Hilton Grand Vacations Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Figures are in millions of dollars except per-share amounts. Hilton Grand Vacations develops, sells and finances vacation ownership interests (VOIs), manages resorts and operates vacation clubs. The quarter was sharply affected by COVID-19, including resort and sales-center closures.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $351 | $450 | Down 22% |
| Net income | $8 | $55 | Down 86% |
| Diluted EPS | $0.09 | $0.58 | Down $0.49 |
| Adjusted EBITDA (non-GAAP) | $33 | $102 | Down 68% |
| Segment Adjusted EBITDA | $70 | $145 | Down 52% |
| Operating cash flow | $53 | $14 | Up $39 |
| Investing cash flow | $(8) | $(10) | |
| Financing cash flow | $562 | $38 |
Revenue from real estate sales and financing was $206 million, down 33%; resort operations and club management segment revenue was $104 million, down 5%. Real estate and financing segment Adjusted EBITDA fell to $15 million from $80 million; resort operations and club management segment Adjusted EBITDA was $55 million versus $65 million. Real estate margin was negative $2 million (negative 1.5%), compared with positive $69 million (29.2%). Company Adjusted EBITDA margin was approximately 9% of revenue, versus 23% in Q1 2019.
Contract sales declined 24% to $244 million. Tour flow fell 19% to 66,965 and volume per guest decreased 5% to $3,506. The filing attributes the deterioration mainly to closures, suspended sales activity, lower close rates and transaction prices, and reduced tours. Reported VOI sales revenue also reflected $47 million of construction-related deferrals and a $23 million increase in estimated financing-receivable losses tied primarily to COVID-19.
Financial position and liquidity
- At March 31, cash and cash equivalents were $669 million and restricted cash was $90 million, for total cash, cash equivalents and restricted cash of $759 million. Restricted cash includes VOI-sale escrow and debt reserves.
- Debt, net of financing costs, was $1.266 billion; non-recourse debt, net, was $885 million. Gross balances before financing-cost deductions were $1.272 billion and $892 million, respectively. Debt increased substantially as the company drew on its revolving credit facility and timeshare facility for precautionary liquidity.
- At quarter-end, $39 million of revolving-facility capacity remained, including $10 million available for short-term borrowings; $255 million remained available under the Timeshare Facility. The company reported compliance with applicable financial covenants at March 31.
- Timeshare financing receivables, net, were $1.122 billion, with an allowance of $212 million versus $184 million at year-end. The allowance included a $37 million provision for the quarter. Receivables 121 days or more past due increased to $76 million from $67 million.
- Total equity was $563 million, compared with $570 million at year-end. Inventory was $885 million, including $386 million of construction in process; the company transferred $301 million of timeshare units under construction from property and equipment to inventory.
Material changes, outlook and risks
- COVID-19 caused temporary closure of substantially all resorts and sales centers and suspension of most sales and operating activity. Closures were for an indeterminate period; management said it could not estimate when operations would resume or normalize. The filing described closures and modified plans as anticipated through April, subject to reassessment.
- Management reported furloughing approximately 67% of employees, or about 6,100 of 9,100 in April; reducing pay for remaining active employees; eliminating discretionary spending; and cutting planned new-inventory investment by approximately $200 million. It also drew on available credit to bolster liquidity.
- Management said the actions and available financing were expected to provide adequate capital for requirements for the foreseeable future, but warned that prolonged disruption could impair liquidity and cause covenant breaches or defaults. The company was negotiating with lenders for covenant amendments and believed it could reach agreement before any default; that outcome was not assured.
- After quarter-end, the company adopted a shareholder rights plan on April 16 and amended the Timeshare Facility on April 22 to provide flexibility in calculating underlying-loan delinquencies. The amendment did not change borrowing capacity or other terms.
- Inventory purchase commitments were approximately $473 million over 11 years, including $26 million expected for the remainder of 2020; other commitments were $26 million. Total contractual obligations were reported at $3.011 billion. Some developer commitments may be subject to change or cancellation under their terms.
- The company repurchased $10 million of stock during the quarter under a $200 million authorization, then suspended the program on March 31. Litigation arose in the ordinary course; management did not expect pending or threatened matters to materially affect the financial statements. No quantitative full-year earnings or revenue guidance was provided.
Investor verification priorities
- Track the duration and pace of resort reopenings, sales-center operations, customer demand and any subsequent guidance.
- Verify lender covenant amendments, covenant headroom, remaining borrowing availability, and the company’s ability to meet debt payments and liquidity needs.
- Monitor timeshare-loan delinquencies, defaults, credit-loss allowances and securitization capacity as economic conditions evolve.
- Assess cash burn and the timing or flexibility of the $473 million inventory commitments and other contractual obligations.
- Reconcile reported cash and restricted cash, debt balances and subsequent borrowings; distinguish non-recourse debt from corporate debt.
- Review subsequent filings for the financial effects of closures, furloughs, the inventory-investment reduction, and any material changes to commercial or developer agreements.