Hilton Grand Vacations Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed October 29, 2020. HGV develops, sells and finances vacation ownership interests (VOIs), manages resorts and operates vacation clubs. Its portfolio comprised 60 properties and 9,594 units.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $208 million | $466 million | $682 million | $1,370 million |
| Net income (loss) | $(7) million | $50 million | $(47) million | $144 million |
| Diluted EPS | $(0.08) | $0.59 | $(0.55) | $1.60 |
| Adjusted EBITDA (non-GAAP) | $19 million | $111 million | $33 million | $303 million |
| Operating cash flow | Not separately stated for the quarter | $86 million | $146 million |
- Q3 revenue fell 55%; nine-month revenue fell 50%. Contract sales declined 68% in Q3 and 62% year to date, principally reflecting reduced travel demand, closures and capacity constraints during the pandemic.
- Real estate margin was negative $9 million in Q3, or negative 13.8% of sales revenue, versus $78 million and 31.6% a year earlier. Nine-month real estate margin was negative $57 million, or negative 27.0%, versus $203 million and 28.6%.
- Rental and ancillary services revenue fell 63% in Q3; its margin was negative $4 million, compared with positive $18 million a year earlier. Financing margin remained comparatively resilient: $27 million in Q3 and $88 million year to date.
- Cash and cash equivalents were $625 million at September 30; cash plus restricted cash was $717 million. Operating cash flow was positive but lower year over year. Investing cash outflow was $24 million and financing cash inflow was $503 million for the nine months.
- Debt, net, was $1.262 billion and non-recourse debt, net, was $837 million, versus $828 million and $747 million, respectively, at December 31, 2019. HGV reported $39 million of remaining revolver capacity and $450 million of Timeshare Facility capacity at quarter-end. It was in compliance with applicable covenants.
- Total assets were $3.544 billion and equity was $522 million at September 30, 2020. Inventory rose to $933 million from $558 million, including $301 million of non-cash transfers from property and equipment to inventory.
Material changes, outlook and risks
- COVID-19 caused HGV to close substantially all resorts and sales centers during the first quarter. By September 30, more than three quarters had reopened, but many operated with capacity limits; travel restrictions particularly affected Hawaii and New York. HGV reported workforce furloughs, temporary salary reductions, cost controls and an approximately $200 million reduction in planned new-inventory investment.
- HGV drew on its revolver for liquidity, amended credit terms and completed a $300 million gross-receivables securitization in June. In October, after quarter-end, it repaid $100 million on the revolver.
- On October 15, HGV announced a planned reduction of approximately 1,600 employees, expected to produce $10–$12 million of cash restructuring costs, mostly in Q4 2020. Approximately 2,000 employees remained furloughed.
- Management said the duration and severity of the pandemic remained uncertain and could further pressure demand, revenue, cash flow, liquidity and covenant compliance. HGV was reviewing certain land and infrastructure assets; the review could result in non-cash impairments. No specific earnings or revenue guidance was provided.
- HGV had approximately $457 million in inventory and land purchase commitments over ten years, plus $16 million of other commitments. It described ordinary-course litigation but did not expect pending claims to materially affect the financial statements; outcomes were uncertain.
Important facts for investors to verify
- Whether reopened resorts and sales centers can sustain demand and improve tour flow, contract sales and margins as travel restrictions change.
- Liquidity and covenant headroom, including the impact of debt maturities, facility availability, the October revolver repayment and inventory commitments.
- Timeshare loan credit quality: the allowance for financing losses increased to $217 million from $184 million, and receivables at least 121 days past due rose to $109 million from $67 million.
- Potential impairment charges from the long-lived-asset review and the timing and cash cost of the workforce reduction.
- How much reported performance depends on non-GAAP Adjusted EBITDA and other operating metrics, which HGV cautions are not substitutes for GAAP results or cash flow.