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16: R4 Condensed Consolidated Statements of Operations HTML 120K
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30: R18 Fair Value Measurements HTML 53K
31: R19 Income Taxes HTML 33K
32: R20 Share-Based Compensation HTML 42K
33: R21 Earnings Per Share HTML 68K
34: R22 Related Party Transactions HTML 43K
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37: R25 Subsequent Events HTML 31K
38: R26 Pay vs Performance Disclosure HTML 41K
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52: R40 Business Segments (Tables) HTML 82K
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54: R42 Organization and Basis of Presentation (Details) HTML 29K
55: R43 REVENUE FROM CONTRACTS WITH CUSTOMERS - Additional HTML 44K
Information (Details)
56: R44 REVENUE FROM CONTRACTS WITH CUSTOMERS - Schedule HTML 64K
of Disaggregated Revenues by Product and Segment
from Contracts with Customers (Details)
57: R45 REVENUE FROM CONTRACTS WITH CUSTOMERS - Schedule HTML 37K
of Accounts Receivable, Net and Timeshare
Financing Receivables, Net from Contracts with
Customers (Details)
58: R46 REVENUE FROM CONTRACTS WITH CUSTOMERS - HTML 47K
Composition of our Contract Liabilities (Details)
59: R47 REVENUE FROM CONTRACTS WITH CUSTOMERS - Schedule HTML 39K
of Deferred Revenue, Deferred Cost of VOI Sales
and Deferred Direct Selling Costs from Sales of
VOIs Related to Projects under Construction
(Details)
60: R48 REVENUE FROM CONTRACTS WITH CUSTOMERS - Schedule HTML 44K
of Remaining Transaction Price Related to Advanced
Deposits, Club Activation Fees and Bonus Points
Incentive Liability (Details)
61: R49 Accounts Receivable (Details) HTML 43K
62: R50 TIMESHARE FINANCING RECEIVABLES - Schedule of HTML 58K
Timeshare Financing Receivables (Details)
63: R51 TIMESHARE FINANCING RECEIVABLES - Additional HTML 82K
Information (Details)
64: R52 TIMESHARE FINANCING RECEIVABLES - Maturities of HTML 63K
Financing Receivables (Details)
65: R53 TIMESHARE FINANCING RECEIVABLES - Schedule of HTML 48K
Change in Allowance For Financing Receivables
Losses (Details)
66: R54 TIMESHARE FINANCING RECEIVABLES - Schedule of HTML 130K
Gross Timeshare Financing Receivables Balances by
Average FICO Score (Details)
67: R55 TIMESHARE FINANCING RECEIVABLES - Financing HTML 216K
Receivables by Origination Year and Average FICO
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Financing Receivables (Details)
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Relating to VOI Products (Details)
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(Details)
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Outstanding Borrowings (Details)
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Derivative Instruments (Details)
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Option Valuation Assumptions (Details)
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Share, Basic and Diluted (Details)
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(Details)
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Activity under the Share Repurchase Program
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92: R80 COMMITMENTS AND CONTINGENCIES - Additional HTML 52K
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Remaining Purchase Obligations (Details)
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(Exact Name of Registrant as Specified in Its Charter)
____________________________________________
iDelaware
i81-2545345
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i6355 MetroWest Boulevard, iSuite 180,
iOrlando,
iFlorida
i32835
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s Telephone Number, Including Area Code (i407)
i613-3100
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 par value per share
iHGV
iNew
York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. iYesx No o
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge Accelerated Filer
x
Accelerated
Filer
o
Non-Accelerated Filer
o
Smaller Reporting Company
io
Emerging Growth Company
io
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ix
No
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of October 30, 2023 was i107,984,020.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: iORGANIZATION
AND BASIS OF PRESENTATION
Our Business
Hilton Grand Vacations Inc. (“Hilton Grand Vacations,”“we,”“us,”“our,”“HGV” or the “Company”) is a global timeshare company engaged in developing, marketing, selling, managing and operating timeshare resorts, timeshare plans and ancillary reservation services, primarily under the Hilton Grand Vacations brand. Our operations primarily consist of selling vacation ownership intervals and vacation ownership interests (collectively, “VOIs” or “VOI”) for ourselves and third parties; financing and servicing loans provided to consumers for their VOI purchases; operating resorts and timeshare plans; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange programs and Diamond points-based multi-resort timeshare clubs and exchange programs. During 2022, we began
offering a new club membership called HGV Max across certain of our sales centers. For any customer who purchases a VOI, this membership provides the ability to use points across all properties within our network. The membership provides new destinations for existing club owners and broader vacation opportunities for new buyers. Our club offerings, including HGV Max, are collectively referred to as “Clubs”.
As of September 30, 2023, we had over i150 properties located in the United States (“U.S.”), Europe, Mexico, the Caribbean, Canada and Japan.
A significant number of our properties and VOIs are concentrated in Florida, Europe, Hawaii, California, Arizona, Nevada and Virginia.
i
Basis of Presentation
The unaudited condensed consolidated financial statements presented herein include 100% of our assets, liabilities, revenues, expenses and cash flows as well as all entities in which we have a controlling financial interest. The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of rights held by other interests. If the entity is
considered to be a variable interest entity (“VIE”), we determine whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interests in the entity. We consolidate entities when we own more than 50% of the voting shares of a company or otherwise have a controlling financial interest. Our accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All material intercompany transactions and balances have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash
flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2022, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2023.
i
Use
of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance.
NOTE 2: iSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
iRecently
Adopted Accounting Pronouncements
On January 1, 2023, we adopted Accounting Standards Update 2022-02 (“ASU 2022-02”), Financial Instruments— Credit Losses (ASC 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 provides, under Issue 2 - Vintage Disclosures, that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. For financing receivables, the vintage disclosure is to present the amortized cost basis by credit quality indicator and class of financing receivable for the year of origination. The vintage disclosures are to be applied prospectively. The impact of adoption of ASU 2022-02 was in disclosure only and did not have an impact on our condensed consolidated financial statements. See Note 5: Timeshare Financing Receivables for
additional information.
The following tables show our disaggregated revenues by product and segment from contracts with customers. We operate our business in the following itwo reportable segments:
(i) Real estate sales and financing and (ii) Resort operations and club management. See Note 16: Business Segments for more information related to our segments.
($ in millions)
Three Months Ended September 30,
Nine
Months Ended September 30,
Real Estate Sales and Financing Segment
2023
2022
2023
2022
Sales of VOIs, net
$
i367
$
i500
$
i1,040
$
i1,130
Sales,
marketing, brand and other fees
i170
i177
i501
i457
Interest
income
i68
i61
i199
i170
Other
financing revenue
i7
i7
i26
i26
Real
estate sales and financing segment revenues
$
i612
$
i745
$
i1,766
$
i1,783
($
in millions)
Three Months Ended September 30,
Nine Months Ended September 30,
Resort Operations and Club Management Segment
2023
2022
2023
2022
Club management
$
i56
$
i48
$
i160
$
i150
Resort
management
i82
i82
i242
i229
Rental(1)
i160
i157
i469
i436
Ancillary
services
i11
i2
i33
i30
Resort
operations and club management segment revenues
$
i309
$
i289
$
i904
$
i845
(1)Excludes
intersegment transactions. See Note 16: Business Segments for additional information.
Our accounts receivable that relate to our contracts with customers includes amounts associated with our contractual right to consideration for completed performance
obligations and are settled when the related cash is received. Accounts receivable are recorded when the right to consideration becomes unconditional and is only contingent on the passage of time. Our timeshare financing receivables consist of loans related to our financing of VOI sales that are secured by the underlying timeshare properties. See Note 5: Timeshare financing receivables for additional information.
i
The following table provides information on our contracts
with customers which are included in Accounts receivable, net and Timeshare financing receivables, net, respectively, on our condensed consolidated balance sheets:
Contract
liabilities include payments received or due in advance of satisfying our performance obligations. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues related to sales of VOIs of projects under construction, Club activation fees and annual dues, the liability for bonus points awarded to our customers for purchase of VOIs at our properties or properties under our fee-for-service arrangements that may be redeemed in the future, deferred maintenance fees and other deferred revenue.
Deferred
sales of VOIs of projects under construction
i18
i3
Club activation
fees and annual dues
i110
i76
Bonus point incentive liability(1)
i108
i106
Deferred
maintenance fees
i18
i14
Other deferred revenue
i36
i42
(1)The
balance includes $i61 million and $i51 million of bonus point incentive liabilities included in Accounts payable,
accrued expenses and other on our condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022, respectively. This liability is for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.
Revenue earned for the three and nine months ended September 30, 2023, that was included in the contract liabilities balance at December 31, 2022, was approximately $i44
million and $i143 million, respectively.
Contract assets relate to incentive fees that can be earned for meeting certain targets on sales of VOIs at properties under our fee-for-service arrangements; however, our right to consideration is conditional upon completing the requirements of the annual incentive fee period. Contract assets were $ii9/
million as of both September 30, 2023 and December 31, 2022.
Transaction Price Allocated to Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) bonus points that may be redeemed in the future.
i
The
following table presents the deferred revenue, deferred cost of VOI sales and deferred direct selling costs from sales of VOIs related to projects under construction as of September 30, 2023 and December 31, 2022:
During
the nine months ended September 30, 2023, we recognized $i4 million of sales of VOIs, net, offset by deferrals of $i18
million, related to sales of projects under construction, some of which were completed during the year. We expect to recognize the revenue, costs of VOI sales and direct selling costs related to the projects under construction as of September 30, 2023, upon their completion in 2024.
i
The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Bonus points incentive
liability as of September 30, 2023:
($ in millions)
Remaining Transaction Price
Recognition Period
Recognition Method
Advanced deposits
$
i185
i18
months
Upon customer stays
Club activation fees
i65
i7
years
Straight-line basis over average inventory holding period
Accounts receivable within the scope of ASC 326 are measured at amortized cost. iThe following table represents our accounts receivable, net of allowance for credit losses:
Our
accounts receivable are generally due within one year of origination. We use delinquency status and economic factors such as credit quality indicators to monitor our receivables within the scope of ASC 326 and use these as a basis for how we develop our expected loss estimates. We have allowances for our accounts receivable to account for fee-for-service commissions, trade accounts receivable, marketing packages, club dues and activation fees.
NOTE 5: iTIMESHARE FINANCING RECEIVABLES
We
define our timeshare financing receivables portfolio segments as (i) originated and (ii) acquired. On August 2, 2021 (the “Acquisition Date”), we acquired Dakota Holdings, Inc., the parent of Diamond Resorts International (“Diamond” or “Legacy-Diamond”) (the “Diamond Acquisition”). Our originated portfolio represents timeshare financing receivables that existed both prior to and following the Acquisition Date, excluding Legacy-Diamond (“Legacy-HGV”) and timeshare financing receivables originated by Legacy-Diamond subsequent to the Acquisition Date. Our acquired portfolio includes all timeshare financing receivables acquired from Legacy-Diamond as of the Acquisition Date.
i
The
following table presents the components of each portfolio segment by class of timeshare financing receivables:
(1)Includes
amounts used as collateral to secure a non-recourse revolving timeshare receivable credit facility (“Timeshare Facility”) as well as amounts held as future collateral for securitization activities.
(2)Non-credit premium of $i97 million was recognized at the Acquisition Date, of which $i30
million and $i41 million remains unamortized as of September 30, 2023 and December 31, 2022, respectively.
/
In August 2023, we completed a securitization of approximately $i293 million
of gross timeshare financing receivables and issued approximately $i187 million of i5.72% notes, $i79 million
of i6.11% notes, and $i27 million of i6.94%
notes due January 2038. The securitization transaction did not qualify as a sale and, accordingly, no gain or loss was recognized. The transaction is considered a secured borrowing, and the notes from the transaction are presented as non-recourse debt. The proceeds were used to pay down in part some of the existing debt and for other general corporate purposes. See Note 7: Consolidated Variable Interest Entities and Note 10: Debt and Non-recourse Debt for additional information.
As of December 31, 2022, we had timeshare financing receivables of $i105
million securing the Timeshare Facility. As of September 30, 2023, we did inot have any timeshare financing receivables securing the Timeshare Facility.
We record an estimate of variable consideration for defaults as a reduction of revenue from financed VOI sales at the time revenue is recognized. We record the difference between the timeshare financing receivable and the variable
consideration included in the transaction price for the sale of the related VOI as an allowance for financing receivables and record the receivable net of the allowance. During the nine months ended September 30, 2023 and 2022, we recorded an adjustment to our estimate of variable consideration of $i117 million and $i101
million, respectively.
We recognize interest income on our timeshare financing receivables as earned. As of September 30, 2023 and December 31, 2022, we had interest receivable outstanding of $i15 million and $i13
million, respectively, on our originated timeshare financing receivables. As of September 30, 2023 and December 31, 2022, we had interest receivable outstanding of $i2 million and $i4 million, respectively,
on our acquired timeshare financing receivables. Interest receivable is included in Other Assets within our condensed consolidated balance sheets. The interest rate charged on the notes correlates to the risk profile of the customer at the time of purchase and the percentage of the purchase that is financed, among other factors. As of September 30, 2023, our originated timeshare financing receivables had interest rates ranging from i1.5% to i25.8%,
a weighted-average interest rate of i14.7%, a weighted-average remaining term of i8.3 years and maturities through 2038. Our acquired timeshare financing receivables had interest rates ranging from i2.0%
to i25.0%, a weighted-average interest rate of i15.7%, a weighted-average remaining term of i7
years and maturities through 2033.
We apply payments we receive for loans, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a loan is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. During the nine months ended September 30, 2023 and 2022, we reversed $i55 million and $i52
million, respectively, of accrued interest income. We resume interest accrual for loans for which we had previously ceased accruing interest once the loan is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the loan is 121 days past due and, subsequently, we write off the uncollectible note against the reserve once the foreclosure process is complete.
Acquired Timeshare Financing Receivables with Credit Deterioration
Our acquired timeshare financing receivables were deemed to be purchased credit deteriorated financial assets. These notes receivable were initially recognized at their purchase price, represented by the acquisition date fair value, and subsequently “grossed-up” by our acquisition date assessment of the allowance for credit losses. The difference over which par value of the acquired purchased
credit deteriorated assets exceeds the purchase price plus the initial allowance for financing receivable losses is reflected as a non-credit premium and is amortized as a reduction to interest income under the effective interest method.
The fair value of our acquired timeshare financing receivables as of the Acquisition Date was determined using a discounted cash flow method, which calculated a present value of expected future risk-adjusted cash flows over the remaining term of the respective timeshare financing receivables. Consequently, the fair value of the acquired timeshare financing receivables recorded on our consolidated balance sheet as of the Acquisition Date included an estimate of expected financing receivable losses which became the historical cost basis for that portfolio going forward.
The allowance for financing receivable losses for our acquired timeshare financing
receivables is remeasured at each period end and takes into consideration an estimated measure of anticipated defaults and early repayments. We consider historical Legacy-Diamond timeshare financing receivables performance and the current economic environment in the re-measurement of the allowance for financing receivable losses for our acquired timeshare financing receivables. Subsequent changes to the allowance for financing receivable losses are recorded as adjustments to the provision.
i
Our gross acquired timeshare financing receivables as of September 30,
2023 mature as follows:
(1)Includes
incremental provision for financing receivables losses, net of activity related to the repurchase of defaulted and upgraded securitized timeshare financing receivables.
/
(2)Represents the initial change in allowance resulting from upgrades of Acquired loans. Upgraded Acquired loans and their related allowance are included in the Originated portfolio segment.
Credit Quality of Timeshare Financing Receivables
Legacy-HGV Timeshare Financing Receivables
We evaluate this portfolio collectively for purposes of estimating variable consideration, since we hold a large group of homogeneous timeshare financing receivables
which are individually immaterial. We monitor the collectability of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for estimating expected defaults and determining our allowance for financing receivables losses on our timeshare financing receivables. For the static pool analysis, we use certain key dimensions to stratify our portfolio, including FICO scores, equity percentage at the time of sale and certain other factors. The adequacy of the related allowance is determined by management through analysis of several factors, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio including assumed default rates, aging and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based
on a periodic analysis of the mortgage portfolio.
(1)Timeshare
financing receivables without a FICO score are primarily related to foreign borrowers.
/i
The following table details our gross Legacy-HGV timeshare financing receivables by the origination year and average FICO score as of September 30, 2023:
($
in millions)
2023
2022
2021
2020
2019
Prior
Total
FICO score
700+
$
i290
$
i233
$
i102
$
i36
$
i67
$
i107
$
i835
600-699
i100
i86
i38
i14
i24
i42
i304
<600
i10
i11
i5
i2
i3
i7
i38
No
score(1)
i58
i43
i21
i13
i20
i31
i186
Total
$
i458
$
i373
$
i166
$
i65
$
i114
$
i187
$
i1,363
Current
period gross write-offs
$
i—
$
i6
$
i10
$
i5
$
i8
$
i15
$
i44
(1)Timeshare
financing receivables without a FICO score are primarily related to foreign borrowers.
/
As of September 30, 2023 and December 31, 2022, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $i88 million and $i76
million, respectively. iThe following tables detail an aged analysis of our gross timeshare receivables balance:
We evaluate these portfolios collectively for purposes of estimating variable consideration, since we hold a large group of homogeneous timeshare financing receivables which are individually immaterial. We monitor the collectability of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for estimating expected
defaults and determining our allowance for financing receivables losses on our timeshare financing receivables.
The adequacy of the related allowance is determined by management through analysis of several factors, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio including assumed default rates, aging and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio.
Our gross balances by average FICO score of our Legacy-Diamond acquired and originated timeshare financing receivables were as follows:
(1)Timeshare
financing receivables without a FICO score are primarily related to foreign borrowers.
The following tables detail our gross Legacy-Diamond acquired and originated timeshare financing receivables by the origination year and average FICO score as of September 30, 2023:
(1)Timeshare
financing receivables without a FICO score are primarily related to foreign borrowers.
As of September 30, 2023 and December 31, 2022, we had ceased accruing interest on Legacy-Diamond timeshare financing receivables with an aggregate principal balance of $i369 million and $i377 million,
respectively. The following tables detail an aged analysis of our gross timeshare receivables balance:
During
the nine months ended September 30, 2023, we acquired inventory associated with a property in New York for $i136 million from a third-party developer. Under the purchase agreement, there are no further inventory commitments related to this property.
For the nine months ended September 30, 2023, we recorded non-cash operating activity transfers of $i39
million related to the registrations for timeshare units under construction from Property and equipment, net to Inventory. As VOI inventory is constructed it is recorded into Property and equipment, net until such units are registered and made available for sale. Once registered and available for sale, the units are then transferred into completed unsold VOIs inventory.
The
table below presents cost of sales true-ups relating to VOI products and the related impacts to the carrying value of inventory and cost of VOI sales:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2023
2022
2023
2022
Cost
of sales true-up(1)
$
i22
$
i8
$
i51
$
i17
(1)For
the three and nine months ended September 30, 2023 and 2022, respectively, the cost of sales true-up decreased cost of VOI sales and increased inventory.
/
NOTE 7: iCONSOLIDATED
VARIABLE INTEREST ENTITIES
As of September 30, 2023, we consolidated i10 VIEs. The activities of these entities are limited primarily to purchasing qualifying non-recourse timeshare financing receivables from us and issuing debt securities and/or borrowing under a debt facility to facilitate such purchases. The timeshare financing receivables held by these entities are not available to our creditors and are not our legal assets, nor is the debt that is securitized through these entities a legal liability
to us.
We have determined that we are the primary beneficiaries of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we often replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the right to receive benefits that could be significant to them. Only the assets of our VIEs are available to settle the obligations of the respective entities.
i
Our condensed consolidated
balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:
As of September 30, 2023 and December 31, 2022, we had ownership interests in BRE Ace LLC and 1776 Holding LLC, which are VIEs. We do not consolidate BRE Ace LLC and 1776 Holding LLC because we are not the primary beneficiary. For both VIEs, our investment interests are included in the condensed consolidated balance sheets as Investments in unconsolidated affiliates, and equity
earned is included in the condensed consolidated statements of operations as Equity in earnings from unconsolidated affiliates.
During the nine months ended September 30, 2023, we received a cash distribution of approximately $i6 million from our investment in BRE Ace LLC.
Our iitwo/
unconsolidated affiliates have aggregated debt balances of $i389 million and $i393 million as of September 30, 2023 and December 31, 2022, respectively. The debt is secured by their assets and is without recourse to us.
Our maximum exposure to loss as a result of our investment interests in the iitwo/ unconsolidated affiliates is primarily
limited to (i) the carrying amount of the investments, which totaled $i74 million as of September 30, 2023 and $i72 million as of December 31, 2022, respectively, and (ii) receivables
for commission and other fees earned under fee-for-service arrangements. See Note 15: Related Party Transactions for additional information.
Amortization
expense on intangible assets was $i40 million and $i50 million for the three months ended September 30, 2023 and 2022, respectively, and $i118
million and $i147 million for the nine months ended September 30, 2023 and 2022, respectively.
NOTE 10: iDEBT
AND NON-RECOURSE DEBT
Debt
i
The following table details our outstanding debt balance and its associated interest rates:
(2)Amount
includes unamortized deferred financing costs related to our term loan and senior notes of $i23 million and $i17 million, respectively, as of September 30, 2023 and $i26
million and $i19 million, respectively, as of December 31, 2022. This amount also includes unamortized original issuance discounts of $i6 million and $i7
million as of September 30, 2023 and December 31, 2022, respectively.
/
(3)Amount does not include unamortized deferred financing costs of $i3 million and $i4
million as of September 30, 2023 and December 31, 2022, respectively, related to our revolving facility which are included in Other assets in our condensed consolidated balance sheets.
Senior secured credit facility
As of September 30, 2023, we had $i16 million of letters of credit outstanding under the revolving credit
facility and $i1 million outstanding backed by cash collateral. We were in compliance with all applicable maintenance and financial covenants and ratios as of September 30, 2023. As of September 30, 2023, we have $i866
million remaining borrowing capacity under the revolver facility.
On May 31, 2023, we amended our Credit Facility Agreement to transition from London Interbank Offered Rate (“LIBOR”) reference rates to Secured Overnight Financing Rate (“SOFR”) reference rates. We applied the optional expedients in ASC 848, Reference Rate Reform (“ASC 848”), accounting for the modification as a continuation of the
existing contract. Therefore, the transition did not require
remeasurement at the modification date or a reassessment of previous accounting determinations, and the change in reference rates will be applied prospectively from the amendment date.
On October 6, 2023, we amended our Term loan under the Senior secured credit facility. Under the amendment, the new interest rate is SOFR plus a spread adjustment of i0.11% plus i2.75%,
down from SOFR plus a spread adjustment of i0.11% plus i3.00%. Additionally, the interest rate floor for the Term loan was lowered from i0.50%
to i0.00%.
We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt. These interest rate swaps are associated with the remaining available SOFR based senior secured credit facility. During the second quarter of 2023, we amended certain interest rate swap contracts to transition from one-month LIBOR to one-month SOFR as the floating interest rate. The notional amount of the amended contracts
was $i550 million. The remaining $i184 million of interest rate swaps were not amended as of September 30, 2023. We did not de-designate the interest rate swaps with a floating interest rate to one-month LIBOR as we are
permitted to maintain the designation as part of the transitional relief in accordance with ASC 848. Transaction costs incurred for the swap amendments were de minimis.
As of September 30, 2023, these interest rate swaps convert the SOFR-based variable rate on our Term Loan to average fixed rates of i1.29% per annum with maturities between 2023 and 2028, for the balance on this borrowing up to the notional values of our interest rate swaps. As of September 30, 2023, the aggregate notional values of the interest
rate swaps under our Term Loan was $i700 million. Our interest rate swaps have been designated and qualify as cash flow hedges of interest rate risk and recorded at their estimated fair value as an asset in Other assets in our condensed consolidated balance sheets. As of September 30, 2023 and December 31, 2022, the estimated fair value of our cash flow hedges were $i61
million and $i63 million, respectively. We characterize payments we make in connection with these derivative instruments as interest expense and a reclassification of accumulated other comprehensive income for presentation purposes.
i
The
following table reflects the activity, net of tax, in Accumulated other comprehensive income related to our derivative instruments during the nine months ended September 30, 2023:
The Senior Unsecured Notes are guaranteed on a senior unsecured basis by certain of our subsidiaries.
We are in compliance with all applicable financial covenants as of September 30, 2023.
(2)Amount
relates to securitized debt only and does not include unamortized deferred financing costs of $i3 million and $i4 million as of September 30, 2023 and December 31, 2022,
respectively, relating to our Timeshare Facility included in Other Assets in our condensed consolidated balance sheets.
(3)The revolving commitment period of the Timeshare Facility terminates in May 2024; however, the repayment maturity date extends 12 months beyond the commitment termination date to May 2025.
In August 2023, we completed a securitization of approximately $i293 million of gross timeshare financing receivables and issued approximately
$i187 million of i5.72% notes, $i79 million
of i6.11% notes, and $i27 million of i6.94%
notes due January 2038. The securitized debt is backed by pledged assets, consisting primarily of a pool of timeshare financing receivables secured by first mortgages, deeds of trust, membership interests or timeshare interests (other than a fee simple interest in real estate) and temporarily by approximately $i49 million on deposit in a prefunding account. The securitized debt is a non-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral to the debt. The proceeds were used to pay down in part some of the existing debt and for other general corporate purposes.
Additionally, in connection with the securitization, we incurred $i5 million in debt issuance costs.
The Timeshare Facility is a non-recourse obligation payable solely from the pool of timeshare financing receivables pledged as collateral and related assets. As of September 30, 2023, our Timeshare Facility has a remaining borrowing capacity of $i750
million.
We are required to deposit payments received from customers on the timeshare financing receivables securing the Timeshare Facility and Securitized Debt into depository accounts maintained by third parties. On a monthly basis, the depository accounts are utilized to make required principal, interest and other payments due under the respective loan agreements. The balances in the depository accounts were $i90 million and $i50 million
as of September 30, 2023 and December 31, 2022, respectively, and were included in Restricted cash in our condensed consolidated balance sheets.
(1)Carrying
amount net of allowance for financing receivables losses.
/
(2)Carrying amount net of unamortized deferred financing costs and discounts.
Our estimates of the fair values were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values. The table above excludes interest rate swaps discussed below and cash and cash equivalents, restricted cash, accounts receivable and advance deposits, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
The
estimated fair values of our originated and acquired timeshare financing receivables were determined using a discounted cash flow model. Our model incorporates default rates, coupon rates, credit quality and loan terms respective to the portfolio based on current market assumptions for similar types of arrangements.
The estimated fair value of our Level 2 derivative financial instruments was determined utilizing projected future cash flows discounted based on an expectation of future interest rates derived from observable market interest rate curves and market volatility. Refer to Note 10: Debt and Non-recourse Debt above.
The
estimated fair value of our Level 1 debt and non-recourse debt were based on prices in active debt markets. The estimated fair value of our Level 3 debt and non-recourse debt were based on the following:
•Debt – based on indicative quotes obtained for similar issuances and projected future cash flows discounted at risk-adjusted rates
•Non-recourse debt – based on projected future cash flows discounted at risk-adjusted rates.
NOTE 12: iINCOME
TAXES
The effective tax rate for the three months ended September 30, 2023 and 2022 was approximately i32% and i26%,
respectively. The effective tax rate for the nine months ended September 30, 2023 and 2022 was approximately i28% and i30%, respectively. The effective tax rate
increase quarter over quarter is due to the overall change in earnings and discrete items, primarily unrecognized tax benefits. The effective tax rate decrease year over year is due to the change in earnings mix of our worldwide income and discrete items, primarily unrecognized tax benefits. The difference between our effective tax rate as compared to the U.S. statutory federal tax rate of 21% is primarily due to the impact of state and foreign income taxes and discrete items, primarily unrecognized tax benefits.
NOTE 13: iSHARE-BASED
COMPENSATION
Stock Plan
On May 3, 2023, the 2023 Omnibus Incentive Plan (“2023 Plan”) was approved by our shareholders to replace the 2017 Omnibus Incentive Plan and the 2017 Plan for Non-Employee Directors (the “2017 Plans”). The 2023 Plan authorizes the issuance of restricted stock units (“Service RSUs” or “RSUs”), nonqualified stock options (“Options”), time and performance-vesting restricted stock units (“Performance RSUs” or “PSUs”), and stock appreciation rights (“SARs”) to certain employees and directors. Pursuant to the 2023 Plan, i5,240,000
shares of our common stock are reserved for issuance. The 2017 Plans remain in place until all of the awards previously granted thereunder have been paid, forfeited or expired. Shares underlying awards that are canceled or forfeited under the 2017 Plans without the issuance of any shares are added to the 2023 Plan share pool. However, the shares which remained available for issuance under the 2017 Plans are no longer available for issuance, and all future awards will be granted pursuant to the 2023 Plan. As of September 30, 2023, there were i5,263,395
shares of common stock available for future issuance under the 2023 plan. We recognized share-based compensation expense of $i12 million and $i14 million for the three months ended September 30,
2023 and 2022, respectively, and $i37 million and $i40 million for the nine months ended September 30, 2023
and 2022, respectively.
As of September 30, 2023, unrecognized compensation costs for unvested awards was approximately $i38 million, which is expected to be recognized over a weighted average period of i1.8
years.
Service RSUs
During the nine months ended September 30, 2023, we issued i532,497 Service RSUs with a grant date fair value of $i48.72,
which generally vest in equal annual installments over ithree years from the date of grant.
Options
During the nine months ended September 30, 2023, we granted i301,215
Options with an exercise price of $i49.14, which generally vest over ithree
years from the date of the grant.
i
The weighted-average grant date fair value of these Options was $i24.78,
which was determined using the Black-Scholes-Merton option-pricing model with the assumptions included in the table below. Expected volatility is calculated using the historical volatility of our share price. Risk-free rate is based on the Treasury Constant Maturity Rate closest to the expected life as of the grant date. Expected term is estimated using the vesting period and contractual term of the Options.
Expected volatility
i46.8
%
Dividend
yield (1)
i—
%
Risk-free rate
i4.2
%
Expected
term (in years)
i6.0
(1)At the date of grant we had no plans to pay dividends during the expected term of these options.
/
As of September 30,
2023, we had i1,711,614 Options outstanding that were exercisable.
During the nine months ended September
30, 2023, we issued i119,887 Performance RSUs with a grant date fair value of $i49.14.
The Performance RSUs are settled at the end of a i3-year performance period, with i50% of the Performance RSUs subject
to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization, further adjusted for net deferral and recognition of revenues and related direct expenses related to sales of VOIs of projects under construction. The remaining i50% of the Performance RSUs are subject to the achievement of certain contract
sales targets. We determined that the performance conditions for our Performance RSUs are probable of achievement and, for the three and nine months ended September 30, 2023, we recognized compensation expense based on the number of Performance RSUs we expect to vest.
Employee Stock Purchase Plan
In March 2017, the Board of Directors adopted the Hilton Grand Vacations Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective during 2017. In connection with the ESPP, we issued i2.5
million shares of common stock which may be purchased under the ESPP. The ESPP allows eligible employees to purchase shares of our common stock at a price per share not less than i95% of the fair market value per share of common stock on the purchase date, up to a maximum threshold established by the plan administrator for the offering period. During the three and nine months ended September 30, 2022, we recognized less than $ii1/
million of compensation expense related to this plan, respectively.
During the fourth quarter of 2022, the Board of Directors amended the ESPP plan to allow eligible employees to purchase shares of our common stock at a price per share not less than i85% of the fair market value per share of common stock on the first day of the Purchase Period or the last day of the Purchase Period, whichever is lower, up to a maximum threshold established by the plan
administrator for the offering period. The amendment became effective in 2023. During the three and nine months ended September 30, 2023, we recognized less than $i1 million and $i1
million of compensation expense related to this plan, respectively.
NOTE 14: iEARNINGS PER SHARE
i
The following tables present the
calculation of our basic and diluted earnings per share (“EPS”) and the corresponding weighted average shares outstanding referenced in these calculations:
Three Months Ended September 30,
Nine Months Ended September 30,
($ and shares outstanding
in millions, except per share amounts)
2023
2022
2023
2022
Basic EPS:
Numerator:
Net
income
$
i92
$
i150
$
i245
$
i274
Denominator:
Weighted
average shares outstanding
i109.5
i119.6
i111.0
i121.3
Basic
EPS(1)
$
i0.84
$
i1.25
$
i2.21
$
i2.26
Diluted
EPS:
Numerator:
Net income
$
i92
$
i150
$
i245
$
i274
Denominator:
Weighted
average shares outstanding
i110.9
i121.1
i112.6
i122.9
Diluted
EPS(1)
$
i0.83
$
i1.24
$
i2.18
$
i2.23
Basic
weighted average shares outstanding
i109.5
i119.6
i111.0
i121.3
RSUs(2),
PSUs(3), Options(4) and ESPP
i1.4
i1.5
i1.6
i1.6
Diluted
weighted average shares outstanding
i110.9
i121.1
i112.6
i122.9
(1)Earnings
per share amounts are calculated using whole numbers.
(2) There were iiiino///
anti-dilutive RSUs for the three and nine months ended September 30, 2023 and 2022, respectively.
(3) There were iiiino///
anti-dilutive PSUs for the three and nine months ended September 30, 2023 and 2022, respectively.
(4) Excludes i0.9 million and i0.7
million of Options that would have been anti-dilutive to EPS for the three and nine months ended September 30, 2023, respectively, under the treasury stock method; and i0.8 million and i0.7
million of Options that would have been anti-dilutive to EPS for the three and nine months ended September 30, 2022, respectively, under the treasury stock method. These Options could potentially dilute EPS in the future.
On May 4, 2022, our Board of Directors approved a share repurchase program authorizing the
Company to repurchase up to an aggregate of $i500 million of its outstanding shares of common stock over a itwo-year period (the "2022 Repurchase Plan"). On May 3, 2023, our Board of Directors approved a new share
repurchase program authorizing the Company to repurchase up to an aggregate of $i500 million of its outstanding shares of common stock over a itwo-year period (the "2023 Repurchase
Plan") which is in addition to the 2022 Repurchase Plan. iThe following table summarizes stock repurchase activity under the share repurchase programs as of September 30, 2023:
From
October 1, 2023 through October 30, 2023, we repurchased approximately i690,000 shares for $i26
million. As of October 30, 2023, we had $i432 million of remaining availability under the 2023 Repurchase Plan.
NOTE 15: iRELATED
PARTY TRANSACTIONS
BRE Ace LLC and 1776 Holding, LLC
We hold an ownership interest in BRE Ace LLC, a VIE, which owns a timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations.”
We hold an ownership interest in 1776 Holding, LLC, a VIE, which owns a timeshare resort property and related operations, known as “Liberty Place Charleston, by Hilton Club.”
We record Equity in earnings from our unconsolidated affiliates in our condensed consolidated statements of operations. See Note 8: Investments in Unconsolidated Affiliates for additional information. Additionally, we earn commissions and other fees related to fee-for-service agreements with the
investees to sell VOIs at Elara, by Hilton Grand Vacations and Liberty Place Charleston, by Hilton Club. iThese amounts are summarized in the following table and are included in Sales, marketing, brand, and other fees on our condensed consolidated statements of operations as of the date they became related parties.
Three
Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2023
2022
2023
2022
Equity in earnings from unconsolidated affiliates
$
i2
$
i2
$
i7
$
i9
Commissions
and other fees
i51
i52
i159
i133
We
also had $i14 million and $i23 million of outstanding receivables related to the fee-for-service agreements included in Accounts receivable, net on our condensed consolidated balance sheets as of September 30, 2023
and December 31, 2022, respectively.
NOTE 16: iBUSINESS SEGMENTS
We operate our business through the following itwo
reportable segments:
•Real estate sales and financing – We market and sell VOIs that we own. We also source VOIs through fee-for-service agreements with third-party developers. Related to the sales of the VOIs that we own, we provide consumer financing, which includes interest income generated from the origination of consumer loans to customers to finance their purchase of VOIs and revenue from servicing the loans. We also generate fee revenue from servicing the loans provided by third-party developers to purchasers of their VOIs.
•Resort operations and club management – We manage the Clubs and earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We also earn fees for managing the timeshare properties. We generate rental revenue from
unit rentals of unsold inventory and inventory made available due to ownership exchanges under our Club programs. We also earn revenue from food and beverage, retail and spa outlets at our timeshare properties.
The performance of our operating segments, which are also our reportable segments, is evaluated primarily based on adjusted earnings before interest expense (excluding non-recourse debt), taxes, depreciation and amortization
(“EBITDA”). We define Adjusted EBITDA as EBITDA, 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 and discounts resulting from purchase accounting, and other non-cash and one-time charges.
We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment operating performance.
i
The
following table presents revenues for our reportable segments reconciled to consolidated amounts:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2023
2022
2023
2022
Revenues:
Real
estate sales and financing
$
i612
$
i745
$
i1,766
$
i1,783
Resort
operations and club management(1)
i322
i299
i944
i870
Total
segment revenues
i934
i1,044
i2,710
i2,653
Cost
reimbursements
i97
i82
i289
i215
Intersegment
eliminations(1)
(i13)
(i10)
(i40)
(i25)
Total
revenues
$
i1,018
$
i1,116
$
i2,959
$
i2,843
(1)Includes
charges to the Real estate sales and financing segment from the Resort operations and club management segment for fulfillment of discounted marketing package stays at resorts. These charges totaled $i13 million and $i10 million, respectively, for the three months ended September 30,
2023 and 2022, and $i40 million and $i25 million, respectively, for the nine months ended September 30, 2023 and 2022.
/i
The
following table presents Adjusted EBITDA for our reportable segments reconciled to net income:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2023
2022
2023
2022
Adjusted
EBITDA:
Real estate sales and financing(1)
$
i205
$
i295
$
i563
$
i666
Resort
operations and club management(1)
i126
i112
i358
i332
Segment
Adjusted EBITDA
i331
i407
i921
i998
Acquisition
and integration-related expense
(i12)
(i19)
(i42)
(i49)
General
and administrative
(i40)
(i50)
(i130)
(i158)
Depreciation
and amortization
(i53)
(i57)
(i156)
(i181)
License
fee expense
(i37)
(i33)
(i101)
(i90)
Other
(loss) gain, net
(i1)
i2
i3
i1
Interest
expense
(i45)
(i37)
(i133)
(i105)
Income
tax expense
(i44)
(i54)
(i96)
(i115)
Equity
in earnings from unconsolidated affiliates
i2
i2
i7
i9
Impairment
expense
i—
i—
(i3)
i—
Other
adjustment items(2)
(i9)
(i11)
(i25)
(i36)
Net
income
$
i92
$
i150
$
i245
$
i274
(1)Includes
intersegment transactions. Refer to our table presenting revenues by reportable segment above for additional discussion.
(2)For the three and nine months ended September 30, 2023 and 2022, these amounts include costs associated with stock-based compensation, restructuring, one-time charges and othernon-cash items included within our reportable segments.
/
NOTE 17: iCOMMITMENTS
AND CONTINGENCIES
Commitments
We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units or other real estate at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of September 30, 2023, we were committed to purchase approximately $i56 million of inventory over a period of itwo
years and $i16 million of other commitments in the normal course of business. We are also committed to an agreement to
exchange parcels of land in Hawaii, subject to the successful completion of zoning, land use requirements and other applicable regulatory requirements. The actual
amount and timing of the acquisitions are subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances.
During the nine months ended September 30, 2023, we fulfilled $i136 million of purchases required under our inventory commitments. iAs
of September 30, 2023, our remaining obligations pursuant to these arrangements were expected to be incurred as follows:
($
in millions)
2023 (remaining)
2024
2025
2026
2027
Thereafter
Total
Inventory purchase obligations(1)
$
i—
$
i56
$
i—
$
i—
$
i—
$
i—
$
i56
Other
commitments(2)
i4
i9
i3
i—
i—
i—
i16
Total
$
i4
$
i65
$
i3
$
i—
$
i—
$
i—
$
i72
(1)Includes
commitments for properties in South Carolina and Japan.
(2)Primarily relates to commitments related to information technology and sponsorships.
Litigation Contingencies
We are involved in litigation arising from the normal course of business, some of which include claims for substantial sums. We evaluate these legal proceedings and claims at each balance sheet date to determine the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, our ability to reasonably estimate the amount of loss. We record a contingent litigation liability when it is determined that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
As of September 30,
2023, we accrued liabilities of approximately $i121 million for all legal matters. Approximately $i101 million of these accrued liabilities relate to a judgment entered against Diamond in March 2022 in connection
with a case filed in 2015 that was not deemed probable and estimable as of the Acquisition Date. This matter is subject to insurance coverage, and as a result, we recorded an insurance claim receivable of $i83 million within Accounts receivable, net in our condensed consolidated balance sheet as of September 30, 2023.
While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material effect on the
Company’s financial condition, cash flows, or materially adversely affect overall trends in our results of operations, legal proceedings are inherently uncertain and unfavorable rulings could, individually or in aggregate, have a material adverse effect on the Company’s business, financial condition or results of operations.
Surety Bonds
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 $i548 million as of September 30, 2023, which primarily consist of escrow, construction and subsidy related bonds.
NOTE 18: iSUBSEQUENT
EVENTS
On November 5, 2023, we entered into a merger agreement with Bluegreen Vacations Holding Corporation (“Bluegreen”) to acquire Bluegreen. Subject to the terms and conditions of the merger agreement, upon the consummation of the transaction, we will acquire all of the shares of Bluegreen for $i75.00 per share in an all-cash transaction, representing total consideration of approximately $i1.5 billion,
inclusive of net debt. Consummation of this transaction is subject to customary conditions and receipt of regulatory approvals. The transaction is anticipated to close during the first half of 2024.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 ended December 31, 2022.
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 (the “Exchange Act”). 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, including, related to the
proposed transaction between HGV and Bluegreen Vacations Holding Corporation (“Bluegreen”).
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, including those related to the proposed merger transaction between HGV and Bluegreen, could adversely impact 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 ended December 31, 2022, as supplemented and updated by the risk factors described from time to time in other periodic reports that we file with the SEC. 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 to Hilton Grand Vacations Inc., together with its consolidated subsidiaries. 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; and the remaining resorts and units are owned by our third-party owners.
“Developed” refers to VOI inventory that is sourced from projects developed by HGV.
“Fee
for service” refers to VOI inventory that we sell and manage on behalf of third-party developers.
“Just-in-time” refers to VOI inventory that is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.
“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.
“Collections” refers to the acquired portfolio of resort properties included in Diamond's single- and multi-use trusts.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q includes discussion of terms that are
not recognized terms under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), and financial measures that are not calculated in accordance
with U.S. GAAP, including earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA, fee-for-service commissions and brand fees, sales and marketing expense, net, sales revenue, real estate expense, and profits and profit margins for our real estate, financing, resort and club management, and rental and ancillary services.
Operational Metrics
This
Quarterly Report on Form 10-Q includes discussion of key business operational metrics, including contract sales, tour flow, and volume per guest (“VPG”).
See “Key Business and Financial Metrics” and “Results of Operations” for a discussion of the meanings of these terms, the Company’s reasons for providing the applicable non-GAAP financial measures, and reconciliations of non-GAAP financial measures to measures calculated in accordance with U.S. GAAP.
Overview
Our Business
We are a global
timeshare company engaged in developing, marketing, selling, managing and operating timeshare resorts, timeshare plans and ancillary reservation services, primarily under the Hilton Grand Vacations brand. Our operations primarily consist of: selling vacation ownership intervals and vacation ownership interests (collectively, “VOIs” or “VOI”) for us and third parties; financing and servicing loans provided to consumers for their VOI purchases; operating resorts and timeshare plans; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange programs and the Diamond points-based multi-resort timeshare clubs and exchange programs.
During 2022, we began offering a new club membership called HGV Max across certain of our sales centers. For any customer who purchases a VOI, this membership provides the ability to use points across all properties within our network. The membership provides new destinations
for existing club owners and broader vacation opportunities for new buyers. It also combines the best benefits from our existing programs, new travel benefits, Hilton hotel discounts and benefits and alternative experiential options available to HGV Max owners. Our club offerings, including HGV Max, are collectively referred to as “Clubs”.
As of September 30, 2023, we have over 150 properties located in the United States (“U.S.”), Europe, Mexico, the Caribbean, Canada, and Japan. A significant number of our properties and VOIs are concentrated in Florida, Europe, Hawaii, California, Arizona, Nevada and Virginia and feature spacious, condominium-style accommodations with superior amenities and quality service. As of September 30, 2023, we had approximately 526,000 members across our club offerings. Based on the type
of Club membership, members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort, any property in the Hilton system of 22 industry-leading brands across approximately 7,300 properties, or affiliated properties, as well as numerous experiential vacation options, such as cruises and guided tours, or they have the option to exchange their VOI for various other timeshare resorts throughout the world through an external exchange program.
In August 2023, a series of wildfires in Maui caused widespread property destruction, damage and loss of life. The fires resulted in resort closures and travel restrictions, adversely impacting travel, including in the surrounding Hawaiian Islands. We have 13 properties and six sales centers in the Hawaiian Islands, including two properties and sales centers in Maui. While neither of our Maui properties sustained physical damage, the decline in tourism throughout
the region has negatively impacted our business and financial results, and there continues to be a level of uncertainty as to the extent of our continued business interruption. Therefore, we will continue to evaluate the overall impact of the wildfires on our operations through the remainder of the year and into 2024.
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 product includes 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 or biennial basis, at the timeshare
resort in which the VOI is located. Traditionally, timeshare operators have funded 100% of the investment necessary to acquire land and construct timeshare properties. We source VOIs through developed properties and fee-for-service and just-in-time agreements with third-party developers and have focused our inventory strategy on developing an optimal inventory mix. The fee-for-service agreements enable us to generate fees from the sales and marketing of the VOIs 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.
Another one of our products is the marketing and selling of 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 that Collection. In general, purchasers of a VOI in a collection do not acquire a direct ownership interest in the resort properties in the Collection. Rather
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 ended September 30, 2023, sales from fee-for-service and just-in-time inventory were 30%, and 17% of contract sales, respectively. See “Key Business and Financial Metrics — 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 $11.6 billion at current pricing. Capital efficient arrangements, comprised of our fee-for-service and just-in-time inventory, represented approximately 36% 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 throughout the United States, Mexico, Canada, Europe, and Japan. 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 over 60 sales distribution centers in various domestic and international locations. 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, are frequent leisure travelers, and have an affinity with our brands. Tour flow quality impacts key metrics such as close rate and VPG, defined in “Key Business and Financial Metrics—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 ended September
30, 2023, 69% of our contract sales were to our existing owners, compared to 71% for the nine months ended September 30, 2022.
We provide financing for members purchasing our developed and acquired inventory and generate interest income on the loans. 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% to 25% per annum. Financing propensity was 62% and 63% for the nine months ended September 30, 2023 and 2022, respectively. We calculate financing propensity as contract
sales volume of financed contracts originated in the period divided by contract sales volume of all contracts originated in the period.
The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the loan term. The weighted-average FICO score for loans to U.S. and Canadian borrowers at the time of origination were as follows:
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 5: Timeshare Financing Receivables in our condensed consolidated financial statements.
In addition, we earn fees from servicing our securitized timeshare financing receivables and the loans provided by third-party developers of our fee-for-service projects to purchasers of their VOIs.
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 services include day-to-day operations of the resorts, maintenance of the resorts, preparation of books and financial records including reports, budgets and projections, arranging for annual audits and maintenance fee billing and collections and employment training and personnel oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10% to 15% of the costs to operate the applicable resort. As a result, 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 also reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The original terms of our management agreements typically range 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 and exchange programs. 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
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% 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. While we do not record the purchase price of sales of VOI products developed by fee-for-service partners as revenue in our condensed consolidated financial statements, rather recording the commission earned as revenue in accordance with U.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, just-in-time, 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.
•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.
EBITDA and Adjusted EBITDA
EBITDA, presented herein, is a financial measure that is not recognized under U.S. GAAP that reflects net income, 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 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 and discounts resulting from purchase accounting, and other non-cash and one-time charges.
EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income or other measures of financial performance or liquidity derived in accordance with U.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 under U.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.
See below under “Segment Results” for reconciliation of our EBITDA
and Adjusted EBITDA to net income, our most comparable U.S. GAAP financial measure.
Non-GAAP Measures within Our Segments
Within each of our two reportable segments, we present additional profit and profit margin information for certain key activities—real estate, financing, resort and club management, and rental and ancillary services. These non-GAAP measures are used by our management team to evaluate the operating performance of each of our key activities, and to make day-to-day operating decisions. We believe these additional measures are also important in helping investors understand the performance and efficiency with which we are able to convert revenues for each of these primary activities into operating profit, both in dollars and as margins, and are frequently used by securities analysts, investors and other interested parties as one of common performance measures to compare
results or estimate valuations across companies in our industry. Specifically—
•Sales revenue represents sales of VOIs, net, and Fee-for-service commissions and brand fees earned from the sale of fee-for-service VOIs. Fee-for-service commissions and brand fees represents sales, marketing, brand and other fees, which corresponds to the applicable line item from our condensed consolidated statements of operations, adjusted by marketing revenue and other fees earned primarily from discounted marketing related packages which encompass a sales tour to prospective owners. Real estate expense represents costs of VOI sales and Sales and marketing expense, net. Sales and marketing expense, net represents sales and marketing expense, which corresponds
to the applicable line item from our condensed consolidated statements of operations, adjusted by marketing revenue and other fees earned primarily from discounted marketing related packages which encompass a sales tour to prospective owners. Both fee-for-service commissions and brand fees and sales and marketing expense, net, represent non-GAAP measures. We present these items net because it provides a meaningful measure of our underlying real estate profit related to our primary real estate activities which focus on the sales and costs associated with our VOIs.
•Real estate profit represents sales revenue less
real estate expense. Real estate margin is calculated as a percentage by dividing real estate profit by sales revenue. We consider real estate profit margin to be an important non-GAAP operating measure because it measures the efficiency of our sales and marketing spending, management of inventory costs, and initiatives intended to improve profitability.
•Financing profit represents financing revenue, net of financing expense, both of which correspond to the applicable line items from our condensed consolidated statements of operations. Financing profit margin is calculated as a percentage by dividing financing profit by financing revenue. We consider this to be an important non-GAAP operating measure because it measures the efficiency and profitability of our financing business in connection with our VOI sales.
•Resort
and club management profit represents resort and club management revenue, net of resort and club management expense, both of which correspond to the applicable line items from our condensed consolidated statements of operations. Resort and club management profit margin is calculated as a percentage by dividing resort and club management profit by resort and club management revenue. We consider this to be an important non-GAAP operating measure because it measures the efficiency and profitability of our resort and club management business that support our VOI sales business.
•Rental and ancillary services profit represents rental and ancillary services revenues, net of rental and ancillary services expenses, both of which correspond to the applicable line items from our condensed consolidated statements of operations. Rental and ancillary services profit margin
is calculated as a percentage by dividing rental and ancillary services profit by rental and ancillary services revenue. We consider this to be an important non-GAAP operating measure because it measures our ability to convert available inventory and unoccupied rooms into revenue and profit by transient rentals, as well as profitability of other services, such as food and beverage, retail, spa offerings and other guest services.
Each of the foregoing four profit measures is not a recognized term under U.S. GAAP and should not be considered as an alternative to net income or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our calculation of such measures may not be comparable to similarly titled measures of other companies. Furthermore, these measures have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income or
other methods of analyzing our results as reported under U.S. GAAP. Such limitations include the fact that these measures only include those revenues and expenses related to one of the four specified operating activities as opposed to on a consolidated basis, and other limitations that are similar to those discussed above under “EBITDA and Adjusted EBITDA.”See below under “Reconciliation of Non-GAAP Profit Measures to GAAP Measure” for reconciliation of these four profit measures to net income, our most comparable U.S. GAAP financial measure.
The following tables present our revenues by segment. We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment operating performance.
Three
Months Ended September 30,
Variance
Nine Months Ended September 30,
Variance
($ in millions)
2023
2022
$
%
2023
2022
$
%
Revenues:
Real
estate sales and financing
$
612
$
745
$
(133)
(17.9)
$
1,766
$
1,783
$
(17)
(1.0)
Resort
operations and club management
322
299
23
7.7
944
870
74
8.5
Total segment revenues
934
1,044
(110)
(10.5)
2,710
2,653
57
2.1
Cost
reimbursements
97
82
15
18.3
289
215
74
34.4
Intersegment eliminations(1)
(13)
(10)
(3)
30.0
(40)
(25)
(15)
60.0
Total
revenues
$
1,018
$
1,116
$
(98)
(8.8)
$
2,959
$
2,843
$
116
4.1
(1)See
Note 16: Business Segments in our condensed consolidated financial statements for details on the intersegment eliminations.
The following table reconciles net income, our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:
Three
Months Ended September 30,
Variance(1)
Nine Months Ended September 30,
Variance(1)
($ in millions)
2023
2022
$
%
2023
2022
$
%
Net
income
$
92
$
150
$
(58)
(38.7)
$
245
$
274
$
(29)
(10.6)
Interest
expense
45
37
8
21.6
133
105
28
26.7
Income tax expense
44
54
(10)
(18.5)
96
115
(19)
(16.5)
Depreciation
and amortization
53
57
(4)
(7.0)
156
181
(25)
(13.8)
Interest expense, depreciation and amortization included in equity in
earnings from unconsolidated affiliates
—
2
(2)
(100.0)
1
2
(1)
(50.0)
EBITDA
234
300
(66)
(22.0)
631
677
(46)
(6.8)
Other
loss (gain) , net
1
(2)
3
NM
(3)
(1)
(2)
NM
Share-based compensation expense
12
14
(2)
(14.3)
38
40
(2)
(5.0)
Impairment
expense
—
—
—
NM
3
—
3
100%
Acquisition and integration-related expense
12
19
(7)
(36.8)
42
49
(7)
(14.3)
Other
adjustment items(2)
10
7
3
42.9
24
48
(24)
(50.0)
Adjusted EBITDA
$
269
$
338
$
(69)
(20.4)
$
735
$
813
$
(78)
(9.6)
(1)NM
- fluctuation in terms of percentage change is not meaningful.
(2)These amounts include costs associated with restructuring, one-time charges, the amortization of premiums resulting from purchase accounting and other non-cash items.
We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 16: Business Segments in our condensed consolidated financial statements. 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—EBITDA and Adjusted EBITDA.” The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA:
Three
Months Ended September 30,
Variance
Nine Months Ended September 30,
Variance
($ in millions)
2023
2022
$
%
2023
2022
$
%
Adjusted
EBITDA:
Real estate sales and financing(1)
$
205
$
295
$
(90)
(30.5)
$
563
$
666
$
(103)
(15.5)
Resort
operations and club management(1)
126
112
14
12.5
358
332
26
7.8
Adjustments:
Adjusted
EBITDA from unconsolidated affiliates
2
5
(3)
(60.0)
8
12
(4)
(33.3)
License fee expense
(37)
(33)
(4)
12.1
(101)
(90)
(11)
12.2
General
and administrative(2)
(27)
(41)
14
(34.1)
(93)
(107)
14
(13.1)
Adjusted EBITDA
$
269
$
338
$
(69)
(20.4)
$
735
$
813
$
(78)
(9.6)
(1)Includes
intersegment transactions, share-based compensation, depreciation and other adjustments attributable to the segments.
(2)Excludes segment related share-based compensation, depreciation and other adjustment items.
Reconciliation of Non-GAAP Profit Measures to GAAP Measure
The following table reconciles net income, our most comparable U.S. GAAP financial measure, to EBITDA and the total of our real estate, financing, resort and club management, and rental and ancillary services profit measures.
Three
Months Ended September 30,
Variance(1)
Nine Months Ended September 30,
Variance(1)
($ in millions)
2023
2022
$
%
2023
2022
$
%
Net
income
$
92
$
150
$
(58)
(38.7)
$
245
$
274
$
(29)
(10.6)
Interest
expense
45
37
8
21.6
133
105
28
26.7
Income tax expense
44
54
(10)
(18.5)
96
115
(19)
(16.5)
Depreciation
and amortization
53
57
(4)
(7.0)
156
181
(25)
(13.8)
Interest expense, depreciation and amortization included in equity in
earnings from unconsolidated affiliates
—
2
(2)
(100.0)
1
2
(1)
(50.0)
EBITDA
234
300
(66)
(22.0)
631
677
(46)
(6.8)
Other
loss (gain), net
1
(2)
3
NM
(3)
(1)
(2)
NM
Equity in earnings from unconsolidated affiliates(2)
(2)
(4)
2
(50.0)
(8)
(11)
3
(27.3)
Impairment
expense
—
—
—
100%
3
—
3
100%
License fee expense
37
33
4
12.1
101
90
11
12.2
Acquisition
and integration-related expense
12
19
(7)
(36.8)
42
49
(7)
(14.3)
General and administrative
40
50
(10)
(20.0)
130
158
(28)
(17.7)
Profit
$
322
$
396
$
(74)
(18.7)
$
896
$
962
$
(66)
(6.9)
Real
estate profit
$
160
$
253
$
(93)
(36.8)
$
429
$
531
$
(102)
(19.2)
Financing
profit
50
43
7
16.3
152
130
22
16.9
Resort and club management profit
95
85
10
11.8
273
261
12
4.6
Rental
and ancillary services profit
17
15
2
13.3
42
40
2
5.0
Profit
$
322
$
396
$
(74)
(18.7)
$
896
$
962
$
(66)
(6.9)
(1)
NM - fluctuation in terms of percentage change is not meaningful.
(2) Excludes impact of interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates of $1 million for the nine months ended September 30, 2023. Also excludes impact of aforementioned items of $2 million for both the three and nine months ended September 30, 2022.
Reconciliation
of Non-GAAP Real Estate Measures to GAAP Measures
The following table reconciles our Sales, marketing, brand and other fees revenue, our most comparable U.S. GAAP financial measure, to Fee-for-service commissions and brand fees, and Sales and marketing expense, our most comparable U.S. GAAP financial measure, to Sales and marketing expense, net. Fee-for-service commissions and brand fees and Sales and marketing, net, are used in calculating our real estate profit and real estate profit margin. See “Real Estate Sales and Financing Segment—Real Estate” below.
Three
Months Ended September 30,
Variance
Nine Months Ended September 30,
Variance
($ in millions)
2023
2022
$
%
2023
2022
$
%
Sales,
marketing, brand and other fees
$
170
$
177
$
(7)
(4.0)
$
501
$
457
$
44
9.6
Less:
Marketing revenue and other fees(1)
(63)
(52)
(11)
21.2
(176)
(164)
(12)
7.3
Fee-for-service commissions and brand fees
$
107
$
125
$
(18)
(14.4)
$
325
$
293
$
32
10.9
Sales
and marketing expense
$
334
$
322
$
12
3.7
$
971
$
849
$
122
14.4
Less:
Marketing revenue and other fees(1)
(63)
(52)
(11)
21.2
(176)
(164)
(12)
7.3
Sales and marketing expense, net
$
271
$
270
$
1
0.4
$
795
$
685
$
110
16.1
(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.
Real Estate Sales and Financing
In accordance with Accounting Standards Codification 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 September 30,
Variance
Nine Months Ended September 30,
Variance
($ in millions)
2023
2022
$
2023
2022
$
Sales
of VOIs (deferrals)
$
(12)
$
10
$
(22)
$
(18)
$
(53)
$
35
Sales of VOIs recognitions
—
76
(76)
4
87
(83)
Net
Sales of VOIs (deferrals) recognitions
(12)
86
(98)
(14)
34
(48)
Cost of VOI sales (deferrals)
(3)
3
(6)
(4)
(18)
14
Cost
of VOI sales recognitions
—
27
(27)
1
30
(29)
Net Cost of VOI sales (deferrals) recognitions
(3)
30
(33)
(3)
12
(15)
Sales
and marketing expense (deferrals)
(2)
2
(4)
(3)
(8)
5
Sales and marketing expense recognitions
—
11
(11)
1
13
(12)
Net
Sales and marketing expense (deferrals) recognitions
(2)
13
(15)
(2)
5
(7)
Net construction (deferrals) recognitions
$
(7)
$
43
$
(50)
$
(9)
$
17
$
(26)
Real
estate sales and financing segment revenues decreased by $133 million for the three months ended September 30, 2023, compared to the same period in 2022, primarily due to a $133 million decrease in Sales of VOI, net, resulting from a $98 million decrease in net deferrals of sales of VOIs under construction, $18 million decrease in contract sales driven by lower VPG and the impact of the Maui wildfires, and $14 million higher provision for financing receivable losses. Sales, marketing, brand and other fees decreased $7 million driven by lower commissions earned on sales of fee-
for-service
properties. This was partially offset by a $7 million increase in financing revenue primarily related to an increase in our loan portfolio and an increase in the weighted average interest rate.
Real estate sales and financing segment revenues decreased by $17 million for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to a $90 million decrease in Sales of VOI, net, driven by a $48 million increase in net deferrals of sales of VOIs under construction, a 15.5% decrease in VPG, the impact of Maui wildfires, and $14 million higher provision for financing receivable losses. Sales, marketing, brand and other fees increased $44 million driven by higher commissions earned on sales of fee-for-service properties. In addition, there was a $29 million increase in financing revenue primarily related to an increase in our loan portfolio and an increase
in the weighted average interest rate.
Real estate sales and financing Adjusted EBITDA decreased by $90 million and $103 million for the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to an increase in marketing costs due to our emphasis in adding new owners, which typically carry a higher cost per tour, in addition to the overall decrease in segment revenues described 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 $23 million and $74 million for the three and nine months ended
September 30, 2023, compared to the same periods in 2022, primarily due to an increase in rental revenue. The rental revenue increase was driven primarily by an increase in occupied room nights compared to the same periods in 2022. For the nine months ended September 30, 2023, the additional increase in Resort operations and club management revenue was due to an increase in resort management revenue, primarily driven by higher fees.
Resort operations and club management segment adjusted EBITDA increased by $14 million and $26 million for the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to the increase in Resort and club management and rental revenues described above, partially offset by an increase in resort and club management
expenses due to personnel-related costs incurred to service increased arrivals and transaction activity.
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
See “Reconciliation of Profit Measures to GAAP Measure” above.
Contract sales decreased by $18 million for the three months ended September 30, 2023, compared to the same period in 2022, primarily due to a 13.5% decrease in VPG, and impact of Maui wildfires, partially offset by a 14.8% increase in tour flow.
Contract sales decreased by $9 million for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to a 15.5% decrease in VPG, and impact of Maui wildfires, partially offset by a 21.5% increase in tour flow.
Three
Months Ended September 30,
Variance
Nine Months Ended September 30,
Variance
($ in millions)
2023
2022
$
%
2023
2022
$
%
Sales
of VOIs, net
$
367
$
500
$
(133)
(26.6)
$
1,040
$
1,130
$
(90)
(8.0)
Fee-for-service
commissions and brand fees
107
125
(18)
(14.4)
325
293
32
10.9
Sales revenue
474
625
(151)
(24.2)
1,365
1,423
(58)
(4.1)
Less:
Cost
of VOI sales
43
102
(59)
(57.8)
141
207
(66)
(31.9)
Sales and marketing expense, net
271
270
1
0.4
795
685
110
16.1
Real
estate expense
$
314
$
372
$
(58)
(15.6)
$
936
$
892
$
44
4.9
Real
estate profit
$
160
$
253
$
(93)
(36.8)
$
429
$
531
$
(102)
(19.2)
Real
estate profit margin(1)
33.8
%
40.5
%
31.4
%
37.3
%
(1)Excluding the marketing revenue and other fees adjustment, Real estate profit margin was 29.8%
and 37.4% for the three months ended September 30, 2023 and 2022, respectively, and 27.8% and 33.5% for the nine months ended September 30, 2023 and 2022, respectively.
Real estate profit decreased by $93 million for the three months ended September 30, 2023, compared to the same period in 2022, driven by a decrease in Sales revenue of $151 million due to lower Sales of VOIs, net of $133 million driven primarily by net deferrals of sales of VOIs under construction and lower Fee-for-service commissions and brand fees of $18 million, partially offset by a decrease in Real estate expense of $58 million due to a decrease in the Cost of VOI sales.
Real
estate profit decreased by $102 million for the nine months ended September 30, 2023, compared to the same period in 2022, driven by a decrease in Sales revenue of $58 million due to a decrease in Sales of VOIs, net, driven by a decrease in the net recognition of sales of VOIs under construction of $90 million. This was partially offset by an increase in Fee-for-service commissions and brand fees of $32 million. Additionally, there was a $44 million increase in Real estate expense due to an increase in marketing costs of $110 million, partially offset by a decrease in the Cost of VOI sales of $66 million.
Financing
Three
Months Ended September 30,
Variance
Nine Months Ended September 30,
Variance
($ in millions)
2023
2022
$
%
2023
2022
$
%
Interest
income
$
68
$
61
$
7
11.5
$
199
$
170
$
29
17.1
Other
financing revenue
7
7
—
—
26
26
—
—
Financing revenue
75
68
7
10.3
225
196
29
14.8
Consumer
financing interest expense
12
11
1
9.1
34
26
8
30.8
Other financing expense
13
14
(1)
(7.1)
39
40
(1)
(2.5)
Financing
expense
25
25
—
—
73
66
7
10.6
Financing profit
$
50
$
43
$
7
16.3
$
152
$
130
$
22
16.9
Financing
profit margin
66.7
%
63.2
%
67.6
%
66.3
%
Financing profit increased by $7 million and $22 million for the three and nine months ended September 30, 2023, compared
to the same periods in 2022, driven by an increase of $7 million and $29 million in financing revenue. For the nine months ended September 30, 2023, this was partially offset by a $7 million increase in Financing expense, compared to the same periods in 2022.
Financing revenue increased primarily due to interest income driven by an increase in our loan portfolio and an increase in the weighted-average interest rate. Financing expense increased in line with the related revenues and due to the increase in the weighted-average interest rate on our non-recourse debt.
Resort
Operations and Club Management Segment
Resort and Club Management
Three
Months Ended September 30,
Variance
Nine Months Ended September 30,
Variance
($ in millions)
2023
2022
$
%
2023
2022
$
%
Club
management revenue
$
56
$
48
$
8
16.7
$
160
$
150
$
10
6.7
Resort
management revenue
82
82
—
—
242
229
13
5.7
Resort and club management revenues
138
130
8
6.2
402
379
23
6.1
Club
management expense
14
11
3
27.3
44
31
13
41.9
Resort management expense
29
34
(5)
(14.7)
85
87
(2)
(2.3)
Resort
and club management expenses
43
45
(2)
(4.4)
129
118
11
9.3
Resort and club management profit
$
95
$
85
$
10
11.8
$
273
$
261
$
12
4.6
Resort
and club management profit margin
68.8
%
65.4
%
67.9
%
68.9
%
Resort and club management profit increased by $10 million for the three months ended September 30, 2023,
compared to the same period in 2022, largely driven by a $8 million increase in Club management revenue due to an increase in reservation and maintenance fees. Resort and club management expenses remained relatively consistent when compared to the three months ended September 30, 2022.
Resort and club management profit increased by $12 million for the nine months ended September 30, 2023, compared to the same period in 2022, largely driven by a $23 million increase in Resort and club management revenue, as a result of an increase in fee revenue for the period. This was offset by a $11 million increase in Resort and club management expenses due to personnel related costs incurred to service the increased transactions for the period.
Rental and Ancillary Services
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance
($ in millions)
2023
2022
$
%
2023
2022
$
%
Rental
revenues
$
160
$
157
$
3
1.9
$
469
$
436
$
33
7.6
Ancillary
services revenues
11
2
9
NM
33
30
3
10.0
Rental and ancillary services revenues
171
159
12
7.5
502
466
36
7.7
Rental
expenses
144
141
3
2.1
431
401
30
7.5
Ancillary services expense
10
3
7
NM
29
25
4
16.0
Rental
and ancillary services expenses
154
144
10
6.9
460
426
34
8.0
Rental and ancillary services profit
$
17
$
15
$
2
13.3
$
42
$
40
$
2
5.0
Rental
and ancillary services profit margin
9.9
%
9.4
%
8.4
%
8.6
%
(1) NM - fluctuation in terms of percentage change is not meaningful.
Rental
and ancillary services profit for the three and nine months ended September 30, 2023 remained consistent with the same periods in 2022.
Rental revenues increased by $3 million and $33 million for the three and nine months ended September 30, 2023, respectively, primarily due to an increase in occupied room nights compared to the same periods in 2022. Rental and ancillary services expense increased consistently with the aforementioned increase in rental revenue.
General and administrative expenses decreased by $10 million and $28 million for the three and nine months ended September
30, 2023, respectively, compared to the same periods in 2022, primarily due to lower legal and professional fees and lower personnel related costs. Depreciation and amortization decreased by $4 million and $25 million for the three and nine months ended September 30, 2023, respectively, primarily due to certain intangible assets being fully amortized. License fee expense increased by $4 million and $11 million, respectively, for the three and nine months ended September 30, 2023 when compared to the same periods in 2022.
Acquisition and Integration-Related Expense
Three
Months Ended September 30,
Variance
Nine Months Ended September 30,
Variance
($ in millions)
2023
2022
$
%
2023
2022
$
%
Acquisition
and integration-related expense
$
12
$
19
$
(7)
(36.8)
$
42
$
49
$
(7)
(14.3)
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, rebranding fees and employee-related costs such as severance and retention. For both the three and nine months ended September 30, 2023, acquisition and integration-related costs decreased by $7 million when compared to the same period in 2022. The decrease was primarily driven by a decrease in professional fees.
Non-Operating Expenses
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2023
2022
$
%
2023
2022
$
%
Interest
expense
$
45
$
37
$
8
21.6
$
133
$
105
$
28
26.7
Equity
in earnings from unconsolidated affiliates
(2)
(2)
—
—
(7)
(9)
2
(22.2)
Other loss (gain), net
1
(2)
3
NM
(3)
(1)
(2)
NM
Income
tax expense
44
54
(10)
(18.5)
96
115
(19)
(16.5)
(1)NM - fluctuation in terms of percentage change
is not meaningful
The change in non-operating expenses for the three and nine months ended September 30, 2023, compared to the same periods in 2022, was primarily due to a decrease in income tax expense of $10 million and $19 million, partially offset by an increase in interest expense of $8 million and $28 million, respectively. For the three and nine months ended September 30, 2023, the increase in interest expense was driven by an increase in weighted-average interest rates and an increase in net proceeds from debt. For the three months ended September 30, 2023, the decrease in income tax expense was driven by the overall change in our earnings which was partially offset by discrete items, primarily unrecognized tax benefits. For the nine months ended September
30, 2023, the decrease in income tax expense was driven by a change in earnings mix of our worldwide income and discrete items, primarily unrecognized tax benefits.
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, 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 revolver credit facility, our non-recourse revolving timeshare credit facility (“Timeshare Facility”), and through periodic securitizations of our timeshare financing receivables.
•During the nine months ended September
30, 2023, we acquired a property in New York for $136 million from a third-party developer for inventory.
•During the nine months ended September 30, 2023, we repurchased $269 million of shares under our share repurchase programs.
•In August 2023, we completed a securitization of approximately $293 million of gross timeshare financing receivables. The proceeds were used to pay down in part some of the existing debt and for other general corporate purposes. See Note 10: Debt and Non-Recourse Debt for additional information.
•As of September 30, 2023, we had total cash and cash equivalents of $227 million and restricted
cash of $308 million. Restricted cash primarily consists of escrow deposits received on VOI sales and reserves related to non-recourse debt.
•As of September 30, 2023, we had $866 million remaining borrowing capacity under the revolver facility.
•As of September 30, 2023, we had an aggregate of $750 million remaining borrowing capacity under our Timeshare Facility. Of this amount, we have $395 million of mortgage notes that are available to be securitized and another $359 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 of September 30, 2023, our inventory-related purchase commitments totaled $56 million over 2 years.
Sources and Uses of Our Cash
The following table summarizes our net cash flows and key metrics related to our liquidity:
Nine
Months Ended September 30,
Variance
($ in millions)
2023
2022
$
Net cash provided by (used in):
Operating activities
$
312
$
763
$
(451)
Investing
activities
(47)
(51)
4
Financing activities
(270)
(644)
374
Operating Activities
Cash flow provided by operating activities is primarily generated from (1) sales and financing of VOIs and (2) net cash generated from managing our resorts, Club operations
and providing related rental and ancillary services. Cash flows provided by operating activities primarily include funding our working capital needs and purchase of VOI inventory, including the purchase and development of real estate for future conversion to inventory. 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.
Net cash provided by operating activities was $312 million for the nine months ended September
30, 2023, compared to $763 million in the same 2022 period in the prior year. The decrease was primarily due to purchase of inventory from a third party developer, increases in cash utilized for working capital, and a decrease in net income during the nine months ended September 30, 2023.
The following table summarizes our VOI inventory spending:
Nine
Months Ended September 30,
($ in millions)
2023
2022
VOI spending - owned properties(1)
$
167
$
96
VOI spending - fee-for-service upgrades(2)
15
9
Purchases
and development of real estate for future conversion to inventory
28
4
Total VOI inventory spending
$
210
$
109
(1)For the nine months ended September 30, 2023 and 2022, our VOI inventory
spending on owned properties relates to deeded properties that are classified as Inventory on our unaudited condensed consolidated balance sheets.
(2)Includes expense related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects from developed projects of $11 million and $6 million recorded in Costs of VOI sales for the nine months ended September 30, 2023 and 2022, respectively.
Investing Activities
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.
Net cash used in investing activities was $47 million for the nine months ended September 30, 2023 compared to $51 million for the nine months ended September 30, 2022. The decrease was primarily due to decreased capital expenditures.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2023 was $270 million compared to net cash used in financing activities of $644 million for the same period in 2022. The decrease was primarily due to net proceeds from debt of $378 million and lower net repayments of non-recourse debt of $93 million compared to 2022, partially
offset by $106 million increase in share repurchases when compared to 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 of September 30, 2023, we were committed to approximately $5,114 million in contractual obligations over 9 years, $167 million of which will be fulfilled in the remainder of 2023. 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 17: Commitments and Contingencies and Note 10: Debt and Non-recourse
Debt for additional information.
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 $548 million as of September 30, 2023, which primarily consist of escrow, construction and subsidy 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 in June 2021 with an aggregate principal balance of $850 million, an interest rate of 5.000%, and maturity in June 2029. The 2031 Notes were issued in June 2021 with an aggregate principal balance of $500 million, an interest rate of 4.875%, and maturity in July 2031.
The Notes were co-issued by Hilton Grand Vacations Borrower LLC and Hilton Grand Vacations Borrower Inc. (the “Issuers”) and are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Hilton 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 applicable U.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.
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:
Total
revenues - transactions with non-guarantor subsidiaries
$
25
Total revenues - other
2,610
Operating income
319
Net income
132
Subsequent
Events
On November 5, 2023, we entered into a merger agreement with Bluegreen Vacations Holding Corporation (“Bluegreen”) to acquire Bluegreen. Subject to the terms and conditions of the merger agreement, upon the consummation
of the transaction, we will acquire all of the shares of Bluegreen for $75.00 per share in an all-cash transaction, representing total consideration of approximately $1.5 billion, inclusive of net debt. Consummation of this transaction is subject to customary conditions and receipt of regulatory approvals. The transaction is anticipated
to close during the first half of 2024.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in accordance with U.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 ended December 31, 2022.
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk
We are exposed to market risk from changes in interest rates and currency exchange rates. We manage our exposure to these risks by monitoring available financing alternatives and through pricing policies that may take into account currency exchange rates. Our exposure to market risk has not materially changed from what we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) or our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Controls can also be circumvented
by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated.
In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, and due to the previously identified material weakness in our internal controls over financial reporting that is described below, which is still being remediated, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023, we identified a material weakness in our internal controls over financial reporting for the year ended December 31, 2022 due to Diamond. Diamond, which was privately owned
prior to our acquisition in August 2021 and, accordingly, not a reporting company under the Exchange Act, did not adequately identify, design and implement the process-level controls for its significant processes that are necessary for compliance with the requirements for reporting companies pursuant to the Exchange Act and did not have appropriate information technology controls for its information technology systems or such controls did not operate for a sufficient period of time prior to the assessment date. These deficiencies neither pertained to, nor impacted, any of the processes, controls or procedures related to the historical business of the Company outside of Diamond. Additionally, the material weakness did not result in any identified misstatements to our financial statements, and there were no changes to previously released financial results.
Notwithstanding
the previously identified material weakness, which continues to be remediated, management, including our Chief Executive Officer and Chief Financial Officer, believes the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Ongoing Remediation Efforts to Address the Previously Identified Material Weakness
Management continues to improve the internal controls over financial reporting at Diamond. The remediation measures
to correct the previously identified material weakness include enhancing the design of existing controls, implementing new controls to address identified risks, implementing enhancements to information technology systems, and providing additional training to personnel to ensure the appropriate level of documentation is maintained to support internal controls over financial reporting.
The previously identified material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the material weakness will be remediated by the end of 2023.
Changes in Internal Controls Over Financial Reporting
Other than with respect to the remediation efforts described above in connection with the
previously identified material weakness, there were no changes in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Information with respect to this item may be found in Note 17: Commitments and Contingencies, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
The following represents important updates to the risk factors previously disclosed in Item 1A. of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 (our “2022 Form 10-K”). The risk factors included in our 2022 Form 10-K are important to understanding our business, operation, results of operations, financial condition, prospects, and our statements generally in this
Form 10-Q. Therefore, they should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.
In addition, the following risks and those risks described in our 2022 Form 10-K contain forward-looking statements, and they may not be the only risks facing the Company. The future business, results of operations and financial condition of the Company can be affected by the risk factors described in such reports and by other factors currently unknown, that management presently believes not to be material, that management has made certain
forward-looking projections, estimates or assumptions on, or that may rapidly evolve, develop or change. Any one or more of such factors could, directly or indirectly, cause our actual financial condition and results of operations to vary materially and adversely from past, or from anticipated future financial condition and results of operations. Any of these factors, in whole or in part, could materially and adversely affect our business, results of operations and financial condition and the trading price of our common stock. Because of these factors affecting our financial condition, key business operational metrics, and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Risks Relating to the Merger
We are subject
to various uncertainties and contractual restrictions, including the risk of litigation, while the merger with Bluegreen is pending, which may cause disruption and may make it more difficult to maintain relationships with employees, suppliers, vendors, customers or others.
Uncertainty about the effect of the merger on relationships with our team members/employees, owners, club members, guests, suppliers, vendors, customers, strategic partners or others may have an adverse effect on us. Although we intend to take steps designed to reduce any adverse effects, these uncertainties may impair our and Bluegreen’s ability to attract, retain and motivate key personnel until the merger is completed and for a period of time thereafter, and could cause suppliers, vendors, customers, and others that deal with us to seek to change, not renew or discontinue existing business relationships with us.
Employee
retention and recruitment may be challenging before the completion of the merger, as employees and prospective employees may have uncertainty about their future roles with HGV after the merger. If, despite our retention and recruiting efforts, key employees depart or prospective key employees are unwilling to accept employment with us because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, our business could be adversely affected.
The pursuit of the merger and the preparation for the integration may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could adversely affect our financial results.
In addition, the merger agreement restricts us and Bluegreen, without
the other party’s consent, from making certain acquisitions and taking other specified actions until the merger closes or the merger agreement terminates. These restrictions may prevent us and Bluegreen from pursuing otherwise attractive business opportunities and making other changes to our respective businesses before completion of the merger or termination of the merger agreement.
One of the conditions to the closing of the merger is the absence of any temporary restraining order, injunction, order or decree issued by a court of competent jurisdiction, other legal restraint or prohibition or any law enacted, enforced or deemed applicable by any governmental entity that prevents the consummation of the merger. Accordingly, while no litigation specific to the merger has been commenced, it is possible that such litigation may commence, and in any such litigation if any of the plaintiffs is successful in obtaining an injunction
prohibiting the consummation of the merger, then such injunction may prevent the merger from being completed, or delay it from being completed within the expected time frame.
Failure to complete the merger with Bluegreen could negatively impact our stock price and the future of our business and financial results.
If the merger is not completed, our ongoing business may be adversely affected, and we may be subject to several risks, including the following:
•we will have to pay certain costs relating to the merger, such as legal, accounting, financial
advisor and other fees and expenses, without the benefit of completing the transaction;
•our common stock price could decline to the extent that the current market price reflects a market assumption that the merger will be completed; and
•our senior management will have had expended significant amount of focus and effort on the merger instead of on pursuing other opportunities that could have been beneficial to us and our stockholders.
If the merger is not completed, we cannot assure you that these risks will not materialize and will not materially adversely affect our business, financial results and stock price.
Our ability to complete the merger with Bluegreen is subject to certain closing conditions and the receipt of consents and approvals from
government entities, which may impose conditions that could adversely affect us or cause the merger to be abandoned.
The merger agreement contains certain closing conditions, including, among others:
•the accuracy of the representations and warranties of the other party contained in the merger agreement, subject to the qualifications described in more detail herein;
•the other party having performed in all material respects all obligations required to be performed by it under the merger agreement;
•the absence of a “material adverse effect” impacting the other party;
•the absence of any judgment, order or decree issued by any court of competent jurisdiction
that prevents the consummation of the merger; and
•the termination or expiration of any applicable waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
We cannot assure you that the various closing conditions will be satisfied, or that any required conditions will not materially adversely affect us following the merger or will not result in the abandonment or delay of the merger.
Any delay in completing the merger may reduce or eliminate the benefits that we expect to achieve.
The merger is subject to a number of conditions beyond our control that may prevent, delay or otherwise materially adversely affect the completion of the merger. We cannot predict whether and when these conditions will be satisfied. Any delay in
completing the merger could cause us not to realize some or all of the synergies that we expect to achieve if the merger is successfully completed within the expected time frame.
We may not be able to integrate successfully and many of the anticipated benefits of combining us and Bluegreen may not be realized.
We entered into the merger agreement with the expectation that the merger will result in various benefits, including, among other things, operating efficiencies and certain key strategic and marketing partnerships and alliances. Achieving the anticipated benefits of the merger is subject to a number of risks and uncertainties, including whether the businesses of HGV and Bluegreen can be integrated in an efficient and effective manner.
It is possible that the integration process could take longer than anticipated and could result in
the loss of valuable employees, the disruption of each company’s ongoing businesses, processes and systems or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the merger. We also may not successfully fully realize the expected benefits related to various key strategic and marketing partnerships and alliances of Bluegreen or may otherwise be constrained by existing strategic and marketing partnerships. Further, our results of operations could also be adversely affected by any issues attributable to Bluegreen’s operations that arise or are based on events or actions that occur before the closing of the merger. We may have difficulty addressing possible differences in corporate cultures and management philosophies. The integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits
will be realized or, if realized, the timing of their realization. Failure to achieve these and other anticipated benefits (including operating efficiencies) could result in increased costs or decreases in the amount of expected net income and could adversely affect our future business, financial condition, operating results and prospects.
Our ability to integrate the Bluegreen business depends on our compliance with the Hilton license agreement, including the “Separate Operations” provisions and certain prohibitions on doing business with competitors.
We are a party to a license agreement with Hilton under
which we license substantially all of the trademarks, brand names and intellectual property used in our business. Under the terms of the Hilton license agreement, we must obtain Hilton’s approval to use the Hilton brand names and trademarks in connection with the conversion of the Bluegreen properties to branded properties using the Hilton marks, as well as for the branding of timeshare properties that we acquire or develop in the future. We have agreed with Hilton to operate the Bluegreen business as a “Separate Operation”, with the parties to agree to a “rebranding” or “conversion” schedule in the future. While we and Hilton have agreed to modify the Separate Operations requirements so as to allow us to achieve greater operating efficiency and synergy than currently provided for, any failure of the parties to do so will adversely impact such operating efficiency and synergy. In addition, any failure to obtain Hilton’s approval with respect to the
conversion of the Bluegreen properties will significantly harm our ability to integrate the Bluegreen business and its properties. If we cannot come to an agreement with Hilton on how to brand and operate Bluegreen properties that do not currently or will not in the future meet the Hilton brand standards, then we will be required to continue to operate them as separate operations.
In addition, the Hilton license agreement contains a number of prohibitions on us entering into certain agreements and arrangements with competitors of Hilton. If we assume or enter into such agreements or arrangements, we may breach the Hilton license agreement. The Hilton license agreement is critical to our business and the modification or amendment the Hilton license agreement or any exercise by Hilton of its termination or other rights under the Hilton license agreement could materially adversely impact our business.
We
will incur additional indebtedness to finance the merger, which could adversely affect our business, financial condition and results of operations, including by decreasing our business flexibility, as well as our ability to meet payment obligations under our indebtedness.
In connection with the completion of the merger, we intend to significantly increase our level of indebtedness. Our increased level of debt, especially with a higher interest rate climate, together with certain covenants and restrictions that will be imposed on us in connection with incurring this indebtedness, will, among other things: (a) require us to dedicate a larger portion of our cash flow from operations to servicing and repayment of debt; (b) reduce funds available for strategic initiatives and opportunities, dividends, share repurchases, working capital and other general corporate needs; (c) limit our ability to incur certain kinds or amounts of
additional indebtedness, which could restrict our flexibility to react to changes in our business, industry and economic conditions and increase borrowing costs; (d) create competitive disadvantages relative to other companies with lower debt levels and (e) increase our vulnerability to the impact of adverse economic and industry conditions. These covenants and restrictions may limit how our business is conducted. We may not be able to maintain compliance with these covenants and restrictions and, if we fail to do so, we may not be able to obtain waivers thereto and/or amend these covenants and restrictions. Our failure to comply with the covenants and restrictions could result in an event of default,which, if not cured or waived, could result in our being required to repay such indebtedness before its due date or to have to negotiate amendments to or waivers thereof, which may have unfavorable terms or result in the incurrence
of additional fees and expenses.
Our ability to make scheduled cash payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate significant operating cash flow in the future, which, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, including global conflicts or wars, on our business that are beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness.
In addition, our credit ratings directly impact the cost and availability of our borrowings and cost of capital. Our ratings will reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations on
a combined basis with Bluegreen. Any downgrades in our ratings could adversely affect ability to security future borrowings and the cost of such borrowings, which could impact our cash flows, financial condition, operating results and share and debt prices.
We will incur substantial transaction costs in connection with the merger.
We expect to incur a number of non-recurring expenses both before and after completing the merger, including fees for third party legal, investment banking and advisory services, the costs and expenses of filing, printing and mailing our merger proxy statement and all filing and other fees paid to the SEC in connection with the merger, obtaining necessary consents and approvals and combining the operations of the two companies. These fees and costs will be substantial. Additional unanticipated costs may be incurred in our integration of Bluegreen. Although
it is expected that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the two businesses, will offset the incremental transaction related costs over time, this net benefit may not be achieved in the near term, or at
all. Further, if the merger is not completed, we would have to recognize these expenses without realizing the expected benefits of the merger.
We and Bluegreen may be subject to complaints, litigation or reputational harm due to dissatisfaction with, or concerns related to, the merger from our current owners.
Our
current owners may be concerned about the actual or perceived impact of the merger on their vacation ownership interests (VOIs), including related to a reduced quality of resorts and product offerings due to the increased size of the business and addition of new owners, or increase or change in homeowners association or other fees. Bluegreen’s current owners may have similar concerns related to a decline in the quality of product offerings or increase in fees as a result of the merger and increase in size of the business. Complaints or litigation brought by existing owners following the completion of the merger could harm our reputation, discourage potential new owners and adversely impact our results of operations.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases
of Equity Securities
(c) Issuer Purchases of Equity Securities
On May 4, 2022, our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to an aggregate of $500 million of its outstanding shares of common stock over a two-year period (the "2022 Repurchase Plan"). On May 3, 2023, our Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to an aggregate of $500 million of its outstanding shares of common stock over a two-year period (the "2023 Repurchase Plan") which is in addition to the 2022 Repurchase Plan. The timing
and actual number of shares repurchased will depend on a variety of factors, including the stock price, corporate and regulatory requirements and other market and economic conditions. The shares are retired upon repurchase. The stock repurchase programs may be suspended or discontinued at any time and will automatically expire at the end of the respective plan terms.
During the three months ended September 30, 2023, we repurchased the following shares:
Period
Total
Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans
From
October 1, 2023 through October 30, 2023, we repurchased approximately 690,000 shares for $26 million. As of October 30, 2023, we had $432 million of remaining availability under the 2023 Repurchase Plan.
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Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 6th day of November 2023.
