Hilton Grand Vacations Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in millions of dollars unless stated otherwise. HGV develops, sells and manages timeshare vacation ownership interests (VOIs), operates resorts and a points-based club, and finances customer purchases. It reported 51 properties and approximately 304,000 Club members.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $427 | $426 | $1,357 | $1,264 |
| Operating income (revenue less operating expenses) | $63 | $76 | $265 | $250 |
| Net income | $41 | $43 | $178 | $144 |
| Diluted EPS | $0.42 | $0.43 | $1.81 | $1.44 |
| Adjusted EBITDA (non-GAAP) | $80 | $94 | $317 | $294 |
- Q3 revenue was nearly flat year over year; nine-month revenue rose 7.4%. Q3 operating margin was approximately 14.8%, versus 17.8%; nine-month operating margin was approximately 19.5%, versus 19.8%.
- Q3 segment Adjusted EBITDA was $67 million for real estate sales and financing (down $14 million) and $62 million for resort operations and club management (up $12 million). Nine-month segment Adjusted EBITDA was $274 million and $179 million, respectively.
- Contract sales, a company-defined non-GAAP operating measure, increased 11.7% to $364 million in Q3 and 12.2% to $1.05 billion for nine months. Tour flow rose 8.6% and 8.1%, respectively; volume per guest increased 2.6% and 4.0%.
- Cash and cash equivalents were $145 million at September 30, down from $246 million at December 31, 2017; restricted cash was $67 million, making total cash and restricted cash $212 million. Nine-month operating cash flow was negative $205 million, compared with positive $299 million a year earlier. The company attributed the change largely to $299 million spent on real estate for future timeshare inventory, inventory deposits, a deferred federal tax payment, higher inventory spending and a license-fee payment.
- Investing cash outflow was $35 million; financing cash inflow was $155 million. Nine-month capital expenditures were $29 million, and the company spent $112 million repurchasing and retiring 2.5 million shares.
- Debt, net, was $530 million and non-recourse debt, net, was $806 million, versus $482 million and $583 million, respectively, at year-end 2017. The September balance-sheet carrying amounts total $1.336 billion. The company reported compliance with applicable financial covenants. Non-recourse debt is payable from pledged timeshare receivables and related assets.
- Timeshare financing receivables, net, were $1.103 billion, against a $169 million loan-loss allowance. Loans 121 or more days past due totaled $63 million, versus $44 million at year-end; loans on non-accrual totaled $69 million, versus $49 million.
Material changes and comparability
- HGV adopted ASC 606 on January 1, 2018 using the modified retrospective method. It now defers VOI revenue and related direct costs for projects under construction until construction is complete. As a result, reported Q3 2018 net income was $41 million; under the previous accounting guidance it would have been $62 million. Nine-month reported net income was $178 million versus $181 million under the previous guidance. The company said adoption did not change total cash flows.
- Q3 real estate sales and financing revenue fell 6.1% to $291 million, principally because revenue on a project under construction was deferred; higher fee-for-service commissions partially offset the decline. Nine-month revenue for this segment rose 5.6% to $967 million.
- Resort operations and club management revenue increased 20.0% to $108 million in Q3 and 12.6% to $304 million for nine months. Growth reflected Club membership gains and higher rentals, including revenue from a New York City hotel acquired in June.
- Property and equipment rose to $538 million from $238 million, including the $176 million New York hotel acquisition and $123 million Honolulu land acquisition. HGV also spent $299 million on real estate for future conversion to inventory during the nine-month period.
- The effective tax rate for the first nine months was approximately 27%, compared with 38% in 2017, primarily reflecting the lower federal corporate tax rate following the Tax Cuts and Jobs Act.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said available cash, operating cash generation and periodic timeshare-receivable securitizations were expected to meet foreseeable operating and capital requirements.
- As of September 30, HGV had approximately $501 million of purchase commitments for inventory and land over seven years. Total disclosed contractual obligations were $2.063 billion, including estimated interest on debt and non-recourse debt.
- In October, construction of a Hawaii property was completed; the company expected to recognize $154 million of deferred VOI revenue and $72 million of related direct costs in Q4 2018.
- Key disclosed risks include consumer and economic cyclicality, competition and fee-for-service agreement terminations, dependence on development and inventory supply, variable interest rates and debt servicing, international and foreign-exchange exposure, cybersecurity, legal claims and catastrophic events. HGV said the Kilauea eruption and Hurricane Florence had not significantly affected financial performance.
- Management expected pending and threatened litigation to have no material effect, while noting that outcomes are uncertain. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Assess underlying sales and earnings trends using ASC 606-adjusted comparisons; reported 2018 results are not directly comparable with 2017 results prepared under prior revenue guidance.
- Track cash generation after the substantial inventory and real-estate investment, and distinguish unrestricted cash from restricted cash.
- Review debt maturities, borrowing costs, securitization terms and the ability of timeshare receivables to support non-recourse obligations.
- Monitor timeshare loan delinquency, non-accrual balances, defaults and the adequacy of the loan-loss allowance.
- Evaluate execution and returns on the New York and Hawaii acquisitions, the Hawaii project’s Q4 revenue and cost recognition, and the $501 million of purchase commitments.
- Consider Adjusted EBITDA and contract sales alongside GAAP results; both are non-GAAP measures and have limitations described in the filing.