Form 10-Q Hilton Grand Vacations For: Sep 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from_________ to ________
Commission file number
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of |
(I.R.S. Employer |
Incorporation or Organization) |
Identification No.) |
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(Address of Principal Executive Offices) |
(Zip Code) |
Registrant’s Telephone Number, Including Area Code (
(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 |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
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.
☒ |
Accelerated Filer |
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Non-Accelerated Filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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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
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of November 5, 2021 was
HILTON GRAND VACATIONS INC.
FORM 10-Q TABLE OF CONTENTS
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Item 1. |
1 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
34 |
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Item 3. |
55 |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
62 |
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Item 4. |
62 |
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Item 5. |
62 |
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Item 6. |
63 |
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65 |
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
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September 30, |
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December 31, |
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2021 |
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2020 |
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(unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Timeshare financing receivables, net |
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Inventory |
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Property and equipment, net |
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Operating lease right-of-use assets, net |
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Investments in unconsolidated affiliates |
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Goodwill |
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Intangible assets, net |
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Land and infrastructure held for sale |
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Other assets |
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TOTAL ASSETS (variable interest entities - $ |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Accounts payable, accrued expenses and other |
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$ |
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$ |
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Advanced deposits |
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Debt, net |
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Non-recourse debt, net |
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Operating lease liabilities |
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Deferred revenues |
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Deferred income tax liabilities |
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Total liabilities (variable interest entities - $ |
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Equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated retained earnings |
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Total equity |
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TOTAL LIABILITIES AND EQUITY |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
1
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in millions, except per share amounts)
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Three Months |
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Nine Months |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenues |
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Sales of VOIs, net |
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$ |
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$ |
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$ |
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$ |
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Sales, marketing, brand and other fees |
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Financing |
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Resort and club management |
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Rental and ancillary services |
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Cost reimbursements |
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Total revenues |
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Expenses |
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Cost of VOI sales |
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Sales and marketing |
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Financing |
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Resort and club management |
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Rental and ancillary services |
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General and administrative |
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Acquisition and integration-related expense |
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Depreciation and amortization |
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License fee expense |
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Impairment expense |
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Cost reimbursements |
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Total operating expenses |
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Interest expense |
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( |
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Equity in earnings (losses) from unconsolidated affiliates |
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( |
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Other (loss) gain, net |
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( |
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( |
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Income (loss) before income taxes |
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( |
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( |
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Income tax (expense) benefit |
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( |
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( |
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Net income (loss) |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Earnings (loss) per share: |
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Basic |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Diluted |
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$ |
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$ |
( |
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$ |
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$ |
( |
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See notes to unaudited condensed consolidated financial statements.
2
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
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Nine Months Ended |
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2021 |
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2020 |
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Operating Activities |
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Net income (loss) |
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$ |
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$ |
( |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of deferred financing costs, acquisition premiums and other |
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Provision for financing receivables losses |
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Impairment expense |
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Other loss, net |
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Share-based compensation |
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Deferred income tax expense (benefit) |
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( |
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Equity in earnings from unconsolidated affiliates |
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( |
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Return on investment in unconsolidated affiliates |
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Net changes in assets and liabilities, net of effects of acquisition: |
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Accounts receivable, net |
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( |
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Timeshare financing receivables, net |
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( |
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Inventory |
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( |
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( |
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Purchases and development of real estate for future conversion to inventory |
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( |
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( |
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Other assets |
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( |
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Accounts payable, accrued expenses and other |
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( |
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Advanced deposits |
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( |
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Deferred revenues |
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( |
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Net cash provided by operating activities |
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Investing Activities |
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Acquisition of Diamond, net of cash and restricted cash acquired |
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( |
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Capital expenditures for property and equipment |
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( |
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( |
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Software capitalization costs |
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( |
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( |
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Investments in unconsolidated affiliates |
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( |
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Net cash used in investing activities |
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( |
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( |
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Financing Activities |
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Issuance of debt |
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Issuance of non-recourse debt |
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Repayment of debt |
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( |
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( |
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Repayment of non-recourse debt |
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( |
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( |
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Debt issuance costs and discounts |
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( |
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( |
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Repurchase and retirement of common stock |
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( |
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Payment of withholding taxes on vesting of restricted stock units |
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( |
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( |
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Proceeds from employee stock plan purchases |
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Proceeds from stock option exercises |
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Other financing activity |
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( |
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Net cash provided by financing activities |
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Net increase in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
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$ |
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$ |
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Supplemental disclosure of non-cash operating activities: |
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Non-cash transfer from Property and Equipment to Inventory |
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$ |
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$ |
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Supplemental disclosure of non-cash investing activities: |
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Non-cash issuance of stock(1) |
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$ |
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$ |
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(1)
3
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in millions)
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Additional |
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Accumulated |
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Common Stock |
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Paid-in |
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Retained |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Equity |
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Balance as of December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Activity related to share-based compensation |
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— |
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— |
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— |
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Balance as of March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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Activity related to share-based compensation |
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— |
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— |
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Balance as of June 30, 2021 |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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Activity related to share-based compensation |
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— |
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— |
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Shares issued for Diamond Acquisition |
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— |
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— |
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Balance as of September 30, 2021 |
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$ |
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$ |
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$ |
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$ |
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Additional |
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Accumulated |
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Common Stock |
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Paid-in |
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Retained |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Equity |
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Balance as of December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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Activity related to share-based compensation |
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— |
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— |
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( |
) |
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( |
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Repurchase and retirement of common stock |
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( |
) |
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— |
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( |
) |
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( |
) |
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( |
) |
Balance as of March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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( |
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Activity related to share-based compensation |
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— |
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— |
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— |
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Balance as of June 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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( |
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Activity related to share-based compensation |
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— |
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— |
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— |
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— |
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— |
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Repurchase and retirement of common stock |
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— |
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— |
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— |
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Balance as of September 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
4
HILTON GRAND VACATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization and Basis of Presentation
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 Company also includes Diamond Resorts ("Diamond"). Our operations primarily consist of: selling vacation ownership intervals and vacation ownership interests (collectively, “VOIs”) for us and third parties; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts and multi-resort trusts; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange program (collectively the “Legacy-HGV Club”) and Diamond points-based clubs.
As of September 30, 2021, we had
Diamond Acquisition
On August 2, 2021, we completed the acquisition of Dakota Holdings, Inc., the parent of Diamond (the “Diamond Acquisition”). We completed the acquisition by exchanging
Diamond also operates in the hospitality and VOI industry, with a worldwide resort network of global vacation destinations. Diamond’s portfolio consists of resort properties (the “Portfolio Properties”) that we manage, are included in one of Diamond's single- and multi-use trusts (collectively, the "Diamond Collections"), or are Diamond branded resorts in which we own inventory, as well as affiliated resorts and hotels, which we do not manage, and which do not carry the Diamond brand but are a part of Diamond's network and, through THE Club® and other Club offerings (the “Diamond Clubs”), are available for its members to use as vacation destinations.
Diamond’s operations primarily consist of: VOI sales and financing which includes marketing and sales of VOIs and consumer financing for purchasers of the Company's VOIs; operations related to the management of the homeowners associations (the “HOAs”) for resort properties and the Diamond Collections, operating and managing points-based vacation clubs, and operation of certain resort amenities and management services.
The unaudited condensed consolidated financial statements in this report include Diamond’s results of operations beginning on August 2, 2021. We refer to Diamond's business and operations that we acquired as "Legacy-Diamond", and our business and operations that existed both prior to and following the Diamond Acquisition as "Legacy-HGV." See Note 3: Diamond Acquisition for more information.
Of our 154 properties, we had
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, 2020, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2021.
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.
5
The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of rights held by other interests. If the entity is considered to be a variable interest entity (“VIE”), we determine whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interests in the entity. We consolidate entities when we own more than 50 percent of the voting shares of a company or otherwise have a controlling financial interest. The consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. GAAP.
Impact of the COVID-19 Pandemic
As of September 30, 2021, nearly all of our resorts and sales centers which had previously closed due to the COVID-19 pandemic were open and operating, although some are still operating in markets with various capacity constraints, social distancing requirements and other safety measures, which are impacting consumer demand for resorts in those markets. Subsequent to September 30, 2021, all of our resorts and all but three of our sales centers have fully reopened. We plan to continue our normal business as conditions permit, but there can be no assurance that such positive trends will continue or that there will not be any increases of new infections and/or new variants (such as Delta variant) that may result in the reimposition of social distancing measures and/or restrictions in certain jurisdictions, as well as travel restrictions that may impede or reverse our recovery.
Note 2: Summary of Significant Accounting Policies
Contracts with Multiple Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. For arrangements that contain multiple goods or services, we determine whether such goods or services are distinct performance obligations that should be accounted for separately in the arrangement. When allocating the transaction price in the arrangement, we may not have observable standalone sales for all of the performance obligations in these contracts; therefore, we exercise significant judgement when determining the standalone selling price of certain performance obligations. In order to estimate the standalone selling prices for products other than Collections contracts, we primarily rely on the expected cost plus margin and adjusted market assessment approaches. We estimate stand-alone selling price for Collections contracts based on historical information, including expected breakage in contracts with multiple performance obligations, and allocate the remainder of the transaction price to the sale of points-based VOIs due to the variability in observable historical prices for traditional VOI sales. We then recognize the revenue allocated to each performance obligation as the related performance obligation is satisfied as discussed below.
Vacation ownership product sales include revenue from the sale of VOIs, which in the case of the Diamond Collections are represented by an annual or biennial allotment of points that can be utilized for vacations at any of the resorts in our network for varying lengths of stay. Typical contracts include the sale of VOIs, certain sales incentives primarily in the form of additional points for use over a specified period of time (“Bonus Points”), and generally membership in the Legacy-HGV Club or Diamond Clubs, each of which represent a separate and distinct performance obligation for which consideration is allocated based on the estimated stand-alone selling price of the sales incentives and membership dues. We recognize revenue related to our VOIs when control of the points passes to the customer, which generally occurs after the expiration of the applicable statutory rescission period and after collectability is reasonably assured and the customer has the right to use the VOI.
Bonus Points are valid for a specified period of time (generally for a period between 18 and 30 months) and may be used for stays at properties within our resort network, and in the case of HGV, hotel reservations within Hilton’s system and VOI interval exchanges with other third-party vacation ownership exchanges. At the time of
6
the VOI sale, we estimate the fair value of sales incentives to be redeemed, including an adjustment for estimated breakage, to determine the standalone selling price of these incentives (“FDI”). We defer a portion of the total transaction price for the combined VOI contract as a liability for the FDI and recognize the corresponding revenue at the point in time when the customer receives the benefits of the FDI, which is upon the customer’s redemption of the Bonus Points. At that time, we also determine whether we are principal or agent for the redeemed good or service and recognize revenue on a gross or net basis accordingly.
Contracts’ financed amount represents variable consideration which is estimated based on the expected value method to the extent that it is probable a significant reversal is not expected to occur. We estimate the expected value to be collected based on historical default rates and recognize revenue net of amounts deemed to be uncollectible. Variable consideration that has not been included in the transaction price is presented as a reserve on the financing receivable. See Note 7: Timeshare Financing Receivables for more information regarding our estimate of variable consideration.
Additionally, we enter into contracts to sell prepaid vacation packages. Our obligation in such contracts is satisfied when customers stay at our property; therefore, we recognize revenue for these packages when they are redeemed. On a portfolio basis, we exercise judgement to estimate the amount of expected breakage related to unused prepaid vacation packages and recognize such breakage in proportion to the pattern of packages utilized by our portfolio of customers.
The Legacy-HGV Club activation fee relates to activities we are required to undertake at or near contract inception to fulfill the contract and does not result in the transfer of a promised good or service. Since our customers are granted the opportunity to renew their membership on an annual basis for no additional activation fee, we defer and amortize the activation fee on a straight-line basis over the seven-year average inventory holding period.
Annual dues for membership renewals are billed each year, and we recognize revenue from these annual dues over the period services are rendered. A member may elect to enter into an optional exchange transaction with at which point the member pays their required transaction fee. This option does not represent a material right as the transactions are priced at their standalone selling price. Revenue related to the transaction is recognized when the services are rendered.
As part of our resort operations, we contract with HOAs to provide day-to-day-management services, including housekeeping services, operation of a reservation system, maintenance, and certain accounting and administrative services. We receive compensation for such management services, which is generally based on a percentage of costs to operate the resorts, on a monthly basis. These fees represent a form of variable consideration and are estimated and recognized over time as the HOAs receive and consume the benefits of the management services. Management fees received related to the portion of unsold VOIs at each resort which we own are recognized on a net basis given we retain these VOIs in our inventory.
7
We account for rental operations of unsold VOIs, including accommodations provided through the use of our vacation sampler programs, as incidental operations. Incremental carrying costs in excess of incremental revenues are recognized in the period incurred. In all periods presented, incremental carrying costs exceeded incremental revenues and all revenues and expenses are recognized in the period earned or incurred.
We capitalize all incremental costs incurred to obtain a contract when such costs would not have been incurred if the contract had not been obtained. We elect to expense costs incurred to obtain a contract when the deferral period would be one year or less. Commissions for VOI sales for resorts under construction are expensed when the associated VOI revenue is recognized which is upon completion of the resort. These commissions are classified as Sales and marketing expense in our consolidated statements of operations. These contract costs are recognized at the point in time that the revenue related to the incentive is recognized and included within Sales of VOIs, net on the consolidated statements of operations.
Business Combinations
We account for our business combinations in accordance with the acquisition method of accounting. We allocate the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. For each acquisition, we recognize goodwill as the amount in which consideration transferred for the acquired entity exceeds the fair values of net assets. The fair value of net assets is the fair value assigned to the assets acquired reduced by the fair value assigned to liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, we use various recognized valuation methods including the income, cost and sales and market approaches, which also include certain valuation techniques such as discount rates, and the amount and timing of future cash flows. We utilize independent valuation specialists under our supervision for certain of our assignments of fair value. We record the net assets and results of operations of an acquired entity in our condensed consolidated financial statements from the acquisition date through period-end. We expense acquisition-related expenses as incurred and include such expenses within Acquisition and integration-related expense on our condensed consolidated statements of operations. See Note 3: Diamond Acquisition for further information.
Acquired Financial Assets with Credit Deterioration
When financial assets are acquired, whether in connection with a business combination or an asset acquisition, we evaluate whether those acquired financial assets have experienced a more-than-insignificant deterioration in credit quality since origination. Financial assets that were acquired with evidence of such credit deterioration are referred to as purchased credit deteriorated ("PCD") assets and reflect the acquirer’s assessment at the acquisition date. The evaluation of PCD assets is a qualitative assessment requiring significant management judgment. We consider indicators such as delinquency, FICO score deterioration, purchased credit impaired status from prior acquisition, certain account status codes which we believe are indicative of credit deterioration, as well as certain loan activity such as modifications and downgrades. In addition, we consider the impact of current and forward-looking economic conditions relative to the conditions which would have existed at origination.
Acquired PCD assets are recorded at the purchase price, represented by the acquisition date fair value, and subsequently “grossed-up” by the acquirer’s acquisition date assessment of the allowance for credit losses. The purchase price and the initial allowance for credit losses collectively represent the PCD asset’s initial amortized cost basis. While the initial allowance for credit losses of PCD assets does not impact period earnings, the Company remeasures the allowance for credit losses for PCD assets during each subsequent reporting period; changes in the allowance are recognized as provision expense within period earnings. The difference over which par value of the acquired PCD assets exceeds the purchase price plus the initial allowance for credit losses is reflected as a non-credit discount (or premium) and is accreted into interest income (or as a reduction to interest income) under the effective interest method.
8
Acquired financial assets which are not PCD assets are also recorded at the purchase price but are not similarly “grossed-up”. The acquirer recognizes an allowance for credit losses as of the acquisition date, which is recognized with a corresponding provision expense impact within earnings. The allowance is remeasured within each subsequent reporting period in the same manner as for PCD assets, with any change in the allowance recognized as provision expense in period earnings. See Note 3: Diamond Acquisition and Note 7: Timeshare Financing Receivables for further information.
Goodwill
We do not amortize goodwill. We evaluate goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that it is more-likely-than-not that we may not be able to recover the carrying amount (book value) of the net assets of the related reporting unit. When evaluating goodwill for impairment, we may perform the optional qualitative assessment by considering factors including macroeconomic conditions, industry and market conditions and overall financial performance. If we bypass the qualitative assessment, or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. We only recognize an impairment on goodwill if the estimated fair value of a reporting unit is less than its carrying value, in an amount not to exceed the carrying value of the reporting unit's goodwill.
Intangible Assets
Our intangible assets consist of management agreements, trade name, customer relationships and certain proprietary technologies with finite lives. We have management agreements, trade name, vacation ownership customer relationships, and software intangibles that were recorded at their fair value as part of the Diamond Acquisition. We also have management agreements that were recorded at their fair value at the time of the completion of a merger on October 24, 2007 where Hilton became a wholly-owned subsidiary of an affiliate of The Blackstone Group L.P. (“Blackstone”). Additionally, we capitalize costs incurred to develop internal-use computer software, including costs incurred in connection with development of upgrades or enhancements that result in additional functionality. These capitalized costs are included in Intangible assets, net in our consolidated balance sheets. Intangible assets with finite useful lives are amortized using the straight-line method over their respective useful lives, which varies for each type of intangible. In our condensed consolidated statements of operations, the amortization of these intangible assets is included in depreciation and amortization expense and the amortization of costs to obtain a contract is recognized as a reduction to the related revenues.
We review all finite life intangible assets for impairment when circumstances indicate that their carrying amounts may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of the carrying value over the fair value in our condensed consolidated statements of operations.
Restricted Cash
Restricted cash includes deposits received on VOI sales that are held in escrow until legal requirements of the local jurisdictions are met with regards to project construction or our contract status and cash reserves required by our non-recourse debt agreements. Restricted cash also includes certain amounts collected on behalf of HOAs.
9
Reclassifications
Certain prior period amounts in the footnotes to the unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation with no effect on previously reported total assets and total liabilities, net income or stockholders’ equity.
Recently Issued Accounting Pronouncements
Adopted Accounting Standards
On January 1, 2021 we adopted Accounting Standards Update 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. The adoption of ASU 2019-12 did not have a material impact on our unaudited condensed consolidated financial statements and related disclosures.
Accounting Standards Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying U.S.GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The guidance was effective as of March 12, 2020 and will apply through December 31, 2022. We are currently evaluating the effect of this ASU but we do not expect it to have a material impact on our consolidated or unaudited condensed consolidated financial statements.
Note 3: Diamond Acquisition
On August 2, 2021, (the “Acquisition Date”), we completed the Diamond Acquisition by exchanging
On the Acquisition Date, shareholders of Diamond received
The following table presents the fair value of each class of consideration transferred in relation to the Diamond Acquisition at the Acquisition Date.
($ in millions, except stock price amounts) |
|
|
|
HGV common stock shares issued for outstanding Diamond shares |
|
|
|
HGV common stock price as of Acquisition Date(1) |
|
|
|
Stock purchase price |
$ |
|
|
|
|
|
|
Repayment of Legacy-Diamond debt |
$ |
|
|
|
|
|
|
Total consideration transferred |
$ |
|
|
(1) Represents the average of the opening and closing price of HGV stock on August 2, 2021.
10
Preliminary Fair Values of Assets Acquired and Liabilities Assumed
We accounted for the Diamond Acquisition as a business combination, which requires us to record the assets acquired and liabilities assumed at fair value as of the Acquisition Date. The preliminary fair values of the assets acquired and liabilities assumed, which are presented in the table below, and the related preliminary acquisition accounting are based on management’s estimates and assumptions, as well as information compiled by management, including the books and records of Diamond. Our estimates and assumptions are subject to change during the measurement period, not to exceed one year from the Acquisition Date. The magnitude of the Diamond Acquisition could necessitate the need to use the full one-year measurement period to adequately analyze and assess a number of the factors used in establishing the asset and liability fair values as of the Acquisition Date. The final values may also result in changes to amortization expense related to intangible assets and depreciation expense related to property and equipment, among other changes.
As discussed more fully below, the primary areas of the purchase price allocation that are not yet finalized include the following: (1) finalizing the review and valuation of acquired intangible assets (including key assumptions, inputs and estimates) and assigning the useful lives to such assets; (2) finalizing the review and valuation of acquired inventory, property and equipment (including key assumptions, inputs and estimates) and assigning the remaining useful lives to the depreciable assets; (3) finalizing the review and valuation of acquired timeshare financing receivables (including key assumptions, inputs and estimates); (4) finalizing the valuation of certain in-place contracts or contractual relationships (including but not limited to leases), including determining the appropriate amortization period; (5) finalizing the review and valuation of other acquired assets and assumed liabilities, including debt assumed; and (6) finalizing our estimate of the impact of purchase accounting on deferred income tax liabilities.
($ in millions) |
|
|
|
Assets acquired |
|
|
|
Cash and cash equivalents |
$ |
|
|
Restricted cash |
|
|
|
Accounts receivable, net of allowance for doubtful accounts |
|
|
|
Timeshare financing receivables, net |
|
|
|
Inventory |
|
|
|
Property and equipment, net |
|
|
|
Operating lease right-of-use assets, net |
|
|
|
Intangible assets, net |
|
|
|
Other assets |
|
|
|
Total assets acquired |
$ |
|
|
|
|
|
|
Liabilities assumed |
|
|
|
Accounts payable, accrued expenses and other |
$ |
|
|
Debt, net |
|
|
|
Non-recourse debt, net |
|
|
|
Operating lease liabilities |
|
|
|
Advanced deposits |
|
|
|
Deferred revenues |
|
|
|
Deferred income tax liabilities |
|
|
|
Total liabilities assumed |
$ |
|
|
|
|
|
|
Net assets acquired |
$ |
|
|
|
|
|
|
Total consideration transferred |
$ |
|
|
|
|
|
|
Goodwill(1) |
$ |
|
|
(1) Goodwill is calculated as total consideration transferred less net assets acquired and it primarily represents the value that we expect to obtain from synergies and growth opportunities from our Combined Company post-acquisition. We have not completed the assignment of goodwill to reporting units or to our reportable segments as of September 30, 2021. The majority of goodwill is not expected to be deductible for tax purposes.
Timeshare Financing Receivables
We acquired timeshare financing receivables which consist of loans to customers who purchased vacation ownership products and chose to finance their purchases. These timeshare financing receivables are collateralized by the underlying
11
VOIs and generally have 10-year amortizing repayment terms. We preliminarily estimated the fair value of the timeshare financing receivables using a discounted cash flow model, which calculated a present value of expected future risk-adjusted cash flows over the remaining term of the respective timeshare financing receivables. We are continuing to evaluate the significant assumptions underlying the discounted cash flow model including default and prepayment assumptions, which could result in changes to our preliminary estimate. For purposes of our initial allocation, we have considered all acquired receivables to be purchase credit deteriorated. See Note 7: Timeshare Financing Receivables for additional information.
Acquired timeshare financing receivables with credit deterioration as of the Acquisition Date were as follows:
($ in millions) |
As of August 2, 2021 |
|
|
Purchase price |
$ |
|
|
Allowance for credit losses(1) |
|
|
|
(Premium) attributable to other factors |
|
( |
) |
Par value |
$ |
|
|
Inventory
We acquired inventory which consists of completed unsold VOIs and undeveloped land and construction in progress. We preliminarily estimated the value of acquired inventory using discounted cash flows, which included our preliminary estimates of future income growth, capitalization rates, discount rates and capital expenditure needs of the relevant properties. We are continuing to assess the market assumptions and property conditions, which could result in changes to these preliminary values.
Property and Equipment
We acquired property and equipment, which includes land, building and leasehold improvements, furniture and fixtures and construction in progress. We preliminarily estimated the value of the majority of property and equipment using a mix of cost, market and discounted cash flow approaches, which included preliminary estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the resorts. Certain assets were preliminarily estimated at carrying value. We are continuing to assess the market assumptions and property conditions, which could result in changes to these preliminary values.
Intangible Assets
The following table presents our preliminary estimates of the fair values of the acquired Diamond’s identified intangible assets and their related estimated remaining useful lives.
|
Estimated Fair |
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|
Estimated |
|
||
|
Value |
|
|
Useful Life |
|
||
|
($ in millions) |
|
|
(in years) |
|
||
Trade name |
$ |
|
|
|
|
||
Management contracts |
|
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Club member relationships |
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Vacation ownership customer relationships |
|
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Computer software |
|
|
|
|
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Total intangible assets |
$ |
|
|
|
|
||
We preliminarily estimated the fair value of Diamond’s trade name using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. We provisionally estimated the value of management contracts and member relationships using the multi-period excess earnings method, which is a variation of the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. We continue to review Diamond’s contracts and historical performance in addition to evaluating the assumptions impacting the estimated values of such intangible assets and their respective useful lives, including the discount rate applied to the estimated cash flows and renewal and growth estimates and expected margins, which could result in changes to these preliminary values.
12
Deferred Revenue
Deferred revenue primarily relates to deferred sales incentives revenues, primarily related to Bonus Points, which are deferred and recognized upon redemption; and Club membership fees, which are deferred and recognized over the terms of the applicable contract term or membership on a straight-line basis. Additionally, deferred revenue includes maintenance fees collected from owners, in certain cases, which are earned by the relevant property owners’ association over the applicable period. We preliminarily estimated the value of the deferred revenue at the carrying value of such liabilities as of the Acquisition Date. We continue to review Diamond’s contracts, which could result in changes to the preliminary estimate.
Deferred Income Taxes
Deferred income taxes primarily relate to the fair value of assets and liabilities acquired from Diamond, including timeshare financing receivables, inventory, property and equipment, intangible assets, and debt. We preliminarily estimated deferred income taxes based on statutory rates in the jurisdictions of the legal entities where the acquired assets and liabilities are recorded. We are continuing to assess the tax rates used, and we will update our estimate of deferred income taxes based on changes to our preliminary valuations of the related assets and liabilities and refinement of the effective tax rates, which could result in changes to these preliminary values.
Debt
As part of the acquisition and consideration transferred, we paid off $2,029 million of Diamond’s existing corporate debt, accrued interest and early termination penalties. The nominal amount remaining represents various smaller notes. Please refer to Note 12: Debt & Non-recourse debt for more information.
Non-Recourse Debt
We preliminarily estimated the fair value of the securitized debt from VIEs and warehouse loan facilities, using a discounted cash flow model under the income approach. The significant assumptions in our analysis include default rates, prepayment rates, bond interest rates and other structural factors. We are continuing to evaluate the significant assumptions underlying the discounted cash flow model including default and prepayment assumptions, which could result in changes to our preliminary estimate.
Lease Obligations
We have recorded a preliminary estimate of the liability for those operating leases assumed in connection with the Diamond Acquisition with a remaining term in excess of a year. We measured the lease liabilities assumed at the present value of the remaining contractual lease payments based on the guidance in ASC 842 and using a discount rate determined as of the Acquisition Date. The right-of-use assets for such leases were initially measured at an amount equal to the lease liabilities, adjusted for favorable or unfavorable terms of the lease when compared with market terms. A small number of operating lease right of use assets and lease liabilities were preliminarily estimated at carrying value. We continue to assess the market assumptions, which could result in changes to our provisional estimate.
Pro Forma Results of Operations
The following unaudited pro forma information presents the combined results of operations of HGV and Diamond as if we had completed the Diamond Acquisition on January 1, 2020, the first day of our 2020 fiscal year, but using our preliminary fair values of assets and liabilities as of the Acquisition Date. These unaudited pro forma results do not reflect any synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Diamond Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.
|
Nine Months Ended September 30, |
|
|||||
($ in millions, except per share data) |
2021 |
|
|
2020 |
|
||
Revenues |
$ |
|
|
$ |
|
||
Net income (loss) |
|
|
|
|
( |
) |
|
13
Diamond Results of Operations
The following table presents the results of Diamond operations included in our unaudited condensed consolidated statement of operations for the period from the Acquisition Date through the end of the third quarter of 2021.
($ in millions) |
August 2, 2021 to |
|
|
Revenue |
$ |
|
|
Net income |
|
|
|
Note 4: Revenue from Contracts with Customers
Disaggregation of Revenue
The following tables show our disaggregated revenues by product and segment from contracts with customers. We operate our business in the following
($ in millions) |
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
Real Estate Sales and Financing Segment |
|
2021 |
|
|
2020 |
|
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2021 |
|
|
2020 |
|
||||
Sales of VOIs, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Sales, marketing, brand and other fees |
|
|
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Interest income |
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Other financing revenue |
|
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|
||||
Real estate sales and financing segment revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
($ in millions) |
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
Resort Operations and Club Management Segment |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Club management |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Resort management |
|
|
|
|
|
|
|
$ |
|
|
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|
||||
Rental(1) |
|
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|
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Ancillary services |
|
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|
||||
Resort operations and club management segment revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(1)
Contract Balances
The following table provides information on our accounts receivable from contracts with customers which are included in Accounts receivable, net on our condensed consolidated balance sheets:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Receivables |
|
$ |
|
|
$ |
|
||
The following table presents the composition of our contract liabilities.
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Contract liabilities: |
|
|
|
|
|
|
||
Advanced deposits |
|
$ |
|
|
$ |
|
||
Deferred sales of VOIs of projects under construction |
|
|
|
|
|
|
||
Annual dues and Legacy-HGV Club activation fees |
|
|
|
|
|
|
||
Bonus Point incentive liability(1) |
|
|
|
|
|
|
||
(1)
14
Revenue earned for the three and nine months ended September 30, 2021 that was included in the contract liabilities balance at December 31, 2020 was approximately $
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 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 7: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our timeshare financing receivables.
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 related to sales of VOIs of projects under construction, Club activation fees and annual dues and the liability for 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.
In addition to the contract liabilities included herein, we also have deferred revenue of $
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) Legacy-HGV Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Bonus Points that may be redeemed in the future.
The following table represents the deferred revenue, cost of VOI sales and direct selling costs from sales of VOIs related to projects under construction as of September 30, 2021 and December 31, 2020:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Sales of VOIs, net |
|
$ |
|
|
$ |
|
||
Cost of VOI sales(1) |
|
|
|
|
|
|
||
Sales and marketing expense |
|
|
|
|
|
|
||
(1)
As of September 30, 2021 we have recognized all revenue, costs of VOI sales and direct selling costs previously in deferral as all projects under construction were completed in the third quarter of 2021.
The following table includes the remaining transaction price related to Advanced deposits, Annual dues and Legacy-HGV Club activation fees and Bonus Points as of September 30, 2021:
($ in millions) |
|
Remaining |
|
|
Recognition Period |
|
Recognition Method |
|
Advanced deposits |
|
$ |
|
|
|
|||
Annual dues and Legacy-HGV Club activation fees |
|
|
|
|
|
|||
Bonus Points |
|
|
|
|
|
|||
15
Note 5: Restricted Cash
Restricted cash was as follows:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Escrow deposits on VOI sales |
|
$ |
|
|
$ |
|
||
Reserves related to non-recourse debt(1) |
|
|
|
|
|
|
||
Other(2) |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
(1) See Note 12: Debt & Non-recourse Debt for further discussion.
(
Note 6: Accounts Receivable
The following table represents our accounts receivable, net of allowance for credit losses. Accounts receivable within the scope of ASC 326 are measured at amortized cost.
|
|
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
|
|
2021 |
|
|
2020 |
|
||
Fee-for-service commissions(1) |
|
|
|
$ |
|
|
$ |
|
||
Real estate and financing |
|
|
|
|
|
|
|
|
||
Resort and club operations |
|
|
|
|
|
|
|
|
||
Tax receivables |
|
|
|
|
|
|
|
|
||
Other receivables(2) |
|
|
|
|
|
|
|
|
||
Total |
|
|
|
$ |
|
|
$ |
|
||
(1)
(2)
Our accounts receivable are all due within one year of origination. We use delinquency status and economic factors such as credit quality indicators to monitor our receivables within the scope of ASC 326 and use these as a basis for how we develop our expected loss estimates.
We sell VOIs on behalf of third-party developers using the Hilton Grand Vacations brand in exchange for sales, marketing and brand fees. We use historical losses and economic factors as a basis to develop our allowance for credit losses. Under these fee-for-service arrangements, we earn commission fees based on a percentage of total interval sales. Additionally, the terms of these arrangements include provisions requiring the reduction of fees earned for defaults and cancellations.
The changes in our allowance for fee-for-service commissions were as follows during the period from December 31, 2020 to September 30, 2021:
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
Balance as of December 31, 2020 |
|
|
|
$ |
|
|
Current period provision for expected credit losses |
|
|
|
|
|
|
Write-offs charged against the allowance |
|
|
|
|
( |
) |
Balance at September 30, 2021 |
|
|
|
|
|
|
16
Note 7: Timeshare Financing Receivables
We define our timeshare financing receivables portfolio segments as (i) originated and (ii) acquired.
|
Originated(2) |
|
|
Acquired(2) |
|
|
||||||||||
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
|
||||
($ in millions) |
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
||||
Securitized |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Unsecuritized(1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Timeshare financing receivables, gross |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Unamortized non-credit acquisition premium(3) |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|||
Less: allowance for financing |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Timeshare financing receivables, net |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
(1)
(2)
(3)
As of September 30, 2021 and December 31, 2020, we had timeshare financing receivables with a carrying value of $
We recognize interest income on our timeshare financing receivables as earned. As of September 30, 2021 and December 31, 2020, we had interest receivable outstanding of $
Acquired Timeshare Financing Receivables with Credit Deterioration
As part of the Diamond Acquisition, we acquired existing portfolios of timeshare financing receivables. Acquired timeshare financing receivables include all timeshare financing receivables of Legacy-Diamond as of the Acquisition Date and were deemed to be purchase credit deteriorated financial assets. These notes receivable are accounted for using the expected cash flow method of recognizing discount accretion based on the expected cash flows from the acquired timeshare financing receivables. Upon acquisition, we recorded these acquired timeshare financing receivables at a preliminary estimate of fair value, including a credit discount which is accreted as an adjustment to yield over the estimated life of the timeshare financing receivables.
17
The fair value of our acquired timeshare financing receivables as of the Acquisition Date was determined using a discounted cash flow method, which calculated a present value of expected future cash flows based on scheduled principal and interest payments over the term of the respective timeshare financing receivables, while considering anticipated defaults and early repayments based on historical experience. Consequently, the fair value of the acquired timeshare financing receivables recorded on our balance sheet as of the Acquisition Date included an estimate of expected credit losses which became the historical cost basis for that portfolio going forward. For acquired loans for which all or a portion of the balance was previously written off, or was required to be written off under our charge-off policy upon acquisition, the expected credit loss included in the grossed-up loan balance was immediately charged off. Subsequent changes to the allowance for credit losses are recorded as additions to or reversals of credit losses in our condensed consolidated statements of operations through provision for credit losses.
Our acquired timeshare financing receivables are remeasured at each period end based on expected future cash flows which takes into consideration an estimated measure of anticipated defaults and early repayments. We consider historical Legacy-Diamond timeshare financing receivables performance and the current economic environment in developing the expected future cash flows used in the re-measurement of our acquired timeshare financing receivables.
Our acquired timeshare financing receivables as of September 30, 2021 mature as follows:
|
Acquired Timeshare Financing Receivables |
|
|||||||||
($ in millions) |
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
Year |
|
|
|
|
|
|
|
|
|||
2021 (remaining) |
$ |
|
|
$ |
|
|
$ |
|
|||
2022 |
|
|
|
|
|
|
|
|
|||
2023 |
|
|
|
|
|
|
|
|
|||
2024 |
|
|
|
|
|
|
|
|
|||
2025 |
|
|
|
|
|
|
|
|
|||
Thereafter |
|
|
|
|
|
|
|
|
|||
|
$ |
|
|
$ |
|
|
$ |
|
|||
Originated Timeshare Financing Receivables
Originated timeshare financing receivables represent all Legacy-HGV timeshare financing receivables and timeshare financing receivables originated by Legacy-Diamond subsequent to the Acquisition Date.
|
Originated Timeshare Financing Receivables |
|
|||||||||
($ in millions) |
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
Year |
|
|
|
|
|
|
|
|
|||
2021 (remaining) |
$ |
|
|
$ |
|
|
$ |
|
|||
2022 |
|
|
|
|
|
|
|
|
|||
2023 |
|
|
|
|
|
|
|
|
|||
2024 |
|
|
|
|
|
|
|
|
|||
2025 |
|
|
|
|
|
|
|
|
|||
Thereafter |
|
|
|
|
|
|
|
|
|||
|
$ |
|
|
$ |
|
|
$ |
|
|||
Allowance for Financing Receivables Losses
The changes in our allowances for financing receivables losses were as follows:
|
September 30, 2021 |
|
|
September 30, 2021 |
|
||
($ in millions) |
Originated |
|
|
Acquired |
|
||
Balance as of December 31, 2020 |
$ |
|
|
$ |
|
||
Provision for financing receivables losses(1) |
|
|
|
|
|
||
Initial allowance for PCD financing receivables acquired during the period(2) |
|
|
|
|
|
||
Write-offs |
|
( |
) |
|
|
( |
) |
Balance as of September 30, 2021 |
$ |
|
|
$ |
|
||
18
|
September 30, 2020 |
|
|
September 30, 2020 |
|
||
($ in millions) |
Originated |
|
|
Acquired |
|
||
Balance as of December 31, 2019 |
$ |
|
|
$ |
|
||
Provision for financing receivables losses(1) |
|
|
|
|
|
||
Write-offs |
|
( |
) |
|
|
|
|
Balance as of September 30, 2020 |
$ |
|
|
$ |
|
||
(1)
(2)
Credit Quality of Timeshare Financing Receivables
Legacy-HGV Timeshare Financing Receivables
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 collectability 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 estimating expected defaults and 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.
Our gross balances by average FICO score of our Legacy-HGV timeshare financing receivables were as follows:
|
Legacy-HGV Timeshare Financing Receivables |
|
|||||
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
2021 |
|
|
2020 |
|
||
FICO score |
|
|
|
|
|
||
700+ |
$ |
|
|
$ |
|
||
600-699 |
|
|
|
|
|
||
<600 |
|
|
|
|
|
||
No score(1) |
|
|
|
|
|
||
|
$ |
|
|
$ |
|
||
(1)
The following table details our Legacy-HGV timeshare financing receivables by the origination year and average FICO score as of September 30, 2021:
($ in millions) |
2021 |
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
Prior |
|
|
Total |
|
|||||||
FICO score |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
700+ |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
600-699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
<600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
No score(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
(1)
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.
19
As of September 30, 2021 and December 31, 2020, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $
|
Legacy-HGV Timeshare Financing Receivables |
|
|||||||||
|
September 30, 2021 |
|
|||||||||
($ in millions) |
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
Current |
$ |
|
|
$ |
|
|
$ |
|
|||
31 - 90 days past due |
|
|
|
|
|
|
|
|
|||
91 - 120 days past due |
|
|
|
|
|
|
|
|
|||
121 days and greater past due |
|
|
|
|
|
|
|
|
|||
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
Legacy-HGV Timeshare Financing Receivables |
|
|||||||||
|
December 31, 2020 |
|
|||||||||
($ in millions) |
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
Current |
$ |
|
|
$ |
|
|
$ |
|
|||
31 - 90 days past due |
|
|
|
|
|
|
|
|
|||
91 - 120 days past due |
|
|
|
|
|
|
|
|
|||
121 days and greater past due |
|
|
|
|
|
|
|
|
|||
|
$ |
|
|
$ |
|
|
$ |
|
|||
Legacy-Diamond Timeshare Financing Receivables
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 collectability 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 estimating expected defaults and 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.
Our gross balances by average FICO score of our Legacy-Diamond acquired and originated timeshare financing receivables were as follows:
|
Legacy-Diamond |
|
|
($ in millions) |
September 30, 2021 |
|
|
FICO score |
|
|
|
700+ |
$ |
|
|
600-699 |
|
|
|
<600 |
|
|
|
No score(1) |
|
|
|
|
$ |
|
|
(1)
|
Legacy-Diamond |
|
|
($ in millions) |
September 30, 2021 |
|
|
FICO score |
|
|
|
700+ |
$ |
|
|
600-699 |
|
|
|
<600 |
|
|
|
No score(1) |
|
|
|
|
$ |
|
|
(1)
20
The following tables details our Legacy-Diamond acquired and originated timeshare financing receivables by the origination year and average FICO score as of September 30, 2021:
Legacy-Diamond Acquired Timeshare Financing Receivables |
|
||||||||||||||||||||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
Prior |
|
|
Total |
|
|||||||
FICO score |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
700+ |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
600-699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
<600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
No score(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
(1)
Legacy-Diamond Originated Timeshare Financing Receivables |
|
||||||||||||||||||||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
Prior |
|
|
Total |
|
|||||||
FICO score |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
700+ |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
600-699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
<600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
No score(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
(1)
The accrued interest on our Legacy-Diamond timeshare financing receivables is accrued based on the contractual provisions of the loan documents, which is suspended at the earlier of (i) the customer’s account becoming over 90 days delinquent, or (ii) the completion of cancellation or foreclosure proceedings. Once suspended, we reverse all prior recognized interest income as well. 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 become owner of the deed for the foreclosed unit.
As of September 30, 2021 we had ceased accruing interest on Legacy-Diamond timeshare financing receivables with an aggregate principal balance of $
|
Legacy-Diamond Timeshare Financing Receivables |
|
|||||||||
|
September 30, 2021 |
|
|||||||||
($ in millions) |
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
Current |
$ |
|
|
$ |
|
|
$ |
|
|||
31 - 90 days past due |
|
|
|
|
|
|
|
|
|||
91 - 120 days past due |
|
|
|
|
|
|
|
|
|||
121 days and greater past due |
|
|
|
|
|
|
|
|
|||
|
$ |
|
|
$ |
|
|
$ |
|
|||
Note 8: Inventory
Inventory was comprised of the following:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Completed unsold VOIs |
|
$ |
|
|
$ |
|
||
Construction in process |
|
|
|
|
|
|
||
Land, infrastructure and other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
21
The table below presents costs of sales true-ups relating to VOI products and the related impacts to the carrying value of inventory.
|
|
Nine months ended September 30, |
|
|||||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Cost of sales true-up(1) |
|
$ |
( |
) |
|
$ |
|
|
(1)
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 September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
($ in millions) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Cost of VOI sales related to fee-for-service upgrades |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Note 9: Property and Equipment
Property and equipment were comprised of the following:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Land |
|
$ |
|
|
$ |
|
||
Building and leasehold improvements |
|
|
|
|
|
|
||
Furniture and equipment |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Note 10: Consolidated Variable Interest Entities
As of September 30, 2021 and December 31, 2020, we consolidated variable interest entities (“VIEs”). The activities of these entities are limited primarily to purchasing qualifying non-recourse timeshare financing receivables from us and issuing debt securities and/or borrowing under a debt facility to facilitate such purchases. The timeshare financing receivables held by these entities are not available to our creditors and are not our legal assets, nor is the debt that is securitized through these entities a legal liability to us.
We have determined that we are the primary beneficiaries of all 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 often 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.
As part of the Diamond Acquisition, we acquired the variable interests in the entities associated with Diamond’s outstanding timeshare financing receivables securitization transactions. They have been aggregated for disclosure purposes as they are similar in nature to our previously established VIEs. We also acquired conduit facilities which are VIEs and do
Our unaudited condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Restricted cash |
|
$ |
|
|
$ |
|
||
Timeshare financing receivables, net |
|
|
|
|
|
|
||
Non-recourse debt(1) |
|
|
|
|
|
|
||
(1)
22
During the nine months ended September 30, 2021 and 2020, we did
Note 11: Investments in Unconsolidated Affiliates
As of September 30, 2021, we have
Our
Note 12: Debt & Non-recourse Debt
Debt
The following table details our outstanding debt balance and its associated interest rates:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Debt(1) |
|
|
|
|
|
|
||
Senior secured credit facility, due |
|
|
|
|
|
|
||
Term loan with a rate of |
|
$ |
|
|
$ |
|
||
Revolver with a weighted average rate of |
|
|
|
|
|
|
||
Senior secured credit facility, due |
|
|
|
|
|
|
||
Term loan with a weighted average rate of |
|
|
|
|
|
|
||
Senior notes with a rate of |
|
|
|
|
|
|
||
Senior notes with a rate of |
|
|
|
|
|
|
||
Senior notes with a rate of |
|
|
|
|
|
|
||
Other debt |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: unamortized deferred financing costs and discounts(2)(3) |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
(1)
(2) Amount includes deferred financing costs and related to our term loan and senior notes of $
(3) Amount does not include deferred financing costs of $
23
Senior secured credit facilities
In March 2021, we amended our Credit Agreement to amend certain terms related to financial covenants to permit the previously announced proposed acquisition of Diamond, pursuant to that certain Agreement and Plan of Merger dated March 10, 2021. Refer to Note 3: Diamond Acquisition for further information regarding the merger. The borrowing capacity under the Credit Agreement remained the same. In connection with the amendment, we incurred $
In connection with the closing of the Diamond Acquisition, HGV entered into a new $
During the nine months ended September 30, 2021, we repaid $
We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt. Such interest rates swaps converted the LIBOR based variable rates on our Term Loan and Revolver to average fixed rates of
Senior Notes due 2029 and 2031
In June 2021, we entered into indentures in connection with the issuance and sale of senior notes, $
24
Non-recourse Debt
The following table details our outstanding non-recourse debt balance and its associated interest rates:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Non-recourse debt(1) |
|
|
|
|
|
|
||
Timeshare Facility with an average rate of |
|
$ |
|
|
$ |
|
||
HGV Securitized Debt with a weighted average rate of |
|
|
|
|
|
|
||
HGV Securitized Debt with a weighted average rate of |
|
|
|
|
|
|
||
HGV Securitized Debt with a weighted average rate of |
|
|
|
|
|
|
||
HGV Securitized Debt with a weighted average rate of |
|
|
|
|
|
|
||
Diamond Resorts Premium Yield Facility with an average rate of |
|
|
|
|
|
|
||
Diamond Resorts Owner Trust 2017 with a weighted average rate of |
|
|
|
|
|
|
||
Diamond Resorts Owner Trust 2018 with a weighted average rate of |
|
|
|
|
|
|
||
Diamond Resorts Owner Trust 2019 with a weighted average rate of |
|
|
|
|
|
|
||
Diamond Resorts Owner Trust 2021 with a weighted average rate of |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: unamortized deferred financing costs(2) |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
(1)
(2)
(3)
The Timeshare Facility is a non-recourse obligation with a borrowing capacity of $
We are required to deposit payments received from customers on the timeshare financing receivables securing the Timeshare Facility, Premium Yield 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 $
Debt Maturities
The contractual maturities of our debt and non-recourse debt as of September 30, 2021 were as follows:
($ in millions) |
|
Debt |
|
|
Non-recourse Debt |
|
|
Total |
|
|||
Year |
|
|
|
|
|
|
|
|
|
|||
2021 (remaining) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
2022 |
|
|
|
|
|
|
|
|
|
|||
2023 |
|
|
|
|
|
|
|
|
|
|||
2024 |
|
|
|
|
|
|
|
|
|
|||
2025 |
|
|
|
|
|
|
|
|
|
|||
Thereafter |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
25
Note 13: Fair Value Measurements
The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:
|
|
September 30, 2021 |
|
|||||||||
|
|
|
|
|
Hierarchy Level |
|
||||||
($ in millions) |
|
Carrying |
|
|
Level 1 |
|
|
Level 3 |
|
|||
Assets: |
|
|
|
|
|
|
|
|
|
|||
Timeshare financing receivables, net(1) |
|
$ |
|
|
|
|
|
$ |
|
|||
Liabilities: |
|
|
|
|
|
|
|
|
|
|||
Debt, net(2) |
|
|
|
|
|
|
|
|
|
|||
Non-recourse debt, net(2) |
|
|
|
|
|
|
|
|
|
|||
|
|
December 31, 2020 |
|
|||||||||
|
|
|
|
|
Hierarchy Level |
|
||||||
($ in millions) |
|
Carrying |
|
|
Level 1 |
|
|
Level 3 |
|
|||
Assets: |
|
|
|
|
|
|
|
|
|
|||
Timeshare financing receivables, net(1) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Liabilities: |
|
|
|
|
|
|
|
|
|
|||
Debt, net(2) |
|
|
|
|
|
|
|
|
|
|||
Non-recourse debt, net(2) |
|
|
|
|
|
|
|
|
|
|||
(1)
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 originated and acquired timeshare financing receivables were determined using a discounted cash flow model. Our model incorporates default rates, coupon rates, credit quality and loan terms respective to the portfolio based on current market assumptions for similar types of arrangements.
The estimated fair values of our Level 1 debt and non-recourse debt were based on prices in active debt markets. The estimated fair values of our Level 3 debt and non-recourse debt were based on the following:
During the quarter ended September 30, 2021, we changed our estimate of fair value for certain non-recourse debt instruments from Level 3 to Level 1 due to availability of pricing for these instruments in active debt markets.
Non-recurring fair value measurements
Our assets that are measured at fair value on a non-recurring basis include land and infrastructure held for sale. These assets were measured to their estimated fair value as of December 31, 2020. We utilized the market approach for the land and cost approach for the infrastructure to determine their respective fair values. The fair value determinations involve judgement and are sensitive to key assumptions utilized, including comparative sales for land (level 2) and replacement costs for infrastructure (level 3). There has been no change to the estimated fair value of these assets for the nine months ended September 30, 2021.
26
Note 14: Intangible Assets
Intangible assets and related amortization expense were as follows:
($ in millions) |
Weighted-average useful life (years) |
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
|||
Trade name |
|
|
|
$ |
|
|
$ |
|
|||
Management contracts |
|
|
|
|
|
|
|
|
|||
Club member relationships |
|
|
|
|
|
|
|
|
|||
Vacation ownership customer relationships |
|
|
|
|
|
|
|
|
|||
Computer software |
|
|
|
|
|
|
|
|
|||
Total gross intangible assets |
|
|
|
$ |
|
|
$ |
|
|||
Less: accumulated amortization |
|
|
|
|
( |
) |
|
|
( |
) |
|
Intangible assets, net |
|
|
|
$ |
|
|
$ |
|
|||
We acquired definite-lived intangible assets as part of the Diamond Acquisition, which have been valued on a provisional basis, in the amount of $
As of September 30, 2021 we estimated our future amortization expense for our amortizing intangible assets as follows:
($ in millions) |
Intangibles |
|
|
2021 (remaining) |
$ |
|
|
2022 |
|
|
|
2023 |
|
|
|
2024 |
|
|
|
2025 |
|
|
|
Thereafter |
|
|
|
Total |
$ |
|
|
Note 15: Leases
We lease sales centers, office space and equipment under operating leases, some of which we acquired as part of the Diamond Acquisition. Our leases expire at various dates from
We recognize rent expense on leases with both contingent and non-contingent lease payment terms. Rent associated with non-contingent lease payments are recognized on a straight-line basis over the lease term. Rent expense for all operating leases was $
Supplemental cash flow information related to operating leases was as follows:
|
|
Nine months ended September 30, |
|
|||||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Operating cash outflows from operating leases |
|
$ |
|
|
$ |
|
||
Right-of-use assets obtained in exchange for new lease liabilities: |
|
|
|
|
|
|
||
Operating leases |
|
|
|
|
|
|
||
27
Supplemental balance sheet information related to operating leases was as follows:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Weighted-average remaining lease term of operating leases (in years) |
|
|
|
|
|
|||
Weighted-average discount rate of operating leases |
|
|
% |
|
|
% |
||
The future minimum lease payments under noncancelable operating leases, due in each of the next five years and thereafter as of September 30, 2021, are as follows:
($ in millions) |
|
Operating |
|
|
Year |
|
|
|
|
2021 (remaining) |
|
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Total future minimum lease payments |
|
$ |
|
|
Less: imputed interest |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
Note 16: 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 for the nine months ended September 30, 2021 and 2020 was approximately
We have considered the income tax accounting and disclosure implications of the relief provided by the American Rescue Plan Act of 2021 enacted on March 11, 2021. As of September 30, 2021, we evaluated the income tax provisions of the American Rescue Plan Act and have determined there to be no effect on either the September 30, 2021 tax rate or the computation of the estimated effective tax rate for the year. We will continue to evaluate the income tax provisions of the American Rescue Plan Act and monitor the developments in the jurisdictions where we have significant operations for tax law changes that could have income tax accounting and disclosure implications.
Note 17: 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 $
Service RSUs
During the nine months ended September 30, 2021, we issued
Options
During the nine months ended September 30, 2021, we issued
28
The weighted-average grant date fair value of these options was $
Expected volatility |
|
|
|
% |
|
Dividend yield |
|
|
|
% |
|
Risk-free rate |
|
|
|
% |
|
Expected term (in years) |
|
|
|
|
As of September 30, 2021, we had
Performance RSUs
During the nine months ended September 30, 2021, we issued two separate tranches of Performance RSUs.
In March 2021, we issued
In August 2021, and in conjunction with the Diamond Acquisition, we issued
We determined that the performance conditions for these awards are probable of achievement and, as of September 30, 2021, we recognized compensation expense based on the number of Performance RSUs we expect to vest.
Employee Stock Purchase Plan
In March 2017, the Board of Directors adopted the Hilton Grand Vacations Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective during 2017. In connection with the Plan, we issued
Note 18: Earnings (Loss) Per Share
The following tables below present the calculation of our basic and diluted earnings (loss) per share (“EPS”) and the corresponding weighted average shares outstanding referenced in these calculations for the three and nine months ended September 30, 2021 and 2020.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
($ and shares outstanding in millions, except per share amounts) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss)(1) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic EPS |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss)(1) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted EPS |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
(1)
$(
29
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
||||
For the three and nine months ended September 30, 2021, we excluded
The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings (loss) per common share by application of the treasury stock method using average market prices during the period. Potentially dilutive shares of
Note 19: Related Party Transactions
BRE Ace LLC and 1776 Holding, LLC
We hold a
We hold a
We record Equity in earnings from our unconsolidated affiliates in our unaudited condensed consolidated statements of operations. See Note 11: Investments in Unconsolidated Affiliates for additional information. Additionally, we earn commissions and other fees related to fee-for-service agreements with the investees to sell VOIs at Elara, by Hilton Grand Vacations and Liberty Place Charleston, by Hilton Club.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
($ in millions) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Equity in earnings (losses) from unconsolidated affiliates |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
Commissions and other fees |
|
|
|
|
|
|
|
|
|
|
|
|
||||
We also had $
Apollo Global Management Inc.
As part of the Diamond Acquisition as described above in Note 3: Diamond Acquisition, Apollo obtained more than
30
Note 20: Business Segments
We operate our business through the following
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, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) other gains, including asset dispositions and foreign currency translations; (ii) debt restructurings/retirements; (iii) non-cash impairment losses; (iv) share-based and other compensation expenses; and (v) other items, including but not limited to costs associated with acquisitions, restructuring, amortization of premiums resulting from purchase accounting, and other non-cash and one-time charges.
We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment operating performance.
Below is the presentation of our reportable segment results which include the newly acquired Diamond operations within both segments for the three and nine months ended September 30, 2021.
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
||||
Real estate sales and financing |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Resort operations and club |
|
|
|
|
|
|
|
|
|
|
|
||||
Segment revenues |
|
|
|
|
|
|
|
|
|
|
|
||||
Cost reimbursements |
|
|
|
|
|
|
|
|
|
|
|
||||
Intersegment eliminations(1)(2) |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total revenues |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(1) Includes charges to the real estate sales and financing segment from the resort operations and club management segment for fulfillment of discounted
marking package stays at resorts. These charges totaled $
nine months ended September 30, 2021 and 2020, these charges totaled $
(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 $
31
The following table presents Adjusted EBITDA for our reportable segments reconciled to net income (loss):
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
||||
Real estate sales and financing(1) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Resort operations and club management(1) |
|
|
|
|
|
|
|
|
|
|
|
||||
Segment Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
||||
Acquisition and integration-related expense |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
General and administrative |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Depreciation and amortization |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
License fee expense |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other (loss) gain, net |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Interest expense |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income tax (expense) benefit |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Equity in earnings (losses) from unconsolidated affiliates |
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Impairment expense |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Other adjustment items(2) |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income (loss) |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
(1) Includes intersegment transactions. Refer to our table presenting revenues by reportable segment above for additional discussion.
(2) For the three and nine months ended September 30, 2021 and 2020, this amount includes costs associated with restructuring, one-time charges and other
non-cash items included within our reportable segments. For the three months ended September 30, 2021, this also includes amortization of
premiums resulting from purchase accounting.
Note 21: Commitments and Contingencies
Commitments
We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units or other real estate at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of September 30, 2021, we were committed to purchase approximately $
($ in millions) |
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
Thereafter |
|
|
Total |
|
|||||||
Inventory purchase obligations |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Other commitments(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
(1)
Rebranding Costs
As part of the Diamond Acquisition and per our licensing agreement with Hilton, we are committed to rebranding Diamond properties to the Hilton Grand Vacations brand and Hilton standards. As of September 30, 2021 we expect to begin incurring rebranding costs during the fourth quarter of 2021, and expect rebranding to occur over a period of several years.
Litigation Contingencies
We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. We evaluate these legal proceedings and claims at each balance sheet date to determine the degree of probability of an
32
unfavorable outcome and, when it is probable that a liability has been incurred, our ability to reasonably estimate the amount of loss. We record a contingent litigation liability when it is determined that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of September 30, 2021 we accrued liabilities of approximately $
While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial condition, cash flows, or materially adversely affect overall trends in our results of operations. Legal proceedings are inherently uncertain and unfavorable rulings could, individually or in aggregate, have a material adverse effect on the Company’s business, financial condition or results of operations.
Note 22: Subsequent Events
In October 2021, the Compensation Committee of the Board of Directors (the "Compensation Committee") approved modifications to the short-term incentive program performance periods and targets covering fiscal year 2021, and in November 2021, the Compensation Committee approved modifications to the long-term incentive performance targets for performance-vesting restricted stock units covering fiscal years 2019 through 2022. The modifications were made to reflect the projected effects of the Diamond Acquisition on applicable metrics. There is no financial impact of these modifications and any awards earned under either the 2021 Short-Term Incentive Program or the Performance RSUs will be subject to the terms and conditions applicable to such awards.
33
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, 2020.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 the future of HGV, and are based on management’s beliefs, expectations, assumptions and such plans, estimates, projections and other information available to management at the time HGV makes 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,”, “would”, “seeks,” “approximately,” “projects,” predicts,” “intends,” “plans,” “estimates,” “anticipates” “future,” “guidance,” “target,” or the negative version of these words or other comparable words, although not all forward-looking statements may contain such words. The forward-looking statements contained in this Quarterly Report on Form 10-Q include statements related to HGV’s 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.
HGV cautions you that our forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that are beyond HGV’s control, that may cause the actual results, performance or achievements to be materially different from the future results. Factors that could cause HGV’s actual results to differ materially from those contemplated by its forward-looking statements include: risks that HGV may not realize the expected cost savings, synergies, growth and other benefits from the Diamond Acquisition or that the costs related to the Diamond Acquisition are greater than anticipated; risks that there may be significant costs and expenses associated with liabilities related to the Diamond business that were either unknown or are greater than those anticipated at the time of the Diamond Acquisition; risks that HGV may not be successful in integrating the Diamond business into all aspects of our business and operations or that the integration will take longer than anticipated; the potential magnification of our operational risks as a result of the Diamond Acquisition and integration of the Diamond business; risks related to disruption of management’s attention from HGV’s ongoing business operations due to its efforts to integrate Diamond Resorts into HGV; any adverse effect of the Diamond Acquisition on HGV’s reputation, relationships, operating results and business generally; the continuing impact of the COVID-19 pandemic on HGV’s business, operating results, and financial condition; the extent and duration of the impact of the COVID-19 pandemic on global economic conditions; HGV’s ability to meet its liquidity needs; risks related to HGV’s indebtedness, especially in light of the significant amount of indebtedness we incurred to complete the Diamond Acquisition; inherent business risks, market trends and competition within the timeshare and hospitality industries; HGV’s ability to successfully source inventory and market, sell and finance VOIs; default rates on our financing receivables (including those financing receivables related to the Diamond business); the reputation of and our ability to access Hilton brands and programs, including the risk of a breach or termination of our license agreement with Hilton; the integration of Diamond’s operations as part of our overall brand that is governed by the terms of the A&R Hilton License Agreement; compliance with and changes to United States and global laws and regulations, including those related to anti-corruption and privacy; risks related to HGV’s acquisitions, joint ventures, and other partnerships; HGV’s dependence on third-party development activities to secure just-in-time inventory; the performance of HGV’s information technology systems and our ability to maintain data security; regulatory proceedings or litigation; adequacy of our workforce to meet HGV’s business and operation needs; HGV’s ability to attract and retain key executives and employees with skills and capacity to meet our needs; and natural disasters or adverse geo-political conditions. Any one or more of the foregoing factors could adversely impact HGV’s operations, revenue, operating profits and margins, financial condition and/or credit rating.
For additional information regarding factors that could cause HGV’s actual results to differ materially from those expressed or implied in the forward-looking statements in this Quarterly Report on Form 10-Q, 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, 2020, as supplemented and updated by the risk factors discussed in “Part II-Item 1A. Risk Factors” of this Report, and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021, and those described from time to time in 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 HGV’s 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.
34
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” or “resorts” and “VOIs” refer to the timeshare properties that we manage or own. Of these resorts and VOIs, a portion is directly owned by us or our joint ventures in which we have an interest and the remaining resorts and VOIs are owned by our third-party owners.
“Developed” refers to 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.
"Points-based" refers to VOI sales that are backed by physical real estate that is contributed to a trust.
“VOI” refers to vacation ownership intervals and interests.
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 earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization (“EBITDA”) and Adjusted EBITDA.
Operational Metrics
This Quarterly Report on Form 10-Q includes discussion of key business operational metrics including contract sales, sales revenue, real estate profit, tour flow, and volume per guest (“VPG”).
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 global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. Our Company also includes Diamond Resorts International ("Diamond"). Our operations primarily consist of: selling vacation ownership intervals and vacation ownership interests (collectively, “VOIs”) for us and third parties; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts and multi-resort trusts; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange program (collectively the “Legacy-HGV Club”) and Diamond points-based clubs.
As of September 30, 2021, we have 154 properties located in the United States (“U.S.”), Europe, Canada, the Caribbean, Japan and Mexico. A significant number of our properties and VOIs are concentrated in Florida, Hawaii, Europe, California, Arizona, Nevada, and Virginia, and feature spacious, condominium-style accommodations with superior amenities and quality service. As of September 30, 2021, we have approximately 331,000 Hilton Grand Vacations Club and Hilton Club members. Legacy-HGV 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 18 industry-leading brands across approximately 6,500 properties, as well as numerous experiential vacation options, such as cruises and guided tours. We also have 131,000 Diamond Club members who are able to utilize their points across the Diamond resorts, affiliated properties and alternative experiential options.
Our business has been adversely impacted by the COVID-19 pandemic and its effects on the global economy, including the various government orders and mandates for closures of non-essential businesses. Please see, “Recent Events Related to the COVID-19 Pandemic and Impact on Our Results of Operations, Financial Condition, and Business During the Three and Nine Months Ended September 30, 2021” and other discussions throughout this Report for additional information regarding such impacts.
Diamond Acquisition
On August 2, 2021, we completed the acquisition of Dakota Holdings, Inc., the parent of Diamond (the “Diamond Acquisition” or, ). We completed the acquisition by exchanging 100 percent of the outstanding equity interests of Diamond
35
into shares of HGV common stock. Pre-existing HGV shareholders own approximately 72 percent of the combined company after giving effect of the Diamond Acquisition, with certain funds controlled by Apollo Global Management Inc. (the "Apollo Funds" or, "Apollo") and other minority shareholders, who previously owned 100 percent of Diamond, holding the remaining approximately 28 percent after giving effect to the Diamond Acquisition.
Diamond also operates in the hospitality and VOI industry, with a worldwide resort network of global vacation destinations. Diamond’s portfolio consists of resort properties (the “Portfolio Properties”) that we manage, are included in one of Diamond's single- and multi-use trusts (collectively, the "Diamond Collections"), or are Diamond branded resorts in which we own inventory. In addition there are affiliated resorts and hotels, which we do not manage, and which do not carry the Diamond brand but are a part of Diamond's network and, through THE Club® and other Club offerings (the “Diamond Clubs”), are available for its members to use as vacation destinations.
Diamond’s operations primarily consist of: VOI sales and financing which includes marketing and sales of VOIs and consumer financing for purchasers of the Company's VOIs; operations related to the management of the homeowners associations (the “HOAs”) for resort properties and the Diamond Collections, operating and managing points-based vacation clubs, and operation of certain resort amenities and management services.
In connection with the Diamond Acquisition, we entered into the following arrangements:
- $1.3 billion seven-year senior secured term loan facility ("Term Loan B")
- $850 million aggregate principal amount of 5.00 percent senior notes due 2029 ("the 2029 Notes")
- $500 million aggregate principal amount of 4.875 percent senior notes due 2031 ("the 2031 Notes")
The cumulative proceeds received from Term Loan B and senior notes were used to repay certain existing indebtedness of both HGV and Diamond, including HGV's pre-existing term loan and senior notes, $260 million of the balance on the revolving credit facility, and approximately $2.03 billion of Diamond's corporate indebtedness inclusive of accrued interest on the existing indebtedness and early termination penalties.
The financial results within this report include Diamond’s results of operations beginning on August 2, 2021. We refer to Diamond's business and operations that we acquired as "Legacy-Diamond", and our business and operations that existed both prior to and following the Diamond Acquisition as "Legacy-HGV." See Note 3: Diamond Acquisition for more information. Acquisition and integration-related expenses represent direct costs associated with the Diamond Acquisition including integration costs, legal fees, financial and other professional services. These expenses also include severance, retention and other employee-related benefits.
Of our 154 properties, we had 92 properties that are Legacy-Diamond as of September 30, 2021.
Our Segments
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 Legacy-HGV product is the marketing and selling of fee-simple VOIs deeded in perpetuity and right to use real estate interests, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week on an annual basis, 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. We source VOIs through fee-for-service and just-in-time agreements with third-party developers and have focused our inventory strategy on developing an optimal inventory mix focused on developed properties as well as fee-for-service and just-in-time agreements. 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 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.
Our primary "Collections" product is the marketing and selling of VOIs sold to customers as beneficial interests in one of our Collections, which are represented by an annual or biennial allotment of points that can be utilized for vacations at any of the resorts in our network for varying lengths of stay. In general, purchasers of points do not acquire a direct ownership interest in the resort properties in our network generally, for each Collection, one or more trustees hold legal title to the deeded fee simple real estate interests or the functional equivalent, or, in some cases, leasehold real estate interests for the benefit of the respective Collection’s association members in accordance with the applicable agreements. We source some of our VOIs through just-in-time agreements with third-party developers and develop our own properties.
36
For the nine months ended September 30, 2021, sales from fee-for-service, just-in-time, developed inventory and points-based sources were 35 percent, 22 percent, 26 percent and 17 percent, respectively, of contract sales. See “Key Business and Financial Metrics and Terms Used by Management — Real Estate Sales Operating Metrics” for additional discussion of contract sales. The estimated contract sales value related to our inventory that is currently available for sale at open or soon-to-be open projects and inventory at new or existing projects that will become available for sale in the future upon registration, delivery or construction is approximately $14 billion at current pricing.
Capital efficient arrangements, comprised of our fee-for-service and just-in-time inventory, represented approximately 38 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 sell our vacation ownership products primarily through our distribution network of both-in-market and off-site sales centers. Our products are currently marketed for sale throughout the United States, Mexico, Canada, Europe, and Japan. We operate sales distribution centers in major markets and popular leisure destinations with year-round demand and a history of being a friendly environment for vacation ownership. We have 16 Legacy-HGV sales distribution centers in various domestic and international locations. We have added approximately 30 sales centers as part of the Diamond Acquisition primarily located in the U.S. at Diamond resort properties. Our marketing and sales activities are based on targeted direct marketing and a highly personalized sales approach. We use targeted direct marketing to reach potential members who are identified as having the financial ability to pay for our products and have an affinity with Hilton (Legacy-HGV only) and are frequent leisure travelers. Tour flow quality impacts key metrics such as close rate and VPG, defined in “Key Business and Financial Metrics and Terms Used by Management—Real Estate Sales Metrics.” Additionally, the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables. For the nine months ended September 30, 2021, 67 percent of our contract sales were to our existing owners.
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 loans that bear a fixed interest rate typically ranging from 4 percent to 18 percent per annum.
The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the loan term. The weighted-average FICO score for loans to U.S. and Canadian borrowers at the time of origination were as follows:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Weighted-average FICO score |
|
|
724 |
|
|
|
734 |
|
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 Clubs.
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 7: Timeshare Financing Receivables in our unaudited condensed consolidated financial statements.
In addition, we earn fees from servicing the loans provided by third-party developers of our fee-for-service projects to purchasers of their VOIs and from our securitized timeshare financing receivables.
37
Resort Operations and Club Management
We enter into management agreements with the HOAs of the timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprised of 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 Clubs, including the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Legacy-HGV Club members, as well as the Diamond Clubs (the Legacy-HGV Club and Diamond Clubs are collectively referred to as “Clubs”). When owners purchase VOI, they are generally enrolled in a Club which allows the member to exchange their points for a number of vacation options. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system.
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 Operating Metrics
We measure our performance using the following key operating metrics:
We believe that the presentation of contract sales on a combined basis (fee-for-service, developed and points-based) is most appropriate for the purpose of the operating metric; additional information regarding the split of contract sales, is included in “—Real Estate” below. See Note 2: Summary of Significant Accounting Policies in our unaudited consolidated financial statements included in Item 1 in our Quarterly Report herein on form 10-Q for the quarter ended September 30, 2021, for additional information on Sales of VOI, net.
38
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, 2020 as well as Note 2: Summary of Significant Accounting Policies above.
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) other gains, including asset dispositions and foreign currency translations; (ii) debt restructurings/retirements; (iii) non-cash impairment losses; (iv) share-based and other compensation expenses; and (v) other items, including but not limited to costs associated with acquisitions, restructuring, amortization of premiums resulting from purchase accounting, and other non-cash and one-time charges.
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.
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:
39
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.
Recent Events Related to the COVID-19 Pandemic and Impact on Our Results of Operations, Financial Condition, and Business During the Three and Nine Months Ended September 30, 2021.
As of September 30, 2021, nearly all of our resorts and sales centers which previously closed due to the COVID-19 pandemic are open and operating, although some are still operating in markets with various capacity constraints, social distancing requirements and other safety measures, which are impacting consumer demand for resorts in those markets. Subsequent to September 30, 2021, all of our resorts and all but three of our sales centers have fully reopened. We plan to continue our normal business as conditions permit, but there can be no assurance that such positive trends will continue or that there will not be any increases of new infections or new variants (such as the Delta variant) that may result in the reimposition of social distancing measures and/or restrictions in certain jurisdictions, as well as travel restrictions that may impede or reverse our recovery. Please carefully review the risk factors contained in this quarterly report on Form 10-Q, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021, in Item 1A of our Form 10-K for the year ended December 31, 2020 and those described from time to time in other periodic reports that we file with the SEC for discussions of various factors and uncertainties related to the pandemic that may materially impact us.
40
Results of Operations
Three and Nine Months Ended September 30, 2021 Compared with the Three and Nine Months Ended September 30, 2020
Segment Results
We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 20: 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 operating performance. 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 |
|
|
Change |
|
|
Change due to |
|
|
|
Change due to |
|
|||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Real estate sales and financing |
$ |
659 |
|
|
$ |
116 |
|
|
$ |
543 |
|
|
$ |
127 |
|
|
|
$ |
416 |
|
|
Resort operations and club management |
|
216 |
|
|
|
61 |
|
|
|
155 |
|
|
|
102 |
|
|
|
|
53 |
|
|
Total segment revenues |
|
875 |
|
|
|
177 |
|
|
|
698 |
|
|
|
229 |
|
|
— |
|
|
469 |
|
Cost reimbursements |
|
58 |
|
|
|
33 |
|
|
|
25 |
|
|
|
16 |
|
|
|
|
9 |
|
|
Intersegment eliminations(1) |
|
(5 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
— |
|
|
|
|
(3 |
) |
|
Total revenues |
$ |
928 |
|
|
$ |
208 |
|
|
$ |
720 |
|
|
$ |
245 |
|
|
|
$ |
475 |
|
|
|
Nine Months Ended |
|
|
Change |
|
|
Change due to |
|
|
|
Change due to |
|
|||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Real estate sales and financing |
$ |
976 |
|
|
$ |
378 |
|
|
$ |
598 |
|
|
$ |
127 |
|
|
|
$ |
471 |
|
|
Resort operations and club management |
|
403 |
|
|
|
209 |
|
|
|
194 |
|
|
|
102 |
|
|
|
|
92 |
|
|
Total segment revenues |
|
1,379 |
|
|
|
587 |
|
|
|
792 |
|
|
|
229 |
|
|
— |
|
|
563 |
|
Cost reimbursements |
|
131 |
|
|
|
105 |
|
|
|
26 |
|
|
|
16 |
|
|
|
|
10 |
|
|
Intersegment eliminations(1) |
|
(13 |
) |
|
|
(10 |
) |
|
|
(3 |
) |
|
|
— |
|
|
|
|
(3 |
) |
|
Total revenues |
$ |
1,497 |
|
|
$ |
682 |
|
|
$ |
815 |
|
|
$ |
245 |
|
|
|
$ |
570 |
|
|
(1) Refer to Note 20: Business Segments in our unaudited condensed consolidated financial statements for details on the intersegment eliminations.
The following table reconciles net income (loss), our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:
|
Three Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Net income (loss) |
$ |
99 |
|
|
$ |
(7 |
) |
|
$ |
106 |
|
|
$ |
30 |
|
|
$ |
76 |
|
Interest expense |
|
42 |
|
|
|
10 |
|
|
|
32 |
|
|
|
(1 |
) |
|
|
33 |
|
Income tax expense (benefit) |
|
49 |
|
|
|
(5 |
) |
|
|
54 |
|
|
|
12 |
|
|
|
42 |
|
Depreciation and amortization |
|
48 |
|
|
|
11 |
|
|
|
37 |
|
|
|
37 |
|
|
|
— |
|
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates |
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
EBITDA |
|
238 |
|
|
|
10 |
|
|
|
228 |
|
|
|
78 |
|
|
|
150 |
|
Other loss (gain), net |
|
20 |
|
|
|
(1 |
) |
|
|
21 |
|
|
|
— |
|
|
|
21 |
|
Share-based compensation expense |
|
14 |
|
|
|
6 |
|
|
|
8 |
|
|
|
— |
|
|
|
8 |
|
Impairment expense |
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Acquisition and integration-related expense |
|
54 |
|
|
|
— |
|
|
|
54 |
|
|
|
3 |
|
|
|
51 |
|
Other adjustment items(1) |
|
13 |
|
|
|
4 |
|
|
|
9 |
|
|
|
8 |
|
|
|
1 |
|
Adjusted EBITDA |
$ |
340 |
|
|
$ |
19 |
|
|
$ |
321 |
|
|
$ |
89 |
|
|
$ |
232 |
|
41
|
Nine Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Net income (loss) |
$ |
101 |
|
|
$ |
(47 |
) |
|
$ |
148 |
|
|
$ |
30 |
|
|
$ |
118 |
|
Interest expense |
|
74 |
|
|
|
32 |
|
|
|
42 |
|
|
|
(1 |
) |
|
|
43 |
|
Income tax expense (benefit) |
|
46 |
|
|
|
(12 |
) |
|
|
58 |
|
|
|
12 |
|
|
|
46 |
|
Depreciation and amortization |
|
71 |
|
|
|
34 |
|
|
|
37 |
|
|
|
37 |
|
|
|
— |
|
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates |
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
EBITDA |
|
293 |
|
|
|
9 |
|
|
|
284 |
|
|
|
78 |
|
|
|
206 |
|
Other loss, net |
|
22 |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
22 |
|
Share-based compensation expense |
|
32 |
|
|
|
10 |
|
|
|
22 |
|
|
|
— |
|
|
|
22 |
|
Impairment expense |
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
Acquisition and integration-related expense |
|
83 |
|
|
|
— |
|
|
|
83 |
|
|
|
3 |
|
|
|
80 |
|
Other adjustment items(1) |
|
20 |
|
|
|
14 |
|
|
|
6 |
|
|
|
8 |
|
|
|
(2 |
) |
Adjusted EBITDA |
$ |
452 |
|
|
$ |
33 |
|
|
$ |
419 |
|
|
$ |
89 |
|
|
$ |
330 |
|
(1) For the three and nine months ended September 30, 2021 and 2020 this amount includes costs associated with restructuring, one-time charges, and
other non-cash items. For the three months ended September 30, 2021, this also includes amortization of premiums resulting from purchase accounting.
The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA:
|
Three Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Real estate sales and financing(1) |
$ |
280 |
|
|
$ |
15 |
|
|
$ |
265 |
|
|
$ |
54 |
|
|
$ |
211 |
|
Resort operations and club |
|
109 |
|
|
|
30 |
|
|
|
79 |
|
|
|
40 |
|
|
|
39 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Adjusted EBITDA from |
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
License fee expense |
|
(24 |
) |
|
|
(11 |
) |
|
|
(13 |
) |
|
|
— |
|
|
|
(13 |
) |
General and administrative(2) |
|
(26 |
) |
|
|
(15 |
) |
|
|
(11 |
) |
|
|
(5 |
) |
|
|
(6 |
) |
Adjusted EBITDA |
$ |
340 |
|
|
$ |
19 |
|
|
$ |
321 |
|
|
$ |
89 |
|
|
$ |
232 |
|
|
Nine Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Real estate sales and financing(1) |
$ |
352 |
|
|
$ |
16 |
|
|
$ |
336 |
|
|
$ |
54 |
|
|
$ |
282 |
|
Resort operations and club |
|
212 |
|
|
|
100 |
|
|
|
112 |
|
|
|
40 |
|
|
|
72 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Adjusted EBITDA from |
|
8 |
|
|
|
5 |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
License fee expense |
|
(57 |
) |
|
|
(39 |
) |
|
|
(18 |
) |
|
|
— |
|
|
|
(18 |
) |
General and administrative(2) |
|
(63 |
) |
|
|
(49 |
) |
|
|
(14 |
) |
|
|
(5 |
) |
|
|
(9 |
) |
Adjusted EBITDA |
$ |
452 |
|
|
$ |
33 |
|
|
$ |
419 |
|
|
$ |
89 |
|
|
$ |
330 |
|
(1) Includes intersegment transactions, share-based compensation, depreciation and other adjustments attributable to the segments.
(2) Excludes segment related share-based compensation, depreciation and other adjustment items.
Real Estate Sales and Financing
In accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), revenue and the related costs to fulfill and acquire the contract (“direct costs”) from sales of VOIs under construction are deferred until the point in time when construction activities are deemed to be completed. The real estate sales
42
and financing segment is impacted by construction related deferral and recognition activity. In periods where Sales of VOIs and related direct costs of projects under construction are deferred, margin percentages will generally contract as the indirect marketing and selling costs associated with these sales are recognized as incurred in the current period. In periods where previously deferred Sales of VOIs and related direct costs are recognized upon construction completion, margin percentages will generally expand as the indirect marketing and selling costs associated with these sales were recognized in prior periods.
The following table represents deferrals and recognitions of Sales of VOI revenue and direct costs for properties under construction:
|
Three Months Ended |
|
|
Change |
|
|
Nine Months Ended |
|
|
Change |
|
||||||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
2021 |
|
|
2020 |
|
|
$ |
|
||||||
Sales of VOIs (deferrals) |
$ |
— |
|
|
$ |
(13 |
) |
|
$ |
13 |
|
|
$ |
— |
|
|
$ |
(64 |
) |
|
$ |
64 |
|
Sales of VOIs recognitions |
|
241 |
|
|
|
— |
|
|
|
241 |
|
|
|
167 |
|
|
|
— |
|
|
|
167 |
|
Net Sales of VOIs recognitions (deferrals) |
|
241 |
|
|
|
(13 |
) |
|
|
254 |
|
|
|
167 |
|
|
|
(64 |
) |
|
|
231 |
|
Cost of VOI sales (deferrals)(1) |
|
— |
|
|
|
(4 |
) |
|
|
4 |
|
|
|
— |
|
|
|
(17 |
) |
|
|
17 |
|
Cost of VOI sales recognitions |
|
73 |
|
|
|
— |
|
|
73 |
|
|
|
50 |
|
|
|
— |
|
|
|
50 |
|
|
Net Cost of VOI sales recognitions (deferrals)(1) |
|
73 |
|
|
|
(4 |
) |
|
|
77 |
|
|
|
50 |
|
|
|
(17 |
) |
|
|
67 |
|
Sales and marketing expense (deferrals) |
|
— |
|
|
|
(1 |
) |
|
1 |
|
|
|
— |
|
|
|
(9 |
) |
|
9 |
|
||
Sales and marketing expense recognitions |
|
35 |
|
|
|
— |
|
|
|
35 |
|
|
|
24 |
|
|
|
— |
|
|
|
24 |
|
Net Sales and marketing expense |
|
35 |
|
|
|
(1 |
) |
|
|
36 |
|
|
|
24 |
|
|
|
(9 |
) |
|
|
33 |
|
Net construction recognitions (deferrals) |
$ |
133 |
|
|
$ |
(8 |
) |
|
$ |
141 |
|
|
$ |
93 |
|
|
$ |
(38 |
) |
|
$ |
131 |
|
(1) Includes anticipated Costs of VOI sales of VOIs under construction that will be acquired under a just-in-time arrangement once construction is complete
for the three and nine months ended September 30, 2021 and 2020.
Real estate sales and financing segment revenues increased by $543 million and $598 million for the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to an increase of $254 million and $231 million, respectively, related to the recognition of sales of VOIs revenue for completed projects which were deferred when under construction. All projects completed in the third quarter of 2021 were in deferral for the three and nine months ending September 30, 2020. Additionally, sales of VOIs increased by $185 million and marketing revenues increased by $110 million as a result of the increase in travel demand and the reopening of nearly all of our resorts and sales centers by the end of the second quarter of 2021. During early 2020, substantially all of our resorts and sales centers were closed due to the COVID-19 pandemic, which significantly lowered our results for the three and nine months ended September 30, 2020. Diamond contributed $127 million to the total increase in real estate sales and financing revenues for the three and nine months ended September 30, 2021 primarily driven by $101 million of sales of VOIs.
Real estate sales and financing Adjusted EBITDA increased by $265 million and $336 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, due to the increases in sales revenue and marketing segment revenues partially offset with the associated increase in cost of VOI sales and real estate operating expenses associated with segment performance discussed herein. In addition, for the three and nine months ended September 30, 2021, real estate sales and financing segment Adjusted EBITDA was impacted favorably by an immaterial amount and $4 million net credit related to government assistance from Japan and an employee retention credit granted under the CARES Act, primarily associated with payments made to employees as a result of operational closures caused by the COVID-19 pandemic, compared to $9 million and $24 million of net expenses for the three and nine months ended September 30, 2020, respectively. Diamond contributed $54 million to the total increase in real estate sales and financing Adjusted EBITDA for the three and nine months ended September 30, 2021.
Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.
43
Resort Operations and Club Management
Resort operations and club management segment revenues increased $155 million and $194 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, primarily due to increases in rental revenues as a result of the reopening of nearly all of our resorts and sales centers by the end of the second quarter of 2021, which led to increased results as compared to the prior periods. During early 2020, substantially all of our resorts and sales centers were closed due to the COVID-19 pandemic, which significantly lowered our results for the three and nine months ended September 30, 2020. We began a phased reopening of our resorts and resumption of our business activities during the second quarter of 2020. Diamond contributed $102 million to the total increase in resort operations and club management segment revenues for the three and nine months ended September 30, 2021, primarily driven by $49 million of rental revenue and $38 million of resort operations revenue.
Resort operations and club management segment Adjusted EBITDA increased $79 million and $112 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, primarily due to the increases in rental revenues described above partially offset with the increases in segment operating expenses associated with segment performance discussed herein. Diamond contributed $40 million to the total increase in resort operations and club management Adjusted EBITDA for the three and nine months ended September 30, 2021.
Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.
Real Estate Sales and Financing Segment
Real Estate
|
Three Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions, except Tour flow and VPG) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Contract sales |
$ |
433 |
|
|
$ |
117 |
|
|
$ |
316 |
|
|
$ |
143 |
|
|
$ |
173 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Fee-for-service sales(1) |
|
(124 |
) |
|
|
(67 |
) |
|
|
(57 |
) |
|
|
— |
|
|
|
(57 |
) |
Provision for financing receivables losses |
|
(50 |
) |
|
|
(12 |
) |
|
|
(38 |
) |
|
|
(23 |
) |
|
|
(15 |
) |
Reportability and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net recognition (deferral) of sales of VOIs under construction(2) |
|
241 |
|
|
|
(13 |
) |
|
|
254 |
|
|
|
— |
|
|
|
254 |
|
Fee-for-service sale upgrades, net |
|
3 |
|
|
|
4 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Other(3) |
|
(15 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
|
|
(20 |
) |
|
|
10 |
|
Sales of VOIs, net |
$ |
488 |
|
|
$ |
24 |
|
|
$ |
464 |
|
|
$ |
100 |
|
|
$ |
364 |
|
Tour flow |
|
97,628 |
|
|
|
25,488 |
|
|
|
|
|
|
|
|
|
|
|||
VPG |
$ |
4,255 |
|
|
$ |
4,205 |
|
|
|
|
|
|
|
|
|
|
|||
|
Nine Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions, except Tour flow and VPG) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Contract sales |
$ |
831 |
|
|
$ |
396 |
|
|
$ |
435 |
|
|
$ |
143 |
|
|
$ |
292 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Fee-for-service sales(1) |
|
(289 |
) |
|
|
(216 |
) |
|
|
(73 |
) |
|
|
— |
|
|
|
(73 |
) |
Provision for financing receivables losses |
|
(78 |
) |
|
|
(57 |
) |
|
|
(21 |
) |
|
|
(23 |
) |
|
|
2 |
|
Reportability and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net recognition (deferral) of sales of VOIs under construction(2) |
|
167 |
|
|
|
(64 |
) |
|
|
231 |
|
|
|
— |
|
|
|
231 |
|
Fee-for-service sale upgrades, net |
|
8 |
|
|
|
13 |
|
|
|
(5 |
) |
|
|
— |
|
|
|
(5 |
) |
Other(3) |
|
(42 |
) |
|
|
8 |
|
|
|
(50 |
) |
|
|
(20 |
) |
|
|
(30 |
) |
Sales of VOIs, net |
$ |
597 |
|
|
$ |
80 |
|
|
$ |
517 |
|
|
$ |
100 |
|
|
$ |
417 |
|
Tour flow |
|
181,921 |
|
|
|
98,263 |
|
|
|
|
|
|
|
|
|
|
|||
VPG |
$ |
4,356 |
|
|
$ |
3,763 |
|
|
|
|
|
|
|
|
|
|
|||
(1) Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.
(2) Represents the net impact of deferred revenues related to the Sales of VOIs under construction that are recognized when construction is complete.
(3) Includes adjustments for revenue recognition, including amounts in rescission and sales incentives.
44
Contract sales increased by $316 million and $435 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, primarily due to an increase in tour flow and VPG and a related improvement in travel demand. As of September 30, 2021, nearly all of our resorts and sales centers which had previously closed due to the COVID-19 pandemic were open and operating. Diamond contributed $143 million to the total increase in contract sales for the three and nine months ended September 30, 2021. Sales of VOIs, net also increased by $254 million and $231 million due to the recognition of all sales of VOIs under construction in the third quarter of 2021 which were in deferral for the three and nine months ended September 30, 2020.
|
Three Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Sales, marketing, brand and other fees |
$ |
118 |
|
|
$ |
52 |
|
|
$ |
66 |
|
|
$ |
11 |
|
|
$ |
55 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Marketing revenue and other fees |
|
45 |
|
|
|
11 |
|
|
|
34 |
|
|
|
11 |
|
|
|
23 |
|
Commissions and brand fees |
|
73 |
|
|
|
41 |
|
|
|
32 |
|
|
|
— |
|
|
|
32 |
|
Sales of VOIs, net |
|
488 |
|
|
|
24 |
|
|
|
464 |
|
|
|
100 |
|
|
|
364 |
|
Sales revenue |
|
561 |
|
|
|
65 |
|
|
|
496 |
|
|
|
100 |
|
|
|
396 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cost of VOI sales |
|
130 |
|
|
|
8 |
|
|
|
122 |
|
|
|
12 |
|
|
|
110 |
|
Sales and marketing expense, net(1) |
|
174 |
|
|
|
66 |
|
|
|
108 |
|
|
|
40 |
|
|
|
68 |
|
Real estate profit (loss) |
$ |
257 |
|
|
$ |
(9 |
) |
|
$ |
266 |
|
|
$ |
48 |
|
|
$ |
218 |
|
Real estate profit margin |
|
45.8 |
% |
|
|
(13.8 |
)% |
|
|
|
|
|
|
|
|
|
|||
|
Nine Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Sales, marketing, brand and other fees |
$ |
252 |
|
|
$ |
171 |
|
|
$ |
81 |
|
|
$ |
11 |
|
|
$ |
70 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Marketing revenue and other fees |
|
90 |
|
|
|
40 |
|
|
|
50 |
|
|
|
11 |
|
|
|
39 |
|
Commissions and brand fees |
|
162 |
|
|
|
131 |
|
|
|
31 |
|
|
|
— |
|
|
|
31 |
|
Sales of VOIs, net |
|
597 |
|
|
|
80 |
|
|
|
517 |
|
|
|
100 |
|
|
|
417 |
|
Sales revenue |
|
759 |
|
|
|
211 |
|
|
|
548 |
|
|
|
100 |
|
|
|
448 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cost of VOI sales |
|
154 |
|
|
|
21 |
|
|
|
133 |
|
|
|
12 |
|
|
|
121 |
|
Sales and marketing expense, net(1) |
|
316 |
|
|
|
247 |
|
|
|
69 |
|
|
|
40 |
|
|
|
29 |
|
Real estate profit (loss) |
$ |
289 |
|
|
$ |
(57 |
) |
|
$ |
346 |
|
|
$ |
48 |
|
|
$ |
298 |
|
Real estate profit margin |
|
38.1 |
% |
|
|
(27.0 |
)% |
|
|
|
|
|
|
|
|
|
|||
(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 increased for the three and nine months ended September 30, 2021 compared to the same periods in 2020, due to the recognition of all sales of VOIs under construction in the third quarter of 2021 which were in deferral for the three and nine months ended September 30, 2020. Further, as a result of the reopening of nearly all of our resorts and sales centers by the end of the second quarter of 2021, combined with a higher mix of our sales for VOIs at new properties, results have increased as compared to the prior periods. For the three and nine months ended September 30, 2021, the increase in cost of VOI sales is consistent with the increase in sales revenue, compared to the compared to the same periods in 2020. For the same periods, the increase in sales and marketing expense, net is consistent with the sales revenue increase, offset by an increase in marketing revenue from an increase in breakage rate on marketing packages. Diamond contributed $48 million to real estate profit primarily driven by contract sales partially offset by marketing expenses, for the three and nine months ended September 30, 2021.
45
Financing
|
Three Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Interest income |
$ |
46 |
|
|
$ |
34 |
|
|
$ |
12 |
|
|
$ |
15 |
|
|
$ |
(3 |
) |
Other financing revenue |
|
7 |
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
Financing revenue |
|
53 |
|
|
|
40 |
|
|
|
13 |
|
|
|
16 |
|
|
|
(3 |
) |
Consumer financing interest expense |
|
8 |
|
|
|
9 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(2 |
) |
Other financing expense |
|
11 |
|
|
|
4 |
|
|
|
7 |
|
|
|
5 |
|
|
|
2 |
|
Financing expense |
|
19 |
|
|
|
13 |
|
|
|
6 |
|
|
|
6 |
|
|
|
— |
|
Financing profit |
$ |
34 |
|
|
$ |
27 |
|
|
$ |
7 |
|
|
$ |
10 |
|
|
$ |
(3 |
) |
Financing profit margin |
|
64.2 |
% |
|
|
67.5 |
% |
|
|
|
|
|
|
|
|
|
|||
|
Nine Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Interest income |
$ |
108 |
|
|
$ |
108 |
|
|
$ |
— |
|
|
$ |
15 |
|
|
$ |
(15 |
) |
Other financing revenue |
|
19 |
|
|
|
19 |
|
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
Financing revenue |
|
127 |
|
|
|
127 |
|
|
|
— |
|
|
|
16 |
|
|
|
(16 |
) |
Consumer financing interest expense |
|
22 |
|
|
|
23 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(2 |
) |
Other financing expense |
|
21 |
|
|
|
16 |
|
|
|
5 |
|
|
|
5 |
|
|
|
— |
|
Financing expense |
|
43 |
|
|
|
39 |
|
|
|
4 |
|
|
|
6 |
|
|
|
(2 |
) |
Financing profit |
$ |
84 |
|
|
$ |
88 |
|
|
$ |
(4 |
) |
|
$ |
10 |
|
|
$ |
(14 |
) |
Financing profit margin |
|
66.1 |
% |
|
|
69.3 |
% |
|
|
|
|
|
|
|
|
|
|||
Financing revenue increased $13 million for the three months ended September 30, 2021, compared to the same period in 2020, primarily due to a $15 million increase related to interest income on the acquired timeshare financing receivables portfolio, partially offset by a $3 million decrease related to interest income on the originated timeshare financing receivables portfolio. The interest income generated from the originated loan portfolio decreased, compared to the same period in 2020, due to a decrease in the timeshare financing receivables balance, partially offset by an increase in weighted average interest rate for the portfolio from 12.6 percent to 12.7 percent as of September 30, 2021.
For the nine months ended September 30, 2021, the increase related to interest income on the acquired timeshare financing receivables portfolio was offset by a decrease related to interest income on the originated timeshare financing portfolio consistent with the drivers for the three months ended September 30, 2021 described above, resulting in the revenues remaining flat in total compared to the same period in 2020.
Financing expense increased by $6 million and $4 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, primarily related to Diamond's financing operations and interest expense on the acquired non-recourse debt.
Resort Operations and Club Management Segment
Resort and Club Management
|
Three Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Club management revenue |
$ |
42 |
|
|
$ |
23 |
|
|
$ |
19 |
|
|
$ |
12 |
|
|
$ |
7 |
|
Resort management revenue |
|
57 |
|
|
|
16 |
|
|
|
41 |
|
|
|
38 |
|
|
|
3 |
|
Resort and club management revenues |
|
99 |
|
|
|
39 |
|
|
|
60 |
|
|
|
50 |
|
|
|
10 |
|
Club management expense |
|
8 |
|
|
|
6 |
|
|
|
2 |
|
|
|
2 |
|
|
|
— |
|
Resort management expense |
|
18 |
|
|
|
3 |
|
|
|
15 |
|
|
|
13 |
|
|
|
2 |
|
Resort and club management expenses |
|
26 |
|
|
|
9 |
|
|
|
17 |
|
|
|
15 |
|
|
|
2 |
|
Resort and club management profit |
$ |
73 |
|
|
$ |
30 |
|
|
$ |
43 |
|
|
$ |
35 |
|
|
$ |
8 |
|
Resort and club management profit margin |
|
73.7 |
% |
|
|
76.9 |
% |
|
|
|
|
|
|
|
|
|
|||
46
|
Nine Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Club management revenue |
$ |
98 |
|
|
$ |
70 |
|
|
$ |
28 |
|
|
$ |
12 |
|
|
$ |
16 |
|
Resort management revenue |
|
94 |
|
|
|
52 |
|
|
|
42 |
|
|
|
38 |
|
|
|
4 |
|
Resort and club management revenues |
|
192 |
|
|
|
122 |
|
|
|
70 |
|
|
|
50 |
|
|
|
20 |
|
Club management expense |
|
18 |
|
|
|
18 |
|
|
|
— |
|
|
|
2 |
|
|
|
(2 |
) |
Resort management expense |
|
27 |
|
|
|
9 |
|
|
|
18 |
|
|
|
13 |
|
|
|
5 |
|
Resort and club management expenses |
|
45 |
|
|
|
27 |
|
|
|
18 |
|
|
|
15 |
|
|
|
3 |
|
Resort and club management profit |
$ |
147 |
|
|
$ |
95 |
|
|
$ |
52 |
|
|
$ |
35 |
|
|
$ |
17 |
|
Resort and club management profit margin |
|
76.6 |
% |
|
|
77.9 |
% |
|
|
|
|
|
|
|
|
|
|||
Resort and club management revenues increased for the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to an increase in annual club dues along with an increase in the number of transactions compared to the same periods in 2020. Additionally, during the three and nine months ended September 30, 2021 we did not issue or refund club transaction fees unlike during the three and nine months ended September 30, 2020, to accommodate our guests impacted by the COVID-19 pandemic. Diamond contributed $50 million to the increase in resort and club management revenues for the three and nine months ended September 30, 2021 primarily related to resort management revenue.
Resort and club management profit increased for the three and nine months ended September 30, 2021, primarily due to the aforementioned increase in club management and resort management revenue, partially offset by an increase in resort management expenses driven by the opening of nearly all of our resorts and sales centers which had previously closed due to the COVID-19 pandemic by the end of the second quarter 2021. Diamond contributed $35 million to the increase in resort and club management profit for the three and nine months ended September 30, 2021.
Rental and Ancillary Services
|
Three Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Rental revenues |
$ |
104 |
|
|
$ |
19 |
|
|
$ |
85 |
|
|
$ |
48 |
|
|
$ |
37 |
|
Ancillary services revenues |
|
8 |
|
|
|
1 |
|
|
|
7 |
|
|
|
4 |
|
|
|
3 |
|
Rental and ancillary services revenues |
|
112 |
|
|
|
20 |
|
|
|
92 |
|
|
|
52 |
|
|
|
40 |
|
Rental expenses |
|
77 |
|
|
|
23 |
|
|
|
54 |
|
|
|
45 |
|
|
|
9 |
|
Ancillary services expense |
|
7 |
|
|
|
1 |
|
|
|
6 |
|
|
|
2 |
|
|
|
4 |
|
Rental and ancillary services expenses |
|
84 |
|
|
|
24 |
|
|
|
60 |
|
|
|
47 |
|
|
|
13 |
|
Rental and ancillary services profit (loss) |
$ |
28 |
|
|
$ |
(4 |
) |
|
$ |
32 |
|
|
$ |
5 |
|
|
$ |
27 |
|
Rental and ancillary services profit margin |
|
25.0 |
% |
|
|
(20.0 |
)% |
|
|
|
|
|
|
|
|
|
|||
|
Nine Months Ended |
|
|
Change |
|
|
Change due to |
|
|
Change due to |
|
||||||||
($ in millions) |
2021 |
|
|
2020 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Rental revenues |
$ |
184 |
|
|
$ |
71 |
|
|
$ |
113 |
|
|
$ |
48 |
|
|
$ |
65 |
|
Ancillary services revenues |
|
14 |
|
|
|
6 |
|
|
|
8 |
|
|
|
4 |
|
|
|
4 |
|
Rental and ancillary services revenues |
|
198 |
|
|
|
77 |
|
|
|
121 |
|
|
|
52 |
|
|
|
69 |
|
Rental expenses |
|
138 |
|
|
|
77 |
|
|
|
61 |
|
|
|
45 |
|
|
|
16 |
|
Ancillary services expense |
|
13 |
|
|
|
8 |
|
|
|
5 |
|
|
|
2 |
|
|
|
3 |
|
Rental and ancillary services expenses |
|
151 |
|
|
|
85 |
|
|
|
66 |
|
|
|
47 |
|
|
|
19 |
|
Rental and ancillary services profit (loss) |
$ |
47 |
|
|
$ |
(8 |
) |
|
$ |
55 |
|
|
$ |
5 |
|
|
$ |
50 |
|
Rental and ancillary services profit margin |
|
23.7 |
% |
|
|
(10.4 |
)% |
|
|
|
|
|
|
|
|
|
|||
47
Rental and ancillary services revenues, expenses, and profit percentage increased for the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to an increase in transient revenue. Diamond contributed $52 million to the increase in rental and ancillary services revenues and $5 million to the rental and ancillary services profit for the three and nine months ended September 30, 2021.
Other Operating Expenses
|
|
Three Months Ended |
|
|
Change |
|
|
Nine Months Ended |
|
|
Change |
|
|||||||||||||||||||
($ in millions) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
$ |
|
% |
|
||||||||
General and administrative |
|
$ |
41 |
|
|
$ |
22 |
|
|
$ |
19 |
|
|
|
86.4 |
% |
|
$ |
92 |
|
|
$ |
65 |
|
|
$ |
27 |
|
|
41.5 |
% |
Depreciation |
|
|
48 |
|
|
|
11 |
|
|
|
37 |
|
|
NM(1) |
|
|
|
71 |
|
|
|
34 |
|
|
|
37 |
|
NM(1) |
|
||
License fee expense |
|
|
24 |
|
|
|
11 |
|
|
|
13 |
|
|
NM(1) |
|
|
|
57 |
|
|
|
39 |
|
|
|
18 |
|
|
46.2 |
% |
|
Impairment expense |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
NM(1) |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
NM(1) |
|
||
(1) Fluctuation in terms of percentage change is not meaningful.
The change in other operating expenses for the three and nine months ended September 30, 2021, compared to the same periods in 2020, is driven by expenses related to the Diamond Acquisition and administrative expenses and depreciation and amortization. General and administrative expenses increased by $19 million and $27 million for the three and nine months ended September 30, 2021, respectively. Diamond contributed $8 million to the increase in general and administrative expenses for the three and nine months ended September 30, 2021 primarily related to salaries and related costs and legal and professional fees. The increase in general and administrative expenses is also related to an increase in expense related to share-based compensation. In the prior year, certain expenses related to Performance RSUs were reversed as the related RSUs were not expected to achieve certain performance targets, resulting in a credit to expense in the prior period. Further, more share-based compensation awards were granted in the three and nine months ending September 30, 2021 than the same periods in 2020. Depreciation and amortization increased primarily as a result of the intangibles acquired as part of the Diamond Acquisition. Two months of amortization expense for the recently acquired assets are included in the results of the three and nine months ended September 30, 2021. License fee expense increase is related to the corresponding increase in Legacy-HGV revenue.
Acquisition and Integration-Related Expense
|
|
Three Months Ended |
|
|
Change |
|
Nine Months Ended |
|
|
Change |
|||||||||||||||||
($ in millions) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
2021 |
|
|
2020 |
|
|
$ |
|
% |
||||||
Acquisition and integration-related expense |
|
$ |
54 |
|
|
$ |
— |
|
|
$ |
54 |
|
|
NM(1) |
|
$ |
83 |
|
|
$ |
— |
|
|
$ |
83 |
|
NM(1) |
(1) Fluctuation in terms of percentage change is not meaningful.
Acquisition and integration-related costs include direct expenses for the Diamond Acquisition including integration costs, legal and other professional fees. Integration costs include technology-related costs, fees paid to management consultants and employee-related costs such as severance and retention. We did not incur any acquisition and integration-related costs for the three and nine months ended September 30, 2020.
Non-Operating Expenses
|
|
Three Months Ended |
|
|
Change |
|
Nine Months Ended |
|
|
Change |
|||||||||||||||||
($ in millions) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
2021 |
|
|
2020 |
|
|
$ |
|
% |
||||||
Interest expense |
|
$ |
42 |
|
|
$ |
10 |
|
|
$ |
32 |
|
|
NM(1) |
|
$ |
74 |
|
|
$ |
32 |
|
|
$ |
42 |
|
NM(1) |
Equity in earnings from unconsolidated affiliates |
|
|
(1 |
) |
|
|
1 |
|
|
|
(2 |
) |
|
NM(1) |
|
|
(7 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
NM(1) |
Other loss (gain), net |
|
|
20 |
|
|
|
(1 |
) |
|
|
21 |
|
|
NM(1) |
|
|
22 |
|
|
|
— |
|
|
|
22 |
|
NM(1) |
Income tax expense (benefit) |
|
|
49 |
|
|
|
(5 |
) |
|
|
54 |
|
|
NM(1) |
|
|
46 |
|
|
|
(12 |
) |
|
|
58 |
|
NM(1) |
(1) Fluctuation in terms of percentage change is not meaningful.
48
The change in non-operating expenses for the three and nine months ended September 30, 2021, compared to the same periods in 2020, is primarily due to (i) an increase in interest expense as a result of the issuance of Term Loan B, the 2029 Notes and the 2031 Notes 2031 (ii) an increase in Other loss (gain), net resulting from the loss on debt extinguishment of certain corporate indebtedness of HGV and (iii) an increase in income tax expense due to an increase in income before taxes combined with an increase in the effective tax rate. See Note 12: Debt and non-recourse debt and Note 16: Income Taxes for additional information.
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 through 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.
49
As of September 30, 2021, we have nearly all of our resorts and sales centers open and currently operating. However, some of our resorts and sales centers are still operating in markets with capacity constraints and are subject to various safety measures, which are impacting consumer demand for resorts in those markets. While we plan to continue normal business as conditions permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity.
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, and provides the ability to be strategically opportunistic in the marketplace. 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 September 30, 2021, our inventory-related purchase commitments totaled $331 million over 9 years.
Sources and Uses of Our Cash
The following table summarizes our net cash flows and key metrics related to our liquidity:
|
|
Nine Months Ended |
|
|||||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Net cash provided by (used in): |
|
|
|
|
|
|
||
Operating activities |
|
$ |
36 |
|
|
$ |
86 |
|
Investing activities |
|
|
(1,610 |
) |
|
|
(24 |
) |
Financing activities |
|
|
1,612 |
|
|
|
503 |
|
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 and Diamond Club operations and providing related rental and 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 operating activities for the nine months ended September 30, 2021, compared to the same period in 2020 was primarily due a decrease in net working capital from operations partially offset by an increase in cash from increased sales and operating activity as compared to the prior year.
The following table summarizes our VOI inventory spending:
|
|
Nine Months Ended September 30, |
|
|||||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
VOI spending - owned properties(2) |
$ |
159 |
|
|
$ |
70 |
|
|
VOI spending - fee-for-service upgrades(1) |
|
5 |
|
|
|
11 |
|
|
Purchases and development of real estate for future conversion to inventory |
|
25 |
|
|
|
27 |
|
|
Total VOI inventory spending |
$ |
189 |
|
|
$ |
108 |
|
|
(1) Includes expense related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects from developed
projects of $4 million and $7 million recorded in Costs of VOI sales for the nine months ended September 30, 2021 and 2020, respectively.
(2) For the nine months ended September 30, 2021 and 2020, our VOI inventory spending on owned properties relates to deeded properties that are
classified as Inventory on our unaudited condensed consolidated balance sheets.
50
Investing Activities
The following table summarizes our net cash used in investing activities:
|
|
Nine Months Ended |
|
|||||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Acquisition of Diamond, net of cash and restricted cash acquired |
|
$ |
(1,585 |
) |
|
$ |
— |
|
Capital expenditures for property and equipment |
|
|
(11 |
) |
|
|
(6 |
) |
Software capitalization costs |
|
|
(14 |
) |
|
|
(16 |
) |
Investments in unconsolidated affiliates |
|
|
— |
|
|
|
(2 |
) |
Net cash used in investing activities |
|
$ |
(1,610 |
) |
|
$ |
(24 |
) |
Our capital expenditures include spending related to technology and 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.
The change in net cash used in investing activities for the nine months ended September 30, 2021, compared to the same period in 2020, was primarily due to the Diamond Acquisition.
Financing Activities
The following table summarizes our net cash provided by financing activities:
|
|
Nine Months Ended |
|
|||||
($ in millions) |
|
2021 |
|
|
2020 |
|
||
Issuance of debt |
|
$ |
2,650 |
|
|
$ |
495 |
|
Issuance of non-recourse debt |
|
|
96 |
|
|
|
495 |
|
Repayment of debt |
|
|
(843 |
) |
|
|
(62 |
) |
Repayment of non-recourse debt |
|
|
(234 |
) |
|
|
(403 |
) |
Debt issuance costs |
|
|
(61 |
) |
|
|
(8 |
) |
Repurchase and retirement of common stock |
|
|
— |
|
|
|
(10 |
) |
Payment of withholding taxes on vesting of restricted stock units |
|
|
(5 |
) |
|
|
(3 |
) |
Proceeds from employee stock plan purchases |
|
|
1 |
|
|
|
1 |
|
Proceeds from stock option exercises |
|
|
10 |
|
|
|
— |
|
Other financing activity |
|
|
(2 |
) |
|
|
(2 |
) |
Net cash provided by financing activities |
|
$ |
1,612 |
|
|
$ |
503 |
|
The change in net cash provided by financing activities for the nine months ended September 30, 2021, compared to the same period in 2020, was primarily due to the increase in debt borrowings for the issuance of Term Loan B in August 2021 and senior notes in June 2021 offset by repayments of debt and non-recourse debt and $3 million of other debt issuance costs.
Contractual Obligations
The following table summarizes our significant contractual obligations as of September 30, 2021:
($ in millions) |
|
Total |
|
|
Less Than 1 |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More Than 5 |
|
|||||
Debt |
|
$ |
2,984 |
|
|
$ |
22 |
|
|
$ |
14 |
|
|
$ |
314 |
|
|
$ |
2,634 |
|
Non-recourse debt |
|
|
1,297 |
|
|
|
270 |
|
|
|
320 |
|
|
|
119 |
|
|
|
588 |
|
Interest on debt(1) |
|
|
1,482 |
|
|
|
179 |
|
|
|
175 |
|
|
|
164 |
|
|
|
964 |
|
Operating leases |
|
|
103 |
|
|
|
18 |
|
|
|
46 |
|
|
|
28 |
|
|
|
11 |
|
Inventory purchase commitments |
|
|
331 |
|
|
|
80 |
|
|
|
199 |
|
|
|
43 |
|
|
|
9 |
|
Other commitments(2) |
|
|
8 |
|
|
|
6 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
Total contractual obligations |
|
$ |
6,205 |
|
|
$ |
575 |
|
|
$ |
756 |
|
|
$ |
668 |
|
|
$ |
4,206 |
|
(1)Includes interest on our debt and non-recourse debt. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 0.08 percent, subject to a 0.25 percent floor, as of September 30, 2021.
(2) Primarily relates to commitments related to information technology and brand licensing in the normal course of business.
51
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 September 30, 2021, our inventory-related purchase commitments totaled $331 million over 9 years, and we expect to purchase $80 million of these commitments over the next twelve months. We also intend to rebrand Diamond properties as Hilton Grand Vacations branded properties pursuant to the A&R Hilton License Agreement.
We utilize surety bonds related to the sales of VOIs in order to meet regulatory requirements of certain states. The availability, terms and conditions and pricing of such bonding capacity are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating. We have commitments from surety providers in the amount of $328 million as of September 30, 2021 which primarily consist of escrow and construction related bonds.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of September 30, 2021 consisted of $331 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 our Hilton Grand Vacations brand and $8 million of other commitments under the normal course of business. 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 21: Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.
Guarantor Financial Information
Certain subsidiaries, which are listed on Exhibit 22 of this Quarterly Report on Form 10-Q, have guaranteed our obligations related to our senior unsecured 2029 Notes and 2031 Notes (together, "the Notes"). The 2029 Notes were issued in June 2021 with an aggregate principal balance of $850 million, an interest rate of 5.0 percent, and maturity in June 2029. The 2031 Notes were issued in June 2021 with an aggregate principal balance of $500 million, an interest rate of 4.875 percent, and maturity in July 2031.
The Notes were co-issued by Hilton Grand Vacations Borrower LLC and Hilton Grand Vacations Borrower Inc. (the “Issuers”) and are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Hilton Grand Vacations Inc. (the “Parent”), Hilton Grand Vacations Parent LLC, the Issuers, and each of the Issuer’s existing and future wholly owned domestic restricted subsidiaries (all entities that guarantee the Notes, collectively, the “Obligor group”).
The Notes rank equally in right of payment with all of the Issuers’ and each guarantor’s existing and future senior indebtedness, are subordinated to all of the Issuers’ and guarantors’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, including the Senior Secured Credit Facilities, rank senior in right of payment to all of the Issuers’ and guarantors’ future subordinated indebtedness and other obligations that expressly provide for their subordination to the notes and the related guarantees, and are structurally subordinated to all existing and future indebtedness claims of holders of preferred stock and other liabilities of the Issuer’s subsidiaries that do not guarantee the Notes.
The guarantee of each guarantor subsidiary is limited to a maximum amount, subject to applicable U.S. and non-U.S. laws. The guarantees can also be released upon the sale or transfer of a guarantor subsidiary’s capital stock or substantially all of its assets, becoming designated as an unrestricted subsidiary, or upon its consolidation into a co-Issuer or another subsidiary Guarantor.
52
The following tables provide summarized financial information of the Obligor group on a combined basis after elimination of (i) intercompany transactions and balances between the Parent and the subsidiary Guarantors and (ii) investments in and equity in the earnings of non-Guarantor subsidiaries and unconsolidated affiliates:
Summarized Financial Information
($ in millions) |
|
September 30, |
|
|
Assets |
|
2021 |
|
|
Cash and cash equivalents |
|
$ |
246 |
|
Restricted cash |
|
|
143 |
|
Accounts receivable, net - due from non-guarantor subsidiaries |
|
|
33 |
|
Accounts receivable, net - due from related parties |
|
|
21 |
|
Accounts receivable, net - other |
|
|
195 |
|
Timeshare financing receivables, net |
|
|
930 |
|
Inventory |
|
|
927 |
|
Property and equipment, net |
|
|
728 |
|
Operating lease right-of-use assets, net |
|
|
73 |
|
Investments in unconsolidated affiliates |
|
|
56 |
|
Goodwill |
|
|
820 |
|
Intangible assets, net |
|
|
1,953 |
|
Land and Infrastructure held for sale |
|
|
41 |
|
Other assets |
|
|
189 |
|
Total assets |
|
$ |
6,355 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Accounts payable, accrued expenses and other - due from non-guarantor subsidiaries |
|
$ |
33 |
|
Accounts payable, accrued expenses and other - other |
|
|
586 |
|
Advanced deposits |
|
|
113 |
|
Debt, net |
|
|
2,929 |
|
Operating lease liabilities |
|
|
89 |
|
Deferred revenues |
|
|
135 |
|
Deferred income tax liabilities |
|
|
798 |
|
Total liabilities |
|
$ |
4,683 |
|
|
|
Nine months ended September 30, |
|
|
($ in millions) |
|
2021 |
|
|
Total revenues - transactions with non-guarantor subsidiaries |
|
$ |
6 |
|
Total revenues - other |
|
|
1,315 |
|
Operating income |
|
|
164 |
|
Net income |
|
|
41 |
|
Subsequent Events
In October 2021, the Compensation Committee of the Board of Directors (the "Compensation Committee") approved modifications to the short-term incentive program performance periods and targets covering fiscal year 2021, and in November 2021, the Compensation Committee approved modifications to the long-term incentive performance targets for performance-vesting restricted stock units covering fiscal years 2019 through 2022. The modifications were made to reflect the projected effects of the Diamond Acquisition on applicable metrics. There is no financial impact of these modifications and any awards earned under either the 2021 Short-Term Incentive Program or the Performance RSUs will be subject to the terms and conditions applicable to such awards.
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 the 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, 2020. Since the filing of our 2020 Annual Report on Form 10-K, we
53
have not changed the critical accounting policies or estimates outlined therein. In addition to the referenced critical accounting policies and estimates, we have implemented the following:
Business Combinations
We account for our business combinations in accordance with the acquisition method of accounting. We allocate the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. For each acquisition, we recognize goodwill as the amount in which consideration transferred for the acquired entity exceeds the fair values of net assets. The fair value of net assets is the fair value assigned to the assets acquired reduced by the fair value assigned to liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, we use various recognized valuation methods including the income, cost and sales and market approaches, which also include certain valuation techniques such as discount rates, and the amount and timing of future cash flows. We utilize independent valuation specialists under our supervision for certain of our assignments of fair value. We record the net assets and results of operations of an acquired entity in our condensed consolidated financial statements from the acquisition date through period-end. We expense acquisition-related expenses as incurred and include such expenses within Acquisition and integration-related expense on our condensed consolidated statements of operations. See Note 2: Summary of Significant Accounting Policies and Note 3: Diamond Acquisition for further detail.
Goodwill
We do not amortize goodwill. We evaluate goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that it is more-likely-than-not that we may not be able to recover the carrying amount (book value) of the net assets of the related reporting unit. When evaluating goodwill for impairment, we may perform the optional qualitative assessment by considering factors including macroeconomic conditions, industry and market conditions and overall financial performance. If we bypass the qualitative assessment, or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. We only recognize an impairment on goodwill if the estimated fair value of a reporting unit is less than its carrying value, in an amount not to exceed the carrying value of the reporting unit's goodwill.
Acquired Financial Assets with Credit Deterioration
When financial assets are acquired, whether in connection with a business combination or an asset acquisition, we evaluate whether those acquired financial assets have experienced a more-than-insignificant deterioration in credit quality since origination. Financial assets that were acquired with evidence of such credit deterioration are referred to as purchased credit deteriorated (“PCD”) assets and reflect the acquirer’s assessment at the acquisition date. The evaluation of PCD assets is a qualitative assessment requiring significant management judgment. We consider indicators such as delinquency, FICO score deterioration, purchased credit impaired status from prior acquisition, certain account status codes which we believe are indicative of credit deterioration, as well as certain loan activity such as modifications and downgrades. In addition, we consider the impact of current and forward-looking economic conditions relative to the conditions which would have existed at origination.
Acquired PCD assets are recorded at the purchase price, represented by the acquisition date fair value, and subsequently “grossed-up” by the acquirer’s acquisition date assessment of the allowance for credit losses. The purchase price and the initial allowance for credit losses collectively represent the PCD asset’s initial amortized cost basis. While the initial allowance for credit losses of PCD assets does not impact period earnings, the Company remeasures the allowance for credit losses for PCD assets during each subsequent reporting period; changes in the allowance are recognized as provision expense within period earnings. The difference over which par value of the acquired PCD assets exceeds the purchase price plus the initial allowance for credit losses is reflected as a non-credit discount (or premium) and is accreted into interest income (or as a reduction to interest income) under the effective interest method.
Acquired financial assets which are not PCD assets are also recorded at the purchase price but are not similarly “grossed-up”. The acquirer recognizes an allowance for credit losses as of the acquisition date, which is recognized with a corresponding provision expense impact within earnings. The allowance is remeasured within each subsequent reporting period in the same manner as for PCD assets, with any change in the allowance recognized as provision expense in period earnings. See Note 3: Diamond Acquisition and Note 7: Timeshare Financing Receivables for further information.
54
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, 2020.
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 primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt.
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 continue to have variable-rate borrowings and continue to 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 (loss), cash flows and financial position. While we have entered into certain hedging transactions to address such potential risk, such transactions and any future 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 September 30, 2021, for our financial instruments that are materially affected by interest rate risk:
|
|
|
Maturities by Period |
|
|||||||||||||||||||||||||||||
($ in millions) |
Weighted |
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
There- |
|
|
Total(2) |
|
|
Fair |
|
||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed-rate securitized |
13.780% |
|
$ |
21 |
|
|
$ |
88 |
|
|
$ |
92 |
|
|
$ |
97 |
|
|
$ |
100 |
|
|
$ |
836 |
|
|
|
1,234 |
|
|
$ |
1,191 |
|
Fixed-rate unsecuritized |
14.740% |
|
|
43 |
|
|
|
44 |
|
|
|
50 |
|
|
|
55 |
|
|
|
64 |
|
|
|
915 |
|
|
|
1,171 |
|
|
|
991 |
|
Liabilities:(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed-rate debt |
4.098% |
|
|
75 |
|
|
|
275 |
|
|
|
201 |
|
|
|
129 |
|
|
|
159 |
|
|
|
3,032 |
|
|
|
3,871 |
|
|
|
3,937 |
|
Variable-rate debt(4) |
3.226% |
|
|
1 |
|
|
|
12 |
|
|
|
397 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
410 |
|
|
|
405 |
|
(1) Weighted-average interest rate as of September 30, 2021.
(2) Amount excludes unamortized deferred financing costs.
(3) Includes debt and non-recourse debt.
(4) Variable-rate debt includes principal outstanding debt of $407 million as of September 30, 2021. See Note 12: 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 and Canadian dollars, the value of which could change materially in reference to our reporting currency, the U.S. dollar. Further, we conduct operations in international markets from which we receive, at least in part, revenues in foreign currencies. A 10 percent increase in the foreign exchange rate of the Japanese yen to U.S. dollar would change our gross timeshare financing receivables by approximately $2 million. A 10 percent change in the foreign exchange rate of the Canadian dollar to U.S. dollar would change our gross timeshare financing receivables by less than $1 million.
55
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. We will continue to assess the adequacy of our disclosure controls and procedures and make any appropriate changes given the various government mandates and orders of business closures and the resulting remote working conditions as a result of the COVID-19 pandemic.
Changes in Internal Control Over Financial Reporting
On August 2, 2021 we acquired Diamond through a business combination. We are currently in the process of assessing Diamond’s internal control over financial reporting and integrating Diamond’s internal control over financial reporting with our existing internal control over financial reporting. There were no other changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will continue to assess the effectiveness of our internal controls over financial reporting consistent with past practice, particularly in light of the various government mandates and orders of business closures and the resulting remote working conditions as a result of the COVID-19 pandemic.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums as detailed above in Note 21: Commitments and Contingencies. Management has evaluated these legal matters and we believe certain unfavorable outcomes are reasonably probable and estimable. We have accrued liabilities for these matters which are included in the September 30, 2021 unaudited condensed consolidated financial statements. 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 September 30, 2021 will not have a material effect on our unaudited condensed consolidated financial statements.
Item 1A. Risk Factors
The following represents important updates to 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, 2020 (our “2020 Form 10-K”). The risk factors discussed below and the risk factors included in our 2020 Form 10-K are important to understanding our business, operation, results of operations, financial condition, prospects, and our statements generally in this Form 10-Q. Therefore, they 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.
In addition, the following risks and those risks described in our 2020 Form 10-K contain forward-looking statements, and they may not be the only risks facing the Company. The future business, results of operations and financial condition of the Company can be affected by the risk factors described in such reports and by other factors currently unknown, that management presently believes not to be material, that management has made certain forward looking projections, estimates or assumptions on, or that may rapidly evolve, develop or change. Any one or more of such factors could, directly or indirectly, cause our actual financial condition and results of operations to vary materially and adversely from past, or from anticipated future financial condition and results of operations. Any of these factors, in whole or in part, could materially and adversely affect our business, results of operations and financial condition and the trading price of our common stock. Because of these factors affecting our 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.
We may not be able to integrate the acquired Diamond business successfully.
On August 2, 2021, we completed the acquisition of Diamond. While the closing of the acquisition has occurred, the successful integration of two businesses such as HGV and Diamond takes significant and sustained amounts of effort and resources. Despite our efforts, it is possible that the integration process could take longer than anticipated and/or could be more difficult than anticipated due to a number of reasons, including the lack of complementary products and resort offerings, delays or other challenges in converting the Diamond resorts into resorts that are suitable for HGV as part of our overall strategy, loss of valuable employees, disruption of each company’s ongoing businesses, processes and systems, inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements between the two businesses, and differences in corporate cultures and philosophies, and other challenges that are inherent in such a complex integration of businesses. There also may be issues attributable to Diamond’s operations that were inherent to the business or are based on events or actions that occurred prior to the closing of the Diamond Acquisition that may make the integration even more challenging. In addition, uncertainty about the effect of the Diamond Acquisition on relationships with our suppliers, vendors, existing owners, and potential owners may hinder the integration. Although we are taking steps designed to reduce or mitigate any adverse effects, these uncertainties may impair cause suppliers, vendors, existing and potential owners, and others that deal with us to seek to change, not renew or discontinue existing business relationships with us.
Integrating the acquired Diamond business into our operations may place a significant burden on management and internal resources and divert management’s attention away from day-to-day business concerns. Further, our ability to attract, retain and motivate key personnel and employees may be impacted if employees or prospective employees have uncertainty about their future roles with us during the integration of the Diamond Acquisition and beyond. Despite our retention and recruiting efforts, key employees may depart or prospective key employees may be unwilling to continue their employment with us and we may be unable to timely find suitable replacements.
We have agreed with Hilton Worldwide Inc. (“Hilton”) to develop a mutually agreeable plan pursuant to which the Diamond properties are to be operated during the integration period, and with respect to those Diamond properties that will
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not be converted to our brand. If we fail to develop and/or execute such a plan with Hilton, such properties may remain subject to a number of restrictions related to how they are operated.
Ultimately, the integration process is subject to a number of uncertainties, and no assurance can be given that our integration efforts will be successful. Any one or more of the foregoing factors may adversely affect or hinder any successful integration of the Diamond acquisition and may materially adversely impact the execution of our strategy post-acquisition, business, operations, and, ultimately, our results of operations.
Anticipated cost savings, synergies, growth in operating results and related benefits of the Diamond Acquisition may not be realized. In addition, we may incur substantial costs and expenses related to the Diamond Acquisition and the integration beyond what we have anticipated. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
We completed the Diamond Acquisition with the expectation that it will result in various benefits and synergies, including, among other things, operating efficiencies, opportunities to potentially increase our revenue, sales, EBITDA, and owners, and cost savings. Achieving such anticipated benefits and synergies of the Diamond Acquisition within the expected timeframe, or at all, is subject to a number of uncertainties, including whether the businesses of HGV and Diamond can be integrated in an efficient and effective manner, as previously discussed, as well as various assumptions. It is possible that any one or more of such benefits and synergies may not be realized, thereby significantly reducing the anticipated benefits associated with the Diamond Acquisition, and may result in in higher than anticipated costs, and lower than anticipated revenue, and/or decreases in the amount of expected net income, all of which would adversely affect our future business, financial condition, and operating results.
Further, we incurred a number of fees, costs and expenses prior to completing the Diamond Acquisition and expect to continue to incur additional fees, costs and expenses associated with combining and integrating the operations of the two companies and achieving the desired benefits. These fees, costs and expenses, which are both recurring and non-recurring, have been, and will continue to be, substantial. Although we believe that achieving cost synergies, benefits, and other efficiencies of the Diamond Acquisition should offset the such costs, fees and expenses over time, such net benefit may not be achieved in the near term, or at all. Moreover, there may be significant potential liabilities associated with the legacy Diamond business prior to the Diamond Acquisition that we may uncover during the integration period, which may result in us incurring significant costs and expenses. Such potential liabilities may have been unknown to us at prior to the closing of the Diamond Acquisition or more significant than we believed at such time. Any such material unexpected costs and expenses may have a material adverse effect on our financial condition and operating results.
We incurred a significant amount of indebtedness to finance the Diamond Acquisition , which could adversely affect our business, financial condition and results of operations, including by decreasing our business flexibility, as well as our ability to meet payment obligations under our indebtedness.
We significantly increased our level of indebtedness in connection with financing the Diamond Acquisition. We closed an unregistered offering of $850 million in aggregate principal amount of 5.000 percent senior notes due 2029 and an unregistered offering of $500 million in aggregate principal amount of 4.875 percent senior notes due 2031. In addition, we borrowed term loans in an initial aggregate principal amount of $1.3 billion under a new senior secured term loan credit facility to repay certain indebtedness of HGV and Diamond in connection with the closing of the Diamond Acquisition. Finally, we assumed several of Diamond’s revolving facilities that are secured by timeshare loan receivables. Our increased level of debt, together with certain covenants and restrictions that have been imposed on us in connection with incurring this indebtedness: (a) requires us to dedicate a larger portion of our cash flow from operations to servicing and repayment of debt; (b) reduces funds available for strategic initiatives and opportunities, dividends, share repurchases, working capital and other general corporate needs; (c) limits our ability to incur certain kinds or amounts of additional indebtedness, which could restrict our flexibility to react to changes in our business, industry and economic conditions and increase borrowing costs; (d) creates competitive disadvantages relative to other companies with lower debt levels and (e) increases our vulnerability to the impact of adverse economic and industry conditions. These covenants and restrictions may limit how our business is conducted. We may not be able to maintain compliance with these covenants and restrictions and, if we fail to do so, we may not be able to obtain waivers thereto and/or amend these covenants and restrictions. Our failure to comply with the covenants and restrictions could result in an event of default, which, if not cured or waived, could result in our being required to repay such indebtedness before their due dates or to have to negotiate amendments to or waivers thereof, which may have unfavorable terms or result in the incurrence of additional fees and expenses.
Our ability to make scheduled cash payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate significant operating cash flow in the future, which, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, including the continued adverse impact of the COVID-19 pandemic on our business, that are beyond our control. We may not be able to maintain a
58
sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness.
In addition, our credit ratings will impact the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings will reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations on a combined basis with Diamond. Downgrades in our ratings could adversely affect our businesses, cash flows, financial condition, operating results and share and debt prices, as well as our obligations with respect to our capital efficient inventory acquisitions.
The Diamond acquisition will only magnify the general operational risks that we face.
The acquired Diamond business is subject to many of the same operational risks as our business prior to the Diamond Acquisition, which are described in the risk factors included in our 2020 Form 10-K. Given the substantial size of the Diamond business and associated complexities, many of the risk factors that we faced prior to the Diamond Acquisition will only become more magnified and substantial and the expanded business will only pose additional challenges for management, including those that relate to management and monitoring of new operations.
Our vacation ownership business depends on the quality and reputation of the brands associated with the portfolios of each of HGV and Diamond, and any deterioration in the quality or reputation of these brands could adversely affect our market share, reputation, business, financial condition and results of operations.
We intend to offer vacation ownership products and services under the Hilton Vacation Club brand, a new upscale HGV sub-brand that will consist of rebranded Diamond properties, in accordance with the Amended and Restated License Agreement with Hilton ( the “A&R Hilton License Agreement”). If the quality of any of these brands deteriorates, or the reputation of these brands declines, including as the result of actions by Hilton, our market share, reputation, business, financial condition or results of operations could be materially adversely affected.
Our stockholders prior to the Diamond Acquisition have a reduced ownership and voting interest as a result of the Diamond Acquisition and exercise less influence over management of us as compared to prior to the Diamond Acquisition.
Our stockholders currently have the right to vote in the election of the board of directors and on other matters affecting us. Each Diamond stockholder who received shares of our common stock in the Diamond Acquisition is now our stockholder. Former Diamond stockholders, as a group, received shares in the Diamond Acquisition constituting approximately 28 percent of the shares of our common stock on a fully diluted basis immediately following the completion of the Diamond Acquisition. As a result, pre-Diamond Acquisition stockholders own, in the aggregate, approximately 72 percent of the shares of our common stock on a fully diluted basis immediately following the completion of the Diamond Acquisition. Because of this, our stockholders prior to the completion of the Diamond Acquisition now have comparatively less influence on our management and policies.
The COVID-19 pandemic has impacted, and will likely continue to have a significant adverse impact on, the business, financial condition and results of operations of the Diamond business.
Similar to its impact on our business and operations, as a result of the COVID-19 pandemic and the various governmental mandates and orders for business closure, Diamond had temporarily closed operations at substantially all of its resorts and had closed substantially all of their sales centers prior to our acquisition. As of September 30, 2021, all of the Diamond resorts and almost all of the sales centers had reopened and were in operations. However, it may be an extended period of time before all of the Diamond resorts return to pre-pandemic occupancy, particularly if there remains lingering actual and/or perceived concern and perception of significant transmission and infection risk due to the COVID-19 pandemic. In addition, any increases in infection rate and/or the spreading of any new variants, such as the Delta variant, may result in the reimposition of restrictions, social distancing, and travel restrictions, all of which will negatively impact the Diamond resorts’ recovery and business.
At the onset of the COVID-19 pandemic, Diamond implemented its own social distancing, hygiene protocols, and enhanced cleaning measures at its resorts, sales centers, and corporate offices in accordance with guidelines from federal, state and local authorities. With the closing of our acquisition of Diamond, the Diamond resorts, sales centers, and corporate offices will be required to adopt HGV standards related to hygiene and cleanliness. These measures, which are intended to protect human life, may result in additional costs, operational inefficiencies, and fewer revenue opportunities.
Any sustained adverse impact on the Diamond business, in addition to our legacy HGV business, due to the COVID-19 pandemic could materially adversely affect our results of operations and financial condition.
Our results will suffer if we do not effectively manage our expanded operations resulting from the Diamond Acquisition.
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The size of our business increased significantly as a result of the Diamond Acquisition. Our future success depends, in part, upon our ability to manage this expanded business, including in non-US jurisdictions where we did not have operations prior to the Diamond Acquisition, which pose new and substantial challenges for management, including challenges related to the management and monitoring of expanded operations and associated increased costs and complexity. We may also need to obtain approvals of developers or HOAs in various instances to include additional resorts in the multi-resort trusts marketed, sold and managed by the acquired Diamond business (the “Diamond Collections”) or increase maintenance fees or impose additional requirements in order to meet our brand and operating standards. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the transactions. In addition, there will be increased compliance and regulatory risk as a result of the expanded size of our business.
The acquired Diamond business operates in a number of locations outside the United States and is subject to certain additional risks related to international operations that we have not historically been subjected to.
The acquired Diamond business has resorts in and sells VOIs in countries outside of the United States, including in Mexico, Canada, the United Kingdom and several countries in the European Union, which are subject to a number of risks, including compliance with local regulations and laws, regulations restricting the sale of VOIs, compliance with anti-corruption laws and regulations such as the Foreign Corrupt Practices Act, exposure to local economic conditions, potential adverse changes in the political or economic relation of foreign countries with the United States, withholding and restrictions on taxes and fluctuations in foreign currency exchange rates. Our business in these foreign jurisdictions may be subject to litigation.
In Mexico, the developer of certain of the acquired Diamond resorts have agreed to requirements that they consider themselves Mexican nationals with respect to certain property and agree to not invoke the protection of the governments in matters relating to the property. Generally, rules in Mexico limit ownership of land near Mexico’s borders and beaches to Mexican citizens and companies, unless granted the right by the Mexican government. If the developer of the resorts in Mexico fails to comply with the agreement with the Mexican government, it would forfeit the land back to Mexico.
We have not historically operated in several of the non-US jurisdictions in which the acquired Diamond business operates and may lack knowledge or familiarity with the rules and regulations, as well as experience and resources, related to operating such business in these countries.
The maintenance and refurbishment of vacation ownership properties depends on maintenance fees paid by the owners of VOIs, which may need to be increased.
The maintenance fees that are assessed on owners of our VOIs by property owners’ association boards, including those VOIs that are part of the acquired Diamond business, are used to maintain and refurbish the vacation ownership properties, to maintain reserves for capital expenditures, and to keep the properties in compliance with applicable brand standards. Property owners’ association boards may elect to not levy sufficient maintenance fees, or owners of VOIs may fail to pay their maintenance fees for reasons such as financial hardship, dissatisfaction with the Diamond Acquisition or because of damage to their VOIs from natural disasters such as hurricanes. In these circumstances, not only could our management fee revenue be adversely affected, but the vacation ownership properties could fall into disrepair and fail to comply with applicable brand standards. If a resort fails to comply with applicable brand standards, Hilton could terminate our right under the A&R Hilton License Agreement to use its trademarks at the non-compliant resort, which could result in the loss of management fees, decreased customer satisfaction and impairment of our ability to market and sell products at the non-compliant locations. See “Risks Related to Our Relationship with Hilton” below.
The maintenance fees that are assessed on owners of our VOIs, including those VOIs that are part of the acquired Diamond business, by property owners’ association boards may increase as costs increase. A similar situation may arise with respect to fees imposed on owners of VOIs with respect to new properties added to our portfolio as a result of the Diamond Acquisition. Increased maintenance fees could make our products less desirable, which could have a negative impact on sales of our products and could also cause an increase in defaults with respect to our vacation ownership notes receivable portfolio.
We may be subject to complaints, litigation or reputational harm due to dissatisfaction with, or concerns related to, the Diamond Acquisition from our and former Diamond owners.
Our and former Diamond VOI owners prior to the completion of the Diamond Acquisition may be concerned about the actual or perceived impact of the Diamond Acquisition and the integration on their VOIs, including related to a reduced quality of resorts and product offerings due to the increased size of the business and addition of new owners, adverse effect on the availability of access to these resorts and other disruptions during the integration period, or increase or change in HOA or other fees. The VOI owners of the acquired Diamond business may have similar concerns related to a decline in the quality of product offerings or increase in fees as a result of the Diamond Acquisition and increase in size of the business. Complaints
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or litigation brought by existing owners following the completion of the Diamond Acquisition could harm our reputation, discourage potential new owners and adversely impact our results of operations
Interests in the acquired Diamond resorts are offered through a trust system, which is subject to a number of regulatory and other requirements.
The Diamond Collections located in the United States are alternatives to traditional deeded timeshare ownership, as they create a network of available resort accommodations at multiple locations. For those US-based Diamond Collections, title to the units available through the Diamond Collections is held in a trust or similar arrangement that is administered by an independent trustee (the “Collection Trustee”). A purchaser of a timeshare interest in a Collection does not receive a deeded interest in any specific resort or resort accommodation, but acquires a membership in the timeshare plan which is denominated by an annual or biennial allotment of points. Owners of Diamond’s timeshare interests are allowed to use their allocated points to reserve accommodations at the various component site(s)/participating resort(s) within the Diamond Collections, thereby giving the members greater flexibility to plan their vacations. Owners may also elect to reserve accommodations at resorts that are not part of their Collection through Diamond’s exchange programs.
The Diamond Collections are registered pursuant to, exempted from, or otherwise in compliance with, the applicable statutory requirements for the sale of timeshare plans in a growing number of jurisdictions. Such registrations and formal exemption determinations for the Diamond Collections confirm the substantial compliance with the filing and disclosure requirements of the respective timeshare statutes by the developer of the applicable Diamond Collection. It does not constitute the endorsement of the creation, sale, promotion or operation of the Diamond Collections by any regulatory body nor relieve the developer of a Diamond Collection or any affiliates of such developer of any duty or responsibility under other statutes or any other applicable laws. Registration under a respective timeshare act (or other applicable law) is not a guarantee or assurance of compliance with applicable law nor an assurance or guarantee of how any judicial body may interpret the Diamond Collections’ compliance therewith. A determination that specific provisions or operations of the Collections do not comply with relevant timeshare acts or applicable law may have a material adverse effect on the developer, the Collection Trustee and the related non-profit members association for each of the Diamond Collections. If we are unable to successfully integrate and manage the trust system our results of operations or reputation may suffer.
Increased activity by third-party exit companies on the acquired Diamond business and its owners may cause distractions and adversely impact our integration.
The Diamond business has been significantly targeted by organized activities of third parties that actively pursue timeshare owners claiming to provide timeshare interest transfers and/or “exit” services. Any increases in the level of participation by timeshare owners in response to such overtures and/or delinquencies or defaults with respect to the timeshare loans owed by such owners may disrupt our business, affect cash flow from collections on the timeshare loans, and generally adversely affect our integration plans. In addition, exit companies may target HGV owners to a greater extent than they already do in light of the Diamond Acquisition.
If the A&R Hilton License Agreement is terminated, we may lose our rights to certain brands developed by us in connection with the integration of the acquired Diamond business.
We and Hilton are parties to the A&R Hilton License Agreement under which we license substantially all of the trademarks, brand names and intellectual property used in our business. Pursuant to the A&R Hilton License Agreement, Hilton would be the sole owner of certain licensed marks related to any new brands associated with the Diamond portfolio that are developed by us. If we default under the A&R Hilton License Agreement, we could lose the right to use one or more of such new brands. The loss of these rights and/or certain other related rights could materially adversely affect our ability to generate revenue and profits from the vacation ownership business associated with the Diamond portfolio. The termination of the A&R Hilton License Agreement following completion of the Diamond Acquisition would materially harm our business and results of operations and impair our ability to market and sell our products and maintain our competitive position.
Our ability to integrate the acquired Diamond business and otherwise expand our business and remain competitive could be harmed if Hilton does not consent to the use of their trademarks in connection with the conversion of Diamond properties and/or new resorts that we may acquire or develop in the future.
Under the terms of the A&R Hilton License Agreement, we must obtain Hilton’s approval to use the Hilton brand names and trademarks in connection with the conversion of the Diamond properties to branded properties using the Hilton marks, as well as for the branding of timeshare properties that we acquire or develop in the future. If Hilton does not permit us to use its trademarks in connection with such conversion and integration, on a timely basis or at all, or in connection with any other timeshare properties that we may acquire in the future pursuant to any future development or acquisition plans, or if we cannot come to an agreement with Hilton on how to brand and operate Diamond properties that are not approved by
61
Hilton, our ability to successfully integrate Diamond and otherwise expand our business and remain competitive may be materially adversely affected. The requirement to obtain approval for such conversion and integration of Diamond properties and any future expansion plans, or the need to identify and secure alternative solutions because we cannot obtain such approval, may delay implementation of our integration and/or expansion plans or cause us to incur additional expense related to the branding of our properties.
Our ability to successfully integrate the Diamond business depends on our compliance with the A&R Hilton License Agreement, including the “Separate Operations” provisions and certain prohibitions on doing business with competitors. While the parties may agree to amend the applicable requirements, ongoing requirements with strict compliance with such provisions as currently written will negatively impact the synergies and efficiencies related to the Diamond acquisition.
We have agreed with Hilton to operate the Diamond business as a “Separate Operation” under the A&R Hilton License Agreement. Complying with that requirement could be costly and difficult and will likely significantly diminish the efficiencies and synergies that are critical to our successful integration of the Diamond business. In addition, the A&R Hilton License Agreement requires Hilton’s approval in connection with our anticipated conversion of the Diamond properties into our branded properties and/or Hilton Vacation Club or another new brand of properties. The creation of any such new brand will also require Hilton’s consent. While we and Hilton have agreed to modify the Separate Operations requirements, with such modifications to be made in Hilton’s sole discretion, so as to allow us to achieve greater operating efficiency and synergy than currently realizable under the A&R Hilton License Agreement, any failure of the parties to do so will adversely impact such operating efficiency and synergy. In addition, any failure to obtain Hilton’s approval with respect to the creation of any new brand or the conversion of Diamond properties into such new brand or existing branded properties will significantly harm our ability to integrate the Diamond business and its properties. If we cannot come to an agreement with Hilton on how to brand and operate Diamond properties that do not currently or will not in the future meet the Hilton brand standards, then we will be required to continue to operate them as separate operations. However, since each property is part of a trust or collection or properties, we may be deemed to be in default of the A&R Hilton License Agreement if Hilton does not permit the operation of a collection that includes both branded and unbranded properties.
In addition, the A&R Hilton License Agreement contains a number of prohibitions on us entering into certain agreements and arrangements with competitors of Hilton. As a result of the Diamond Acquisition, we assumed Diamond’s contracts with third parties, a number which are with competitors of Hilton and are prohibited under the A&R Hilton License Agreement. The A&R Hilton License Agreement provides for a cure period for agreements or arrangements related to the Diamond business that would result in a violation or breach of provisions in the A&R Hilton License Agreement. However, to the extent we are not able to terminate such agreements within the cure period or we are unable to obtain a waiver from Hilton, we may be in default of the A&R Hilton License Agreement.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
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2.1 |
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3.1 |
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3.2 |
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3.3 |
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10.1 |
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10.2 |
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10.3 |
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10.4† |
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10.5† |
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22* |
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List of Issuer Subsidiaries of Guaranteed Securities and Guarantor Subsidiaries. |
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31.1* |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1* |
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32.2* |
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101.NS |
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Inline 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. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Calculation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Label Linkbase Document. |
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101.PRE |
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Inline XBRL Taxonomy Presentation Linkbase Document. |
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The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101 |
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* Filed herewith
†Denotes management contract or compensatory plan or arrangement..
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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 9th day of November 2021.
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HILTON GRAND VACATIONS INC. |
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By: |
/s/ Mark D. Wang |
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Name: |
Mark D. Wang |
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Title: |
President and Chief Executive Officer |
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By: |
/s/ Daniel J. Mathewes |
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Name: |
Daniel J. Mathewes |
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Title: |
Senior Executive Vice President and Chief Financial Officer |
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