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, 2020 .
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 the future of HGV, and are based on management's beliefs, expectations, assumptions and such plans, estimates, projections and other information available to management at the time HGV makes 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,", "would", "seeks," "approximately," "projects," predicts," "intends," "plans," "estimates," "anticipates" "future," "guidance," "target," or the negative version of these words or other comparable words, although not all forward-looking statements may contain such words. The forward-looking statements contained in this Quarterly Report on Form 10-Q include statements related to HGV's 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. HGV cautions you that our forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that are beyond HGV's control, that may cause the actual results, performance or achievements to be materially different from the future results. Factors that could cause HGV's actual results to differ materially from those contemplated by its forward-looking statements include: risks that HGV may not realize the expected cost savings, synergies, growth and other benefits from the Diamond Acquisition or that the costs related to the Diamond Acquisition are greater than anticipated; risks that there may be significant costs and expenses associated with liabilities related to the Diamond business that were either unknown or are greater than those anticipated at the time of the Diamond Acquisition; risks that HGV may not be successful in integrating the Diamond business into all aspects of our business and operations or that the integration will take longer than anticipated; the potential magnification of our operational risks as a result of the Diamond Acquisition and integration of the Diamond business; risks related to disruption of management's attention from HGV's ongoing business operations due to its efforts to integrateDiamond Resorts into HGV; any adverse effect of the Diamond Acquisition on HGV's reputation, relationships, operating results and business generally; the continuing impact of the COVID-19 pandemic on HGV's business, operating results, and financial condition; the extent and duration of the impact of the COVID-19 pandemic on global economic conditions; HGV's ability to meet its liquidity needs; risks related to HGV's indebtedness, especially in light of the significant amount of indebtedness we incurred to complete the Diamond Acquisition; inherent business risks, market trends and competition within the timeshare and hospitality industries; HGV's ability to successfully source inventory and market, sell and finance VOIs; default rates on our financing receivables (including those financing receivables related to the Diamond business); the reputation of and our ability to access Hilton brands and programs, including the risk of a breach or termination of our license agreement with Hilton; the integration of Diamond's operations as part of our overall brand that is governed by the terms of the A&R Hilton License Agreement; compliance with and changes toUnited States and global laws and regulations, including those related to anti-corruption and privacy; risks related to HGV's acquisitions, joint ventures, and other partnerships; HGV's dependence on third-party development activities to secure just-in-time inventory; the performance of HGV's information technology systems and our ability to maintain data security; regulatory proceedings or litigation; adequacy of our workforce to meet HGV's business and operation needs; HGV's ability to attract and retain key executives and employees with skills and capacity to meet our needs; and natural disasters or adverse geo-political conditions. Any one or more of the foregoing factors could adversely impact HGV's operations, revenue, operating profits and margins, financial condition and/or credit rating. For additional information regarding factors that could cause HGV's actual results to differ materially from those expressed or implied in the forward-looking statements in this Quarterly Report on Form 10-Q, 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, 2020 , as supplemented and updated by the risk factors discussed in "Part II-Item 1A. Risk Factors" of this Report, and in our Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2021 andJune 30, 2021 , and those described from time to time in 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 HGV's ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, changes in management's expectations, or otherwise. 34 --------------------------------------------------------------------------------
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 "VOIs" refer to the timeshare properties that we manage or own. Of these resorts and VOIs, a portion is directly owned by us or our joint ventures in which we have an interest and the remaining resorts and VOIs 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.
"Points-based" refers to VOI sales that are backed by physical real estate that is contributed to a trust.
"VOI" refers to vacation ownership intervals and interests.
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") and Adjusted EBITDA.
Operational Metrics
This Quarterly Report on Form 10-Q includes discussion of key business operational metrics including contract sales, sales revenue, real estate profit, tour flow, and volume per guest ("VPG").
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 global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. Our Company also includesDiamond Resorts International ("Diamond"). Our operations primarily consist of: selling vacation ownership intervals and vacation ownership interests (collectively, "VOIs") for us and third parties; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts and multi-resort trusts; and managing our points-basedHilton Grand Vacations Club andHilton Club exchange program (collectively the "Legacy-HGV Club ") and Diamond points-based clubs. As ofSeptember 30, 2021 , we have 154 properties located inthe United States ("U.S."),Europe ,Canada , theCaribbean ,Japan andMexico . A significant number of our properties and VOIs are concentrated inFlorida ,Hawaii ,Europe ,California ,Arizona ,Nevada , andVirginia , and feature spacious, condominium-style accommodations with superior amenities and quality service. As ofSeptember 30, 2021 , we have approximately 331,000Hilton Grand Vacations Club andHilton Club members.Legacy-HGV Club members have the flexibility to exchange their VOIs for stays at anyHilton Grand Vacations resort or any property in the Hilton system of 18 industry-leading brands across approximately 6,500 properties, as well as numerous experiential vacation options, such as cruises and guided tours. We also have 131,000Diamond Club members who are able to utilize their points across the Diamond resorts, affiliated properties and alternative experiential options. 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, "Recent Events Related to the COVID-19 Pandemic and Impact on Our Results of Operations, Financial Condition, and Business During the Three and Nine Months EndedSeptember 30, 2021 " and other discussions throughout this Report for additional information regarding such impacts.
Diamond Acquisition
OnAugust 2, 2021 , we completed the acquisition ofDakota Holdings, Inc. , the parent of Diamond (the "Diamond Acquisition" or, ). We completed the acquisition by exchanging 100 percent of the outstanding equity interests of Diamond 35 -------------------------------------------------------------------------------- into shares of HGV common stock. Pre-existing HGV shareholders own approximately 72 percent of the combined company after giving effect of the Diamond Acquisition, with certain funds controlled by Apollo Global Management Inc. (the "Apollo Funds" or, "Apollo") and other minority shareholders, who previously owned 100 percent of Diamond, holding the remaining approximately 28 percent after giving effect to the Diamond Acquisition. Diamond also operates in the hospitality and VOI industry, with a worldwide resort network of global vacation destinations. Diamond's portfolio consists of resort properties (the "Portfolio Properties ") that we manage, are included in one of Diamond's single- and multi-use trusts (collectively, the "Diamond Collections"), or are Diamond branded resorts in which we own inventory. In addition there are affiliated resorts and hotels, which we do not manage, and which do not carry the Diamond brand but are a part of Diamond's network and, through THE Club® and other Club offerings (the "Diamond Clubs "), are available for its members to use as vacation destinations. Diamond's operations primarily consist of: VOI sales and financing which includes marketing and sales of VOIs and consumer financing for purchasers of the Company's VOIs; operations related to the management of the homeowners associations (the "HOAs") for resort properties and the Diamond Collections, operating and managing points-based vacation clubs, and operation of certain resort amenities and management services.
In connection with the Diamond Acquisition, we entered into the following arrangements:
-
-
-
The cumulative proceeds received from Term Loan B and senior notes were used to repay certain existing indebtedness of both HGV and Diamond, including HGV's pre-existing term loan and senior notes,$260 million of the balance on the revolving credit facility, and approximately$2.03 billion of Diamond's corporate indebtedness inclusive of accrued interest on the existing indebtedness and early termination penalties. The financial results within this report include Diamond's results of operations beginning onAugust 2, 2021 . We refer to Diamond's business and operations that we acquired as "Legacy-Diamond", and our business and operations that existed both prior to and following the Diamond Acquisition as "Legacy-HGV." See Note 3: Diamond Acquisition for more information. Acquisition and integration-related expenses represent direct costs associated with the Diamond Acquisition including integration costs, legal fees, financial and other professional services. These expenses also include severance, retention and other employee-related benefits.
Of our 154 properties, we had 92 properties that are Legacy-Diamond as of
Our Segments
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 Legacy-HGV 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. We source 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. Our primary "Collections" product is the marketing and selling of VOIs sold to customers as beneficial interests in one of our Collections, which are represented by an annual or biennial allotment of points that can be utilized for vacations at any of the resorts in our network for varying lengths of stay. In general, purchasers of points do not acquire a direct ownership interest in the resort properties in our network generally, for each Collection, one or more trustees hold legal title to the deeded fee simple real estate interests or the functional equivalent, or, in some cases, leasehold real estate interests for the benefit of the respective Collection's association members in accordance with the applicable agreements. We source some of our VOIs through just-in-time agreements with third-party developers and develop our own properties. 36 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2021 , sales from fee-for-service, just-in-time, developed inventory and points-based sources were 35 percent, 22 percent, 26 percent and 17 percent, respectively, of contract sales. See "Key Business and Financial Metrics and Terms Used by Management - Real Estate Sales Operating Metrics" for additional discussion of contract sales. The estimated contract sales value related to our inventory that is currently available for sale at open or soon-to-be open projects and inventory at new or existing projects that will become available for sale in the future upon registration, delivery or construction is approximately$14 billion at current pricing. Capital efficient arrangements, comprised of our fee-for-service and just-in-time inventory, represented approximately 38 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 primarily through our distribution network of both-in-market and off-site sales centers. Our products are currently marketed for sale throughoutthe United States ,Mexico ,Canada ,Europe , andJapan . 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 16 Legacy-HGV sales distribution centers in various domestic and international locations. We have added approximately 30 sales centers as part of the Diamond Acquisition primarily located in theU.S. at Diamond resort properties. 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 with Hilton (Legacy-HGV only) 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 byManagement-Real Estate Sales Metrics." Additionally, the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables. For the nine months endedSeptember 30, 2021 , 67 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 4 percent to 18 percent per annum. 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 loans toU.S. and Canadian borrowers at the time of origination were as follows: Nine Months Ended September 30, 2021 2020 Weighted-average FICO score 724 734 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 Clubs. 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 7: 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.
37
--------------------------------------------------------------------------------Resort Operations and Club Management
We enter into management agreements with the HOAs of the 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 Clubs, including the points-basedHilton Grand Vacations Club andHilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to ourLegacy-HGV Club members, as well as theDiamond Clubs (theLegacy-HGV Club andDiamond Clubs are collectively referred to as "Clubs"). When owners purchase VOI, they are generally enrolled in a Club which allows the member to exchange their points for a number of vacation 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 (Collections (points-based), just-in-time, developed, and fee-for-service) 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 the requirements for revenue recognition, as well as adjustments for incentives. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business 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 withU.S. GAAP, we believe contract sales to be an 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, developed and points-based) 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: Summary of Significant Accounting Policies in our unaudited consolidated financial statements included in Item 1 in our Quarterly Report herein on form 10-Q for the quarter endedSeptember 30, 2021 , 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.
38
--------------------------------------------------------------------------------•
Real estate profit 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.
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, 2020 as well
as Note 2: Summary of Significant Accounting Policies above.
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) other gains, including asset dispositions and foreign currency translations; (ii) debt restructurings/retirements; (iii) non-cash impairment losses; (iv) share-based and other compensation expenses; and (v) other items, including but not limited to costs associated with acquisitions, restructuring, amortization of premiums resulting from purchase accounting, and other non-cash and one-time charges. 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;
39
--------------------------------------------------------------------------------•
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; • 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 Impact on Our Results of
Operations, Financial Condition, and Business During the Three and Nine Months
Ended
As ofSeptember 30, 2021 , nearly all of our resorts and sales centers which previously closed due to the COVID-19 pandemic are open and operating, although some are still operating in markets with various capacity constraints, social distancing requirements and other safety measures, which are impacting consumer demand for resorts in those markets. Subsequent toSeptember 30, 2021 , all of our resorts and all but three of our sales centers have fully reopened. We plan to continue our normal business as conditions permit, but there can be no assurance that such positive trends will continue or that there will not be any increases of new infections or new variants (such as the Delta variant) that may result in the reimposition of social distancing measures and/or restrictions in certain jurisdictions, as well as travel restrictions that may impede or reverse our recovery. Please carefully review the risk factors contained in this quarterly report on Form 10-Q, our Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2021 andJune 30, 2021 , in Item 1A of our Form 10-K for the year endedDecember 31, 2020 and those described from time to time in other periodic reports that we file with theSEC for discussions of various factors and uncertainties related to the pandemic that may materially impact us. 40 --------------------------------------------------------------------------------
Results of Operations
Three and Nine Months Ended
Segment Results
We evaluate our business segment operating performance using segment Adjusted
EBITDA, as described in Note 20: 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 Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Revenues:
Real estate sales and
financing $ 659 $ 116 $ 543 $ 127 $ 416
Resort operations and club
management 216 61 155 102 53
Total segment revenues 875 177 698 229 - 469
Cost reimbursements 58 33 25 16 9
Intersegment
eliminations(1) (5 ) (2 ) (3 ) - (3 )
Total revenues $ 928 $ 208 $ 720 $ 245 $ 475
Nine Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Revenues:
Real estate sales and financing$ 976 $ 378 $ 598 $ 127 $ 471 Resort operations and club management 403 209 194 102 92 Total segment revenues 1,379 587 792 229 - 563 Cost reimbursements 131 105 26 16 10 Intersegment eliminations(1) (13 ) (10 ) (3 ) - (3 ) Total revenues$ 1,497 $ 682 $ 815 $ 245 $ 570
(1) Refer to Note 20: Business Segments in our unaudited condensed consolidated financial statements for details on the intersegment eliminations.
The following table reconciles net income (loss), our most comparable
Three Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Net income (loss) $ 99 $ (7 ) $ 106 $ 30 $ 76
Interest expense 42 10 32 (1 ) 33
Income tax expense 49 (5 ) 54 12 42
(benefit)
Depreciation and 48 11 37 37 -
amortization
Interest expense,
depreciation and
amortization included in - 1 (1 ) - (1 )
equity in earnings from
unconsolidated affiliates
EBITDA 238 10 228 78 150
Other loss (gain), net 20 (1 ) 21 - 21
Share-based compensation 14 6 8 - 8
expense
Impairment expense 1 - 1 - 1
Acquisition and 54 - 54 3 51
integration-related expense
Other adjustment items(1) 13 4 9 8 1
Adjusted EBITDA $ 340 $ 19 $ 321 $ 89 $ 232
41
--------------------------------------------------------------------------------
Nine Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Net income (loss) $ 101 $ (47 ) $ 148 $ 30 $ 118
Interest expense 74 32 42 (1 ) 43
Income tax expense 46 (12 ) 58 12 46
(benefit)
Depreciation and 71 34 37 37 -
amortization
Interest expense,
depreciation and
amortization included in 1 2 (1 ) - (1 )
equity in earnings from
unconsolidated affiliates
EBITDA 293 9 284 78 206
Other loss, net 22 - 22 - 22
Share-based compensation 32 10 22 - 22
expense
Impairment expense 2 - 2 - 2
Acquisition and 83 - 83 3 80
integration-related expense
Other adjustment items(1) 20 14 6 8 (2 )
Adjusted EBITDA $ 452 $ 33 $ 419 $ 89 $ 330
(1) For the three and nine months ended
other non-cash items. For the three months ended
The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA:
Three Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Adjusted EBITDA:
Real estate sales and $ 265
financing(1) $ 280 $ 15 $ 54 $ 211
Resort operations and club 109 30 79 40 39
management(1)
Adjustments:
Adjusted EBITDA from 1 - 1 - 1
unconsolidated affiliates
License fee expense (24 ) (11 ) (13 ) - (13 )
General and
administrative(2) (26 ) (15 ) (11 ) (5 ) (6 )
Adjusted EBITDA $ 340 $ 19 $ 321 $ 89 $ 232
Nine Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Adjusted EBITDA:
Real estate sales and $ 336
financing(1) $ 352 $ 16 $ 54 $ 282
Resort operations and club 212 100 112 40 72
management(1)
Adjustments:
Adjusted EBITDA from 8 5 3 - 3
unconsolidated affiliates
License fee expense (57 ) (39 ) (18 ) - (18 )
General and
administrative(2) (63 ) (49 ) (14 ) (5 ) (9 )
Adjusted EBITDA $ 452 $ 33 $ 419 $ 89 $ 330
(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
42
--------------------------------------------------------------------------------
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:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
($ in millions) 2021 2020 $ 2021 2020 $
Sales of VOIs (deferrals) $ - $ (13 ) $ 13 $ - $ (64 ) $ 64
Sales of VOIs recognitions 241 - 241 167 - 167
Net Sales of VOIs
recognitions (deferrals) 241 (13 ) 254 167 (64 ) 231
Cost of VOI sales
(deferrals)(1) - (4 ) 4 - (17 ) 17
Cost of VOI sales
recognitions 73 - 73 50 - 50
Net Cost of VOI sales
recognitions (deferrals)(1) 73 (4 ) 77 50 (17 ) 67
Sales and marketing expense
(deferrals) - (1 ) 1 - (9 ) 9
Sales and marketing expense
recognitions 35 - 35 24 - 24
Net Sales and marketing
expense
recognitions (deferrals) 35 (1 ) 36 24 (9 ) 33
Net construction
recognitions (deferrals) $ 133 $ (8 ) $ 141 $ 93 $ (38 ) $ 131 (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 and nine months ended
Real estate sales and financing segment revenues increased by$543 million and$598 million for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020, primarily due to an increase of$254 million and$231 million , respectively, related to the recognition of sales of VOIs revenue for completed projects which were deferred when under construction. All projects completed in the third quarter of 2021 were in deferral for the three and nine months endingSeptember 30, 2020 . Additionally, sales of VOIs increased by$185 million and marketing revenues increased by$110 million as a result of the increase in travel demand and the reopening of nearly all of our resorts and sales centers by the end of the second quarter of 2021. During early 2020, substantially all of our resorts and sales centers were closed due to the COVID-19 pandemic, which significantly lowered our results for the three and nine months endedSeptember 30, 2020 . Diamond contributed$127 million to the total increase in real estate sales and financing revenues for the three and nine months endedSeptember 30, 2021 primarily driven by$101 million of sales of VOIs. Real estate sales and financing Adjusted EBITDA increased by$265 million and$336 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in 2020, due to the increases in sales revenue and marketing segment revenues partially offset with the associated increase in cost of VOI sales and real estate operating expenses associated with segment performance discussed herein. In addition, for the three and nine months endedSeptember 30, 2021 , real estate sales and financing segment Adjusted EBITDA was impacted favorably by an immaterial amount and$4 million net credit related to government assistance fromJapan and an employee retention credit granted under the CARES Act, primarily associated with payments made to employees as a result of operational closures caused by the COVID-19 pandemic, compared to$9 million and$24 million of net expenses for the three and nine months endedSeptember 30, 2020 , respectively. Diamond contributed$54 million to the total increase in real estate sales and financing Adjusted EBITDA for the three and nine months endedSeptember 30, 2021 .
Refer to "-Real Estate" and "-Financing" for further discussion on the revenues and expenses of the real estate sales and financing segment.
43
--------------------------------------------------------------------------------Resort Operations and Club Management
Resort operations and club management segment revenues increased$155 million and$194 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in 2020, primarily due to increases in rental revenues as a result of the reopening of nearly all of our resorts and sales centers by the end of the second quarter of 2021, which led to increased results as compared to the prior periods. During early 2020, substantially all of our resorts and sales centers were closed due to the COVID-19 pandemic, which significantly lowered our results for the three and nine months endedSeptember 30, 2020 . We began a phased reopening of our resorts and resumption of our business activities during the second quarter of 2020. Diamond contributed$102 million to the total increase in resort operations and club management segment revenues for the three and nine months endedSeptember 30, 2021 , primarily driven by$49 million of rental revenue and$38 million of resort operations revenue. Resort operations and club management segment Adjusted EBITDA increased$79 million and$112 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in 2020, primarily due to the increases in rental revenues described above partially offset with the increases in segment operating expenses associated with segment performance discussed herein. Diamond contributed$40 million to the total increase in resort operations and club management Adjusted EBITDA for the three and nine months endedSeptember 30, 2021 . Refer to "- Resort and Club Management" and "-Rental and Ancillary Services" for further discussion on the revenues and expenses of the resort operations and club management segment.
Real Estate Sales and Financing Segment
Real Estate
Three Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV($ in millions, except Tour flow and VPG) 2021 2020 $ $ $ Contract sales$ 433 $ 117 $ 316 $ 143 $ 173 Adjustments: Fee-for-service sales(1) (124 ) (67 ) (57 ) - (57 ) Provision for financing receivables losses (50 ) (12 ) (38 ) (23 ) (15 ) Reportability and other: Net recognition (deferral) of sales of VOIs under 241 (13 ) 254 - 254 construction(2) Fee-for-service sale upgrades, net 3 4 (1 ) - (1 ) Other(3) (15 ) (5 ) (10 ) (20 ) 10 Sales of VOIs, net$ 488 $ 24 $ 464 $ 100 $ 364 Tour flow 97,628 25,488 VPG$ 4,255 $ 4,205 Nine Months Ended Change due to Change due to September 30, Change Legacy-Diamond Legacy-HGV ($ in millions, except Tour flow and VPG) 2021 2020 $ $ $ Contract sales$ 831 $ 396 $ 435 $ 143 $ 292 Adjustments: Fee-for-service sales(1) (289 ) (216 ) (73 ) - (73 ) Provision for financing receivables losses (78 ) (57 ) (21 ) (23 ) 2 Reportability and other: Net recognition (deferral) of sales of VOIs under 167 (64 ) 231 - 231 construction(2) Fee-for-service sale upgrades, net 8 13 (5 ) - (5 ) Other(3) (42 ) 8 (50 ) (20 ) (30 ) Sales of VOIs, net$ 597 $ 80 $ 517 $ 100 $ 417 Tour flow 181,921 98,263 VPG$ 4,356 $ 3,763
(1) Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.
(2) Represents the net impact of deferred revenues related to the Sales of VOIs under construction that are recognized when construction is complete.
(3) Includes adjustments for revenue recognition, including amounts in rescission and sales incentives.
44
--------------------------------------------------------------------------------
Contract sales increased by $316 million and $435 million for the three and nine
months ended September 30, 2021 , respectively, compared to the same periods in
2020, primarily due to an increase in tour flow and VPG and a related
improvement in travel demand. As of September 30, 2021 , nearly all of our
resorts and sales centers which had previously closed due to the COVID-19
pandemic were open and operating. Diamond contributed $143 million to the total
increase in contract sales for the three and nine months ended September 30,
2021 . Sales of VOIs, net also increased by $254 million and $231 million due to
the recognition of all sales of VOIs under construction in the third quarter of
2021 which were in deferral for the three and nine months ended September 30,
2020 .
Three Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Sales, marketing, brand
and other fees $ 118 $ 52 $ 66 $ 11 $ 55
Less:
Marketing revenue and
other fees 45 11 34 11 23
Commissions and brand fees 73 41 32 - 32
Sales of VOIs, net 488 24 464 100 364
Sales revenue 561 65 496 100 396
Less:
Cost of VOI sales 130 8 122 12 110
Sales and marketing
expense, net(1) 174 66 108 40 68
Real estate profit (loss) $ 257 $ (9 ) $ 266 $ 48 $ 218
Real estate profit margin 45.8 % (13.8 )%
Nine Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Sales, marketing, brand
and other fees $ 252 $ 171 $ 81 $ 11 $ 70
Less:
Marketing revenue and
other fees 90 40 50 11 39
Commissions and brand fees 162 131 31 - 31
Sales of VOIs, net 597 80 517 100 417
Sales revenue 759 211 548 100 448
Less:
Cost of VOI sales 154 21 133 12 121
Sales and marketing
expense, net(1) 316 247 69 40 29
Real estate profit (loss) $ 289 $ (57 ) $ 346 $ 48 $ 298
Real estate profit margin 38.1 % (27.0 )%
(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 increased for the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020, due to the recognition of all sales of VOIs under construction in the third quarter of 2021 which were in deferral for the three and nine months endedSeptember 30, 2020 . Further, as a result of the reopening of nearly all of our resorts and sales centers by the end of the second quarter of 2021, combined with a higher mix of our sales for VOIs at new properties, results have increased as compared to the prior periods. For the three and nine months endedSeptember 30, 2021 , the increase in cost of VOI sales is consistent with the increase in sales revenue, compared to the compared to the same periods in 2020. For the same periods, the increase in sales and marketing expense, net is consistent with the sales revenue increase, offset by an increase in marketing revenue from an increase in breakage rate on marketing packages. Diamond contributed$48 million to real estate profit primarily driven by contract sales partially offset by marketing expenses, for the three and nine months endedSeptember 30, 2021 . 45 -------------------------------------------------------------------------------- Financing Three Months Ended Change due to Change due to September 30, Change Legacy-Diamond Legacy-HGV ($ in millions) 2021 2020 $ $ $ Interest income$ 46 $ 34 $ 12 $ 15 $ (3 ) Other financing revenue 7 6 1 1 - Financing revenue 53 40 13 16 (3 ) Consumer financing interest expense 8 9 (1 ) 1 (2 ) Other financing expense 11 4 7 5 2 Financing expense 19 13 6 6 - Financing profit$ 34 $ 27 $ 7 $ 10 $ (3 ) Financing profit margin 64.2 % 67.5 % Nine Months Ended Change due to Change due to September 30, Change Legacy-Diamond Legacy-HGV ($ in millions) 2021 2020 $ $ $ Interest income$ 108 $ 108 $ - $ 15 $ (15 ) Other financing revenue 19 19 - 1 (1 ) Financing revenue 127 127 - 16 (16 ) Consumer financing interest expense 22 23 (1 ) 1 (2 ) Other financing expense 21 16 5 5 - Financing expense 43 39 4 6 (2 ) Financing profit$ 84 $ 88 $ (4 ) $ 10 $ (14 ) Financing profit margin 66.1 % 69.3 % Financing revenue increased$13 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, primarily due to a$15 million increase related to interest income on the acquired timeshare financing receivables portfolio, partially offset by a$3 million decrease related to interest income on the originated timeshare financing receivables portfolio. The interest income generated from the originated loan portfolio decreased, compared to the same period in 2020, due to a decrease in the timeshare financing receivables balance, partially offset by an increase in weighted average interest rate for the portfolio from 12.6 percent to 12.7 percent as ofSeptember 30, 2021 . For the nine months endedSeptember 30, 2021 , the increase related to interest income on the acquired timeshare financing receivables portfolio was offset by a decrease related to interest income on the originated timeshare financing portfolio consistent with the drivers for the three months endedSeptember 30, 2021 described above, resulting in the revenues remaining flat in total compared to the same period in 2020. Financing expense increased by$6 million and$4 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in 2020, primarily related to Diamond's financing operations and interest expense on the acquired non-recourse debt.
Resort Operations and Club Management Segment
Resort and Club Management
Three Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Club management revenue $ 42 $ 23 $ 19 $ 12 $ 7
Resort management revenue 57 16 41 38 3
Resort and club management
revenues 99 39 60 50 10
Club management expense 8 6 2 2 -
Resort management expense 18 3 15 13 2
Resort and club management
expenses 26 9 17 15 2
Resort and club management
profit $ 73 $ 30 $ 43 $ 35 $ 8
Resort and club management
profit margin 73.7 % 76.9 %
46
--------------------------------------------------------------------------------
Nine Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Club management revenue $ 98 $ 70 $ 28 $ 12 $ 16
Resort management revenue 94 52 42 38 4
Resort and club management
revenues 192 122 70 50 20
Club management expense 18 18 - 2 (2 )
Resort management expense 27 9 18 13 5
Resort and club management
expenses 45 27 18 15 3
Resort and club management
profit $ 147 $ 95 $ 52 $ 35 $ 17
Resort and club management
profit margin 76.6 % 77.9 %
Resort and club management revenues increased for the three and nine months
ended September 30, 2021 , compared to the same periods in 2020, primarily due to
an increase in annual club dues along with an increase in the number of
transactions compared to the same periods in 2020. Additionally, during the
three and nine months ended September 30, 2021 we did not issue or refund club
transaction fees unlike during the three and nine months ended September 30,
2020 , to accommodate our guests impacted by the COVID-19 pandemic. Diamond
contributed $50 million to the increase in resort and club management revenues
for the three and nine months ended September 30, 2021 primarily related to
resort management revenue.
Resort and club management profit increased for the three and nine months ended
September 30, 2021 , primarily due to the aforementioned increase in club
management and resort management revenue, partially offset by an increase in
resort management expenses driven by the opening of nearly all of our resorts
and sales centers which had previously closed due to the COVID-19 pandemic by
the end of the second quarter 2021. Diamond contributed $35 million to the
increase in resort and club management profit for the three and nine months
ended September 30, 2021 .
Rental and Ancillary Services
Three Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Rental revenues $ 104 $ 19 $ 85 $ 48 $ 37
Ancillary services
revenues 8 1 7 4 3
Rental and ancillary
services revenues 112 20 92 52 40
Rental expenses 77 23 54 45 9
Ancillary services
expense 7 1 6 2 4
Rental and ancillary
services expenses 84 24 60 47 13
Rental and ancillary
services profit (loss) $ 28 $ (4 ) $ 32 $ 5 $ 27
Rental and ancillary
services profit margin 25.0 % (20.0 )%
Nine Months Ended Change due to Change due to
September 30, Change Legacy-Diamond Legacy-HGV
($ in millions) 2021 2020 $ $ $
Rental revenues $ 184 $ 71 $ 113 $ 48 $ 65
Ancillary services
revenues 14 6 8 4 4
Rental and ancillary
services revenues 198 77 121 52 69
Rental expenses 138 77 61 45 16
Ancillary services
expense 13 8 5 2 3
Rental and ancillary
services expenses 151 85 66 47 19
Rental and ancillary
services profit (loss) $ 47 $ (8 ) $ 55 $ 5 $ 50
Rental and ancillary
services profit margin 23.7 % (10.4 )%
47
-------------------------------------------------------------------------------- Rental and ancillary services revenues, expenses, and profit percentage increased for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020, primarily due to an increase in transient revenue. Diamond contributed$52 million to the increase in rental and ancillary services revenues and$5 million to the rental and ancillary services profit for the three and nine months endedSeptember 30, 2021 . Other Operating Expenses Three Months Ended Nine Months Ended September 30, Change September 30, Change
($ in millions) 2021 2020 $ % 2021 2020 $ % General and administrative$ 41 $ 22 $ 19 86.4 %$ 92 $ 65 $ 27 41.5 % Depreciation 48 11 37 NM(1) 71 34 37 NM(1) and amortization License fee expense 24 11 13 NM(1) 57 39 18 46.2 % Impairment expense 1 - 1 NM(1) 2 - 2 NM(1)
(1) Fluctuation in terms of percentage change is not meaningful.
The change in other operating expenses for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020, is driven by expenses related to the Diamond Acquisition and administrative expenses and depreciation and amortization. General and administrative expenses increased by$19 million and$27 million for the three and nine months endedSeptember 30, 2021 , respectively. Diamond contributed$8 million to the increase in general and administrative expenses for the three and nine months endedSeptember 30, 2021 primarily related to salaries and related costs and legal and professional fees. The increase in general and administrative expenses is also related to an increase in expense related to share-based compensation. In the prior year, certain expenses related to Performance RSUs were reversed as the related RSUs were not expected to achieve certain performance targets, resulting in a credit to expense in the prior period. Further, more share-based compensation awards were granted in the three and nine months endingSeptember 30, 2021 than the same periods in 2020. Depreciation and amortization increased primarily as a result of the intangibles acquired as part of the Diamond Acquisition. Two months of amortization expense for the recently acquired assets are included in the results of the three and nine months endedSeptember 30, 2021 . License fee expense increase is related to the corresponding increase in Legacy-HGV revenue.
Acquisition and Integration-Related Expense
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
($ in millions) 2021 2020 $ % 2021 2020 $ %
Acquisition and
integration-related
expense $ 54 $ - $ 54 NM(1) $ 83 $ - $ 83 NM(1)
(1) Fluctuation in terms of percentage change is not meaningful.
Acquisition and integration-related costs include direct expenses for the Diamond Acquisition including integration costs, legal and other professional fees. Integration costs include technology-related costs, fees paid to management consultants and employee-related costs such as severance and retention. We did not incur any acquisition and integration-related costs for the three and nine months endedSeptember 30, 2020 .
Non-Operating Expenses
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
($ in millions) 2021 2020 $ % 2021 2020 $ %
Interest expense $ 42 $ 10 $ 32 NM(1) $ 74 $ 32 $ 42 NM(1)
Equity in earnings
from unconsolidated (1 ) 1 (2 ) NM(1) (7 ) (3 ) (4 ) NM(1)
affiliates
Other loss (gain), 20 (1 ) 21 22 - 22
net NM(1) NM(1)
Income tax expense 49 (5 ) 54 46 (12 ) 58
(benefit) NM(1) NM(1)
(1) Fluctuation in terms of percentage change is not meaningful.
48
--------------------------------------------------------------------------------
The change in non-operating expenses for the three and nine months ended
September 30, 2021 , compared to the same periods in 2020, is primarily due to
(i) an increase in interest expense as a result of the issuance of Term Loan B,
the 2029 Notes and the 2031 Notes 2031 (ii) an increase in Other loss (gain),
net resulting from the loss on debt extinguishment of certain corporate
indebtedness of HGV and (iii) an increase in income tax expense due to an
increase in income before taxes combined with an increase in the effective tax
rate. See Note 12: Debt and non-recourse debt and Note 16: 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.
?
In March 2021 , we amended our Credit Agreement to amend certain terms related to
financial covenants to permit the Diamond Acquisition. The financial covenants
were also amended to provide greater flexibility for the Company. The borrowing
capacity under the Credit Agreement remained the same. In connection with the
amendment, we incurred $1 million in debt issuance costs. We amended our
Timeshare Facility to align with our amended Credit Agreement. In addition, we
obtained a revolving credit facility commitment in connection with the Diamond
Acquisition and incurred $2 million in debt issuance costs which were amortized
over the term of the commitment in the first quarter of 2021. This was included
in Interest expense in our unaudited condensed consolidated statements of
operations.
?
In June 2021 , we entered into indentures in connection with the issuance and
sale of senior notes, $850 million aggregate principal amount of 5.00 percent
senior notes due 2029 (" the 2029 Notes") and $500 million aggregate principal
amount of 4.875 percent senior notes due 2031 ("the 2031 Notes"). The net
proceeds from the 2029 Notes and the 2031 Notes were used to finance the
repayment of certain indebtedness in connection with the Diamond Acquisition.
The gross proceeds of the offerings were initially deposited and held in an
escrow account until the closing of the Diamond Acquisition on August 2, 2021 .
In connection with the offerings, we incurred $24 million in debt issuance
costs.
?
In connection with the closing of the Diamond Acquisition, HGV also entered into
a new $1.3 billion seven-year senior secured term loan facility ("Term Loan B").
The Term Loan B was issued at a $6 million discount and the cumulative proceeds
received from the Term loan and related senior notes discussed below were used
to repay certain existing indebtedness of both HGV and Diamond, including HGV's
pre-existing term loan and senior notes, $260 million of the balance on the
revolving credit facility, and approximately $2.03 billion of Diamond's
corporate indebtedness. We incurred a $20 million of loss on debt extinguishment
for the transactions described herein which is included in Other (loss) gain,
net. As of September 30, 2021 , we incurred approximately $27 million in debt
issuance costs for Term Loan B.
?
As of September 30, 2021 , we had total cash and cash equivalents of $564
million , including $230 million of restricted cash.
?
As of September 30, 2021 , we have $499 million remaining borrowing capacity
under the revolver facility. In addition, we have $629 million remaining
borrowing capacity in total under our Timeshare Facility, and conduit facilities
due in 2023 and 2024. We have $180 million of securities that are available to
be securitized, and another $149 million of securities that we expect will
become eligible as soon as they meet typical milestones including receipt of
first payment, deeding, or recording.
49
--------------------------------------------------------------------------------
As of September 30, 2021 , we have nearly all of our resorts and sales centers
open and currently operating. However, some of our resorts and sales centers are
still operating in markets with capacity constraints and are subject to various
safety measures, which are impacting consumer demand for resorts in those
markets. While we plan to continue normal business as conditions permit, the
pandemic continues to be unprecedented and rapidly changing, and has unknown
duration and severity.
We believe that our capital allocation strategy provides adequate funding for
our operations, is flexible enough to fund our development pipeline, securitizes
the optimal level of receivables, and provides the ability to be strategically
opportunistic in the marketplace. 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 of September 30, 2021 , our
inventory-related purchase commitments totaled $331 million over 9 years.
Sources and Uses of Our Cash
The following table summarizes our net cash flows and key metrics related to our
liquidity:
Nine Months Ended
September 30,
($ in millions) 2021 2020
Net cash provided by (used in):
Operating activities $ 36 $ 86
Investing activities (1,610 ) (24 )
Financing activities 1,612 503
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
and Diamond Club operations and providing related rental and 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 nine
months ended September 30, 2021 , compared to the same period in 2020 was
primarily due a decrease in net working capital from operations partially offset
by an increase in cash from increased sales and operating activity as compared
to the prior year.
The following table summarizes our VOI inventory spending:
Nine Months Ended September 30,
($ in millions) 2021 2020
VOI spending - owned properties(2) $ 159 $ 70
VOI spending - fee-for-service upgrades(1) 5 11
Purchases and development of real estate for future
conversion to inventory 25 27
Total VOI inventory spending $ 189 $ 108
(1) Includes expense related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects from developed
projects of
(2) For the nine months ended
classified as Inventory on our unaudited condensed consolidated balance sheets.
50
--------------------------------------------------------------------------------Investing Activities
The following table summarizes our net cash used in investing activities:
Nine Months Ended
September 30,
($ in millions) 2021 2020Acquisition of Diamond, net of cash and restricted cash acquired
$ (1,585 ) $ - Capital expenditures for property and equipment (11 ) (6 ) Software capitalization costs (14 ) (16 ) Investments in unconsolidated affiliates - (2 ) Net cash used in investing activities$ (1,610 )
Our capital expenditures include spending related to technology and 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. The change in net cash used in investing activities for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, was primarily due to the Diamond Acquisition. Financing Activities The following table summarizes our net cash provided by financing activities: Nine Months Ended September 30, ($ in millions) 2021 2020 Issuance of debt$ 2,650 $ 495 Issuance of non-recourse debt 96
495
Repayment of debt (843 ) (62 ) Repayment of non-recourse debt (234 ) (403 ) Debt issuance costs (61 ) (8 ) Repurchase and retirement of common stock - (10 ) Payment of withholding taxes on vesting of restricted (5 ) (3 ) stock units Proceeds from employee stock plan purchases 1
1
Proceeds from stock option exercises 10
-
Other financing activity (2 ) (2 ) Net cash provided by financing activities$ 1,612 $ 503 The change in net cash provided by financing activities for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, was primarily due to the increase in debt borrowings for the issuance of Term Loan B inAugust 2021 and senior notes inJune 2021 offset by repayments of debt and non-recourse debt and$3 million of other debt issuance costs.
Contractual Obligations
The following table summarizes our significant contractual obligations as ofSeptember 30, 2021 : Less Than 1 More Than 5 ($ in millions) Total Year 1-3 Years 3-5 Years Years Debt$ 2,984 $ 22$ 14 $ 314 $ 2,634 Non-recourse debt 1,297 270 320 119 588 Interest on debt(1) 1,482 179 175 164 964 Operating leases 103 18 46 28 11 Inventory purchase commitments 331 80 199 43 9 Other commitments(2) 8 6 2 - -
Total contractual obligations
(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 0.08 percent, subject to a 0.25 percent floor, as ofSeptember 30, 2021 .
(2) Primarily relates to commitments related to information technology and brand licensing in the normal course of business.
51
--------------------------------------------------------------------------------
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
of September 30, 2021 , our inventory-related purchase commitments totaled $331
million over 9 years, and we expect to purchase $80 million of these commitments
over the next twelve months. We also intend to rebrand Diamond properties as
Hilton Grand Vacations branded properties pursuant to the A&R Hilton License
Agreement.
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 $328
million as of September 30, 2021 which primarily consist of escrow and
construction related bonds.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as ofSeptember 30, 2021 consisted of$331 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$8 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 21: Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.
Guarantor Financial Information
Certain subsidiaries, which are listed on Exhibit 22 of this Quarterly Report on Form 10-Q, have guaranteed our obligations related to our senior unsecured 2029 Notes and 2031 Notes (together, "the Notes"). The 2029 Notes were issued inJune 2021 with an aggregate principal balance of$850 million , an interest rate of 5.0 percent, and maturity inJune 2029 . The 2031 Notes were issued inJune 2021 with an aggregate principal balance of$500 million , an interest rate of 4.875 percent, and maturity inJuly 2031 . The Notes were co-issued byHilton Grand Vacations Borrower LLC andHilton Grand Vacations Borrower Inc. (the "Issuers") and are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis byHilton Grand Vacations Inc. (the "Parent"),Hilton Grand Vacations Parent LLC , the Issuers, and each of the Issuer's existing and future wholly owned domestic restricted subsidiaries (all entities that guarantee the Notes, collectively, the "Obligor group"). The Notes rank equally in right of payment with all of the Issuers' and each guarantor's existing and future senior indebtedness, are subordinated to all of the Issuers' and guarantors' existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, including the Senior Secured Credit Facilities, rank senior in right of payment to all of the Issuers' and guarantors' future subordinated indebtedness and other obligations that expressly provide for their subordination to the notes and the related guarantees, and are structurally subordinated to all existing and future indebtedness claims of holders of preferred stock and other liabilities of the Issuer's subsidiaries that do not guarantee the Notes. The guarantee of each guarantor subsidiary is limited to a maximum amount, subject to applicableU.S. and non-U.S. laws. The guarantees can also be released upon the sale or transfer of a guarantor subsidiary's capital stock or substantially all of its assets, becoming designated as an unrestricted subsidiary, or upon its consolidation into a co-Issuer or another subsidiary Guarantor. 52
-------------------------------------------------------------------------------- The following tables provide summarized financial information of the Obligor group on a combined basis after elimination of (i) intercompany transactions and balances between the Parent and the subsidiary Guarantors and (ii) investments in and equity in the earnings of non-Guarantor subsidiaries and unconsolidated affiliates:
Summarized Financial Information
($ in millions) September 30, Assets 2021 Cash and cash equivalents $ 246 Restricted cash 143 Accounts receivable, net - due from non-guarantor subsidiaries
33
Accounts receivable, net - due from related parties
21
Accounts receivable, net - other
195
Timeshare financing receivables, net 930 Inventory 927 Property and equipment, net 728 Operating lease right-of-use assets, net
73
Investments in unconsolidated affiliates 56 Goodwill 820 Intangible assets, net 1,953 Land and Infrastructure held for sale 41 Other assets 189 Total assets $ 6,355 Liabilities
Accounts payable, accrued expenses and other - due from non-guarantor subsidiaries
$ 33
Accounts payable, accrued expenses and other - other 586
Advanced deposits 113
Debt, net 2,929
Operating lease liabilities 89
Deferred revenues 135
Deferred income tax liabilities 798
Total liabilities $ 4,683
Nine months ended
September 30,
($ in millions) 2021Total revenues - transactions with non-guarantor subsidiaries $
6
Total revenues - other 1,315
Operating income 164
Net income 41
Subsequent Events
In October 2021 , the Compensation Committee of the Board of Directors (the
"Compensation Committee") approved modifications to the short-term incentive
program performance periods and targets covering fiscal year 2021, and in
November 2021 , the Compensation Committee approved modifications to the
long-term incentive performance targets for performance-vesting restricted stock
units covering fiscal years 2019 through 2022. The modifications were made to
reflect the projected effects of the Diamond Acquisition on applicable metrics.
There is no financial impact of these modifications and any awards earned under
either the 2021 Short-Term Incentive Program or the Performance RSUs will be
subject to the terms and conditions applicable to such awards.
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, 2020 . Since the filing of our 2020 Annual Report on Form 10-K, we 53
-------------------------------------------------------------------------------- have not changed the critical accounting policies or estimates outlined therein. In addition to the referenced critical accounting policies and estimates, we have implemented the following:
Business Combinations
We account for our business combinations in accordance with the acquisition method of accounting. We allocate the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. For each acquisition, we recognize goodwill as the amount in which consideration transferred for the acquired entity exceeds the fair values of net assets. The fair value of net assets is the fair value assigned to the assets acquired reduced by the fair value assigned to liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, we use various recognized valuation methods including the income, cost and sales and market approaches, which also include certain valuation techniques such as discount rates, and the amount and timing of future cash flows. We utilize independent valuation specialists under our supervision for certain of our assignments of fair value. We record the net assets and results of operations of an acquired entity in our condensed consolidated financial statements from the acquisition date through period-end. We expense acquisition-related expenses as incurred and include such expenses within Acquisition and integration-related expense on our condensed consolidated statements of operations. See Note 2: Summary of Significant Accounting Policies and Note 3: Diamond Acquisition for further detail.
We do not amortize goodwill. We evaluate goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that it is more-likely-than-not that we may not be able to recover the carrying amount (book value) of the net assets of the related reporting unit. When evaluating goodwill for impairment, we may perform the optional qualitative assessment by considering factors including macroeconomic conditions, industry and market conditions and overall financial performance. If we bypass the qualitative assessment, or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. We only recognize an impairment on goodwill if the estimated fair value of a reporting unit is less than its carrying value, in an amount not to exceed the carrying value of the reporting unit's goodwill.
Acquired Financial Assets with Credit Deterioration
When financial assets are acquired, whether in connection with a business
combination or an asset acquisition, we evaluate whether those acquired
financial assets have experienced a more-than-insignificant deterioration in
credit quality since origination. Financial assets that were acquired with
evidence of such credit deterioration are referred to as purchased credit
deteriorated ("PCD") assets and reflect the acquirer's assessment at the
acquisition date. The evaluation of PCD assets is a qualitative assessment
requiring significant management judgment. We consider indicators such as
delinquency, FICO score deterioration, purchased credit impaired status from
prior acquisition, certain account status codes which we believe are indicative
of credit deterioration, as well as certain loan activity such as modifications
and downgrades. In addition, we consider the impact of current and
forward-looking economic conditions relative to the conditions which would have
existed at origination.
Acquired PCD assets are recorded at the purchase price, represented by the
acquisition date fair value, and subsequently "grossed-up" by the acquirer's
acquisition date assessment of the allowance for credit losses. The purchase
price and the initial allowance for credit losses collectively represent the PCD
asset's initial amortized cost basis. While the initial allowance for credit
losses of PCD assets does not impact period earnings, the Company remeasures the
allowance for credit losses for PCD assets during each subsequent reporting
period; changes in the allowance are recognized as provision expense within
period earnings. The difference over which par value of the acquired PCD assets
exceeds the purchase price plus the initial allowance for credit losses is
reflected as a non-credit discount (or premium) and is accreted into interest
income (or as a reduction to interest income) under the effective interest
method.
Acquired financial assets which are not PCD assets are also recorded at the
purchase price but are not similarly "grossed-up". The acquirer recognizes an
allowance for credit losses as of the acquisition date, which is recognized with
a corresponding provision expense impact within earnings. The allowance is
remeasured within each subsequent reporting period in the same manner as for PCD
assets, with any change in the allowance recognized as provision expense in
period earnings. See Note 3: Diamond Acquisition and Note 7: Timeshare Financing
Receivables for further information.
54--------------------------------------------------------------------------------
© Edgar Online, source
