Hilton Grand Vacations Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; amounts in U.S. dollars unless stated otherwise. The company develops, markets, sells and manages timeshare resorts and provides consumer financing and vacation-club services. At quarter-end, it operated 57 properties with 9,177 units and had approximately 317,000 Club members.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $454 million | $563 million | $904 million | $930 million |
| Net income | $39 million | $107 million | $94 million | $137 million |
| Diluted EPS | $0.43 | $1.10 | $1.01 | $1.39 |
| Adjusted EBITDA | $90 million | $175 million | $192 million | $237 million |
| Operating cash flow | Six-month figures: $72 million provided in 2019; $134 million used in 2018 | — |
- Q2 revenue fell 19.4% year over year; first-half revenue declined 2.8%. Q2 sales of vacation ownership interests (VOIs), net, dropped to $120 million from $250 million; first-half VOI sales were $245 million versus $328 million.
- Q2 real estate margin was $56 million, or 24.7% of sales revenue, compared with $150 million, or 41.3%, a year earlier. First-half real estate margin was $125 million, or 27.0%, versus $181 million, or 33.6%.
- Q2 contract sales, a non-GAAP operating measure, rose 1.7% to $363 million, while volume per guest fell 5.7% to $3,393. Tour flow increased 7.9%. First-half contract sales were essentially flat at $685 million; volume per guest declined 6.8% as tour flow increased 7.2%.
- Resort operations and club management supported results: segment revenue increased 16.3% in Q2 and 14.3% in the first half. Segment Adjusted EBITDA rose to $66 million from $58 million in Q2 and to $131 million from $117 million in the first half. Real estate sales and financing segment Adjusted EBITDA fell to $69 million from $163 million in Q2 and to $149 million from $207 million in the first half.
- Cash and cash equivalents were $120 million at June 30; restricted cash was another $67 million. Total debt, net, was $937 million and non-recourse debt, net, was $696 million. At year-end 2018, the respective balances were $604 million and $759 million. The company reported $374 million of remaining revolver capacity and $315 million under its Timeshare Facility, and said it was in compliance with financial covenants.
- First-half investing cash outflow was $30 million and financing cash outflow was $35 million. The financing total included $410 million of debt issuance, $105 million of debt repayments, and $271 million spent repurchasing and retiring common stock. Shares outstanding fell to 85.9 million from 94.6 million at year-end.
Changes, outlook and risks
- Management attributed the sharp Q2 sales-revenue and earnings decline principally to timing of VOI revenue recognition: the prior-year quarter included a $91 million net increase upon completion of a resort under construction, while 2019 included lower recognition from a property under construction. Lower volume per guest and a shift in inventory mix also weighed on sales revenue. Contract sales remained comparatively resilient as higher tour flow offset weaker volume per guest.
- Resort and club growth reflected an increase of approximately 18,000 Club members, new property launches and higher rental revenue. Rental growth was also supported by a hotel acquired in June 2018; related expenses increased as well.
- The filing provides no specific forward earnings or revenue guidance. Management said available cash, operating cash flow, credit facilities and receivable securitizations were expected to meet liquidity needs for the foreseeable future.
- Inventory purchase commitments totaled approximately $511 million over 12 years, including $38 million expected for the remainder of 2019. Timing and amounts may change under the agreements, which may permit cancellation in certain circumstances. Separately, July 2019 subsequent events included a $37 million Los Cabos hotel-unit purchase for future timeshare conversion, $20 million of revolver borrowings and $5 million of repayments, and a $15 million Timeshare Facility repayment.
- Key risks identified include consumer demand and economic or tourism-market weakness, VOI sales execution and inventory sourcing, timeshare-loan defaults, interest-rate exposure on variable-rate debt, dependence on Hilton brand and program licenses, international and currency risks, and litigation. Management said pending or threatened litigation was not expected to materially affect the financial statements. No material changes to the previously disclosed risk factors were reported.
- The allowance for timeshare financing receivable losses was $174 million, against gross receivables of $1.299 billion; $64 million of gross receivables were at least 121 days past due. First-half provision for losses was $38 million, versus $30 million in 2018.
Investor verification points
- Check how much of the year-over-year earnings decline reflects construction-related revenue-recognition timing versus underlying sales productivity, particularly close rates and average transaction prices.
- Track contract sales, volume per guest, tour flow and real estate margin together; contract sales alone does not equal GAAP revenue.
- Review debt growth, variable-rate exposure, upcoming maturities and remaining borrowing capacity, distinguishing company debt from non-recourse securitized debt.
- Monitor receivable delinquencies, loss provisions and allowance adequacy, especially the sizable unsecuritized past-due balance.
- Assess the pace and funding of the $511 million inventory commitments and the return on recent and planned resort or hotel acquisitions.
- Reconcile share repurchases and debt issuance with cash generation and confirm whether the business sustains positive operating cash flow.