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, 2021 .
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, which may cause the actual results, performance or achievements to be
materially different from the future results. Any one or more of these risks or
uncertainties could adversely impact
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HGV's operations, revenue, operating profits and margins, key business operational metrics discussed under "- Operational Metrics" below, financial condition 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" and the Summary of Risk Factors in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , as supplemented and updated by the risk factors discussed in "Part II-Item 1A. Risk Factors" of this Report 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.
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. "Legacy-HGV" refers to our business and operations that existed both prior to and following the Diamond Acquisition (as defined below), excluding Legacy-Diamond. "Legacy-Diamond" refers to the business and operations that we acquired in the Diamond Acquisition. Except where the context requires otherwise, references to our "properties" or "resorts" refer to the timeshare properties that we manage or own. Of these resorts and units, a portion is directly owned by us or joint ventures in which we have an interest; 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.
"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 owns and operatesDiamond Resorts International ("Diamond") and is in the process of rebranding Diamond properties and sales centers to brands that meet Hilton standards. Our operations primarily consist of: selling vacation ownership intervals and vacation ownership interests (collectively, 34
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"VOIs", "VOI") 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, 2022 , we have 154 properties located inthe United States ("U.S."),Europe ,Mexico , theCaribbean ,Canada , andJapan . A significant number of our properties and VOIs are concentrated inFlorida ,Nevada ,Hawaii ,Europe ,California ,Virginia andArizona . and feature spacious, condominium-style accommodations with superior amenities and quality service. As ofSeptember 30, 2022 , we have approximately 344,000Hilton 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 7,000 properties, as well as numerous experiential vacation options, such as cruises and guided tours. We also have 171,000Diamond Club members who are able to utilize their points across the Diamond resorts, affiliated properties and alternative experiential options. Diamond Acquisition OnAugust 2, 2021 , we completed the acquisition ofDakota Holdings, Inc. , the parent of Diamond (the "Diamond Acquisition"). We completed the acquisition by exchanging 100 percent of the outstanding equity interests of Diamond 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 at the time the Diamond Acquisition was completed. 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 that we manage, are included in one of Diamond's single- and multi-use trusts (collectively, the "Diamond Collections" or "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. 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.
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. In addition to developing our own 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 Legacy-HGV 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. 35
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We also source VOIs through our Collections product 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. Purchasers of points generally do not acquire a direct ownership interest in the resort properties in our network. 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. For the nine months endedSeptember 30, 2022 , sales from fee-for-service, just-in-time, developed inventory and points-based sources were 28 percent, 14 percent, 21 percent and 36 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$12 billion at current pricing. Capital efficient arrangements, comprised of our fee-for-service and just-in-time inventory, represented approximately 40 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 approximately 60 sales distribution centers in various domestic and international locations. A phased rebranding of sales centers that were acquired as part of the Diamond Acquisition began in late 2021. 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 by Management-Real Estate Sales Operating Metrics." Additionally, the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables. For the nine months endedSeptember 30, 2022 , 71 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 2.5 percent to 25 percent per annum. Financing propensity was 63 percent and 66 percent for the nine months endedSeptember 30, 2022 and 2021. 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 loans toU.S. and Canadian borrowers at the time of origination were as follows: Nine Months Ended September 30, 2022 2021 Weighted-average FICO score 735 724 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 and our Timeshare Facility, 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. 36
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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 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 . When owners purchase a 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 (fee-for-service, just-in-time, developed, and points-based) 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 unaudited 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 unaudited 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.
•Sales revenue represents Sales of VOIs, net, commissions and brand fees earned from the sale of fee-for-service intervals.
•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
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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 endedDecember 31, 2021 .
EBITDA and Adjusted EBITDA
EBITDA, presented herein, is a financial measure that is not recognized under
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 transactions; (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 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, 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;
•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.
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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 Nine Months Ended September
September 30, Variance (1) 30, Variance (1)
($ in millions) 2022 2021 $ % 2022 2021 $ %
Revenues:
Real estate sales and
financing $ 745 $ 659 $ 86 13.1 $ 1,783 $ 976 $ 807 82.7
Resort operations and club
management 299 216 83 38.4 870 403 467 NM
Total segment revenues 1,044 875 169 19.3 2,653 1,379 1,274 92.4
Cost reimbursements 82 58 24 41.4 215 131 84 64.1
Intersegment eliminations(2) (10) (5) (5) 100.0 (25) (13) (12) 92.3
Total revenues $ 1,116 $ 928 $ 188 20.3 $ 2,843 $ 1,497 $ 1,346 89.9
(1)NM - fluctuation in terms of percentage change is not meaningful.
(2)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, our most comparable
Three Months Ended Nine Months Ended
September 30, Variance (1) September 30, Variance (1)
($ in millions) 2022 2021 $ % 2022 2021 $ %
Net income $ 150 $ 99 $ 51 51.5 $ 274 $ 101 $ 173 NM
Interest expense 37 42 (5) (11.9) 105 74 31 41.9
Income tax expense 54 49 5 10.2 115 46 69 NM
Depreciation and amortization 57 48 9 18.8 181 71 110 NM
Interest expense, depreciation and
amortization included in equity in
earnings from unconsolidated
affiliates 2 - 2 100.0 2 1 1 100.0
EBITDA 300 238 62 26.1 677 293 384 NM
Other loss, net (2) 20 (22) (110.0) (1) 22 (23) NM
Share-based compensation expense 14 14 - - 40 32 8 25.0
Impairment expense - 1 (1) (100.0) - 2 (2) (100.0)
Acquisition and
integration-related expense 19 54 (35) (64.8) 49 83 (34) (41.0)
Other adjustment items(2) 7 13 (6) (46.2) 48 20 28 NM
Adjusted EBITDA $ 338 $ 340 $ (2) (0.6) $ 813 $ 452 $ 361 79.9
(1)NM - fluctuation in terms of percentage change is not meaningful.
(2)For the three and nine months endedSeptember 30, 2022 and 2021 this amount includes costs associated with restructuring, one-time charges and other non-cash items. This amount also includes the amortization of premiums resulting from purchase accounting. 39
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The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA:
Three Months Ended Nine Months Ended
September 30, Variance (1) September 30, Variance (1)
($ in millions) 2022 2021 $ % 2022 2021 $ %
Adjusted EBITDA:
Real estate sales and
financing(2) $ 295 $ 280 $ 15 5.4 $ 666 $ 352 $ 314 89.2
Resort operations and club
management(2) 112 109 3 2.8 332 212 120 56.6
Adjustments:
Adjusted EBITDA from
unconsolidated affiliates 5 1 4 NM 12 8 4 50.0
License fee expense (33) (24) (9) 37.5 (90) (57) (33) 57.9
General and administrative(3) (41) (26) (15) 57.7 (107) (63) (44) 69.8
Adjusted EBITDA $ 338 $ 340 $ (2) (0.6) $ 813 $ 452 $ 361 79.9
(1)NM - fluctuation in terms of percentage change is not meaningful.
(2)Includes intersegment transactions, share-based compensation, depreciation and other adjustments attributable to the segments.
(3)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:
Three Months Ended Nine Months Ended
September 30, Variance September 30, Variance
($ in millions) 2022 2021 $ 2022 2021 $
Sales of VOIs (deferrals) $ 10 $ -
76 241 (165) 87 167 (80)
Net Sales of VOIs (deferrals) recognitions 86 241 (155) 34 167 (133)
Cost of VOI sales (deferrals)(1) 3 - 3 (18) - (18)
Cost of VOI sales recognitions 27 73 (46) 30 50 (20)
Net Cost of VOI sales (deferrals)
recognitions(1) 30 73 (43) 12 50 (38)
Sales and marketing expense (deferrals) 2 - 2 (8) - (8)
Sales and marketing expense recognitions 11 35 (24) 13 24 (11)
Net Sales and marketing expense (deferrals)
recognitions 13 35 (22) 5 24 (19)
Net construction (deferrals) recognitions
(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 endedSeptember 30, 2022 and 2021. Real estate sales and financing segment revenues increased by$86 million and$807 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, sales revenue primarily increased in these periods due to an increase in travel demand and a 40
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corresponding increase in tour flow and sales transactions; partially offset by a net decrease in the recognition of deferred sales of VOIs related to projects previously under construction during the same periods in 2021. Sales revenue for the nine months endedSeptember 30, 2022 also increased as a result of the launch of new properties in the second half of 2021. Real estate sales and financing Adjusted EBITDA increased by$15 million and by$314 million for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021, primarily due to the revenue increases discussed above.
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 increased by$83 million and$467 million for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, the increase in resort operations and club management revenues was driven by greater resort management revenue from the launch of new properties in the second half of 2021 as well as an increase in Club members. Resort operations and club management segment adjusted EBITDA increased by$3 million and by$120 million for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021, primarily due to the increase in resort and club management and rental revenues described above, partially offset by a by an increase in resort and club management expenses due to personnel-related costs incurred to service increased arrivals and transaction activity along with the launch of new club features and programs. Refer to "- Resort and Club Management" and "-Rental and Ancillary Services" for further discussion on the revenues and expenses of the resort operations and club management segment.
Real Estate Sales and Financing Segment
Real Estate
Three Months Ended Nine Months Ended
September 30, Variance (1) September 30, Variance (1)
($ in millions, except Tour
flow and VPG) 2022 2021 $ % 2022 2021 $ %
Contract sales $ 621 $ 433 $ 188 43.4 $ 1,747 $ 831 $ 916 NM
Adjustments:
Fee-for-service sales(2) (175) (124) (51) 41.1 (488) (289) (199) 68.9 Provision for financing receivables losses (32) (50) 18 (36.0) (103) (78) (25) 32.1 Reportability and other: Net recognition of sales of VOIs under construction(3) 86 241 (155) (64.3) 34 167 (133) (79.6) Fee-for-service sale upgrades, net 5 3 2 66.7 14 8 6 75.0 Other(4) (5) (15) 10 (66.7) (74) (42) (32) 76.2 Sales of VOIs, net$ 500 $ 488 $ 12 2.5$ 1,130 $ 597 $ 533 89.3 Tour flow 142,647 97,628 45,019 375,507 181,921 193,586 VPG$ 4,229 $ 4,255 $ (26)$ 4,463 $ 4,356 $ 107
(1)NM - 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 recognition of 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.
Contract sales increased by
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periods was primarily due to an increase in tour flow corresponding with increases in travel demand related to new inventory available for sale at resorts that were opened in the second half of 2021.
Three Months Ended Nine Months Ended
September 30, Variance (1) September 30, Variance (1)
($ in millions) 2022 2021 $ % 2022 2021 $ %
Sales, marketing, brand and
other fees $ 177 $ 118 $ 59 50.0 $ 457 $ 252 $ 205 81.3
Less:
Marketing revenue and other fees 52 45 7 15.6 164 90 74 82.2 Commissions and brand fees 125 73 52 71.2 293 162 131 80.9 Sales of VOIs, net 500 488 12 2.5 1,130 597 533 89.3 Sales revenue 625 561 64 11.4 1,423 759 664 87.5 Less: Cost of VOI sales 102 130 (28) (21.5) 207 154 53 34.4 Sales and marketing expense, net(2) 246 174 72 41.4 644 316 328 NM Real estate profit $ 277$ 257 $ 20 7.8 $ 572$ 289 $ 283 97.9 Real estate profit margin 44.3 % 45.8 % 40.2 % 38.1 %
(1)NM - fluctuation in terms of percentage change is not meaningful.
(2)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.
Real estate profit increased by$20 million and by$283 million for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, these increases were driven by greater travel demand; partially offset by a net decrease in the recognition of deferred sales of VOIs related to projects previously under construction. The increase in real estate profit was also attributed to a higher mix of sales of VOIs at new properties and greater commissions earned on sales of fee-for-service properties compared to the same periods in 2021. For the three and nine months endedSeptember 30, 2022 , cost of VOI sales decreased primarily due to a net decrease in the recognition of deferred cost of VOI sales related to projects previously under construction during the same periods in 2021; partially offset with an increase consistent with the increase in sales revenue. For the same periods, marketing revenue and other fees increased as a result of increased sales of vacation packages. Financing Three Months Ended Nine Months Ended September 30, Variance (1) September 30, Variance (1) ($ in millions) 2022 2021 $ % 2022 2021 $ % Interest income(2) $ 61$ 46 $ 15 32.6 $ 170$ 108 $ 62 57.4 Other financing revenue 7 7 - - 26 19 7 36.8 Financing revenue 68 53 15 28.3 196 127 69 54.3 Consumer financing interest expense(3) 11 8 3 37.5 26 22 4 18.2 Other financing expense 14 11 3 27.3 40 21 19 90.5 Financing expense 25 19 6 31.6 66 43 23 53.5 Financing profit $ 43$ 34 $ 9 26.5 $ 130$ 84 $ 46 54.8 Financing profit margin 63.2 % 64.2 % 66.3 % 66.1 %
(1)NM - fluctuation in terms of percentage change is not meaningful.
(2)For the three and nine months endedSeptember 30, 2022 , this amount includes$7 million and$27 million , respectively, of amortization of the premium related to the acquired timeshare financing receivables resulting from the Diamond Acquisition. (3)For the three and nine months endedSeptember 30, 2022 , this amount includes$2 million and$8 million , respectively, of amortization of the premium related to the acquired non-recourse debt resulting from the Diamond Acquisition. Financing profit increased by$9 million and$46 million for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, financing revenue 42
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increased due to an increase in the weighted average interest rate and an increase in the carrying balance of the timeshare financing receivables portfolio. Financing expense also increased due to increased costs associated with loan servicing in addition to an increase in consumer financing interest expense resulting from an increase in the weighted-average interest rate compared to the same periods in 2021.
Resort Operations and Club Management Segment
Resort and Club Management
Three Months Ended Nine Months Ended
September 30, Variance (1) September 30, Variance (1)
($ in millions) 2022 2021 $ % 2022 2021 $ %
Club management revenue $ 48 $ 42 $ 6 14.3 $ 150 $ 98 $ 52 53.1
Resort management revenue 82 57 25 43.9 229 94 135 NM
Resort and club management
revenues 130 99 31 31.3 379 192 187 97.4
Club management expense 11 8 3 37.5 31 18 13 72.2
Resort management expense 34 18 16 88.9 87 27 60 NM
Resort and club management
expenses 45 26 19 73.1 118 45 73 NM
Resort and club management
profit $ 85 $ 73 $ 12 16.4 $ 261 $ 147 $
114 77.6
Resort and club management
profit margin 65.4 % 73.7 % 68.9 % 76.6 %
(1)NM - fluctuation in terms of percentage change is not meaningful.
Resort and club management profit increased by$12 million and$114 million for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, the increases in resort operations and club management revenues were driven by greater resort management revenue from the launch of new properties in the second half of 2021 as well as an increase in Club members and number of transactions; partially offset by an increase in resort and club management expenses due to personnel related costs incurred to service increased transactions and the launch of new club features and programs.
Rental and Ancillary Services
Three Months Ended Nine Months Ended
September 30, Variance (1) September 30, Variance (1)
($ in millions) 2022 2021 $ % 2022 2021 $ %
Rental revenues $ 157 $ 104 $ 53 51.0 $ 436 $ 184 $ 252 NM
Ancillary services revenues 2 8 (6) (75.0) 30 14 16 NM
Rental and ancillary
services revenues 159 112 47 42.0 466 198 268 NM
Rental expenses 141 77 64 83.1 401 138 263 NM
Ancillary services expense 3 7 (4) (57.1) 25 13 12 92.3
Rental and ancillary
services expenses 144 84 60 71.4 426 151 275 NM
Rental and ancillary
services profit $ 15 $ 28 $ (13) (46.4) $ 40 $ 47 $ (7) (14.9)
Rental and ancillary
services profit margin 9.4 % 25.0 % 8.6 % 23.7 %
(1)NM - fluctuation in terms of percentage change is not meaningful.
Rental and ancillary services profit decreased by$13 million and$7 million for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, rental and ancillary services revenue increased in both of these periods due to an increase in average nightly rates charged in addition 43
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to an increase in rooms available for rent corresponding with the launch of new
properties during the second half of 2021. Rental and ancillary services expense
increased consistent with the aforementioned launch of new properties.
Other Operating Expenses
Three Months Ended Nine Months Ended
September 30, Variance (1) September 30, Variance (1)
($ in millions) 2022 2021 $ % 2022 2021 $ %
General and administrative $ 50 $ 41 $ 9 22.0 $ 158 $ 92 $ 66 71.7
Depreciation and amortization 57 48 9 18.8 181 71 110 NM
License fee expense 33 24 9 37.5 90 57 33 57.9
Impairment (reversal) expense - 1 (1) (100.0) - 2 (2) (100.0)
(1)NM - fluctuation in terms of percentage change is not meaningful.
The change in other operating expenses for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021 was driven by increased costs subsequent to the Diamond Acquisition and increases in expenses related to share-based compensation. General and administrative expenses increased by$9 million and$66 million compared to the same periods in 2021, primarily due to increased salaries and wages expenses corresponding with an increase in team members associated with the Diamond Acquisition. General and administrative expenses also increased due to expenses incurred associated with Performance RSUs during the three and nine months endedSeptember 30, 2022 , that were not incurred in the same periods in 2021 due to certain performance targets that were not expected to be achieved during that period. Depreciation and amortization increased due to additional amortization expense recognized related to management contracts, club member relationships and trade names acquired as a part of the Diamond Acquisition. License fee expense increased during the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021 due to improved results related to increased travel demand.
Acquisition and Integration-Related Expense
Three Months Ended Nine Months Ended
September 30, Variance (1) September 30, Variance (1)
($ in millions) 2022 2021 $ % 2022 2021 $ %
Acquisition and integration-related
expense $ 19 $ 54 $ (35) (64.8) $ 49 $ 83 $ (34) (41.0)
(1)NM - fluctuation in terms of percentage change is not meaningful.
Acquisition and integration-related costs include direct expenses related to 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. For the three and nine months endedSeptember 30, 2022 , acquisition and integration-related costs decreased by$35 million and$34 million , respectively, due to decreased legal and professional fees incurred compared to the same periods in 2021. Non-Operating Expenses Three Months Ended Nine Months Ended September 30, Variance (1) September 30, Variance (1) ($ in millions) 2022 2021 $ % 2022 2021 $ % Interest expense$ 37 $ 42 $ (5) (11.9)$ 105 $ 74 $ 31 41.9 Equity in earnings from unconsolidated affiliates (2) (1) (1) 100.0 (9) (7) (2) 28.6 Other (gain) loss, net (2) 20 (22) (110.0) (1) 22 (23) (104.5) Income tax expense 54 49 5 10.2 115 46 69 NM
(1)NM- fluctuation in terms of percentage change is not meaningful.
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The change in non-operating expenses for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021 was primarily due to a year over year increase in interest expense as a result of the issuance of our senior secured credit facility in the third quarter of 2021, in addition to an increase in Other (gain) loss, net resulting from a loss on debt extinguishment of certain corporate indebtedness in the third quarter of 2021. Income tax expense also increased consistent with the increase in income before income taxes in the same periods.
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 acquisitions
and development projects, including rebranding.
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 April 2022 , we completed a securitization of $246 million of gross timeshare
financing receivables. The proceeds were primarily used to pay down one of our
conduit facilities in full and for general corporate purposes. See Note 13: Debt
and Non-Recourse Debt for additional information.
•In May 2022 , we amended and restated our Timeshare Facility agreement under new
terms, which includes increasing the borrowing capacity from $450 million to
$750 million allowing us to borrow up to the maximum amount until May 2024 and
requiring all amounts borrowed to be repaid in 2025. The Timeshare Facility is
secured by certain timeshare financing receivables in our loan portfolio. See
Note 13: Debt and Non-Recourse Debt and Note 7: Timeshare Financing Receivables
for additional information.
•In
•As of
•As of
•As ofSeptember 30, 2022 , we had an aggregate of$750 million remaining borrowing capacity in total under our Timeshare Facility due in 2025. Of this amount, we have$178 million of mortgage notes that are available to be securitized and another$324 million of mortgage notes that we expect will become eligible as soon as they meet typical milestones including receipt of first payment, deeding, or recording. 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 ofSeptember 30, 2022 , our inventory-related purchase commitments totaled$270 million over 8 years. 45
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Sources and Uses of Our Cash
The following table summarizes our net cash flows and key metrics related to our
liquidity:
Nine Months Ended September 30, Variance
($ in millions) 2022 2021 $
Net cash provided by (used in):
Operating activities $ 763 $ 36 $ 727
Investing activities (51) (1,610) 1,559
Financing activities (644) 1,612 (2,256)
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
The following table summarizes our VOI inventory spending:
Nine Months Ended September 30,
($ in millions) 2022 2021
VOI spending - owned properties(1) $ 96 $ 159
VOI spending - fee-for-service upgrades(2) 9 5
Purchases and development of real estate for future conversion to
inventory 4 25
Total VOI inventory spending $ 109 $ 189 (1)For the nine months ended
(2)Includes expense related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects from developed projects of$6 million and$4 million recorded in Costs of VOI sales for the nine months endedSeptember 30, 2022 and 2021, respectively.
Investing Activities
The following table summarizes our net cash used in investing activities:
Nine Months Ended September 30, Variance
($ in millions) 2022 2021 $
Acquisition of Diamond, net of cash and restricted $ - $ (1,585) $ 1,585
cash acquired
Capital expenditures for property and equipment (25) (11) (14)
Software capitalization costs (26) (14) (12)
Net cash used in investing activities $ (51)
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 in addition to capitalized costs
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associated with rebranding Legacy-Diamond properties as a result of the Diamond Acquisition. 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 nine months ended
Financing Activities
The following table summarizes our net cash (used in) provided by financing
activities:
Nine Months Ended September 30, Variance
($ in millions) 2022 2021 $
Issuance of debt $ - $ 2,650 $ (2,650)
Issuance of non-recourse debt 671 96 575
Repayment of debt (310) (843) 533
Repayment of non-recourse debt (824) (234) (590)
Debt issuance costs and discounts (12) (61) 49
Repurchase and retirement of common stock (162) - (162)
Payment of withholding taxes on vesting of
restricted stock units (8) (5) (3)
Proceeds from employee stock plan purchases 2 1 1
Proceeds from stock option exercises 1 10 (9)
Other financing activity (2) (2) -
Net cash (used in) provided by financing activities $ (644)
The change in net cash provided by financing activities for nine months endedSeptember 30, 2022 , compared to the same period in 2021, was primarily driven by corporate debt drawn in connection with the Diamond Acquisition in the third quarter of 2021, in addition to the launch of our share repurchase program in the first half of 2022. Contractual Obligations Our commitments primarily relate to agreements with developers to purchase or construct vacation ownership units, operating leases, and obligations associated with our debt, non-recourse debt and the related interest. As ofSeptember 30, 2022 , we were committed to approximately$5,054 million in contractual obligations over 9 years,$312 million of which will be fulfilled in the remainder of 2022. The ultimate amount and timing of certain commitments 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, Note 13: Debt and Non-recourse Debt and Note 15: Leases in our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information. We also intend to rebrand Diamond properties to brands that meet Hilton standards in accordance with the Amended and Restated License Agreement with Hilton. 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$303 million as ofSeptember 30, 2022 which primarily consist of escrow and construction related bonds.
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 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 . 47
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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. 48
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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, December 31, Assets 2022 2021 Cash and cash equivalents $ 299 $ 333 Restricted cash 207 165 Accounts receivable, net - due from non-guarantor subsidiaries 37 45 Accounts receivable, net - due from related parties 14 20 Accounts receivable, net - other 295 231 Timeshare financing receivables, net 526 678 Inventory 1,014 727 Property and equipment, net 747 693 Operating lease right-of-use assets, net 54 66 Investments in unconsolidated affiliates 69 59 Goodwill 1,416 1,377 Intangible assets, net 1,318 1,441 Land and Infrastructure held for sale - 41 Other assets 366 263 Total assets$ 6,362 $ 6,139 Liabilities
Accounts payable, accrued expenses and other - due from non-guarantor subsidiaries
$ 37 $ 45
Accounts payable, accrued expenses and other - other 878 592
Advanced deposits 135 111
Debt, net 2,612 2,912
Operating lease liabilities 72 83
Deferred revenues 185 150
Deferred income tax liabilities 681 649
Total liabilities $ 4,600 $ 4,542
Nine Months Ended
($ in millions) September 30, 2022
Total revenues - transactions with non-guarantor subsidiaries $ 9
Total revenues - other 2,478
Operating income 338
Net income 155
Subsequent Events
Management has evaluated all subsequent events through November 9, 2022 the date
the unaudited consolidated financial statements were available to be issued. The
results of management's analysis indicated no significant subsequent events have
occurred that required consideration or adjustments to our disclosures in the
unaudited financial statements.
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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, 2021 .
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