Hilton Grand Vacations Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. HGV develops, sells and finances vacation ownership interests (VOIs), and manages resorts and its vacation club. At quarter-end it operated 51 properties with 8,367 units and approximately 298,000 Club members.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $563 million | $439 million | $930 million | $838 million |
| Net income | $107 million | $51 million | $137 million | $101 million |
| Diluted EPS | $1.10 | $0.51 | $1.39 | $1.02 |
| Adjusted EBITDA (non-GAAP) | $175 million | $106 million | $237 million | $200 million |
| Contract sales (non-GAAP operating metric) | $357 million | $323 million | $686 million | $610 million |
- Q2 real estate margin was $150 million, or 41.3% of sales revenue, versus $90 million and 36.9% a year earlier. First-half real estate margin was $181 million (33.6%), versus $162 million (35.2%).
- For the first half, cash used in operating activities was $134 million, compared with $177 million provided in 2017. Investing activities used $23 million; financing activities provided $63 million. Cash, cash equivalents and restricted cash totaled $203 million at June 30, including $72 million restricted; unrestricted cash was $131 million.
- At June 30, debt, net was $637 million and non-recourse debt, net was $604 million. The company reported $645 million of debt and $608 million of non-recourse debt before unamortized financing costs. HGV said it complied with applicable financial covenants.
- Total assets were $2.608 billion and total equity was $517 million. Timeshare financing receivables, net, were $1.089 billion, with a $157 million loan-loss allowance; inventory was $544 million.
Changes versus prior period and comparability
- Reported Q2 revenue rose 28.2% and net income more than doubled year over year. First-half revenue grew 11.0% and net income 35.6%. Management cited increased VOI sales revenue, including recognition following completion of a resort under construction, higher fee-for-service sales, increased financing income, Club membership growth and higher rentals.
- Q2 segment Adjusted EBITDA was $163 million in real estate sales and financing, up from $99 million, and $58 million in resort operations and club management, up from $52 million. First-half segment Adjusted EBITDA was $207 million and $117 million, respectively.
- HGV adopted ASC 606 on January 1, 2018 using the modified retrospective method. Under the new standard, VOI sales and associated direct costs for projects under construction are generally deferred until construction is complete. This makes reported comparisons with 2017, which used prior guidance, less directly comparable. For Q2 2018, the filing estimates that under prior guidance revenue would have been $478 million and net income $65 million, versus reported $563 million and $107 million. The filing also provides 2017 results recast under ASC 606: Q2 2017 revenue of $414 million and net income of $41 million.
- Contract sales increased 10.5% in Q2 and 12.5% in the first half. Tour flow grew 8.2% and 7.8%, respectively; volume per guest rose 2.7% and 4.7%.
- First-half operating cash flow was pressured by the $176 million purchase of a New York City hotel for future timeshare conversion, a $41 million deposit on an inventory commitment, a $63 million federal tax payment deferred from 2017, higher inventory spending and a license-fee payment related to Q4 2017.
Outlook, risks and notable items
- No specific full-year earnings or revenue guidance is provided. Management stated that it believes available cash, operating cash generation and financing sources will be adequate for foreseeable operating expenses and other expenditures.
- HGV had commitments to purchase approximately $464 million of inventory and land over seven years; timing and amounts may change under the agreements, which may permit cancellation in certain circumstances. Contractual obligations totaled $1.924 billion, including debt and estimated interest, non-recourse debt and purchase commitments.
- In June, HGV acquired a New York City operating hotel for $176 million for future conversion to timeshare inventory. In July, it agreed to acquire part of another operating hotel for $50 million and paid a $2 million deposit.
- HGV repurchased and retired 2.5 million shares from an HNA affiliate for approximately $112 million. HNA separately sold 22.25 million shares; HGV received no proceeds. HNA ceased to be a related party following the sale.
- Management identified risks including consumer and economic conditions, competition, dependence on development and third-party fee-for-service arrangements, variable interest rates and debt obligations, international and currency exposure, cybersecurity and privacy, and legal matters. The filing added GDPR compliance as a material risk, including potential penalties of up to 4% of worldwide annual revenue. Pending litigation was not expected to have a material financial statement effect.
- The Kilauea eruption had not materially affected HGV operations as of the filing. Management reported disclosure controls were effective; Oracle Cloud systems were implemented during Q2, with related internal-control testing planned for the third and fourth quarters.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects completed-project timing and ASC 606, versus underlying sales volume, pricing and recurring fees.
- Cash conversion and liquidity needs after the hotel acquisition, tax payment, share repurchase and planned inventory spending; distinguish restricted from unrestricted cash.
- Ability to service and refinance debt, including variable-rate exposure and the scheduled maturities, while meeting the $464 million inventory and land commitments.
- Trends in timeshare loan delinquencies and credit losses: loans 121 days or more past due reached $59 million, versus $44 million at year-end 2017; the allowance rose to $157 million.
- Execution, costs and expected returns from the New York hotel conversions and other development or acquisition commitments, and progress on Oracle Cloud control testing.