

 

30.4

%

Financing activities

 

 

(35

)

 

 

63

 

 

 

(98

)

 

NM(1)

 

 

(1)

Fluctuation in terms of percentage change is not meaningful.

40


 

Operating Activities

 

Cash flow provided by operating activities is primarily generated from (1) sales and financing of VOIs and (2) net cash generated from managing our resorts, Club operations and providing related ancillary services. Cash flows used in operating activities primarily include spending for the purchase and development of real estate for future conversion to inventory and funding our working capital needs. Our cash flows from operations generally vary due to the following factors related to the sale of our VOIs; the degree to which our owners finance their purchase and our owners’ repayment of timeshare financing receivables; the timing of management and sales and marketing services provided; and cash outlays for VOI inventory acquisition and development. Additionally, cash flow from operations will also vary depending upon our sales mix of VOIs; over time, we generally receive more cash from the sale of an owned VOI as compared to that from a fee-for-service sale.

 

The change in net cash flows provided by (used in) operating activities for the six months ended June 30, 2019, compared to the same period in 2018 was primarily due to (i) a reduction in the purchase and development of real estate for future conversion to inventory and (ii) a federal tax payment of $63 million made in January of 2018 which was deferred from 2017.

 

The following table exhibits our VOI inventory spending:

 

 

 

Six Months Ended June 30,

 

($ in millions)

 

2019

 

 

2018

 

VOI spending - owned properties

 

$

54

 

 

$

49

 

VOI spending - fee-for-service upgrades(1)

 

 

24

 

 

 

13

 

Purchases and development of real estate for future conversion to inventory

 

 

80

 

 

 

176

 

Total VOI inventory spending

 

$

158

 

 

$

238

 

 

(1)

Includes expense related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects of $16 million and $15 million recorded in Costs of VOI sales for the six months ended June 30, 2019 and 2018, respectively.

 

Investing Activities

The following table summarizes our net cash used in investing activities:

 

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

Capital expenditures for property and equipment

 

$

(17

)

 

$

(20

)

 

$

3

 

 

 

(15.0

)%

Software capitalization costs

 

 

(11

)

 

 

(9

)

 

 

(2

)

 

 

22.2

 

Return of investment from unconsolidated affiliates

 

 

 

 

 

11

 

 

 

(11

)

 

 

(100.0

)

Investments in unconsolidated affiliates

 

 

(2

)

 

 

(5

)

 

 

3

 

 

 

(60.0

)

Net cash used in investing activities

 

$

(30

)

 

$

(23

)

 

$

(7

)

 

 

30.4

 

 

The change in net cash used in investing activities for the six months ended June 30, 2019, compared to the same period in 2018, was primarily due to an $11 million return of investment from our 25 percent interest in BRE Ace LLC as a result of a distribution received in 2018.

41


 

Our capital expenditures include spending related to technology, buildings and leasehold improvements used to support sales and marketing locations, resort operations and corporate activities. We believe the renovations of our existing assets are necessary to stay competitive in the markets in which we operate.

Financing Activities

The following table summarizes our net cash provided by financing activities:

 

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2019

 

 

2018

 

 

$

 

 

%

 

Issuance of debt

 

$

410

 

 

$

160

 

 

$

250

 

 

NM(1)

 

Issuance of non-recourse debt

 

 

15

 

 

 

100

 

 

 

(85

)

 

 

(85.0

)%

Repayment of debt

 

 

(105

)

 

 

(5

)

 

 

(100

)

 

NM(1)

 

Repayment of non-recourse debt

 

 

(79

)

 

 

(80

)

 

 

1

 

 

 

(1.3

)

Debt issuance costs

 

 

(2

)

 

 

(2

)

 

 

 

 

 

 

Repurchase and retirement of common stock

 

 

(271

)

 

 

(112

)

 

 

(159

)

 

NM(1)

 

Payment of withholding taxes on vesting of restricted stock units

 

 

(3

)

 

 

(1

)

 

 

(2

)

 

NM(1)

 

Proceeds from employee stock plan purchases

 

 

2

 

 

 

 

 

 

2

 

 

NM(1)

 

Capital contribution

 

 

 

 

 

3

 

 

 

(3

)

 

 

(100.0

)

Other financing activity

 

 

(2

)

 

 

 

 

 

(2

)

 

NM(1)

 

Net cash (used in) provided by financing activities

 

$

(35

)

 

$

63

 

 

$

(98

)

 

NM(1)

 

 

(1)

Fluctuation in terms of percentage change is not meaningful.

 

The change in net cash flows (used in) provided by financing activities for the six months ended June 30, 2019 was primarily due to additional borrowings and repayments of debt and non-recourse debt, partially offset by an additional repurchases and retirements of common stock compared to the same period in 2018.

Contractual Obligations

The following table summarizes our significant contractual obligations as of June 30, 2019:

 

 

 

Payments Due by Period

 

($ in millions)

 

Total

 

 

Less Than 1

Year

 

 

1-3 Years

 

 

3-5 Years

 

 

More Than 5

Years

 

Debt(1)

 

$

1,173

 

 

$

56

 

 

$

110

 

 

$

661

 

 

$

346

 

Non-recourse debt(1)

 

 

755

 

 

 

205

 

 

 

375

 

 

 

124

 

 

 

51

 

Purchase commitments

 

 

485

 

 

 

120

 

 

 

275

 

 

 

90

 

 

 

 

Total contractual obligations

 

$

2,413

 

 

$

381

 

 

$

760

 

 

$

875

 

 

$

397

 

  

(1)

Includes principal, as well as estimated interest payments. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 2.398 percent as of June 30, 2019.

 

See Note 13: Leases in our unaudited condensed consolidated financial statements for information on our contractual obligations relating to our operating leases as of June 30, 2019.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of June 30, 2019 consisted of $511 million of certain commitments with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under the Hilton Grand Vacations brand. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 19: Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.

42


 

Subsequent Events

 

In July 2019, we executed the following transactions:

 

 

we completed the purchase of 87 hotel units for future conversion to 74 timeshare units located in Los Cabos, Mexico for $37 million;

 

 

we borrowed $20 million and repaid $5 million, respectively, under our revolving credit facility; and

 

 

we repaid $15 million under our Timeshare Facility.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2018.  

 

43


 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risk from changes in interest rates and currency exchange rates. We manage our exposure to these risks by monitoring available financing alternatives and through pricing policies that may take into account currency exchange rates. Our exposure to market risk has not materially changed from what we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Interest Rate Risk

We are exposed to interest rate risk on our variable-rate debt, comprised of the term loans, revolver and our Timeshare Facility, of which the Timeshare Facility is without recourse to us. The interest rates are based on one-month LIBOR and we are most vulnerable to changes in this rate.

We intend to securitize timeshare financing receivables in the asset-backed financing market periodically. We expect to secure fixed-rate funding to match our fixed-rate timeshare financing receivables. However, if we have variable-rate debt in the future, we will monitor the interest rate risk and evaluate opportunities to mitigate such risk through the use of derivative instruments.

To the extent we utilize variable-rate indebtedness in the future, any increase in interest rates beyond amounts covered under any corresponding derivative financial instruments, particularly if sustained, could have an adverse effect on our net income, cash flows and financial position. Hedging transactions we may enter into may not adequately mitigate the adverse effects of interest rate increases or that counterparties in those transactions will honor their obligations.

The following table sets forth the contractual maturities, weighted-average interest rates and the total fair values as of June 30, 2019, for our financial instruments that are materially affected by interest rate risk:

 

 

 

 

 

 

 

Maturities by Period

 

($ in millions)

 

Weighted

Average

Interest

Rate(1)

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

There-

after

 

 

Total(2)

 

 

Fair

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate securitized timeshare

   financing receivables

 

 

11.950

%

 

$

40

 

 

$

81

 

 

$

80

 

 

$

77

 

 

$

75

 

 

$

226

 

 

$

579

 

 

$

614

 

Fixed-rate unsecuritized

   timeshare financing

   receivables

 

 

12.685

%

 

 

39

 

 

 

58

 

 

 

64

 

 

 

70

 

 

 

75

 

 

 

414

 

 

 

720

 

 

 

773

 

Liabilities:(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

 

4.226

%

 

 

111

 

 

 

169

 

 

 

89

 

 

 

65

 

 

 

76

 

 

 

384

 

 

 

894

 

 

 

918

 

Variable-rate debt(4)

 

 

3.797

%

 

 

5

 

 

 

10

 

 

 

10

 

 

 

145

 

 

 

582

 

 

 

 

 

 

752

 

 

 

758

 

 

(1)

Weighted-average interest rate as of June 30, 2019.

(2)

Amount excludes unamortized deferred financing costs.

(3)

Includes debt and non-recourse debt.

(4)

Variable-rate debt includes principal outstanding debt of $617 million and non-recourse debt of $135 million as of June 30, 2019. See Note 11: Debt & Non-recourse Debt in our unaudited condensed consolidated financial statements for additional information.

Foreign Currency Exchange Rate Risk

Though the majority of our operations are conducted in United States dollar (“U.S. dollar”), we are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from our timeshare financing receivables denominated in Japanese yen, the value of which could change materially in reference to our reporting currency, the U.S. dollar. A 10 percent increase in the foreign exchange rate of Japanese yen to U.S. dollar would increase our gross timeshare financing receivables by less than $1 million.

44


 

ITEM 4.

Controls and Procedures

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) or our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated. 

In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our  Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

45


 

PART II OTHER INFORMATION

Item 1.

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has evaluated these legal matters and we believe an unfavorable outcome is either reasonably possible or remote and/or for which are not reasonably estimable. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of June 30, 2019 will not have a material effect on our unaudited condensed consolidated financial statements.  

Item 1A.

Risk Factors

 

As of June 30, 2019, there have been no material changes from the risk factors previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018. These risk factors may be important to understanding statements in this Form 10-Q and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

The risks described in our Annual Report on Form 10-K for the year ended December 31, 2018 contain forward-looking statements, and they may not be the only risks facing the Company. The business, financial condition and operating results of the Company can be affected by the risk factors described in the foregoing reports and by other factors currently unknown or that management presently believes not to be material.  Any one or more of such factors could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and the trading price of our common stock.  Because of these factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) Not applicable.

(c) Issuer Repurchases. In April 2019, our board of directors authorized an additional $200 million of shares repurchases under conditions substantially similar to the November 2018 authorization. During the three months ended June 30, 2019, we repurchased the following shares:

 

 

 

Total Number of

Shares Purchased

 

 

Average

Price Paid

Per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs

 

 

Appropriate

Dollar Value of

Shares that

May Yet Be

Purchased

Under Plan

 

April 1 - April 30, 2019

 

 

925,199

 

 

$

32.55

 

 

 

925,199

 

 

$

201,475,009

 

May 1 - May 31, 2019

 

 

941,000

 

 

 

28.52

 

 

 

941,000

 

 

 

174,633,868

 

June 1 - June 30, 2019

 

 

4,001,216

 

 

 

29.37

 

 

 

4,001,216

 

 

 

57,121,193

 

Total

 

 

5,867,415

 

 

$

29.74

 

 

 

5,867,415

 

 

$

57,121,193

 

 

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

46


 

Item 6.Exhibits

 

Exhibit

No.

 

Description

 

 

 

 

    3.1

 

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37794) filed on March 17, 2017).

 

 

 

    3.2

 

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-37794) filed on March 17, 2017).

 

 

 

    3.3

 

Second Supplemental Indenture, dated as of May 29, 2019, by and among the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee, to the Indenture, dated as of October 24, 2016, by and among Hilton Grand Vacations Borrower LLC, as the issuer, Hilton Grand Vacations Borrower Inc., as the co-issuer, the guarantors party thereto from time to time, and Wilmington Trust, National Association, as trustee. *

 

 

 

  10.1

 

Joinder Agreement, dated as of April 9, 2019, by and among subsidiary guarantors party thereto and Bank of America N.A., as administrative agent and collateral agent, related to the Credit Agreement, dated as of December 28, 2016, as amended by Amendment No. 1 to the Credit Agreement, dated as of November 28, 2018, by and among Hilton Grand Vacations Borrower LLC, Hilton Grand Vacations Parent LLC, the other guarantors party thereto from time to time, the other lender parties thereto, and Bank of America, N.A., as successor administrative agent, collateral agent, L/C issuer and swing line lender. *

 

 

 

  10.2

 

Omnibus Amendment No. 11 to Receivables Loan Agreement and Amendment No. 5 to Sale and Contribution Agreement, effective as of April 25, 2019, by and among Hilton Grand Vacations Trust I LLC, as borrower, the financial institutions signatory thereto as managing agents, the financial institutions signatory thereto as conduit lenders, the financial institutions signatory thereto as committed lenders, and Bank of America, N.A., as administrative agent and structuring agent. *

 

 

 

  31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

 

 

  31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

 

 

  32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

 

 

 

  32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

 

 

 

101.INS

 

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Label Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document.

 

 

 

 

*  

Filed herewith.

 

 

47


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 1st day of August 2019.

 

 

HILTON GRAND VACATIONS INC.

 

 

 

 

By:

/s/ Mark D. Wang 

 

Name:

Mark D. Wang

 

Title:

President and Chief Executive Officer

 

 

 

 

By:

/s/ Daniel J. Mathewes

 

Name:

Daniel J. Mathewes

 

Title:

Executive Vice President and Chief Financial Officer

 

48