Hilton Grand Vacations Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; amounts in U.S. dollars, millions except per-share data. HGV became an independent public company on January 3, 2017, so prior-period comparisons include pre-spin-off Hilton allocations and should be read with that change in mind.
Business context and financial results
HGV develops, markets, sells and manages timeshare vacation ownership interests (VOIs), provides consumer financing and operates resorts and vacation clubs. At quarter-end, it reported 48 properties with 8,101 units and approximately 284,000 Club members.
- Q3 revenue: $426, up 4.7% from $407. VOI sales were $145, up 11.5%; sales, marketing, brand and other fees were $127, down 6.6%; financing revenue was $38, up 11.8%; resort and club management revenue was $37, up 12.1%; rental and ancillary revenue was $45, up 9.8%.
- Q3 earnings: Net income was $43 versus $35, up 22.9%; diluted EPS was $0.43 versus $0.35. Adjusted EBITDA, a non-GAAP measure, was $94 versus $93.
- Nine-month results: Revenue was $1,264 versus $1,168, up 8.2%; net income was $144 versus $130, up 10.8%; diluted EPS was $1.44 versus $1.31; Adjusted EBITDA was $294 versus $292.
- Margins: Real estate margin was $56, or 23.5% of sales revenue, in Q3 versus $65, or 27.8%; nine-month margin was $197, or 28.2%, versus $188, or 28.7%. Financing margin percentage was 71.1% versus 76.5% in Q3 and 70.6% versus 76.0% for nine months. Resort and club management margin percentage was 67.6% versus 72.7% in Q3 and 70.4% versus 74.5% for nine months.
Cash, debt and liquidity
- Cash and cash equivalents were $226 at September 30, compared with $48 at year-end 2016; restricted cash was $58, for total cash and restricted cash of $284.
- Nine-month operating cash flow was $299 versus $133; investing cash outflow was $77 versus $21; financing cash outflow was $89 versus $94. Management attributed the operating cash flow increase partly to improved results, working-capital sources and deferral of federal tax payment to Q1 2018.
- Balance-sheet debt was $484 and non-recourse debt was $612, totaling $1,096 net of financing costs. The company reported compliance with applicable financial covenants. Non-recourse borrowings are payable from pledged timeshare receivables and related assets.
- Net timeshare financing receivables were $1,055, with a $138 allowance for loan losses; nine-month loan-loss provision was $45. Gross loans 91 or more days past due totaled $47, versus $43 at year-end 2016.
- HGV reported $208 of developer purchase commitments over five years, with most expected in 2019. Management stated that available cash and operating cash flows should meet foreseeable requirements.
Material changes, outlook and risks
- Contract sales increased 6.5% in Q3 to $326 and 9.0% for nine months to $936. Q3 tour flow rose 9.4%, while volume per guest declined 1.3% to $3,555; nine-month volume per guest rose 2.5% to $3,590.
- New projects in Washington, D.C. and New York contributed to VOI sales growth. Higher marketing spending supported tour flow but pressured Q3 real estate margin and segment earnings. Resort and club management growth reflected new properties and member additions.
- A Q2 change in the estimate of expired discounted vacation-package redemptions reduced advanced deposits by $11 and increased nine-month revenue and net income by $10 (about $0.10 per share). This is a notable nonrecurring estimate benefit.
- In March, HGV securitized receivables and issued approximately $350 of notes; proceeds were used in part to reduce its timeshare facility. In July, it invested $40 for a 25% non-managing interest in the Elara joint venture. The partner manages the venture and may call for additional capital contributions.
- Management gave no specific earnings or revenue guidance in the supplied filing text. It described a long-term target mix of approximately 50% owned and 50% fee-for-service inventory. The company expected adoption of the new revenue standard to change presentation of certain sales incentives; quantified historical presentation impact was estimated at $29.7 for 2016.
- Risk factors include consumer loan defaults and timeshare receivable performance, interest-rate exposure on variable-rate debt, dependence on fee-for-service agreements, and limited control and potential funding obligations in joint ventures. Fee-for-service fees tied to two third-party-owned properties represented approximately 20% of Q3 revenue and 14% of nine-month revenue.
- Hurricane Irma temporarily closed certain managed Florida properties, but HGV said it did not significantly affect operations or financial performance. On October 13, 2017, after quarter-end, HGV acquired an 83-unit Park City lodge. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of earnings growth reflects underlying operations versus the $10 estimate-related revenue and net-income benefit.
- Whether the improvement in operating cash flow is sustainable, given working-capital movements and the deferred federal tax payment.
- Loan delinquency, write-off and reserve trends, including the rise in non-accrual loan balances and the $45 provision.
- Exposure to the two third-party properties and the Elara joint venture’s governance, capital-call provisions and debt structure.
- Timing and funding of the $208 purchase commitments, and the impact of future revenue-standard adoption on reported revenue and expenses.