Hilton Grand Vacations Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. HGV became a separate public company on January 3, 2017. The prior-period financial statements were prepared on a standalone basis from Hilton’s records, so some comparisons reflect the separation and changed cost structure.
Business context
HGV develops, markets, sells and finances vacation ownership interests (VOIs), manages resorts and its points-based club, and earns rental and ancillary revenues. At quarter-end, it reported 48 resorts with 8,085 units and approximately 273,000 club members. HNA acquired approximately 25% of the company from Blackstone on March 15, 2017.
Financial performance and position
- Revenue: $399 million, up 7.8% from $370 million. Real estate sales and financing segment revenue rose 6.4% to $283 million; resort operations and club management rose 8.6% to $88 million.
- Profit and margins: Net income was $50 million versus $48 million; diluted EPS was $0.51 versus $0.48. Net margin was approximately 12.5%, compared with 13.0%. Adjusted EBITDA, a non-GAAP measure, was $94 million versus $96 million. Segment Adjusted EBITDA increased 5.5% to $134 million.
- Sales indicators: Contract sales were $287 million, up 9.5%; tour flow increased 2.0% to 72,405 and volume per guest increased 8.1% to $3,737. Real estate margin was $61 million in both periods, while its percentage of sales revenue declined to 28.2% from 29.6%.
- Cash flow and liquidity: Operating cash flow was $135 million versus $36 million, with the increase attributed largely to operating performance and working-capital sources. Investing cash outflow was $10 million in both periods; financing cash outflow was $2 million versus $21 million. Cash and cash equivalents were $196 million and restricted cash was $78 million at March 31, for $274 million combined.
- Debt: Balance-sheet carrying values were $488 million of debt and $695 million of non-recourse debt. Excluding financing costs and discounts, principal balances were $498 million and $702 million, respectively. HGV completed a $350 million securitization during the quarter and used proceeds to repay part of its timeshare facility. It reported compliance with financial covenants.
- Other balance-sheet items: Total assets were $2.307 billion, timeshare financing receivables net of allowance were $1.017 billion, and equity was $226 million. The loan-loss allowance was $124 million; $41 million of receivables were on non-accrual status.
Changes versus Q1 2016
- Revenue growth was led by sales, marketing and brand fees, financing, and resort and club management. Management cited a new fee-for-service property, sales at recently developed projects, increased club membership and higher transaction activity.
- Sales and marketing expense rose $17 million, and general and administrative expense rose $7 million, including costs of operating as a newly independent public company. Real estate margin dollars were flat despite higher sales revenue.
- Q1 2017 included $7 million of interest expense, while Q1 2016 included $6 million of allocated Parent interest expense. The 2017 effective tax rate was approximately 34%, down from 40%.
Outlook, risks and unusual items
- Guidance: The filing gives no specific full-year revenue or earnings guidance. Management said existing cash, operating cash generation and receivable securitizations should be adequate for anticipated requirements for the foreseeable future; interim results are not necessarily indicative of full-year performance.
- Commitments: HGV had approximately $212 million of commitments to purchase inventory and land over five years, subject to contract terms and possible cancellation in certain circumstances. Total disclosed contractual obligations were $1.622 billion, including debt, non-recourse debt and purchase commitments.
- Credit and funding risks: Timeshare receivables are exposed to borrower defaults and estimates of loan losses. The company relies on securitization markets; its timeshare facility and securitized debt are collateralized by receivables. Variable-rate debt is exposed to LIBOR movements.
- Other risks and contingencies: HGV described ordinary-course litigation, but did not expect pending or threatened matters to have a material effect; some matters had reasonably possible unfavorable outcomes or could not be estimated. It reported no material change to previously disclosed risk factors. It also noted foreign-exchange exposure, principally Japanese-yen receivables, with a 10% yen appreciation estimated to increase gross receivables by less than $1 million.
- Accounting and transition items: The spin-off generated a $9 million increase in additional paid-in capital from a tax-basis step-up. HGV was evaluating the impact and transition method for the new revenue-recognition standard, expecting gross-versus-net presentation changes for certain non-cash first-day incentives. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether contract-sales growth converts into recognized revenue, profit and sustained cash generation, given the lower real estate margin percentage and higher sales and marketing costs.
- The quality and performance of timeshare receivables, including the $124 million allowance, delinquency trends and securitization-related repurchase obligations.
- The refinancing, collateral and cash-flow implications of $1.2 billion in debt principal, including the $212 million inventory and land purchase commitments.
- How standalone public-company costs, Hilton brand and transition agreements, and the HNA ownership relationship affect future expenses and operations.
- The eventual financial-statement effects of the revenue-recognition standard; the filing says the assessment was ongoing and does not provide a quantified impact.