HILTON GRAND VACATIONS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements convey management's expectations as to our future, and are based on management's beliefs, expectations, assumptions and such plans, estimates, projections and other information available to management at the time we make such statements. Forward-looking statements include all statements that are not historical facts and may be identified by terminology such as the words "outlook," "believe," "expect," "potential," "goal," "continues," "may," "will," "should," "could," "seeks," "approximately," "projects," predicts," "intends," "plans," "estimates," "anticipates" "future," "guidance," "target," or the negative version of these words or other comparable words. The forward-looking statements contained in this Report include statements related to our revenues, earnings, taxes, cash flow and related financial and operating measures, and expectations with respect to future operating, financial and business performance, and other anticipated future events and expectations that are not historical facts. We caution you that our forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that are beyond our control, that may cause our actual results, performance or achievements to be materially different from the future results, business performance or achievements expressed in or implied by such statements. The forward-looking statements in this Report are not guarantees of our future performance, and you should not place undue reliance on such statements. Factors that could cause our actual results to differ materially from those contemplated by our forward-looking statements include: the material impact of the COVID-19 pandemic on our business, operating results, and financial condition, including, without limitation, our ability to meet certain sales and performance levels, particularly as they relate to our fee-for-service and third party partners, the effectiveness of actions taken by us to manage the impact of the pandemic, and the duration of closure of substantially all of our properties and operations, and uncertainties of when our properties will re-open or the period of time required for ramp-up of operations upon re-opening; the extent and duration of the impact of the COVID-19 pandemic on global economic conditions; the extent and duration of government and other restrictions on travel and commercial activity in response to the COVID-19 pandemic; our ability to meet our liquidity needs and ability to remain compliant with our debt covenants; risks associated with the inherent business, financial and operating risks of the timeshare industry, including limited underwriting standards due to the real-time nature of industry sales practices, and the intense competition associated with the industry; our ability successfully market and sell VOIs; our development and other activities to source inventory for VOI sales; significant increases in defaults on our vacation ownership mortgage receivables; the ability of managed homeowner associations to collect sufficient maintenance fees; general volatility in the economy and/or the financial and credit markets; adverse economic or market conditions and trends in the tourism and hospitality industry, which may impact the purchasing and vacationing decisions of consumers; our actions or the occurrence of other events that could cause a breach under or termination of our license agreement withHilton that could affect or terminate our access to the Hilton brands and programs, or actions ofHilton that affect the reputation of the licensed marks orHilton's programs; economic and operational uncertainties related to our expanding global operations, including our ability to manage the outcome and timing of such operations and compliance with anti-corruption, data privacy and other applicable laws and regulations affecting our international operations; the effects of foreign currency exchange; changes in tax rates and exposure to additional tax liabilities; the impact of future changes in legislation, regulations or accounting pronouncements; our acquisitions, joint ventures, and strategic alliances that that may not result in expected benefits, including the termination of material fee-for-service agreements; our dependence on third-party development activities to secure just-in-time inventory; our use of social media platforms; cyber-attacks, security vulnerabilities, and information technology system failures resulting in disclosure of personal data, company data loss, system outages or disruptions of our online services, which could lead to reduced revenue, increased costs, liability claims, harm to user engagement, and harm to our reputation or competitive position; the impact of claims against us that may result in adverse outcomes, including regulatory proceedings or litigation; our credit facilities, indenture and other debt agreements and instruments, including variable interest rates, operating and financial restrictions, our ability to make scheduled payments, and our ability to refinance our debt on acceptable terms; the continued service and availability of key executives and employees, including our ability to meet human capital needs given our recent furloughs as our business and operations normalize after the COVID-19 pandemic eases and the succession planning of our key executives; and catastrophic events or geo-political conditions including war, terrorist activity, political strife, pandemic outbreak (including COVID-19), or natural disasters that may disrupt our operations in key vacation destinations. Any one or more of the foregoing factors could adversely impact our operations, revenue, operating margins, financial condition and/or credit rating. 30
-------------------------------------------------------------------------------- For additional information regarding factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements in this Report, please see the risk factors discussed in "Part I-Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , as supplemented and updated by the risk factors discussed in "Part II-Item 1A. Risk Factors" of this Report, as well as those described from time to time other periodic reports that we file with theSEC . There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments, changes in management's expectations, or otherwise.
Terms Used in this Quarterly Report on Form 10-Q
Except where the context requires otherwise, references in this Quarterly Report on Form 10-Q to "Hilton Grand Vacations ," "HGV," "the Company," "we," "us" and "our" refer toHilton Grand Vacations Inc. , together with its consolidated subsidiaries. Except where the context requires otherwise, references to our "properties" or "resorts" and "units" refer to the timeshare properties that we manage or own. Of these resorts and units, a portion is directly owned by us or or joint ventures in which we have an interest and the remaining resorts and units are owned by our third-party owners.
"Developed" refers to VOI inventory that is sourced from projects developed by HGV.
"Fee for service" refers to VOI inventory that we sell and manage on behalf of third-party developers.
"Just-in-time" refers to VOI inventory that is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.
"VOI" refers to vacation ownership intervals.
Non-GAAP Financial Measures This Quarterly Report on Form 10-Q includes discussion of terms that are not recognized terms underU.S. Generally Accepted Accounting Principles ("U.S. GAAP"), and financial measures that are not calculated in accordance withU.S. GAAP, including earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization ("EBITDA"), Adjusted EBITDA, free cash flow and adjusted free cash flow. Operational Metrics
This Quarterly Report on Form 10-Q includes discussion of key business operational metrics including contract sales, sales revenue, real estate margin, tour flow, volume per guest and transient rate.
See "Key Business and Financial Metrics and Terms Used by Management" and "-Results of Operations" for a discussion of the meanings of these terms, the Company's reasons for providing non-GAAP financial measures, and reconciliations of non-GAAP financial measures to measures calculated in accordance withU.S. GAAP. Overview Our Business We are a timeshare company that markets and sells VOIs, manages resorts in top leisure and urban destinations, and operates a points-based vacation club. As ofMarch 31, 2020 , we have 59 properties, representing 9,551 units, that are primarily located in vacation destinations such asOrlando ,Las Vegas , Hawaiian Islands,New York City ,Washington D.C. , andSouth Carolina and feature spacious, condominium-style accommodations with superior amenities and quality service. As ofMarch 31, 2020 , we have approximately 328,000Hilton Grand Vacations Club andHilton Club (collectively the "Club") members. Club members have the flexibility to exchange their VOIs for stays at anyHilton Grand Vacations resort or any property in theHilton system of 18 industry-leading brands across approximately 6,000 properties, as well as numerous experiential vacation options, such as cruises and guided tours. Our business has been adversely impacted by the COVID-19 pandemic and its effects on the global economy, including the various government orders and mandates for closures of non-essential businesses. Please see "COVID-19 and Subsequent Events" and other discussions throughout this Report for additional information regarding such impacts. 31
--------------------------------------------------------------------------------
We operate our business across two segments: (1) real estate sales and financing; and (2) resort operations and club management.
Real Estate Sales and Financing
Our primary product is the marketing and selling of fee-simple VOIs deeded in perpetuity and right to use real estate interests, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week on an annual basis, at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In 2010, we began sourcing VOIs through fee-for-service and just-in-time agreements with third-party developers and have focused our inventory strategy on developing an optimal inventory mix focused on developed properties as well as fee-for-service and just-in-time agreements. The fee-for-service agreements enable us to generate fees from the sales and marketing of theVOIs and Club memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs. The just-in-time agreements enable us to source VOI inventory in a manner that allows us to correlate the timing of acquisition of the inventory with the sale to purchasers. Sales of owned, including just-in-time inventory, generally result in greater Adjusted EBITDA contributions, while fee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory and fee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital. For the three months endedMarch 31, 2020 , sales from fee-for-service, just-in-time and developed inventory sources were 53 percent, 25 percent and 22 percent, respectively, of contract sales. See "Key Business and Financial Metrics and Terms Used by Management--Real Estate Sales Metrics" for additional discussion of contract sales. Based on our trailing twelve months sales pace, we have access to approximately seven years of future inventory, with capital efficient arrangements representing approximately 52 percent of that supply. We believe that the visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales, reduce capital investments, minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering into new markets. We sell our vacation ownership products under the Hilton Grand Vacations brand primarily through our distribution network of both in-market and off-site sales centers. Our products are currently marketed for sale throughoutthe United States and theAsia-Pacific region . We operate sales distribution centers in major markets and popular leisure destinations with year-round demand and a history of being a friendly environment for vacation ownership. We have sales distribution centers inLas Vegas ,Orlando ,Oahu ,Japan ,New York ,Myrtle Beach ,Waikoloa ,Washington D.C. ,Hilton Head ,Park City ,Chicago ,Korea and Carlsbad. Our marketing and sales activities are based on targeted direct marketing and a highly personalized sales approach. We use targeted direct marketing to reach potential members who are identified as having the financial ability to pay for our products and have an affinity withHilton and are frequent leisure travelers. Tour flow quality impacts key metrics such as close rate and VPG, defined in "Key Business and Financial Metrics and Terms Used by Management--Real Estate Sales Metrics." Additionally, the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables. For the three months endedMarch 31, 2020 , 55 percent of our contract sales were to our existing owners. We provide financing for members purchasing our developed and acquired inventory and generate interest income. Our timeshare financing receivables are collateralized by the underlying VOIs and are generally structured as 10-year, fully-amortizing loans that bear a fixed interest rate typically ranging from 9 percent to 18 percent per annum. Financing propensity was 63 percent and 65 percent for the three months endedMarch 31, 2020 and 2019, respectively. We calculate financing propensity as contract sales volume of financed contracts originated in the period divided by contract sales volume of all contracts originated in the period. The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower's credit profile and the loan term. The weighted-average FICO score for new loans toU.S. and Canadian borrowers at the time of origination were as follows: Three Months Ended March 31, 2020 2019 Weighted-average FICO score 736 738 Prepayment is permitted without penalty. When a member defaults, we ultimately return their VOI to inventory for resale and that member no longer participates in our Club. 32
-------------------------------------------------------------------------------- Some of our timeshare financing receivables have been pledged as collateral in our securitization transactions, which have in the past and may in the future provide funding for our business activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and related cash deposits. For additional information see Note 6: Timeshare Financing Receivables in our unaudited condensed consolidated financial statements.
In addition, we earn fees from servicing the loans provided by third-party developers of our fee-for-service projects to purchasers of their VOIs and from our securitized timeshare financing receivables.
Resort Operations and Club Management
We enter into management agreements with the HOAs of the VOI owners for timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprised of owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services include day-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The initial term of our management agreements typically ranges from three to five years and the agreements are subject to periodic renewal for one to three-year periods. Many of these agreements renew automatically unless either party provides advance notice of termination before the expiration of the term. We also manage and operate the points-basedHilton Grand Vacations Club andHilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Club members. When owners purchase a VOI, they are generally enrolled in the Club and given an annual allotment of points that allow the member to exchange their annual usage rights in the VOI that they own for a number of vacation and travel options. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system. We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges through our club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.
Key Business and Financial Metrics and Terms Used by Management
Real Estate Sales Operating Metrics
We measure our performance using the following key operating metrics:
• Contract sales represents the total amount of VOI products (fee-for-service
and developed) under purchase agreements signed during the period where we
have received a down payment of at least 10 percent of the contract price.
Contract sales differ from revenues from the Sales of VOIs, net that we
report in our condensed consolidated statements of operations due to therequirements for revenue recognition, as well as adjustments for incentives
and other administrative fee revenues. We consider contract sales to be an
important operating measure because it reflects the pace of sales in ourbusiness and is used to manage the performance of the sales organization.
While we do not record the purchase price of sales of VOI products
developed by fee-for-service partners as revenue in our condensed
consolidated financial statements, rather recording the commission earned
as revenue in accordance with
important operational metric, reflective of the overall volume and pace of
sales in our business and believe it provides meaningful comparability of
our results to the results of our competitors which may source their VOI
products differently.
We believe that the presentation of contract sales on a combined basis
(fee-for-service and developed) is most appropriate for the purpose of the
operating metric, additional information regarding the split of contract sales,
is included in "-Real Estate" below. See Note 2: Basis of Presentation and
Summary of Significant Accounting Policies in our audited consolidated financial
statements included in Item 8 in our Annual Report on form 10-K for the year
ended December 31, 2019 , for additional information on Sales of VOI, net.
• Sales revenue represents Sales of VOIs, net, commissions and brand fees
earned from the sale of fee-for-service intervals.
33
--------------------------------------------------------------------------------
• Real estate margin represents sales revenue less the cost of VOI sales,
sales and marketing costs, net of marketing revenue. Real estate margin
percentage is calculated by dividing real estate margin by sales revenue.
We consider this to be an important operating measure because it measures
the efficiency of our sales and marketing spending and management of
inventory costs.
• Tour flow represents the number of sales presentations given at our sales
centers during the period.
• Volume per guest ("VPG") represents the sales attributable to tours at our
sales locations and is calculated by dividing Contract sales, excluding
telesales, by tour flow. We consider VPG to be an important operating
measure because it measures the effectiveness of our sales process,
combining the average transaction price with the closing rate.
Resort and Club Management and Rental Metrics
• Transient rate represents the total rental room revenue for transient
guests divided by total number of transient room nights sold in a given
period and excludes room rentals associated with marketing programs, owner
usage and the redemption of Club Bonus Points.
For further information see Item 8. Financial Statements and Supplementary Data
- Note 2: Basis of Presentation and Summary of Significant Accounting Policies
in our Annual Report on Form 10-K for the year ended December 31, 2019 .
EBITDA and Adjusted EBITDA
EBITDA, presented herein, is a financial measure that is not recognized underU.S. GAAP that reflects net income (loss), before interest expense (excluding non-recourse debt), a provision for income taxes and depreciation and amortization. Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and certain other compensation expenses; (vii) costs related to the spin-off; and (viii) other items. EBITDA and Adjusted EBITDA are not recognized terms underU.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance withU.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported underU.S. GAAP. Some of these limitations are:
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements
for, our working capital needs;
• EBITDA and Adjusted EBITDA do not reflect our interest expense (excluding
interest expense on non-recourse debt), or the cash requirements necessary
to service interest or principal payments on our indebtedness;
• EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash
requirements to pay our taxes;
• EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or
future requirements for capital expenditures or contractual commitments;
• EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes
resulting from matters that we consider not to be indicative of our future
operations;
34
--------------------------------------------------------------------------------
• EBITDA and Adjusted EBITDA do not reflect any cash requirements for future
replacements of assets that are being depreciated and amortized; and
• EBITDA and Adjusted EBITDA may be calculated differently from other
companies in our industry limiting their usefulness as comparative
measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be
considered as discretionary cash available to us to reinvest in the growth of
our business or as measures of cash that will be available to us to meet our
obligations.
Recent Events Related to the COVID-19 Pandemic and Other Matters
InMarch 2020 , a National Public Health Emergency was declared in response to the coronavirus, known as COVID-19. As a result, many local, county and state government officials have issued, and continue to issue, various mandates and orders to close non-essential businesses, impose travel restrictions, and require "stay-at-home" and/or self-quarantine in certain cases, all in an effort to protect the health and safety of individuals and aimed at slowing and ultimately stopping the spread and transmission of the virus. Accordingly, as ofMarch 31, 2020 we had temporarily closed substantially all of our properties and suspended ourU.S sales operations and closed such sales offices. In addition, we have stopped accepting reservations at ourU.S. ,Europe , andBarbados resorts. We also furloughed more than 6,100 of our approximately 9,100 employees and implemented hiring freezes. We currently anticipate that these temporary closures. modified operating plans, non-acceptance of reservations, and related actions will be in place through the end ofApril 2020 , after which we will re-evaluate our decision on a case-by-case basis after taking into account various government orders and mandates at such time, as well as the safety of our owners, guests and employees. Our sales operations inJapan andSouth Korea remain open on a limited basis. InApril 2020 , in response to the impact of the COVID-19 pandemic, we filed a Current Report on Form 8-K disclosing that our executive officers and the Board of Directors had agreed to temporarily reduce officers' base salaries and forgo non-employee directors' annual cash retainers. In addition, we disclosed that we had drawn down the substantial remainder of our available borrowings under our credit facility through net borrowings of an additional$445 million . After taking into account the other borrowings and repayments over the course ofMarch 2020 , the total amount outstanding under our credit facility immediately thereafter was$761 million at an average interest rate of 2.60%.
Outlook
The COVID-19 pandemic has created an unprecedented and challenging time. Our
current focus is on taking critical actions that are aimed at positioning the
Company in sound position from an operational, liquidity, credit access, and
compliance perspective for a strong recovery when the impact of COVID-19
subsides. As discussed above, we have taken several steps to enhance our
liquidity, preserve cash, reduce our expenditures and provide financial
flexibility, and our management is continuing to assess the evolving situation
and will take additional actions as appropriate. We will continue to monitor the
COVID-19 pandemic and its related impact, including the various government
mandates and orders that have caused us to close substantially all of our
properties, and any new recommended or required business practice, and start to
re-open our properties and normalize our operations. In the meantime, we will
continue to work on key initiatives, such as our digital strategy and other
sales strategy that may not be impacted by the various closures, so that we are
as well positioned as possible once the impact of COVID-19 has eased.
Any sustained material adverse impact on our revenues, net income and other
operating results due to COVID-19 could cause our financial covenants under our
debt obligations to be adversely affected. If we are unable to comply with or
obtain potential modifications to such covenants prior to any breaches, we may
trigger events of defaults under these arrangements. We are currently in
negotiations with our lenders to amend such covenants as needed and believe we
will be able to reach an agreement in advance of any such default.
35
--------------------------------------------------------------------------------Results of Operations
Three Months Ended
Segment Results
We evaluate our business segment operating performance using segment Adjusted
EBITDA, as described in Note 18: Business Segments in our unaudited condensed
consolidated financial statements. We do not include equity in earnings (losses)
from unconsolidated affiliates in our measures of segment operating performance.
For a discussion of our definition of EBITDA and Adjusted EBITDA, how management
uses them to manage our business and material limitations on their usefulness,
refer to "-Key Business and Financial Metrics and Terms Used by
Management-EBITDA and Adjusted EBITDA." The following tables set forth revenues
and Adjusted EBITDA by segment:
Three Months Ended March 31, Variance
($ in millions) 2020 2019 $ %
Revenues:
Real estate sales and financing $ 206 $ 307 $ (101 ) (32.9 )%
Resort operations and club
management 104 110 (6 ) (5.5 )
Segment revenues 310 417 (107 ) (25.7 )
Cost reimbursements 49 42 7 16.7
Intersegment eliminations(1) (8 ) (9 ) 1 (11.1 )
Total revenues $ 351 $ 450 $ (99 ) (22.0 )
(1) Refer to Note 18: Business Segments in our unaudited condensed consolidated
financial statements for details on the intersegment eliminations.
The following table reconciles net income, our most comparable
Three Months Ended March 31, Variance
($ in millions) 2020 2019 $ %
Net Income $ 8 $ 55 $ (47 ) (85.5 )%
Interest expense 10 10 - -
Income tax expense 1 20 (19 ) (95.0 )
Depreciation and amortization 12 8 4 50.0
Interest expense, depreciation
and amortization included in
equity in earnings from
unconsolidated affiliates 1 1 - - EBITDA 32 94 (62 ) (66.0 ) Other (gain) loss, net (2 ) 1 (3 ) NM(1) Share-based compensation expense(2) (2 ) 5 (7 ) NM(1) Other adjustment items(3) 5 2 3 NM(1) Adjusted EBITDA $ 33 $ 102$ (69 ) (67.6 )
(1) Fluctuation in terms of percentage change is not meaningful.
(2) As of
2018, 2019, and 2020 Performance RSUs are improbable of achievement therefore
we reversed
prior years and ceased accruing expense related to all Performance RSUs
granted during the three months ended
(3) For the three months ended
costs associated with restructuring, one-time charges and other non-cash
items.
36
--------------------------------------------------------------------------------
The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA:
Three Months Ended March 31, Variance
($ in millions) 2020 2019 $ %
Adjusted EBITDA:
Real estate sales and financing(1) $ 15 $ 80 $ (65 ) (81.3 )%
Resort operations and club
management(1) 55 65 (10 ) (15.4 )
Segment Adjusted EBITDA 70 145 (75 ) (51.7 )
Adjustments:
Adjusted EBITDA from unconsolidated affiliates 4 2 2 100.0 License fee expense (22 ) (23 ) 1 (4.3 ) General and administrative(2) (19 ) (22 ) 3 (13.6 ) Adjusted EBITDA $ 33 $ 102$ (69 ) (67.6 )
(1) Includes intersegment transactions, share-based compensation, depreciation
and other adjustments attributable to the segments.
(2) Excludes segment related share-based compensation, depreciation and other
adjustment items.
Real Estate Sales and Financing
In accordance with Accounting Standards Codification ("ASC") Topic 606, "Revenue
from Contracts with Customers" ("ASC 606"), revenue and the related costs to
fulfill and acquire the contract ("direct costs") from sales of VOIs under
construction are deferred until the point in time when construction activities
are deemed to be completed. The Real estate sales and financing segment is
impacted by construction related deferral and recognition activity. In periods
where Sales of VOIs and related direct costs of projects under construction are
deferred, margin percentages will generally contract as the indirect marketing
and selling costs associated with these sales are recognized as incurred in the
current period. In periods where previously deferred Sales of VOIs and related
direct costs are recognized upon construction completion, margin percentages
will generally expand as the indirect marketing and selling costs associated
with these sales were recognized in prior periods.
The following table represents deferrals and recognitions of Sales of VOI
revenue and direct costs for properties under construction for the three months
ended March 31, 2020 . There were no construction deferrals or recognitions for
the three months ended March 31, 2019 .
Three Months Ended
March 31,
($ in millions) 2020
Sales of VOIs (deferrals) $ (47 )
Sales of VOIs recognitions -
Net Sales of VOIs (deferrals) recognitions (47 )
Cost of VOI sales (deferrals)(1) (13 )
Cost of VOI sales recognitions -
Net Cost of VOI sales (deferrals) recognitions(1) (13 ) Sales and marketing expense (deferrals) (7 ) Sales and marketing expense recognitions
-
Net Sales and marketing expense (deferrals) recognitions (7 ) Net construction (deferrals) recognitions $ (27 )
(1) Includes anticipated Costs of VOI sales of VOIs under construction that will
be acquired under a just-in-time arrangement once construction is complete
for the three months ended
Real estate sales and financing segment revenues decreased by$101 million for the three months endedMarch 31, 2020 , compared to the same period in 2019, primarily due to a$99 million decrease in sales revenue, a$5 million decrease in marketing revenue and a$3 million increase in financing revenue. 37 -------------------------------------------------------------------------------- Real estate sales and financing segment Adjusted EBITDA decreased by$65 million for the three months endedMarch 31, 2020 , compared to the same period in 2019, primarily due to the decreases in segment revenues associated with segment performance discussed herein partially offset by decreases in related expenses. In addition, real estate sales and financing segment Adjusted EBITDA was impacted by$11 million one-time payroll related expenses incurred primarily related to payments made to employees' as a result of operational closures caused by the COVID-19 pandemic.
Refer to "-Real Estate" and "-Financing" for further discussion on the revenues and expenses of the real estate sales and financing segment.
Resort Operations and Club Management
Resort operations and club management segment revenues decreased$6 million for the three months endedMarch 31, 2020 , compared to the same period in 2019, primarily due to a decrease in rental and ancillary services revenue, partially offset by an increase in resort and club management revenue. Resort operations and club management segment Adjusted EBITDA decreased$10 million for the three months endedMarch 31, 2020 , compared to the same period in 2019, primarily due to the decreases in segment margin associated with segment performance discussed herein. Refer to "- Resort and Club Management" and "-Rental and Ancillary Services" for further discussion on the revenues and expenses of the resort operations and club management segment.
Real Estate Sales and Financing Segment
Real Estate
Three Months Ended March 31, Variance
($ in millions, except Tour flow and VPG) 2020 2019 $ %
Sales of VOIs, net $ 56 $ 125 $ (69 ) (55.2 )%
Adjustments:
Fee-for-service sales(2) 130 190 (60 ) (31.6 )
Provision for financing receivables losses 37 14 23 NM(1)
Reportability and other:
Net deferral (recognition) of sales of
VOIs under construction(3) 47 - 47 NM(1)
Fee-for-service sale upgrades, net (8 ) (14 ) 6 (42.9 )
Other(4) (18 ) 7 (25 ) NM(1)
Contract sales $ 244 $ 322 $ (78 ) (24.2 )
Tour flow 66,965 82,644 (15,679 ) (19.0 )
VPG $ 3,506 $ 3,677 $ (171 ) (4.7 )
(1) Fluctuation in terms of percentage change is not meaningful.
(2) Represents contract sales from fee-for-service properties on which we earn
commissions and brand fees.
(3) Represents the net impact of deferred revenues related to the Sales of VOIs
under construction that are recognized when construction is complete.
(4) Includes adjustments for revenue recognition, including amounts in rescission
and sales incentives.
38
-------------------------------------------------------------------------------- Contract sales decreased$78 million for the three months endedMarch 31, 2020 , compared to the same period in 2019, primarily due to a decrease in VPG from both a 29-basis point decline in close rate and a 5 percent average transaction price reduction coupled with a decrease in tour flow primarily related to the temporary closure of substantially all of our properties and suspension of sales and related operations due to the COVID-19 pandemic. Three Months Ended March 31, Variance ($ in millions) 2020 2019 $ % Sales, marketing, brand and other fees $ 106 $ 141$ (35 ) (24.8 )% Less: Marketing revenue and other fees 25 30 (5 ) (16.7 ) Commissions and brand fees 81 111 (30 ) (27.0 ) Sales of VOIs, net 56 125 (69 ) (55.2 ) Sales revenue 137 236 (99 ) (41.9 ) Less: Cost of VOI sales 14 36 (22 ) (61.1 ) Sales and marketing expense, net(1) 125 131 (6 ) (4.6 ) Real estate margin $ (2 ) $ 69$ (71 ) NM(1) Real estate margin percentage (1.5 )% 29.2 %
(1) Includes revenue recognized through our marketing programs for existing
owners and prospective first-time buyers and revenue associated with sales
incentives, title service and document compliance.
Sales revenue decreased for the three months ended March 31, 2020 , compared to
the same period in 2019, primarily due to (i) decreases in sales as a result of
the temporary closure of substantially all of our properties and suspension of
our sales and related operations as a result of the COVID-19 pandemic, (ii) $47
million of deferrals of VOI sales of projects under construction during the
three months ended March 31, 2020 , compared to the same period in 2019 where
there were no projects under construction, (iii) a $23 million incremental
increase to the provision for financing receivables related to our estimate of
the impacts to our portfolio as a result of the COVID-19 pandemic and (iv) a $30
million decrease in commission and brand fees as a result of the COVID-19
pandemic and due to a shift in inventory mix, partially offset by a $5 million
decrease in marketing revenue and other fees mainly associated with reduced
vacation package sales and lower redemptions of marketing packages as a result
of the COVID-19 pandemic.
Financing
Three Months Ended March 31, Variance
($ in millions) 2020 2019 $ %
Interest income $ 38 $ 36 $ 2 5.6 %
Other financing revenue 6 5 1 20.0
Financing revenue 44 41 3 7.3
Consumer financing interest expense 7 7 - -
Other financing expense 6 6 - -
Financing expense 13 13 - -
Financing margin $ 31 $ 28 $ 3 10.7Financing margin percentage 70.5 % 68.3 % Financing revenue increased by$3 million for the three months endedMarch 31, 2020 , compared to the same period in 2019, due to higher interest income resulting from an increase in the weighted average interest rate we receive on our timeshare financing receivables balance and an increase in other financing revenue related to higher loan servicing fees. Financing margin and finance margin percentage increased for the three months endedMarch 31, 2020 , compared to the same period in 2019, due to the increase in interest income and other financing revenue. 39
--------------------------------------------------------------------------------
Resort Operations and Club Management Segment
Resort and Club Management
Three Months Ended March 31, Variance
($ in millions) 2020 2019 $ %
Club management revenue $ 25 $ 26 $ (1 ) (3.8 )%
Resort management revenue 19 16 3 18.8
Resort and club management revenues 44 42 2 4.8
Club management expense 7 7 - -
Resort management expense 5 4 1 25.0
Resort and club management expenses 12 11 1 9.1
Resort and club management margin $ 32 $ 31 $ 1 3.2
Resort and club management margin
percentage 72.7 % 73.8 %
Resort and club management revenues increased by $2 million for the three months
ended March 31, 2020 , compared to the same period in 2019, primarily due to a $3
million in increase in resort management revenue driven by (i) an increase of
approximately 17,000 Club members and higher rates pertaining to annual dues and
(ii) higher resort management revenue and other fees from the launch of new
properties subsequent to the first quarter of 2019, partially offset by a $1
million decrease in club management revenue primarily related to the refunding
of club transaction fees to accommodate our guests impacted by the COVID-19
pandemic. Resort and club management margin percentage decreased for the three
months ended March 31, 2020 , compared to the same period in 2019, primarily due
to an increase in segment expenses relating to the launch of new properties
subsequent to the first quarter of 2019.
Rental and Ancillary Services
Three Months Ended March 31, Variance
($ in millions) 2020 2019 $ %
Rental revenues $ 47 $ 52 $ (5 ) (9.6 )%
Ancillary services revenues 5 7 (2 ) (28.6 )
Rental and ancillary services revenues 52 59 (7 ) (11.9 )
Rental expenses 32 29 3 10.3
Ancillary services expense 5 6 (1 ) (16.7 )
Rental and ancillary services expenses 37 35 2 5.7
Rental and ancillary services margin $ 15 $ 24 $ (9 ) (37.5 )
Rental and ancillary services margin
percentage 28.8 % 40.7 %
Rental and ancillary services revenues decreased by $7 million for the three
months ended March 31, 2020 , compared to the same period in 2019, primarily due
to the temporary closure of substantially all of our properties and suspension
of substantially all of our resort operations as a result of the COVID-19
pandemic. Rental and ancillary services expenses increased $2 million for the
three months ended March 31, 2020 , compared to the same period in 2019,
primarily due to the launch of new properties subsequent to the first quarter of
2019, partially offset by a decrease in transient expenses driven by lower
transient arrivals from the temporary suspension of operations due to the
COVID-19 pandemic. Rental and ancillary services margin and margin percentage
decreased for the three months ended March 31, 2020 , compared to the same period
in 2019 primarily due to the decreases in revenue and increases in expenses
discussed above.
Other Operating Expenses
Three Months Ended March 31, Variance
($ in millions) 2020 2019 $ %
General and administrative $ 21 $ 27 $ (6 ) (22.2 )%
Depreciation and amortization 12 8 4 50.0
License fee expense 22 23 (1 ) (4.3 )
40
-------------------------------------------------------------------------------- The change in other operating expenses for the three months endedMarch 31, 2020 , compared to the same period in 2019, is primarily due to (i) the reversal of previously recognized expense related to our 2018 and 2019 Performance RSUs which are not expected to achieve certain performance targets and (ii) higher depreciation and amortization expense as a result of additional software placed into service related to systems enhancements and leasehold improvements at newly renovated sales centers subsequent to the first quarter of 2019. Non-Operating Expenses Three Months Ended March 31, Variance ($ in millions) 2020 2019 $ % Interest expense $ 10 $ 10 $ - - Equity in earnings from (3 ) (1 ) (2 ) NM(1) unconsolidated affiliates Other (gain) loss, net (2 ) 1 (3 ) NM(1) Income tax expense 1 20 (19 ) (95.0 )
(1) Fluctuation in terms of percentage change is not meaningful
The change in non-operating expenses for the three months endedMarch 31, 2020 , compared to the same periods in 2019, is primarily due to an increase in equity in earnings from unconsolidated affiliates and a decrease in income tax expense due to a decrease in income before income taxes combined with a decrease in the effective tax rate. See Note 14: Income Taxes for additional information.
Liquidity and Capital Resources
Overview
Our cash management objectives are to maintain the availability of liquidity,
minimize operational costs, make debt payments and fund future acquisitions and
development projects. Our known short-term liquidity requirements primarily
consist of funds necessary to pay for operating expenses and other expenditures,
including payroll and related benefits, legal costs, operating costs associated
with the operation of our resorts and sales centers, interest and scheduled
principal payments on our outstanding indebtedness, inventory-related purchase
commitments, and capital expenditures for renovations and maintenance at our
offices and sales centers. Our long-term liquidity requirements primarily
consist of funds necessary to pay for scheduled debt maturities,
inventory-related purchase commitments and costs associated with potential
acquisitions and development projects.
We finance our short- and long-term liquidity needs primarily through cash and
cash equivalents, cash generated from our operations, draws on our senior
secured credit facility and our non-recourse revolving timeshare credit facility
("Timeshare Facility"), and through periodic securitizations of our timeshare
financing receivables.
• As of March 31, 2020 , we had total cash and cash equivalents of $759
million , including $90 million of restricted cash. The restricted cash
balance relates to escrowed cash from sales of our VOIs and reserves
related to our non-recourse debt.
• During the first quarter of 2020, we substantially drew down the remaining
borrowing capacity under the revolver facility as a precautionary measure
to ensure liquidity for a sustained period as a result of the COVID-19
pandemic. We do not have a plan for the use of the proceeds other than for
general corporate and working capital purposes in the ordinary course of
business. As of
capacity under the revolver facility ("Revolver") which includes
million of undrawn borrowing capacity available for letters of credit and
$10 million available under short-term borrowings. See Note 11: Debt and Non-Recourse Debt for additional information. • During the first quarter of 2020, we drew down$195 million on our
Timeshare Facility and have
our Timeshare Facility. See Note 11: Debt and Non-Recourse Debt for
additional information.
To optimize our liquidity and access to capital in light of the significant adverse impact of the COVID-19 pandemic, particularly as substantially all of our properties have temporarily closed and substantially all of our sales, operations and other activities have been suspended, we have undertaken efforts to increase our capital and decrease our expenses. These include the furlough of approximately 67 percent of our employees, temporary salary reductions for the remaining employees', eliminating discretionary spending, and reducing our planned investment in new inventory by approximately$200 million . 41 -------------------------------------------------------------------------------- We believe that these actions, together with drawing on available borrowings under our Revolver and preserving our capacity under our Timeshare Facility as described above, will provide adequate capital to meet our short- and long-term liquidity requirements for operating expenses and other expenditures, including payroll and related benefits, legal costs, and to finance our long-term growth plan and capital expenditures for the foreseeable future. As we are not able to estimate the date that the suspensions of resort and sales operations will be lifted, we may need to take additional actions to ensure the continuity of our business. Any sustained material adverse impact on our revenues, net income and other operating results due to COVID-19 could cause our financial covenants under our debt obligations to be adversely affected. If we are unable to comply with or obtain potential modifications to such covenants prior to any breaches, we may trigger events of defaults under these arrangements. We are currently in negotiations with our lenders to amend such covenants as needed and believe we will be able to reach an agreement in advance of any such default. Sources and Uses of Our Cash The following table summarizes our net cash flows and key metrics related to our liquidity: Three Months Ended March 31, Variance ($ in millions) 2020 2019 $ Net cash provided by (used in): Operating activities $ 53 $ 14$ 39 Investing activities (8 ) (10 ) 2 Financing activities 562 38 524 Operating Activities Cash flow provided by operating activities is primarily generated from (1) sales and financing of VOIs and (2) net cash generated from managing our resorts, Club operations and providing related ancillary services. Cash flows used in operating activities primarily include spending for the purchase and development of real estate for future conversion to inventory and funding our working capital needs. Our cash flows from operations generally vary due to the following factors related to the sale of our VOIs; the degree to which our owners finance their purchase and our owners' repayment of timeshare financing receivables; the timing of management and sales and marketing services provided; and cash outlays for VOI inventory acquisition and development. Additionally, cash flow from operations will also vary depending upon our sales mix of VOIs; over time, we generally receive more cash from the sale of an owned VOI as compared to that from a fee-for-service sale. The change in net cash flows provided by operating activities for the three months endedMarch 31, 2020 , compared to the same period in 2019 was primarily due to a reduction in the purchase and development of real estate for future conversion to inventory, partially offset by decreased sources of cash from working capital.
The following table exhibits our VOI inventory spending:
Three Months Ended March 31,
($ in millions) 2020 2019
VOI spending - owned properties $ 17 $ 26
VOI spending - fee-for-service upgrades(1) 8 14
Purchases and development of real estate for future
conversion to inventory 5 60
Total VOI inventory spending $ 30 $ 100
(1) Includes expense related to granting credit to customers for their existing
ownership when upgrading into fee-for-service projects from developed
projects of
three months ended March 31, 2020 and 2019, respectively.
42
--------------------------------------------------------------------------------
Investing Activities
The following table summarizes our net cash used in investing activities:
Three Months Ended March 31, Variance
($ in millions) 2020 2019 $Capital expenditures for property and equipment $ (3 ) $
(6 ) $ 3
Software capitalization costs (5 ) (4 ) (1 )
Net cash used in investing activities $ (8 ) $ (10 ) $ 2
The change in net cash used in investing activities for the three months ended
Our capital expenditures include spending related to technology, buildings and leasehold improvements used to support sales and marketing locations, resort operations and corporate activities. We believe the renovations of our existing assets are necessary to stay competitive in the markets in which we operate.
Financing Activities
The following table summarizes our net cash provided by financing activities:
Three Months Ended March 31, Variance
($ in millions) 2020 2019 $
Issuance of debt $ 495 $ 195 $ 300
Issuance of non-recourse debt 195 - 195
Repayment of debt (57 ) (23 ) (34 )
Repayment of non-recourse debt (58 ) (40 ) (18 )
Repurchase and retirement of common stock (10 ) (92 ) 82
Payment of withholding taxes on vesting of (2 ) (2 ) -
restricted stock units
Other financing activity (1 ) - (1 )
Net cash provided by financing activities $ 562 $
38 $ 524
The change in net cash flows provided by financing activities for the three
months ended March 31, 2020 , compared to the same period in 2019, was primarily
due to (i) higher issuances of debt and non-recourse debt relating to our
Revolver and Timeshare Facility and (ii) a reduction in share repurchases of
common stock, partially offset by higher repayments of debt and non-recourse
debt. See Note 11: Debt & Non-recourse Debt in our condensed consolidated
financial statements for further discussion.
Contractual Obligations
The following table summarizes our significant contractual obligations as ofMarch 31, 2020 : Payments Due by Period Less Than 1 More Than 5 ($ in millions) Total Year 1-3 Years 3-5 Years Years Debt$ 1,272 $ 12$ 22 $ 1,215 $ 23 Non-recourse debt 892 221 444 141 86 Interest on debt(1) 258 67 115 61 15 Operating leases 90 19 29 23 19 Inventory purchase commitments 473 101 260 98 14 Other commitments(2) 26 18 8 - -
Total contractual obligations
878$ 1,538 $ 157
(1) Includes interest on our debt and non-recourse debt. For our variable-rate
debt, we have assumed a constant 30-day LIBOR rate of 0.99 percent as of
(2) Primarily relates commitments related to information technology and brand
licensing under the normal course of business.
43
-------------------------------------------------------------------------------- We have made commitments with developers to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand. As ofMarch 31, 2020 , our inventory-related purchase commitment totaled$473 million over 11 years of which we expect to purchase$26 million for the remaining of 2020. We utilize surety bonds related to the sales of VOIs in order to meet regulatory requirements of certain states. The availability, terms and conditions and pricing of such bonding capacity are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating. We have commitments from surety providers in the amount of$569 million as ofMarch 31, 2020 which primarily consist of escrow and construction related bonds.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as ofMarch 31, 2020 consisted of$473 million of certain commitments with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand and$26 million of other commitments under the normal course of business. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 19: Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.
COVID-19 and Subsequent Events
The novel coronavirus ("COVID-19") pandemic has significantly impacted the
hospitality industry due to travel restrictions and stay-at-home directives that
have resulted in cancellations and significantly reduced travel around the
world. As a result of the reduction in travel, we have closed substantially all
of our resorts and sales centers for an indeterminate duration. In response to
the impact of COVID-19, we have taken actions to ensure the continuity of our
business and operations, including furloughing approximately 67 percent of our
employees, implementing salary reductions for the remaining active employees,
eliminating all discretionary spending, and reducing our planned investment in
new inventory by approximately $200 million .
In addition, we drew down on the availability under our credit facility as a
precautionary measure to ensure liquidity for a sustained period. As we are not
able to estimate the date that the suspensions of resort and sales operations
will be lifted, we may need to take additional actions to ensure the continuity
of our business. Any sustained material adverse impact on our revenues, net
income and other operating results due to COVID-19 could cause our financial
covenants under our debt obligations to be adversely affected. If we are unable
to comply with or obtain potential modifications to such covenants prior to any
breaches, we may trigger events of defaults under these arrangements. We are
currently in negotiations with our lenders to amend such covenants as needed and
believe we will be able to reach an agreement in advance of any such default.
• On
• On
which amended certain key definitions related to delinquency level
calculations of underlying timeshare loans that are used as collateral for
borrowings under our Timeshare Facility. Additionally, it provides us with
the added flexibility to manage any potential increase in the rate of
delinquency that may result from the impact of the COVID-19 pandemic. All
other terms and borrowing capacity remained unchanged.
• In
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in accordance withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 44
--------------------------------------------------------------------------------
© Edgar Online, source
