Hilton Grand Vacations Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The filing is unaudited.
Business context and reporting period
Hilton Grand Vacations develops, sells and manages timeshare resorts, and finances vacation-ownership purchases. It reported 154 properties and approximately 339,000 Hilton Grand Vacations/Hilton Club members and 169,000 Diamond Club members. Diamond was acquired on August 2, 2021; accordingly, the 2021 comparative results do not include Diamond for the periods shown. Year-over-year changes therefore reflect both business growth and the acquisition, and are not directly like-for-like.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $948 | $334 | $1,727 | $569 |
| Net income | $73 | $9 | $124 | $2 |
| Diluted EPS | $0.60 | $0.10 | $1.01 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $273 | $70 | $475 | $112 |
| Segment Adjusted EBITDA | $337 | $106 | $591 | $175 |
Q2 real estate profit was $183 million, with a 39.8% margin, compared with $29 million and 21.8% a year earlier. For the first half, real estate profit was $295 million, with a 37.0% margin, versus $32 million and 16.2%. Financing profit was $42 million in Q2 and $87 million in the first half; its margin was 65.6% and 68.0%, respectively. Resort and club management profit was $87 million in Q2 and $176 million in the first half, while rental and ancillary services profit was $21 million and $25 million, respectively.
Cash flow from operations was $530 million in the first half, compared with $92 million in 2021. Investing cash outflow was $35 million; financing cash outflow was $518 million. Cash and cash equivalents were $374 million at June 30, 2022, with $292 million of restricted cash. Total cash, cash equivalents and restricted cash at period-end was $666 million.
At June 30, 2022, debt, net, was $2.787 billion and non-recourse debt, net, was $1.024 billion. Total debt carrying value was therefore approximately $3.811 billion. The company reported $824 million of remaining revolver capacity and $874 million of aggregate remaining capacity under its Timeshare Facility and conduit facility. It said it was in compliance with applicable debt covenants.
Total assets were $8.132 billion and total equity was $2.077 billion. Timeshare financing receivables, net, were $1.689 billion, with allowances for financing receivable losses totaling $753 million across originated and acquired portfolios. The first-half provision for financing receivable losses was $71 million.
Material changes versus the prior comparable period
- Revenue and earnings increased substantially, with Diamond now included in 2022 results but not in 2021 comparative periods. Management also attributed improvement, excluding acquisition effects, to increased travel demand, higher tour flow, new properties and lower construction-related revenue deferrals.
- Q2 contract sales were $617 million, versus $259 million; first-half contract sales were $1.126 billion, versus $398 million. Tour flow increased to 134,259 in Q2 from 56,345; VPG was $4,452 versus $4,385.
- Real estate sales and financing segment Adjusted EBITDA rose to $218 million in Q2 from $45 million; resort operations and club management segment Adjusted EBITDA rose to $119 million from $61 million. Acquisition effects contribute to these comparisons.
- First-half operating cash flow increased to $530 million from $92 million. Financing cash flows shifted from a $1.175 billion inflow in 2021—when debt was issued in connection with the acquisition—to a $518 million outflow in 2022, including repayments of debt and share repurchases.
- Debt, net, and non-recourse debt, net, declined from $2.913 billion and $1.328 billion at December 31, 2021, respectively, to $2.787 billion and $1.024 billion at June 30, 2022.
Outlook, risks, contingencies and unusual items
The filing provides no specific quantified earnings or revenue guidance. Management cited increased travel demand and continued Diamond rebranding and integration activity, which is expected to take several years. Management stated that liquidity and capital allocation plans were intended to support operations and development, but future results remain subject to risks and uncertainties.
- Demand and credit risk: Results depend on travel demand, sales activity, consumer financing and customers’ ability to repay. The company’s timeshare loan portfolios include significant past-due balances, particularly in the acquired Diamond portfolio; credit losses and defaults could affect revenue and cash flow.
- Debt and market exposure: The company is exposed to variable interest rates, including LIBOR- and SOFR-based borrowings, and foreign exchange movements. Interest-rate swaps hedge a portion of variable-rate debt, not all exposure.
- Commitments: Inventory and land purchase commitments totaled $271 million over nine years. Total contractual obligations were approximately $5.091 billion over nine years, including $422 million expected in the remainder of 2022; amounts and timing may change under contract terms.
- Litigation: Accrued legal liabilities were approximately $120 million. This includes a $93 million judgment against Diamond, partly offset by a $79 million insurance receivable, and a $14 million charge for the amount not considered probable of recovery from insurers. Outcomes remain uncertain.
- Acquisition accounting and integration: The Diamond purchase-price allocation remained preliminary, with certain asset, liability and tax valuations still under review. Acquisition-related amortization and integration expenses affect reported results.
- Share repurchases: The company authorized repurchases of up to $500 million over two years. It repurchased 1,918,291 shares in Q2 at an average $43.14 per share; approximately $417.2 million remained authorized. Repurchases may reduce cash available for other purposes and are not assured to enhance shareholder value.
- Unusual items: A $7 million impairment reversal was recorded in Q2 after certain land and infrastructure assets no longer qualified as held for sale. The company also recorded impairment expense on leased office right-of-use assets as it ceased using two locations during the first half.
Important facts for investors to verify
- Assess underlying operating growth separately from the Diamond acquisition effect; the 2021 comparison excludes Diamond.
- Review the trend in contract sales, tour flow, VPG, real estate margins and the $71 million first-half financing receivable loss provision.
- Distinguish unrestricted cash from restricted cash, and confirm availability and terms of revolver and timeshare-facility capacity.
- Monitor debt service, variable-rate exposure, contractual obligations and the company’s ability to meet inventory and rebranding commitments.
- Track the resolution and insurance recovery of the Diamond judgment, and changes to the preliminary acquisition accounting.
- Consider the remaining repurchase authorization alongside cash needs, debt obligations and future investment requirements.