Hilton Grand Vacations Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. HGV develops, sells and manages timeshare vacation ownership interests and provides consumer financing. It reported 56 properties with 8,966 units and approximately 312,000 Club members.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $450 million | $367 million | +22.6% |
| Net income | $55 million | $30 million | +83.3% |
| Diluted EPS | $0.58 | $0.30 | +93.3% |
| Adjusted EBITDA (non-GAAP) | $102 million | $62 million | +64.5% |
| Operating cash flow | $14 million | $25 million | Down $11 million |
- Real estate sales and financing revenue rose 27.4% to $307 million; segment Adjusted EBITDA increased to $80 million from $44 million. Resort operations and club management revenue rose 12.2% to $110 million; segment Adjusted EBITDA was $65 million versus $59 million.
- Real estate margin increased to $69 million from $31 million; margin percentage was 29.2% versus 17.6%. Financing margin was $28 million, with a 68.3% margin percentage versus 71.1%. Rental and ancillary margin was $24 million, with a 40.7% margin percentage versus 45.1%.
- At March 31, cash and cash equivalents were $158 million and restricted cash was $64 million. Total assets were $2.96 billion and equity was $575 million. Net debt was $800 million and non-recourse debt was $720 million; total debt increased from $1.36 billion at year-end 2018 to $1.52 billion.
- Timeshare financing receivables, net, were $1.11 billion, with a $169 million allowance. The allowance declined from $172 million at year-end after $17 million of write-offs and a $14 million provision.
Material changes and drivers
- Reported sales of VOIs, net, rose to $125 million from $78 million. Management attributed much of the increase to revenue from two properties that had been under construction in Q1 2018 and were completed later that year; the prior-year comparison also included deferred revenue effects.
- Contract sales, a non-GAAP operating measure, declined 2.1% to $322 million. Tour flow increased 6.4%, but volume per guest fell 8.0% to $3,677, reflecting lower closing rates and average transaction prices.
- Rental and ancillary revenue increased, primarily following the June 2018 acquisition of an operating hotel and higher Club inventory rentals. Club membership increased by approximately 19,500 year over year.
- Operating cash flow decreased partly because HGV spent $63 million on real estate for future conversion to inventory; total VOI inventory spending was $100 million versus $34 million. Financing activities provided $38 million, including $195 million of revolver borrowings, and included $92 million of share repurchases.
- HGV reported $4 million of VOI cost-of-sales true-ups that increased inventory carrying value. Q1 2018 included $2 million of spin-off costs in the Adjusted EBITDA reconciliation.
Liquidity, outlook and risks
- Management said available capital sources were adequate for foreseeable operating, investment and growth needs. At quarter-end, it reported $509 million of remaining revolver capacity and $330 million under the non-recourse Timeshare Facility. HGV was in compliance with applicable financial covenants.
- HGV committed to purchase approximately $527 million of inventory and land over 12 years, including an expected $119 million for the remainder of 2019. The timing and amount may change under the agreements, which may permit cancellation in some circumstances.
- In April, HGV repurchased 925,199 shares for $30 million, borrowed and repaid $100 million and $70 million under its revolver, and extended the Timeshare Facility commitment period to April 2021. The board authorized an additional $200 million of share repurchases.
- The filing provides no specific earnings or revenue guidance. Risks cited include timeshare sales and consumer credit performance, economic and tourism conditions, inventory sourcing, reliance on Hilton branding and programs, variable interest rates, foreign exchange, cyber and operational risks, and natural or geopolitical disruptions. Management expected pending litigation not to have a material financial statement effect; outcomes remain uncertain.
Important facts for investors to verify
- How much of revenue and Adjusted EBITDA growth reflects the timing of prior-year construction-related deferrals rather than underlying sales momentum.
- Whether lower contract sales and volume per guest persist, and how sales mix, closing rates and average transaction prices develop.
- Cash availability after distinguishing unrestricted cash from restricted cash, and the effect of increased revolver borrowings, debt maturities and interest-rate exposure.
- Whether receivables delinquency, defaults and allowance levels remain consistent with management’s assumptions; $61 million of gross receivables were at least 121 days past due at quarter-end.
- The timing and funding implications of the $527 million inventory and land commitment, and the impact of continued repurchases on liquidity and share count.
- Non-GAAP measures, including Adjusted EBITDA, contract sales and segment margins, should be assessed alongside GAAP earnings and cash flows; definitions may limit comparability.