Hilton Grand Vacations Inc. annual report, FY2018

Hilton Grand Vacations Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. HGV markets and sells vacation ownership intervals (VOIs), provides consumer financing, manages resorts and operates vacation clubs. At year-end, it had 54 properties, 8,888 units and approximately 309,000 Club members.

Financial performance and position

Metric	2018	2017	Change
Total revenue	$1.999 billion	$1.711 billion	+16.8%
Net income	$298 million	$327 million	-8.9%
Diluted EPS	$3.05	$3.28	-7.0%
Adjusted EBITDA (non-GAAP)	$503 million	$395 million	+27.3%
Operating cash flow	-$159 million	$356 million	-$515 million
Cash and restricted cash	$180 million	$297 million	-$117 million

Revenue growth reflected higher VOI sales and fee-for-service commissions, increased financing revenue, and higher rental and ancillary revenue. Sales of VOIs, net, rose 33.9% to $734 million; contract sales, a non-GAAP operating measure, increased 10.6% to $1.410 billion.
Real estate margin increased to $396 million from $307 million; margin percentage rose to 33.5% from 32.4%. Financing margin was $109 million, with margin percentage declining to 69.0% from 70.7%. Resort and club management margin was $125 million, approximately flat as a percentage of revenue at 72.7%. Rental and ancillary margin rose to $85 million from $57 million.
Net income fell despite higher revenue and pre-tax income ($403 million versus $311 million), primarily because 2017 included a $135 million income-tax benefit from U.S. tax reform; 2018 recorded $105 million of income-tax expense.
Fourth-quarter 2018 revenue was $642 million versus $447 million in fourth-quarter 2017; net income was $120 million versus $183 million. The filing does not give a clear explanation in the cited quarterly table for the year-over-year net-income decline.
Year-end assets were $2.753 billion and liabilities $2.137 billion. Debt, net, was $604 million and non-recourse debt, net, was $759 million. Cash was $108 million, plus $72 million of restricted cash. Timeshare financing receivables, net, were $1.120 billion.
Operating cash flow turned negative mainly with $299 million spent on real estate for future inventory and $46 million of inventory deposits, alongside tax-payment and other timing effects. Investing cash use was $62 million; financing activities provided $104 million.

Material changes and notable items

Contract sales rose 10.6%, supported by tour flow increasing 8.2% to 357,861 and volume per guest rising 2.4% to $3,743. Inventory sources were 55% fee-for-service, 22% just-in-time and 23% developed.
HGV acquired an operating New York City hotel for $176 million for future timeshare conversion and Honolulu land for $123 million. These acquisitions contributed to a substantial increase in property and equipment, to $559 million from $238 million.
HGV adopted ASC 606 in 2018 using the modified retrospective method. It deferred recognition of revenue and related costs for VOIs under construction until construction is complete. The adoption reduced 2018 reported revenue by $95 million and net income by $51 million compared with prior accounting guidance; the filing says it had no effect on total cash flows. Comparisons with 2017 therefore require care.
Loan defaults increased to 4.71% from 4.12% in 2017 and 3.67% in 2016. The loan-loss provision rose to $69 million from $58 million; the allowance was $172 million at year-end.
In November, HGV amended its senior secured facilities, increasing revolving capacity to $800 million and extending maturity to 2023. It reported $684 million of remaining revolver capacity at year-end and $330 million of additional Timeshare Facility capacity.
HGV repurchased 4,987,263 shares during 2018 for $183 million in total, including 2,487,263 shares at an average $28.62 in December. The remaining authorization under the $200 million program was approximately $128.8 million at year-end.

Outlook, risks and contingencies

2019 guidance: contract-sales growth of 9%–11%, with fee-for-service sales at 48%–54% of contract sales; net income of $260–$275 million; Adjusted EBITDA of $450–$470 million; diluted EPS of $2.74–$2.89; operating cash flow of $75–$115 million; and adjusted free cash flow of $60–$120 million. Guidance assumes no impact from construction-related revenue and expense deferrals.
Management said available cash, operating cash generation, credit facilities and periodic receivables securitizations were expected to fund liquidity needs for the foreseeable future. However, 2018 operating cash flow was negative and inventory investment and commitments are significant.
Purchase commitments for inventory and land totaled $607 million over six years, including $237 million expected in 2019. Contractual obligations totaled $2.309 billion, including debt, non-recourse debt, leases and purchase commitments.
Key risks include consumer demand and economic sensitivity; higher defaults or weaker securitization markets; construction, inventory-supply and third-party developer risks; geographic concentration and natural disasters; regulatory, litigation, privacy and cybersecurity exposure; variable-rate debt; and reliance on Hilton’s brands, systems and loyalty program. Hilton’s license carries royalties, and certain performance or other failures could lead to deflagging or termination.
Legal proceedings arise in the ordinary course. Management stated it did not expect pending or threatened matters to materially affect consolidated results, financial position or cash flows, while noting outcomes cannot be predicted with certainty.
In January 2019, HGV acquired Maui land for $60 million cash plus a $23 million promissory note, with stated contractual interest of $27 million; it also bought Barbados timeshare inventory for $9 million.

Important facts for investors to verify

Reconcile 2018 performance to prior-year results on a consistent basis, especially the ASC 606 deferrals and the one-time 2017 tax benefit.
Assess the causes and sustainability of rising loan defaults, the $172 million allowance and the portfolio’s future credit performance.
Track cash conversion and funding needs against planned inventory purchases, the $607 million commitments and available revolver and securitization capacity.
Review debt maturities, variable-rate exposure and covenant headroom; reported variable-rate debt was $432 million, or 31% of total debt.
Test whether 2019 guidance is being achieved in contract sales, margins, cash flow and Adjusted EBITDA, and distinguish non-GAAP measures from GAAP results.
Evaluate the return and execution risks of the New York and Hawaii acquisitions, and HGV’s continuing dependence on Hilton’s brand license and customer channels.