Hilton Grand Vacations Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. Amounts are in U.S. dollars and millions unless stated otherwise. HGV develops, sells and manages vacation-ownership interests, provides consumer financing, and operates resorts and vacation clubs.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $235 | $351 | Down 33.0% |
| Net income (loss) | $(7) | $8 | EPS $(0.08), versus $0.09 |
| Operating cash flow | $62 | $53 | Improved $9 |
| Investing cash flow | $(5) | $(8) | Cash used |
| Financing cash flow | $(78) | $562 | Prior-year period included substantial debt issuance |
| Adjusted EBITDA | $42 | $33 | Up 27.3%; non-GAAP measure |
| Real estate profit margin | 4.6% | (1.5)% | Real estate profit was $3 versus $(2) |
| Rental and ancillary services profit | $1 | $15 | Margin declined to 3.1% from 28.8% |
Revenue weakness was concentrated in real estate sales and financing: segment revenue fell 40.3% to $123, while resort operations and club management revenue fell 23.1% to $80. Contract sales declined 43.0% to $139, and tour flow dropped 58.3% to 27,948 presentations; VPG rose 32.5% to $4,647. Management attributed lower sales and rental activity principally to COVID-19-related travel disruption and operating constraints.
At March 31, 2021, cash and cash equivalents were $400; restricted cash was $105, for total cash, cash equivalents and restricted cash of $505. Timeshare financing receivables, net, were $940, with a $207 allowance. Inventory was $720. Debt, net, was $1,156 and non-recourse debt, net, was $698; the latter is backed by pledged assets and generally without recourse to HGV. Total liabilities were $2,745 and equity was $369. HGV reported $139 of remaining capacity under its revolving facility and $450 under its non-recourse Timeshare Facility.
Material changes and operating drivers
- Sales of VOIs, net, decreased to $33 from $56; sales, marketing, brand and other fees fell to $53 from $106. Financing revenue decreased to $37 from $44, while resort and club management revenue was broadly stable at $45 versus $44.
- Real estate and financing segment Adjusted EBITDA increased to $27 from $15, as lower cost of VOI sales and real estate operating expenses more than offset lower revenue. Resort operations and club management segment Adjusted EBITDA decreased to $42 from $55, reflecting weaker rental and ancillary activity.
- General and administrative expense rose to $36 from $21, including acquisition-related legal and consulting costs and higher performance-based compensation expense. Interest expense rose to $15 from $10.
- Cash declined by $21 during the quarter. Financing cash use included $69 of non-recourse debt repayments; no debt or non-recourse debt was issued in Q1 2021, compared with $495 and $195, respectively, in Q1 2020.
Liquidity, debt and commitments
HGV reported $1,162 of gross corporate debt and $706 of gross non-recourse debt at quarter-end. Corporate debt included a $660 revolving credit facility balance, a $175 term loan due 2023, and $300 of 6.125% senior notes due 2024. The filing lists $818 of corporate debt maturities in 2023, including the revolving facility. HGV said it was compliant with applicable financial covenants at March 31, 2021; covenant terms had been amended to provide additional flexibility, including in connection with the planned acquisition.
Inventory purchase commitments totaled $453 over ten years, with approximately $227 expected in the next twelve months. Total contractual obligations were reported as $2,638, including debt, non-recourse debt, interest, leases and commitments. The timing and amount of some developer purchases may change under contract terms, including cancellation in certain circumstances.
Outlook, risks and unusual items
- COVID-19 recovery: Approximately 80% of resorts and nearly all sales centers were open at March 31, but some markets remained subject to capacity limits and safety measures. Management said improving travel trends were encouraging but emphasized that the pandemic’s duration and effects remained uncertain; no quantitative earnings or revenue guidance was provided.
- Diamond acquisition: HGV agreed to acquire Dakota Holdings, Inc. (Diamond Resorts) in a stock transaction valued at approximately $1.4 billion at signing. Diamond stockholders are expected to receive approximately 34.5 million HGV shares; existing HGV shareholders are expected to own about 72% of the combined company and Apollo about 28%. Closing was anticipated in summer 2021, subject to shareholder, regulatory and other conditions. HGV intended to fund the transaction with cash, assumed debt and incremental debt financing.
- Acquisition costs and non-GAAP results: Q1 included $15 of Diamond acquisition costs, $4 of restructuring costs and $3 of other one-time charges and non-cash items in the Adjusted EBITDA reconciliation. Adjusted EBITDA excludes specified items and should not be treated as GAAP earnings or cash available for debt service.
- Credit and operating risks: COVID-19-related travel weakness, financing-receivable defaults, liquidity and debt service, covenant flexibility, and the planned acquisition’s completion, financing, integration and expected benefits are key risks. The filing also highlights potential dilution, integration costs, regulatory approvals, and dependence on Hilton brand and license arrangements.
- Other contingencies: HGV had $367 of surety-provider commitments, primarily for escrow and construction bonds. It was involved in ordinary-course litigation; management did not expect pending matters to materially affect the financial statements, though possible losses were not reasonably estimable.
Important facts for investors to verify
- Whether travel demand, resort openings and tour flow continued to recover after quarter-end, and whether the recovery translated into improved contract sales and rental margins.
- The Diamond transaction’s final terms, financing, closing conditions, share issuance and resulting leverage and ownership dilution.
- Cash available for general use versus restricted cash, revolver availability, covenant requirements and upcoming debt maturities.
- Performance and collectability of the $940 net timeshare financing portfolio, including the $207 allowance and delinquency trends.
- Timing and flexibility of the $453 inventory commitments, particularly the approximately $227 expected within twelve months.
- The quality of reported Adjusted EBITDA and the impact of acquisition and other excluded costs; the filing does not provide quantitative forward guidance.