Hilton Grand Vacations Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; financial figures are in millions of dollars unless otherwise stated. HGV develops, sells and finances vacation ownership interests (VOIs), operates resorts and manages vacation clubs. At quarter-end, it reported 57 properties with 9,177 units and approximately 322,000 Club members.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $466 | $427 | $1,370 | $1,357 |
| Net income | $50 | $41 | $144 | $178 |
| Diluted EPS | $0.59 | $0.42 | $1.60 | $1.81 |
| Adjusted EBITDA (non-GAAP) | $111 | $80 | $303 | $317 |
| Operating cash flow | Not separately provided for the quarter | $148 | $(205) |
Q3 revenue rose 9.1% and net income rose 22.0% year over year. For the first nine months, revenue was nearly flat (+1.0%), while net income fell 19.1%. Nine-month Adjusted EBITDA decreased 4.4%; it is a non-GAAP measure and should not be treated as cash available to meet obligations.
- Revenue and sales: Q3 VOI sales revenue was $138 versus $99, largely reflecting lower construction-related revenue deferrals. Nine-month VOI sales revenue was $383 versus $427, with a $49 net deferral of sales for projects under construction in 2019. Contract sales were $360 in Q3 versus $364 and $1,045 for nine months versus $1,050.
- Sales performance: Q3 tour flow increased 8.5%, but volume per guest (VPG) declined 7.8% to $3,363. Management attributed lower contract sales to lower VPG, including lower close rates and average transaction prices. For nine months, tour flow rose 7.7%, while VPG declined 7.2% to $3,464.
- Margins: Real estate margin was $78, or 31.6% of sales revenue, in Q3, compared with $56, or 25.5%, a year earlier. For nine months, it was $203, or 28.6%, versus $237, or 31.2%. The comparisons were affected by construction deferrals and recognition timing. Resort and club management margin increased to $96 for nine months from $83; rental and ancillary services margin decreased to $65 from $69.
- Cash flow and liquidity: Nine-month operating cash flow was $148, compared with a $205 outflow in 2018, primarily reflecting reduced spending on real estate for future inventory and the absence of the prior-year $63 federal tax payment. Investing cash outflow was $46; financing cash outflow was $71. Cash and cash equivalents were $113, with another $98 restricted, for total cash and restricted cash of $211.
- Debt: At September 30, debt, net was $815 and non-recourse debt, net was $795. The non-recourse borrowings are payable from pledged timeshare receivables and related assets. HGV reported $494 of remaining revolver capacity and $450 of capacity under its non-recourse Timeshare Facility. The company said it was in compliance with applicable financial covenants.
- Other balance-sheet items: Timeshare financing receivables, net were $1,139, supported by a $179 allowance; the nine-month loss provision was $60 versus $50. Gross receivables at least 121 days past due were $60. Total equity declined to $494 from $616 at year-end 2018.
Material changes and notable items
- HGV repurchased and retired $283 of common stock during the first nine months, versus $112 in the prior-year period. Shares outstanding declined to 85.5 million from 94.6 million at December 31, 2018.
- In August, HGV completed a $300 securitization of timeshare receivables, issuing notes at rates of 2.34% to 2.84%. It used proceeds in part to repay Timeshare Facility borrowings and earlier securitized debt; it prepaid the remaining 2013-A notes in September. The securitization was accounted for as secured borrowing, not a sale.
- HGV completed a $37 purchase of 87 hotel units in Los Cabos for planned conversion into 74 timeshare units. Property and equipment increased to $765 from $559 at year-end, including construction in progress of $190.
- At quarter-end, HGV had $480 of inventory and land purchase commitments over 11 years, plus $32 of other commitments. Management stated timing and amounts may change under the agreements, which may permit cancellation in certain circumstances.
Outlook, risks and contingencies
The filing does not provide specific earnings or revenue guidance. Management said available liquidity sources—including cash, operating cash generation, credit facilities and periodic receivables securitizations—were expected to be adequate for short- and long-term requirements for the foreseeable future. It also cited inventory commitments and potential acquisitions and development as funding needs.
- Key stated risks include timeshare sales and underwriting conditions, higher mortgage defaults, consumer and tourism-market weakness, inventory sourcing and development, dependence on the Hilton brand and license arrangements, variable interest rates, refinancing, foreign exchange, legal or regulatory claims, cybersecurity and disruption from natural disasters or geopolitical events.
- HGV reported ordinary-course litigation, including claims for substantial sums, but said resolution of pending or threatened matters was not expected to materially affect its financial statements. Possible losses were not reasonably estimable.
- Management reported no material change in previously disclosed risk factors, no significant subsequent event requiring adjustment through October 31, 2019, and effective disclosure controls providing reasonable assurance.
Investor verification priorities
- Assess whether lower VPG, close rates and average transaction prices persist despite higher tour flow, and how these trends affect contract sales and margins.
- Review the timing and accounting effects of construction-related VOI deferrals and recognitions, including the expected recognition of $49 of deferred VOI revenue in Q2 2020.
- Evaluate receivable performance, including the $179 allowance, $60 of balances at least 121 days past due, and the impact of the expected-credit-loss accounting standard HGV was evaluating.
- Check debt maturities, available borrowing capacity and covenant terms, while distinguishing corporate debt from non-recourse debt secured by receivables.
- Track the $480 of inventory purchase commitments, project development and conversion costs, and whether buybacks remain supportable alongside these liquidity demands.