Hilton Grand Vacations Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in millions of dollars except per-share data. The statements include Diamond Resorts results only from its August 2, 2021 acquisition date; comparisons with 2020 therefore reflect both recovery from pandemic disruption and a different business scope.
Business context
HGV develops, sells, finances and manages vacation ownership interests (VOIs), resorts and membership clubs. After acquiring Diamond, the combined company reported 154 properties, including 92 Legacy-Diamond properties. Former HGV shareholders owned approximately 72% of the combined company and former Diamond owners, including Apollo-controlled funds, approximately 28%.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $928 | $208 | $1,497 | $682 |
| Net income (loss) | $99 | $(7) | $101 | $(47) |
| Diluted EPS | $0.90 | $(0.08) | $1.07 | $(0.55) |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $36 | $86 |
| Investing cash flow | Not separately stated for quarter | Not separately stated for quarter | $(1,610) | $(24) |
| Financing cash flow | Not separately stated for quarter | Not separately stated for quarter | $1,612 | $503 |
Q3 real estate profit was $257, with a 45.8% margin, versus a $9 million loss and negative 13.8% margin a year earlier. Financing profit was $34, with a 64.2% margin, versus $27 and 67.5%. Resort and club management profit was $73, with a 73.7% margin, versus $30 and 76.9%. Rental and ancillary profit was $28, with a 25.0% margin, versus a $4 million loss.
Management-reported Adjusted EBITDA was $340 in Q3 and $452 for the first nine months, compared with $19 and $33 in the respective 2020 periods. These are non-GAAP measures and are not substitutes for net income or cash flow.
Balance sheet, debt and liquidity
- At September 30, 2021, cash and cash equivalents were $334 and restricted cash was $230, compared with $428 and $98, respectively, at year-end 2020. Unrestricted cash plus restricted cash totaled $564.
- Total assets were $8,097 and total liabilities were $6,203. Timeshare financing receivables, net, were $1,767; inventory was $1,461.
- Debt, net, was $2,929 and non-recourse debt, net, was $1,290. The filing’s contractual maturity table reports $4,281 of debt and non-recourse debt before unamortized financing costs and discounts.
- HGV reported $499 of remaining revolver capacity and $629 of borrowing capacity across its Timeshare and conduit facilities. It also identified $180 of receivables available for securitization and another $149 expected to become eligible upon meeting customary milestones.
- Operating cash flow was $36 for the nine months, down from $86. Investing cash use included $1,585 net for the Diamond acquisition. Financing cash provided was $1,612, principally reflecting debt issuance and repayments.
Material changes and unusual items
- Revenue rose substantially as resorts and sales centers reopened, travel demand improved, Diamond was consolidated for part of the quarter, and $241 of previously deferred VOI sales were recognized in Q3 after projects under construction were completed.
- Diamond contributed $245 of revenue and $30 of net income from August 2 through September 30. The acquisition involved $1,381 of HGV stock issued and $2,029 of Diamond debt, accrued interest and termination costs repaid; total consideration transferred was reported as $3,410.
- Acquisition and integration expense was $54 in Q3 and $83 for the nine months. A $20 loss on debt extinguishment contributed to other losses. Interest expense increased to $42 in Q3 and $74 year to date.
- The acquisition added $820 of preliminary goodwill and $1,906 of preliminary-valued intangible assets. The purchase-price allocation remained subject to change during the measurement period, potentially affecting amortization, depreciation and deferred taxes.
- The nine-month provision for financing receivable losses was $77. At quarter-end, acquired Diamond receivables included $332 that were at least 121 days past due; HGV stated that such loans are fully reserved under its policy.
- HGV accrued approximately $25 for legal matters, substantially related to matters existing at the acquisition date. Management did not expect pending matters to have a material effect, while noting litigation outcomes are uncertain.
Outlook, commentary and risks
The filing provides no specific numeric revenue or earnings guidance. Management said nearly all resorts and sales centers were operating by September 30; after quarter-end, all resorts and all but three sales centers had reopened. It cautioned that COVID-19, new variants, travel restrictions and capacity constraints could interrupt recovery.
Key stated risks include integrating Diamond and realizing expected synergies, higher-than-anticipated integration costs or legacy liabilities, increased indebtedness and debt-service demands, financing-receivable defaults, and the effects of the pandemic. Other risks include Hilton brand and license approvals, compliance with the license agreement’s separate-operations requirements, international operating and regulatory exposure, maintenance-fee pressures, and complaints or litigation from owners. HGV reported compliance with applicable debt covenants at September 30, 2021.
The company had $331 of inventory and land purchase commitments over nine years and expected to begin Diamond property rebranding costs in Q4 2021, with rebranding planned over several years. Management reported disclosure controls were effective; assessment and integration of Diamond’s internal controls were ongoing.
Investor verification priorities
- Track post-acquisition results on a comparable basis, separating Diamond’s contribution, HGV recovery, and deferred VOI revenue recognition.
- Review the final Diamond purchase-price allocation and test goodwill, intangible-asset values, useful lives and resulting non-cash expense.
- Monitor integration costs, rebranding spending, promised synergies, and any additional legacy Diamond liabilities.
- Assess debt service and maturities against operating cash generation, available borrowing capacity and securitization access.
- Follow delinquency, charge-offs, allowance adequacy and collections across both acquired and originated timeshare receivables.
- Evaluate continued recovery against COVID-related restrictions, owner responses, Hilton licensing requirements and the disclosed legal contingencies.