Hilton Grand Vacations Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in millions of dollars unless stated otherwise. HGV develops, markets, sells and manages timeshare resorts and operates a points-based vacation club; it reported 60 properties and approximately 327,000 Club members at quarter-end.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $123 | $454 | $474 | $904 |
| Net income (loss) | $(48) | $39 | $(40) | $94 |
| Diluted EPS | $(0.56) | $0.43 | $(0.47) | $1.01 |
| Adjusted EBITDA (non-GAAP) | $(19) | $90 | $14 | $192 |
| Operating cash flow | Not separately stated | Not separately stated | $88 | $71 |
| Investing cash flow | Not separately stated | Not separately stated | $(15) | $(29) |
| Financing cash flow | Not separately stated | Not separately stated | $598 | $(35) |
- At June 30, cash and cash equivalents were $733; restricted cash was $90, for total cash and restricted cash of $823. Cash and cash equivalents were $67 at year-end 2019.
- Balance-sheet debt, net, was $1.263 billion and non-recourse debt, net, was $926 million. Gross contractual balances were $1.269 billion and $937 million, respectively. Non-recourse debt is payable from pledged collateral and is without recourse to HGV.
- HGV reported $760 million drawn on its revolver and $39 million of remaining revolver capacity; it also reported $450 million of remaining borrowing capacity under its Timeshare Facility. The filing says it was compliant with applicable financial covenants at June 30.
- Total assets were $3.635 billion, total liabilities $3.112 billion, and equity $523 million. Inventory was $907 million, up from $558 million at year-end, including $396 million of construction in process. A $301 million transfer of timeshare units under construction from property and equipment to inventory was noncash.
Material changes and operating results
- Revenue declined 72.9% in Q2 and 47.6% for the first half year over year, primarily because COVID-19 closures and suspended sales and resort operations sharply reduced activity.
- Real estate sales and financing revenue fell 81.8% in Q2 and 57.4% for the half. Q2 contract sales fell 90.4% to $35 million; first-half contract sales fell 59.3% to $279 million. Q2 tour flow fell 94.3% to 5,810, while volume per guest rose 41.1% to $4,786.
- Q2 sales of VOIs, net, were zero versus $120 million a year earlier; first-half sales were $56 million versus $245 million. The filing explains that some VOI revenue and related direct costs are deferred until construction is complete.
- Resort operations and club management segment revenue fell 61.4% in Q2 and 33.9% for the half. Rental and ancillary revenue fell 91.7% in Q2 and 52.1% for the half. Q2 rental and ancillary margin was a loss of $19 million, compared with a $23 million margin the prior year.
- Q2 real estate margin was a loss of $46 million, versus a $56 million margin in Q2 2019; the six-month margin was a loss of $48 million versus a $125 million margin. The filing attributes the deterioration to reduced sales revenue and sales activity amid continuing costs.
- Financing revenue was broadly stable: $43 million in Q2 and $87 million for the half. First-half financing margin was $61 million versus $59 million in 2019.
- Operating cash flow increased to $88 million from $71 million for the first half, with the filing citing lower real estate purchases and development spending, partly offset by weaker working-capital sources. HGV spent $69 million on VOI inventory in the half versus $158 million a year earlier.
Management commentary, outlook and risks
- HGV closed substantially all resorts and sales centers beginning in March, furloughed approximately 67% of employees (over 6,100 of approximately 9,100), reduced salaries, froze hiring, cut discretionary spending, and reduced planned new-inventory investment by approximately $200 million. It suspended its share repurchase program.
- Phased reopenings began in the second quarter. Approximately two thirds of resorts and sales centers were open at June 30; nearly three quarters were open by July, often with significant capacity constraints. HGV introduced enhanced cleaning, protective equipment, distancing and other safety measures.
- HGV drew approximately $445 million on its revolver in March as a precaution, amended credit and timeshare-facility terms to provide covenant and operating flexibility, and completed a June securitization of $300 million of gross timeshare receivables. The securitization issued approximately $300 million of notes; proceeds were used primarily to repay Timeshare Facility borrowings and for general corporate expenses.
- The timeshare financing receivables allowance was $210 million, up from $184 million at year-end. The first-half provision was $45 million, including a $23 million revenue reduction related to changed estimates primarily driven by COVID-19 economic factors. Receivables 121 or more days past due increased to $92 million from $67 million at year-end; non-accrual receivables rose to $101 million from $74 million.
- Management provided no quantified earnings or revenue guidance. It said pandemic duration, severity, travel demand, government restrictions and reopening conditions remained uncertain; a prolonged or worsening impact could harm results, liquidity and covenant compliance despite amendments and liquidity measures.
- Inventory purchase commitments totaled $464 million over 11 years; other commitments were $26 million. Total contractual obligations, including debt, interest, leases and commitments, were $3.014 billion. HGV said pending or threatened litigation was not expected to materially affect the financial statements, although possible losses were not reasonably estimable.
Investor verification points
- Track reopening pace, capacity restrictions, tour flow, contract sales and travel demand, particularly in Florida, Hawaii and New York.
- Verify unrestricted liquidity separately from restricted cash, remaining revolver and Timeshare Facility availability, covenant terms and near-term maturities.
- Monitor timeshare loan delinquencies, non-accrual balances, allowance adequacy and the performance and collateral requirements of securitized debt.
- Assess whether operating cash flow can support debt service and the $464 million of inventory commitments as operating conditions evolve.
- Reconcile reported earnings with non-GAAP Adjusted EBITDA and consider the effects of deferred VOI revenue, restructuring items and the noncash inventory transfer.