UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,June 30, 2017

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number001-37794

 

 

Hilton Grand Vacations Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware 81-2545345

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

6355 MetroWest Boulevard, Suite 180,

Orlando, Florida

 32835
(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code (407)613-3100

 

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

 

 

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.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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 Rule12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   Accelerated Filer 
Non-Accelerated Filer ☒  (Do not check if a smaller reporting company)  Smaller Reporting Company 
Emerging Growth Company    

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.  ☐

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of AprilJuly 27, 2017 was 99,038,837.99,082,128.

 

 

 


HILTON GRAND VACATIONS INC.

FORM10-Q TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

   2 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   1719 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   2932 

Item 4.

 

Controls and Procedures

   3033 

PART II - OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

   3133 

Item 1A.

 

Risk Factors

   3133 

Item 2.

 

Unregistered SaleSales of Equity Securities and Use of Proceeds

   3134 

Item 3.

 

DefaultDefaults Upon Senior Securities

   3134 

Item 4.

 

Mine Safety Disclosures

   3134 

Item 5.

 

Other Information

   3134 

Item 6.

 

Exhibits

   3135 
 

Signatures

  

PART I FINANCIAL INFORMATION

Item 1.  Financial Statements

Item 1.Financial Statements

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

  June 30,   December 31, 
      March 31,    
    2017    
    December 31,   
 2016   
   2017   2016 
  (unaudited)       (unaudited)     

ASSETS

        

Cash and cash equivalents

  $196     $48     $191   $48 

Restricted cash

   78      103      62    103 

Accounts receivable, net of allowance for doubtful accounts of $7 and $6

   115      123   

Accounts receivable, net of allowance for doubtful accounts of $10 and $6

   123    123 

Timeshare financing receivables, net

   1,017      1,025      1,034    1,025 

Inventory

   507      513      492    513 

Property and equipment, net

   254      256      255    256 

Intangible assets, net

   69      70      71    70 

Other assets

   71      42      59    42 
  

 

   

 

   

 

   

 

 

TOTAL ASSETS (variable interest entities - $576 and $258)

  $    2,307     $    2,180   

TOTAL ASSETS (variable interest entities - $534 and $258)

  $2,287   $2,180 
  

 

   

 

   

 

   

 

 

LIABILITIES AND EQUITY

        

Liabilities:

    

Accounts payable, accrued expenses and other

  $264     $231     $265   $231 

Advanced deposits

   107      103      100    103 

Debt

   488      490      486    490 

Non-recourse debt

   695      694      645    694 

Deferred revenues

   142      106      128    106 

Deferred income tax liabilities

   385      389      380    389 
  

 

   

 

   

 

   

 

 

Total liabilities (variable interest entities - $569 and $245)

   2,081      2,013   

Total liabilities (variable interest entities - $518 and $245)

   2,004    2,013 

Commitments and contingencies - see Note 14

        

Equity:

        

Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of March 31, 2017 and December 31, 2016

   —      —   

Common stock, $0.01 par value; 3,000,000,000 authorized shares, 99,038,837 issued and outstanding as of March 31, 2017 and 98,802,597 issued and outstanding as of December 31, 2016

   1      1   

Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of June 30, 2017 and December 31, 2016

   —      —   

Common stock, $0.01 par value; 3,000,000,000 authorized shares, 99,082,128 issued and outstanding as of June 30, 2017 and 98,802,597 issued and outstanding as of December 31, 2016

   1    1 

Additionalpaid-in capital

   147      138      153    138 

Accumulated retained earnings

   78      28      129    28 
  

 

   

 

   

 

   

 

 

Total equity

   226      167      283    167 
  

 

   

 

   

 

   

 

 

TOTAL LIABILITIES AND EQUITY

  $2,307     $2,180     $2,287   $2,180 
  

 

   

 

   

 

   

 

 

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share amounts)

 

       Three Months Ended March 31,     
   2017  2016 

Revenues

   

Sales of VOIs, net

  $118   $115  

Sales, marketing, brand and other fees

   130    118  

Financing

   35    32  

Resort and club management

   36    31  

Rental and ancillary services

   46    45  

Cost reimbursements

   34    29  
  

 

 

  

 

 

 

Total revenues

   399    370  
  

 

 

  

 

 

 
   

Expenses

   

Cost of VOI sales

   33    38  

Sales and marketing

   152    135  

Financing

   10     

Resort and club management

   10     

Rental and ancillary services

   27    26  

General and administrative

   23    16  

Depreciation and amortization

       

License fee expense

   20    19  

Cost reimbursements

   34    29  
  

 

 

  

 

 

 

Total operating expenses

   316    284  

Allocated Parent interest expense

   —     (6) 

Interest expense

   (7)   —   
  

 

 

  

 

 

 

Income before income taxes

   76    80  

Income tax expense

   (26)   (32) 
  

 

 

  

 

 

 

Net income

  $50   $48  
  

 

 

  

 

 

 
   

Earnings per share:(1)

   

Basic and diluted

  $0.51   $0.48  
  

 

 

  

 

 

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
 
   2017  2016  2017  2016 

Revenues

     

Sales of VOIs, net

  $143  $114  $261  $229 

Sales, marketing, brand and other fees

   144   128   274   246 

Financing

   36   34   71   66 

Resort and club management

   35   34   71   65 

Rental and ancillary services

   47   49   93   94 

Cost reimbursements

   34   32   68   61 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

   439   391   838   761 
  

 

 

  

 

 

  

 

 

  

 

 

 

Expenses

     

Cost of VOI sales

   34   28   67   66 

Sales and marketing

   169   151   321   286 

Financing

   11   8   21   16 

Resort and club management

   10   8   20   16 

Rental and ancillary services

   31   30   58   56 

General and administrative

   29   21   52   37 

Depreciation and amortization

   7   6   14   11 

License fee expense

   23   20   43   39 

Cost reimbursements

   34   32   68   61 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   348   304   664   588 

Gain on foreign currency transactions

   —     1   —     1 

Allocated Parent interest expense

   —     (7  —     (13

Interest expense

   (7  —     (14  —   

Other loss, net

   —     (1  —     (1
  

 

 

  

 

 

  

 

 

  

 

 

 

Income before income taxes

   84   80   160   160 

Income tax expense

   (33  (33  (59  (65
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $51  $47  $101  $95 
  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings per share:(1)

     

Basic and diluted

  $0.51  $0.48  $1.02  $0.96 

 

(1)For the three and six months ended March 31,June 30, 2016, basic and diluted earnings per share was calculated based on shares distributed to Hilton Grand Vacations’ stockholders on January 3, 2017. See Note 11:Earnings Per Sharefor additional information.

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

      Three Months Ended March 31,       Six Months Ended June 30, 
  2017 2016   2017 2016 

Operating Activities

      

Net income

  $50   $48    $101  $95 

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

         14  11 

Amortization of deferred financing costs and other

         3  2 

Provision for loan losses

   11   10     27  23 

Other loss, net

   —    1 

Gain on foreign currency transactions

   —    (1

Share-based compensation

      —      8   —   

Deferred income taxes

         1  1 

Net changes in assets and liabilities:

      

Accounts receivables, net

     (8)    —    (28

Timeshare financing receivables, net

   (4)  (9)    (35 (27

Inventory

     (4)    22  3 

Purchase of assets for future conversion to inventory

   —    (14

Other assets

   (29)  (22)    (19 (17

Accounts payable, accrued expenses and other

   36   (19)    36  11 

Advanced deposits

         (3 6 

Deferred revenues

   36   22     22  20 

Other

   —     
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   135   36     177  86 
  

 

  

 

 
     

 

  

 

 

Investing Activities

      

Capital expenditures for property and equipment

   (8)  (9)    (15 (14

Software capitalization costs

   (2)  (1)    (6 (3
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (10)  (10)    (21 (17
  

 

  

 

   

 

  

 

 
   

Financing Activities

      

Issuance ofnon-recourse debt

   350    —      350   —   

Repayment ofnon-recourse debt

   (344)  (29)    (395 (58

Repayment of debt

   (3)   —      (5  —   

Debt issuance costs

   (5)   —      (5  —   

Net transfers from Parent

   —     

Net transfers to Parent

   —    (15

Proceeds from stock option exercises

   1   —   
  

 

  

 

   

 

  

 

 

Net cash used in financing activities

   (2)  (21)    (54 (73
  

 

  

 

   

 

  

 

 
   

Net increase in cash, cash equivalents and restricted cash

   123    

Net increase (decrease) in cash, cash equivalents and restricted cash

   102  (4

Cash, cash equivalents and restricted cash, beginning of period

   151   79     151  79 
  

 

  

 

   

 

  

 

 

Cash, cash equivalents and restricted cash, end of period

  $274   $84    $253  $75 
  

 

  

 

   

 

  

 

 
   

Supplemental Disclosures

      

Non-cash financing activity

      

Transfer of inventory from Parent

  $—    $15    $—    $9 
  

 

  

 

 

Transfer of property and equipment from Parent

  $—    $33 

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in millions)

 

         Additional       Accumulated       
         Common Stock           Paid-in       Retained         Total     
       Shares          Amount        Capital       Earnings         Equity     

Balance as of December 31, 2016

   99     $1     $138     $28     $167   

Net income

   —      —      —      50      50   

Deferred intercompany transaction(1)

   —      —      9      —      9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2017

   99     $1     $147     $78     $226   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

       Additional   Accumulated     
   Common Stock   Paid-in   Retained   Total 
   Shares   Amount   Capital   Earnings   Equity 

Balance as of December 31, 2016

   99   $1   $138   $28   $167 

Net income

   —      —      —      101    101 

Deferred intercompany transaction(1)

   —      —      9    —      9 

Activity related to share-based compensation

   —      —      6    —      6 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2017

   99   $1   $153   $129   $283 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)Refer to Note 9:Income Taxes for further discussion.

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization and Basis of Presentation

OurSpin-off from Hilton Worldwide Holdings Inc.

On February 26, 2016, Hilton Worldwide Holdings Inc. (“Hilton”)January 3, 2017, the previously announced that its Boardspin-off was completed by way of Directors had unanimously approved a plan to enhance long-term stockholder value by separating Hilton into three independent, publicly traded companies. Hilton subsequently executedtax- free spin-offspro rata distribution of Park Hotels & Resorts Inc. (“Park”) and Hilton Grand Vacations Inc.’s (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”).

On January 3, 2017, the spin-offs were completed by way of a pro rata distribution of the Company’s and Park’s common stock to Hilton stockholders of record as of 5:00 p.m., Eastern time, on December 15, 2016, thespin-off record date.Worldwide Holdings Inc. (“Former Hilton Parent” and together with its then consolidated subsidiaries, “Hilton”) stockholders. Each Hilton stockholder received one share of our common stock for every ten shares of Hilton common stock, in each case, held by such stockholder onstock. As a result of the record date. Hilton did not distribute any fractional shares of HGV common stock. Instead, the distribution agent aggregated fractional shares into whole shares, sold the whole shares in the open market at prevailing market prices and distributed the aggregate net cash proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in thespin-off.spin-off, Also on January 3, 2017, we became a separate publicly tradedpublicly-traded company on the New York Stock Exchange under the ticker symbol “HGV,” and Hilton did not retain any ownership interest in our company.

In connection with the completion of thespin-off, we entered into agreements with Hilton (who at the time was a related party) and other third parties, including licenses to use the Hilton brand. The unaudited condensed consolidated financial statements reflect the effect of these agreements. For the three months ended March 31,June 30, 2017 and 2016, we incurred $58$40 million and $60$44 million, respectively, and for the six months ended June 30, 2017 and 2016, we incurred $98 million and $104 million, respectively, in costs relating to the agreements entered with Hilton. SeeKey Agreements Related to theSpin-Offsection inPart I - Item 1. Businessof our Annual Report on Form10-K for the year ended December 31, 2016 for further information.

Prior to thespin-off, Hilton maintained a share-based compensation plan for the benefit of its officers, directors and employees which was presented as a component ofNet transfers (to) from Parent,, a financing activity, on the condensed consolidated statements of cash flows. Subsequent to thespin-off, share-based compensation expense is presented as a component of operating activities on the condensed consolidated statements of cash flows.

Our Business

Hilton Grand Vacations is a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. Our operations primarily consist of: selling vacation ownership intervals (“VOIs”) for us and third parties; operating our resorts; financing and servicing loans provided to consumers for their timeshare purchases; and managing our points-based Hilton Grand Vacations Club exchange program (the “Club”). As of March 31,June 30, 2017, we had 48 timeshare properties, comprised of 8,0858,101 units, located in the United States (“U.S.”) and Europe.

Basis of Presentation

The unaudited condensed consolidated financial statements presented herein include 100 percent of our assets, liabilities, revenues, expenses and cash flows and all entities in which we have a controlling financial interest. Through the date of thespin-off, the unaudited condensed consolidated financial statements presented herein were prepared on a stand-alone basis and were derived from the unaudited consolidated financial statements and accounting records of Hilton.

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, 2016, included in our Annual Report on Form10-K filed with the SEC on March 2, 2017.

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.

The accompanying unaudited condensed consolidated financial statements, in our opinion, 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.

We review our estimate of the expected redemption of expired prepaid discounted vacation packages (“packages”) on an ongoing basis. We only reduce the liability for expired packages when a package is redeemed or the likelihood of redemption is remote. This review considers factors such as historical experience, current business practices for pursuing individuals to redeem expired packages and the sufficiency and reliability of data available following a change in those redemption business practices. Previously, we concluded that redemption of an expired package was remote once a package has been expired for six months and therefore retained the liability until six months after expiration. During the review in the second quarter of 2017, we determined we now had sufficiently reliable updated information under current business practices to revise our estimate of expired packages that we expect to redeem. As a result, we changed our accounting estimate for expected redemptions of expired packages to relieve a portion of the remaining liability at expiration and recorded an $11 million reduction to theAdvanced Deposits liability, with corresponding increases toSales, marketing, brand and other feesrevenue of $10 million andAccounts payable, accrued expenses and otherfor the related sales tax liability of $1 million. As a result, for the six months ended June 30, 2017, our net income increased by $10 million and basic and diluted earnings per share increased by $0.10.

Note 2: Recently Issued Accounting Pronouncements

Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2016-09 (“ASU2016-09,2016-09”), Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting(“ASU2016-09”). ASU2016-09 includes provisions intended to simplify several aspects of the accounting and presentation of share-based payments. These provisions include the recognition of the income tax effects of awards in the consolidated statement of operations when the awards vest or are settled, permitting an employer to withhold shares in an amount up to the employee’s maximum individual tax rate without resulting in liability classification of the award, permitting entities to make a policy election to account for forfeitures as they occur, and changes to the classificationof tax-related cash flows resulting from share-based payments and cash payments made to taxing authorities on the employee’s behalf on the statement of cash flows. This ASU2016-09 was effective for reporting periods beginning after December 15, 2016. We adopted ASU2016-09 retrospectively as of January 1, 2017 and have applied to all periods herein with no material impact to our unaudited condensed consolidated financial statements.

In November 2016, the FASB issued ASUNo. 2016-18, (“ASU2016-18”)Statement of Cash Flows (Topic 230): Restricted Cash.This ASU is intended to provide guidance on the presentation of restricted cash or restricted cash equivalents and reduce the diversity in practice. This ASU requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconcilingbeginning-of-period andend-of-period total amounts on the statement of cash flows. We elected, as permitted by the standard, to early adopt ASU2016-18 retrospectively as of January 1, 2017 and have applied it to all periods presented herein. The adoption of ASU2016-18 did not have a material impact to our unaudited condensed consolidated financial statements. The effect of the adoption of ASU2016-18 on our condensed consolidated statements of cash flows was to include restricted cash balances in the beginning and end of period balances of cash and cash equivalent and restricted cash. The change in restricted cash was previously disclosed in operating activities and financing activities in the condensed consolidated statements of cash flows.

In January 2017, the FASB issued ASUNo. 2017-01 (“ASU2017-01”),Business Combinations (Topic 804): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. We elected, as permitted by the standard, to early adopt ASU2017-01 prospectively as of January 1, 2017. The adoption of ASU2017-01 did not have a material impact to our unaudited condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In May 2014, the FASB issued ASUNo. 2014-09 (“ASU2014-09”),Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements inRevenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods orservices to customers in an amount that reflects the consideration to which the entity expects to be entitled inexchange for those goods or services. Subsequent to ASU2014-09, the FASB has issued several related ASUs amending the original ASU.

The provisions of this ASU are to be applied retrospectively or using a modified retrospective approach; early adoption is permittedapproach for reporting periods beginning after December 15, 2016. We are still evaluating our transition approach and expect to reach a decision in 2017.

We are currently evaluating the effect that this ASU will have on our consolidated financial statements by analyzing both transactional and analytical data for each of our revenue streams. We expect changes to gross versus netThe following is a status of presentationour evaluation of certainnon-cash first day incentives. While we continue to assess all potential impacts of the standard, we expect the timing ofby significant revenue recognition related to our accounting for ongoing management fees revenues from our homeowners’ association (“HOA”) management agreements and transient guest transactions to remain substantially unchanged. stream:

Sales of VOIs, net - We do not expect material changes to our accounting for Sales of VOIs, net, including the accounting for uncollectible timeshare financing receivables. We are still evaluating the impact on revenue recognition for sales of VOIs that are under construction.

Sales, marketing, brand and other fees - We expect changes to gross versus net presentation of certainnon-cash first day incentives. We do not expect material changes to our accounting for our commissions, brand and other fees underfee-for-service arrangements. We are still evaluating impacts to certain marketing revenue streams, including sales of marketing preview packages.

Financing - We do not expect material changes to our accounting for financing revenues, as these revenues are out of the scope of Topic 606.

Resort and club management - We do not expect material changes to our accounting for ongoing management fees from our homeowners’ association management agreements and the fees earned from our Club members.

Rental and ancillary services - We do not expect significant changes to our revenue recognition of transient guest transactions, including rental and ancillary services.

Cost reimbursements - While we do not expect significant changes to the timing of recognition of cost reimbursements, we are still evaluating potential impacts to changes in presentation.

We will continue to evaluate and disclose expected impacts that ASU2014-09 will have on our unaudited condensed consolidated financial statements as more information becomes available. A determination as to whether we will apply the retrospective or modified retrospective adoption method will be made once our qualitative evaluation is complete and we commence quantifying the expected impacts later this year.

In August 2016, the FASB issued ASUNo. 2016-15 (“ASU2016-15”),Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.Payments. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The provisions of this ASU are effective for reporting periods beginning after December 15, 2017; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

In January 2017, the FASB issued ASU2017-03 (“ASU2017-03”),Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323).ASU2017-03requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. The SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. In addition, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. ASU2017-03 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years with early adoption permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

Note 3: Restricted Cash

Restricted cash was as follows:

 

                                                  
        March 31,          December 31,   
 ($ in millions)  2017   2016 

Escrow deposits on VOI sales

  $43    $81  

Reserves related tonon-recourse debt(1)

   35     22  
  

 

 

   

 

 

 
  $78    $103  
  

 

 

   

 

 

 

   June 30,   December 31, 
($ in millions)  2017   2016 

Escrow deposits on VOI sales

  $38   $81 

Reserves related tonon-recourse debt(1)

   24    22 
  

 

 

   

 

 

 
  $62   $103 
  

 

 

   

 

 

 

 

(1)See Note 7:Debt &Non-recourse debt for further discussion.

Note 4: Timeshare Financing Receivables

Timeshare financing receivables were as follows:

 

                                                                           
  March 31, 2017   June 30, 2017 
($ in millions)  Securitized     Unsecuritized     Total   Securitized
and Pledged
 Unsecuritized Total 

Timeshare financing receivables

  $577    $564     $1,141    $541  $623  $1,164 

Less: allowance for loan loss

   (37)    (87)     (124)    (33 (97 (130
  

 

   

 

   

 

   

 

  

 

  

 

 
  $540    $477     $1,017    $508  $526  $1,034 
  

 

   

 

   

 

   

 

  

 

  

 

 
  December 31, 2016   December 31, 2016 
($ in millions)  Securitized   Unsecuritized   Total   Securitized
and Pledged
 Unsecuritized Total 

Timeshare financing receivables

  $253    $892     $1,145    $253  $892  $1,145 

Less: allowance for loan loss

   (9)    (111)     (120)    (9 (111 (120
  

 

   

 

   

 

   

 

  

 

  

 

 
  $244    $781     $1,025    $244  $781  $1,025 
  

 

   

 

   

 

   

 

  

 

  

 

 

The interest rate charged on the notes correlates to the risk profile of the borrower at the time of purchase and the percentage of the purchase that is financed, among other factors. As of March 31,June 30, 2017, our timeshare financing receivables had interest rates ranging from 5.3 percent to 20.5 percent, a weighted average interest rate of 12.012.1 percent, a weighted average remaining term of 7.6 years and maturities through 2028.

We pledge a portion of our timeshare financing receivables as collateral to secure anon-recourse revolving timeshare receivable credit facility (“Timeshare Facility”) with a borrowing capacity of $450 million. As of March 31,June 30, 2017 and December 31, 2016, we had $156$148 million and $509 million, respectively, of gross timeshare financing receivables securing the Timeshare Facility. We recognize interest income on our timeshare financing receivables as earned. We record an estimate of uncollectibility as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale.

In March 2017, we completed a securitization of approximately $357 million of gross timeshare financing receivables and issued approximately $291 million of 2.66 percent notes and approximately $59 million of 2.96 percent notes, which have a stated maturity date of December 2028. The securitization transactions did not qualify as sales and, accordingly, no gain or loss was recognized. The transaction is considered a secured borrowing; therefore, the proceeds from the transaction are presented asnon-recourse debt (collectively, the “Securitized Debt”). See Note 7:Debt &Non-recourse debt for further discussion.

Our timeshare financing receivables as of March 31,June 30, 2017 mature as follows:

 

                                                                                 
($ in millions)  Securitized   Unsecuritized   Total   Securitized
and Pledged
 Unsecuritized Total 

Year

          

2017 (remaining)

  $82     $58     $140    $39  $39  $78 

2018

   82      51      133     79  52  131 

2019

   80      54      134     78  56  134 

2020

   77      57      134     75  61  136 

2021

   70      59      129     69  64  133 

Thereafter

   186      285      471     201  351  552 
  

 

   

 

   

 

   

 

  

 

  

 

 
   577      564      1,141     541  623  1,164 

Less: allowance for loan loss

   (37)     (87)     (124)    (33 (97 (130
  

 

   

 

   

 

   

 

  

 

  

 

 
  $540     $477     $1,017    $508  $526  $1,034 
  

 

   

 

   

 

   

 

  

 

  

 

 

We evaluate this portfolio collectively, since we hold a large group of homogeneous timeshare financing receivables, which are individually immaterial. We monitor the credit quality 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 determining our loan loss reserve requirements on our timeshare financing receivables. For static pool analysis, we use threecertain key dimensions to stratify our portfolio:portfolio, including FICO scores; country of residence; andscores, equity percentage at the time of sale.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.

Our gross timeshare financing receivables balances by FICO score were as follows:

 

                                                      
   March 31,   December 31, 
  

 

 

 
 ($ in millions)  2017   2016 

FICO score

    

700+

  $724    $725  

600-699

   213     211  

<600

   28     28  

No score(1)

   176     181  
  

 

 

   

 

 

 
  $1,141    $1,145  
  

 

 

   

 

 

 

   June 30,   December 31, 
($ in millions)  2017   2016 

FICO score

    

700+

  $746   $725 

600-699

   216    211 

<600

   28    28 

No score(1)

   174    181 
  

 

 

   

 

 

 
  $1,164   $1,145 
  

 

 

   

 

 

 

 

(1)Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.

We apply payments we receive for loans, including those innon-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a noteloan is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. 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 and we receive the deed for the foreclosed unit.

As of March 31,June 30, 2017 and December 31, 2016, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $41$46 million and $38 million, respectively. The following tables detail an aged analysis of our gross timeshare financing receivables balance:

 

                                                                                 
  March 31, 2017   June 30, 2017 
($ in millions)  Securitized   Unsecuritized   Total   Securitized
and Pledged
   Unsecuritized   Total 

Current

  $566     $517     $1,083    $530   $575   $1,105 

31 - 90 days past due

   8      9      17     6    7    13 

91 - 120 days past due

   1      4          2    2    4 

121 days and greater past due

   2      34      36     3    39    42 
  

 

   

 

   

 

   

 

   

 

   

 

 
  $577     $564     $1,141    $541   $623   $1,164 
  

 

   

 

   

 

   

 

   

 

   

 

 
  December 31, 2016 
($ in millions)  Securitized   Unsecuritized   Total 

Current

  $248     $847     $1,095  

31 - 90 days past due

   3      9      12  

91 - 120 days past due

   1      4       

121 days and greater past due

   1      32      33  
  

 

   

 

   

 

 
  $253     $892     $1,145  
  

 

   

 

   

 

 

   December 31, 2016 
($ in millions)  Securitized
and Pledged
   Unsecuritized   Total 

Current

  $248   $847   $1,095 

31 - 90 days past due

   3    9    12 

91 - 120 days past due

   1    4    5 

121 days and greater past due

   1    32    33 
  

 

 

   

 

 

   

 

 

 
  $253   $892   $1,145 
  

 

 

   

 

 

   

 

 

 

The changes in our allowance for loan loss were as follows:

 

                                                                                 
  March 31, 2017   June 30, 2017 
($ in millions)  Securitized   Unsecuritized   Total   Securitized
and Pledged
 Unsecuritized Total 

Balance as of December 31, 2016

  $9     $111     $120    $9  $111  $120 

Write-offs

   —      (7)     (7)    —    (17 (17

Securitizations

   28      (28)     —  

Securitization

   28  (28  —   

Provision for loan loss(1)

   —      11      11     (4 31  27 
  

 

   

 

   

 

   

 

  

 

  

 

 

Balance as of March 31, 2017

  $37     $87     $124  

Balance as of June 30, 2017

  $33  $97  $130 
  

 

   

 

   

 

   

 

  

 

  

 

 
  March 31, 2016 
($ in millions)  Securitized   Unsecuritized   Total 

Balance as of December 31, 2015

  $17     $89     $106  

Write-offs

   —      (9)     (9) 

Provision for loan loss(1)

   (3)     13      10  
  

 

   

 

   

 

 

Balance as of March 31, 2016

  $14     $93     $107  
  

 

   

 

   

 

 

 

   June 30, 2016 
($ in millions)  Securitized
and Pledged
  Unsecuritized  Total 

Balance as of December 31, 2015

  $17  $89  $106 

Write-offs

   —     (17  (17

Provision for loan loss(1)

   (4  27   23 
  

 

 

  

 

 

  

 

 

 

Balance as of June 30, 2016

  $13  $99  $112 
  

 

 

  

 

 

  

 

 

 

 

(1)Includes activity related to repurchase of defaulted and upgraded securitized timeshare financing receivables, net of incremental provision for loan loss.

Note 5: Inventory

Inventory was as follows:

 

                                                      
   March 31,   December 31, 
 ($ in millions)  2017   2016 

Completed unsold VOIs

  $232     $233   

Construction in process

   17      20   

Land, infrastructure and other

   258      260   
  

 

 

   

 

 

 
  $507     $513   
  

 

 

   

 

 

 

   June 30,   December 31, 
($ in millions)  2017   2016 

Completed unsold VOIs

  $220   $233 

Construction in process

   14    20 

Land, infrastructure and other

   258    260 
  

 

 

   

 

 

 
  $492   $513 
  

 

 

   

 

 

 

We incurred less than $1benefited from $3 million in costs of salestrue-ups relating to VOI products for the threesix months ended March 31,June 30, 2017, which resulted in less than $1a $3 million increase to the carrying value of inventory as of March 31,June 30, 2017. We incurredbenefited from $10 million in costs of salestrue-ups relating to VOI products for the year ended December 31, 2016, which resulted in a $10 million increase to the carrying value of inventory as of December 31, 2016. For the three months ended March 31, 2017 and 2016, weShown below are expenses incurred, expenses of $11 million and $10 million, respectively, recorded inCost of VOI sales, related to granting credit to customers for their existing ownership when upgrading intofee-for-service projects.

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
($ in millions)  2017   2016   2017   2016 

Cost of VOI sales related tofee-for-service upgrades

  $9   $14   $20   $24 

Note 6: Consolidated Variable Interest Entities

As of March 31,June 30, 2017 and December 31, 2016, we consolidated three and two variable interest entities (“VIEs”), respectively, that issued Securitized Debt, backed by pledged assets consisting primarily of a pool of timeshare financing receivables, which is without recourse to us. 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 are required to replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. Only assets of our VIEs are available to settle the obligations of the respective entities.

Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:

 

                                                    
        March 31,             December 31,      
 ($ in millions)  2017   2016 

Restricted cash

  $32    $10  

Timeshare financing receivables, net

   540     244  

Non-recourse debt(1)

   567     244  

   June 30,   December 31, 
($ in millions)  2017   2016 

Restricted cash

  $21   $10 

Timeshare financing receivables, net

   508    244 

Non-recourse debt(1)

   517    244 

 

(1)Net of deferred financing costs.

During the threesix months ended March 31,June 30, 2017 and 2016, we did not provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.

Note 7: Debt &Non-recourse debt

Debt

The following table details our outstanding debt balance and its associated interest rates:

 

                                                    
       March 31,           December 31,     
 ($ in millions)  2017   2016 

Debt(1)

    

Senior secured credit facilities:

    

Term loan with an average rate of 3.23%, due 2021

  $198    $200  

Senior notes with a rate of 6.125%, due 2024

   300     300  
  

 

 

   

 

 

 
   498     500  

Less: unamortized deferred financing costs and discount(2)(3)

   (10)    (10) 
  

 

 

   

 

 

 
  $488    $490  
  

 

 

   

 

 

 

   June 30,  December 31, 
($ in millions)  2017  2016 

Debt(1)

   

Senior secured credit facilities:

   

Term loan with an average rate of 3.47%, due 2021

  $195  $200 

Senior notes with a rate of 6.125%, due 2024

   300   300 
  

 

 

  

 

 

 
   495   500 

Less: unamortized deferred financing costs and discount(2)(3)

   (9  (10
  

 

 

  

 

 

 
  $486  $490 
  

 

 

  

 

 

 

 

(1)

For the threesix months ended March 31,June 30, 2017 and year ended December 31, 2016, weighted average interest rates were 4.9775.081 percent and 4.851 percent, respectively.

(2)

Amount includes deferred financing costs of $2 million and $7 million as of June 30, 2017 and $2 million and $8 million as of March 31, 2017 and December 31, 2016, relating to our term loan and senior notes, respectively.

(3)

Amount does not include deferred financing costs of $2 million as of March 31,June 30, 2017 and December 31, 2016, relating to our revolving facility included inOther Assets in our condensed consolidated balance sheets.

We were in compliance with all applicable financial covenants as of March 31,June 30, 2017.

Non-recourse Debt

The following table details our outstandingnon-recourse debt balance and its associated interest rates:

 

                                                    
       March 31,           December 31,     
 ($ in millions)  2017   2016 

Non-recourse debt(1)

    

Timeshare Facility with an average rate of 2.12%, due 2019

  $128    $450  

Securitized Debt with an average rate of 2.42%, due 2028

   574     246  
  

 

 

   

 

 

 
   702     696  

Less: unamortized deferred financing costs(2)(3)

   (7)    (2) 
  

 

 

   

 

 

 
  $695    $694  
  

 

 

   

 

 

 

   June 30,  December 31, 
($ in millions)  2017  2016 

Non-recourse debt(1)

   

Timeshare Facility with an average rate of 2.36%, due 2019

  $128  $450 

Securitized Debt with an average rate of 2.42%, due 2028

   523   246 
  

 

 

  

 

 

 
   651   696 

Less: unamortized deferred financing costs(2)

   (6  (2
  

 

 

  

 

 

 
  $645  $694 
  

 

 

  

 

 

 

 

(1)

For the threesix months ended March 31,June 30, 2017 and year ended December 31, 2016, weighted average interest rates were 2.3662.410 percent and 1.946 percent, respectively.

(2)

Amount includes deferred financing costs of $7 million as of March 31, 2017relates to securitized debt only and $2 million as of December 31, 2016, relating to our Securitized Debt.

(3)

Amount does not include deferred financing costs of $2 million as of June 30, 2017 and $3 million as of March 31, 2017 and December 31, 2016, relating to our Timeshare Facility included inOther Assets in our condensed consolidated balance sheets.

The Timeshare Facility is anon-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral and related assets.

In March 2017, we completed a securitization of approximately $357 million of gross timeshare financing receivablereceivables and issued approximately $291 million of 2.66 percent notes and $59 million of 2.96 percent notes due December 2028. The Securitized Debt is backed by pledged assets, consisting primarily of a pool of timeshare financing receivables secured by first mortgages or deeds of trust on timeshare interests. The Securitized Debt is anon-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral to the debt.

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 as of March 31,June 30, 2017 and December 31, 2016 were $35$24 million and $22 million, respectively, and were included inRestricted cash in our condensed consolidated balance sheets.

Debt Maturities

The contractual maturities of our debt andnon-recourse debt as of March 31,June 30, 2017 were as follows:

 

                                                                        

($ in millions)

      Debt         Non-recourse  
Debt
       Total       Debt   Non-recourse
Debt
   Total 

Year

            

2017 (remaining)

  $   $119    $127    $5   $61   $66 

2018

   10     132     142     10    126    136 

2019

   10     227     237     10    230    240 

2020

   10     88     98     10    122    132 

2021

   160     66     226     160    34    194 

Thereafter

   300     70     370     300    78    378 
  

 

   

 

   

 

   

 

   

 

   

 

 
  $498    $702    $1,200    $495   $651   $1,146 
  

 

   

 

   

 

   

 

   

 

   

 

 

Note 8: Fair Value Measurements

The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:

 

                                                                           
   March 31, 2017 
   

 

   Hierarchy Level 
 ($ in millions)  Carrying
Amount
   Level 1   Level 3 

Assets:

      

Timeshare financing receivables(1)

  $1,017    $—    $1,142  

Liabilities:

      

Debt(2)

   488     318     192  

Non-recourse debt(2)

   695     —     699  
   December 31, 2016 
   

 

   Hierarchy Level 
 ($ in millions)  Carrying
Amount
   Level 1   Level 3 

Assets:

      

Timeshare financing receivables(1)

  $1,025    $—    $1,147  

Liabilities:

      

Debt(2)

   490     314     200  

Non-recourse debt(2)

   694     —     696  

   June 30, 2017 
       Hierarchy Level 
($ in millions)  Carrying
Amount
   Level 1   Level 3 

Assets:

      

Timeshare financing receivables(1)

  $1,034   $—     $1,299 

Liabilities:

      

Debt(2)

   486    325    201 

Non-recourse debt(2)

   645    —      646 
   December 31, 2016 
       Hierarchy Level 
($ in millions)  Carrying
Amount
   Level 1   Level 3 

Assets:

      

Timeshare financing receivables(1)

  $1,025   $—     $1,147 

Liabilities:

      

Debt(2)

   490    314    200 

Non-recourse debt(2)

   694    —      696 

 

(1)Carrying amount includesnet of allowance for loan loss.
(2)Carrying amount includesnet of unamortized deferred financing costs and discount.

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 cash and cash equivalents, restricted cash, accounts receivable, accounts payable, advance deposits and accrued liabilities, 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 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 values of our Level 1 debt was based on prices in active debt markets. The estimated fair value of our Level 3 debt andnon-recourse debt were as follows:

 

Debt - based on indicative quotes obtained for similar issuances and projected future cash flows discounted at risk-  adjustedrisk-adjusted rates.

 

Non-recourse debt - based on projected future cash flows discounted at risk-adjusted rates.

Note 9: Income Taxes

At the end of each quarter, we estimate the effective tax rate expected to be applied for the full year. The effective income tax rate is determined by the level and composition ofpre-tax income or loss, which is subject to federal, foreign, state and local income taxes. The effective income tax rate for the threesix months ended March 31,June 30, 2017 and 2016 was approximately 3437 percent and 40 percent, respectively, which decreased primarily due to a decrease in cumulative installment sale interest liability, partially offset by an increase in the cumulative effect of a change in the state effective tax rate.

The Company was a party to several intercompany asset transfers with Hilton prior to thespin-off. As required under U.S. tax regulations, the gain resulting from the intercompany transfer of these assets should be deferred and no deferred tax asset or liability should be recognized until a recognition event occurs. On January 3, 2017, Hilton executed atax-freespin-off of the Company, which met the requirement of a recognition event. On thespin-off date, for the assets transferred, we recognized a stepped up tax basis,re-measured the asset by applying applicable tax rate changes and evaluated the realizability of the asset. This resulted in a reduction to our net deferred tax liability and an increase in ourAdditionalpaid-in capital of $9 million on our condensed consolidated balance sheetssheet as of March 31,June 30, 2017.

Note 10: Share-Based Compensation

Stock Plan

We issue time-vesting restricted stock units (“RSUs”) and nonqualified stock options (“options”) to certain employees. All performance shares that were issued under the Stock Plan of our former Parent, Hilton, were converted to RSUs as of December 31, 2016. We recognized share-based compensation expense of $3$5 million and $2$3 million during the three months ended March 31,June 30, 2017 and 2016, respectively and $8 million and $5 million during the six months ended June 30, 2017 and 2016, respectively. As of March 31,June 30, 2017, unrecognized compensation costs for unvested awards were approximately $24$17 million, which is expected to be recognized over a weighted average period of 2.62.2 years. As of March 31,June 30, 2017, there were 7,705,3117,806,023 shares of common stock available for future issuance.

RSUs

During the threesix months ended March 31,June 30, 2017, we issued 466,826487,718 RSUs with a weighted average grant date fair value of $28.31,$28.64, which generally vest 25 percent in the first year, 25 percent in the second year and 50 percent in the third year from the date of grant.

Options

During the threesix months ended March 31,June 30, 2017,we issued 669,658 options with a grant date fair value of $8.66 and an exercise price of $28.30, which generally vest 25 percent in the first year, 25 percent in the second year and 50 percent in the third year from the date of grant.

The grant date fair value of each of these option grants was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:

 

    March 31,    
2017

Expected volatility(1)

   26.3%26.3% 

Dividend yield(2)

   %% 

Risk-free rate(3)

   2.3%2.3% 

Expected term (in years)(4)

   6.0 

 

 

(1)Due to limited trading history for Hilton Grand Vacations’ common stock, we did not have sufficient information available on which to base a reasonable and supportable estimate of the expected volatility of itsour share price. As a result, we used a weighted-average of the implied volatility and the average historical volatility of itsour peer group over a time period consistent with its expected term assumption. Our peer group was determined based upon companies in our industry with similar business models and is consistent with those used to benchmark its executive compensation.

(2)At the date of grant we had no plans to pay dividends during the expected term of these options.

(3)Based on the yields of U.S. Department of Treasury instruments with similar expected lives.

(4)Estimated using the average of the vesting periods and the contractual term of the options.

As of March 31,June 30, 2017, we had 204,109169,926 options outstanding that were exercisable.

Note 11: Earnings Per Share

The following table presents the calculation of our basic and diluted earnings per share (“EPS”). The weighted average shares outstanding for the three and six months ended March 31,June 30, 2016 reflect 98,802,597 shares distributed on January 3, 2017, ourspin-off date, to our stockholders. See Note 1: Organization and Basis of Presentation for further discussion. The weighted average shares outstanding for the three months ended March 31, 2017 used to compute basic EPS and diluted EPS for the three months ended June 30, 2017 is 98,798,00798,959,438 and 99,339,928,99,529,301, respectively and for the six months ended June 30, 2017 is 98,881,494 and 99,442,829, respectively.

 

   Three Months Ended March 31,    Three Months Ended
June 30,
   Six Months Ended
June 30,
 
($ in millions, except per share amounts)  2017   2016 
($ and shares outstanding in millions, except per share amounts)  2017   2016   2017   2016 

Basic EPS:

            

Numerator:

            

Net Income

  $50    $48  

Net Income(1)

  $51   $47   $101   $95 

Denominator:

            

Weighted average shares outstanding

   99     99     99    99    99    99 
  

 

   

 

   

 

   

 

   

 

   

 

 

Basic EPS

  $0.51    $0.48    $0.51   $0.48   $1.02   $0.96 
  

 

   

 

   

 

   

 

   

 

   

 

 
    

Diluted EPS:

            

Numerator:

            

Net Income

  $50    $48  

Net Income(1)

  $51   $47   $101   $95 

Denominator:

            

Weighted average shares outstanding

   99     99     100    99    99    99 
  

 

   

 

   

 

   

 

   

 

   

 

 

Diluted EPS

  $0.51    $0.48    $0.51   $0.48   $1.02   $0.96 
  

 

   

 

   

 

   

 

   

 

   

 

 

(1)Net income for the three months ended June 30, 2017 and 2016 was $50,828,907 and $47,400,289, respectively, and for the six months ended June 30, 2017 and 2016 was $101,041,522 and $95,069,102, respectively.

The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period.

For the three and six months ended March 31,June 30, 2017, we excluded 198,994295,316 and 399,194 share-based compensation awards because their effect would have been anti-dilutive under the treasury stock method.

Note 12: Related Party Transactions

Relationship Between HGV and Hilton after theSpin-Off

On January 3, 2017, when thespin-off was completed, Hilton and Park ceased to be a related parties of HGV. In connection with thespin-off, we entered into certain agreements with Hilton (who at the time was a related party) and other third parties. SeeKey Agreements Related to theSpin-Offsection inPart I - Item 1. Businessof our Annual Report on Form10-K for the year ended December 31, 2016 for further information.

HNA Tourism Group Co., Ltd.

On March 15, 2017, Blackstone completed the previously announced sale of 24,750,000 shares of our common stock to HNA Tourism Group Co., Ltd. (“HNA”), representing approximately 25 percent of the outstanding shares of our common stock.

In connection with the consummation of the sale, we adopted our amended and restatedby-laws, effective March 15, 2017, to remove references to Blackstone’s ownership of at least 40 percent of the total voting power of our common stock and revised certain provisions referencing the Blackstone Stockholders Agreement, as appropriate, to include references to the HNA Stockholder Agreement.

The Blackstone Group

In connection with the consummationAs of theMarch 31, 2017, Blackstone held 15,008,689 shares, or approximately 15 percent of our outstanding common stock. On May 25, 2017, The Blackstone Group L.P. (“Blackstone”) filed a Registration Statement on Formspin-offS-1 described in Note 1:Organization and Basis of Presentationand the sale of 25 percentregistered all of our common stock held by them.On June 14, 2017, Blackstone entered into an underwriting agreement with J.P. Morgan Securities LLC pursuant to HNA as described above,which J.P. Morgan Securities LLC agreed to purchase from Blackstone holds9,650,000 shares of our common stock at a price of $35.40 per share. The sale was completed on June 20, 2017. We did not receive any proceeds from the sale. As of June 30, 2017, Blackstone held approximately 15five percent of HGVthe outstanding shares of our common stock as of March 31, 2017.

stock.

For the three months ended March 31, 2017 and 2016, we earned commissions and other fees of $51 million and $44 million, respectively,The following table summarizes amounts included in our condensed consolidated statements of operations related to afee-for-service agreementarrangement with a Blackstone affiliate to sell VOIs at a property. on their behalf:

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
($ in millions)  2017   2016   2017   2016 

Commission and other fees

  $42   $44   $93   $88 

Also related to thefee-for-service agreement, as of March 31,June 30, 2017 and December 31, 2016, we recognized receivables of $19$8 million and $20 million, respectively.

Note 13: Business Segments

We operate our business through the following two segments:

 

  Real estate sales and financing –We market and sell VOIs that we own. We also source VOIs throughfee-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 Club, earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We 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 program. We also earn revenue from food and beverage, retail and spa outlets at our timeshare properties.

The performance of our operating segments is evaluated primarily based on adjusted earnings before interest expense, taxes, depreciation and amortization (“EBITDA”). We define Adjusted EBITDA as EBITDA which has been further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements;(iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and other compensation expenses; (vii) costs related to thespin-off; and (viii) other items. During the three months ended March 31,first quarter of 2017, we revised our definition of EBITDA to exclude the adjustment of interest expense relating to ournon-recourse debt as a reconciling item to arrive at net income (loss) in order to conform to the presentation of the timeshare industry following the consummation of thespin-off from Hilton. This adjustment was retrospectively applied to prior period(s) to conform with the current presentation.

The following table presents revenues for our reportable segments reconciled to consolidated amounts:

 

       Three Months Ended March 31,     
 ($ in millions)  2017  2016 

Revenues:

   

Real estate sales and financing(1)

  $283   $266  

Resort operations and club management(2)

   88    81  
  

 

 

  

 

 

 

Total segment revenues

   371    347  

Cost reimbursements

   34    29  

Intersegment eliminations(1)(2)(3)

   (6)   (6) 
  

 

 

  

 

 

 

Total revenues

  $399   $370  
  

 

 

  

 

 

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
 
($ in millions)  2017  2016  2017  2016 

Revenues:

     

Real estate sales and financing(1)

  $323  $276  $606  $542 

Resort operations and club management(2)

   92   89   180   170 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total segment revenues

   415   365   786   712 

Cost reimbursements

   34   32   68   61 

Intersegment eliminations(1)(2)(3)

   (10  (6  (16  (12
  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

  $439  $391  $838  $761 
  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Includes charges of $1 million to the resort operations and club management segment for billing and collection services provided by the real estate sales and financing segment for the six months ended June 30, 2016. There were no charges for the three months ended March 31, 2016.

June 30, 2016 or for the three and six months ended June 30, 2017.

(2)

Includes charges to the real estate sales and financing segment from the resort operations and club management segment for discounted stays at properties resulting from marketing packages. These charges totaled $6$10 million and $5$6 million for the three months ended March 31,June 30, 2017 and 2016, respectively, and $16 million and $11 million for the six months ended June 30, 2017 and 2016, respectively.

(3)

Includes charges to the real estate sales and financing segment from the resort operations and club management segment for the rental of model units to show prospective buyers. These charges totaled less than $1 million for each of the three and six months ended March 31,June 30, 2017 and 2016.

The following table presents Adjusted EBITDA for our reportable segments reconciled to net income:

 

     Three Months Ended March 31,   
 ($ in millions)  2017   2016 

Adjusted EBITDA:

    

Real estate sales and financing(1)

  $83    $81  

Resort operations and club management(1)

   51     46  
  

 

 

   

 

 

 

Segment Adjusted EBITDA

   134     127  

General and administrative

   (23)    (16) 

Depreciation and amortization

   (7)    (5) 

License fee expense

   (20)    (19) 

Allocated Parent interest expense(2)

   —     (6) 

Interest expense

   (7)    —  

Income tax expense

   (26)    (32) 

Other adjustment items

   (1)    (1) 
  

 

 

   

 

 

 

Net income

  $50    $48  
  

 

 

   

 

 

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
 
($ in millions)  2017  2016  2017  2016 

Adjusted EBITDA:

     

Real estate sales and financing(1)

  $99  $84  $182  $165 

Resort operations and club management(1)

   52   51   103   97 
  

 

 

  

 

 

  

 

 

  

 

 

 

Segment Adjusted EBITDA

   151   135   285   262 

General and administrative

   (29  (21  (52  (37

Depreciation and amortization

   (7  (6  (14  (11

License fee expense

   (23  (20  (43  (39

Other loss, net

   —     1   —     1 

Gain on foreign currency transactions

   —     (1  —     (1

Allocated Parent interest expense(2)

   —     (7  —     (13

Interest expense

   (7  —     (14  —   

Income tax expense

   (33  (33  (59  (65

Other adjustment items

   (1  (1  (2  (2
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $51  $47  $101  $95 
  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)Includes intersegment eliminations. Refer to our table presenting revenues by reportable segment above for additional discussion.

(2)This amount represents interest expense on an unconditional obligation to guarantee certain Hilton allocated debt balances which were released in November 2016.

Note 14: Commitments and Contingencies

We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of March 31,June 30, 2017, we were committed to purchase approximately $212 million of inventory and land over a period of five years. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. During the threesix months ended March 31,June 30, 2017 and 2016, we purchased $4 million and $11 million, respectively, of VOI inventory as required under our commitments. As of March 31,June 30, 2017, our remaining obligation pursuant to these arrangements was expected to be incurred as follows: $4 million in 2017, $61$3 million in 2018, $129$187 million in 2019, $9 million in 2020, and $9 million in 2021.

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of March 31,June 30, 2017, will not have a material effect on our condensed consolidated results of operations, financial position or cash flows.

Note 15: Subsequent Events

On July 18, 2017, we entered into an agreement with BRE Ace Holdings LLC, a Delaware limited liability company (“BRE Ace Holdings”), an affiliate of Blackstone Real Estate Partners VIII, which is an affiliate of Blackstone and formed BRE Ace LLC. Pursuant to the agreement, we contributed $40 million in cash for a 25 percent interest in BRE Ace LLC, which owns, a1,201-key timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations,” located in Las Vegas Nevada. The Company’s investment in BRE Ace LLC will be accounted for under equity method of accounting.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 Form10-Q and with our Annual Report on Form10-K for the year ended December 31, 2016.

Forward-Looking Statements

This Quarterly Report onForm 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”) that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the benefits resulting from our separation from Hilton Worldwide Holdings Inc., the effects of competition and the effects of future legislation or regulations andother non-historical statements. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” ��should,“should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements in this

Quarterly Report onForm 10-Q. We do not intend to update any of these forward-looking statement or publicly announce the results of any revisions to these forward-looking statements, other than as is required under the federal securities laws.

The risk factors discussed in “PartI-Item 1A. Risk Factors” of our Annual Report on Form10-K for the year ended December 31, 2016 and in “PartII-Item 1A. Risk Factors” of this Quarterly Report on Form10-Q for the quarter ended June 30, 2017 could cause our results to differ materially from those expressed in forward-looking statements. 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. Any such risks could cause our results to differ materially from those expressed in forward-looking statements. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Terms Used in this Quarterly Report onForm 10-Q

Except where the context requires otherwise, references in this Quarterly Report onForm 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” and “rooms” refer to the timeshare properties managed, franchised, owned or leased by us. Of these resortsproperties and rooms, a portion are directly owned or leased by us or joint ventures in which we have an interest and the remaining resortsproperties and rooms are owned by third-party owners.

Investment funds associated with or designated by The Blackstone Group L.P. and their affiliates, former majority owners of Hilton Worldwide Holdings, Inc. (“Hilton”), are referred to herein as “Blackstone.”

Investment funds associated with or designated by HNA Tourism Group Co., Ltd. and their affiliates are referred to herein as “HNA.”

“Developed” refers 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.

Non-GAAP Financial Measures

This Quarterly Report on Form10-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 contract sales, sales revenue, real estate margin, tour flow, volume per guest, capital efficiency ratio, transient rate, earnings before interest expense (excluding interest expense relating to ournon-recourse debt), taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and segment Adjusted EBITDA. See “Management’s Discussion and Analysis of Financial Condition and Results ofOperations-Key Business and Financial Metrics and Terms Used by Management” and “-Results of Operations” for a discussion of the meanings of these terms, the Company’s reasons for providingnon-GAAP financial measures, and reconciliations ofnon-GAAP financial measures to measures calculated in accordance with U.S. GAAP.

Overview

Spin-Off Transactions

 On February 26, 2016, Hilton announced that its Board of Directors had unanimously approved a plan to enhance long-term stockholder value by separating Hilton into three independent, publicly traded companies. Hilton subsequently executedtax- free spin-offs of Park Hotels & Resorts Inc. (“Park”) and Hilton Grand Vacations.

On January 3, 2017, the spin-offs werepreviously announcedspin-off was completed by way of a pro rata distribution of the Company’s and Park’s common stock to Hilton stockholders of record as of 5:00 p.m., Eastern time, on December 15, 2016, thespin-off record date.Worldwide Holdings Inc. (“Former Hilton Parent” and together with its them consolidated subsidiaries, “Hilton”) stockholders. Each Hilton stockholder received one share of our common stock for every ten shares of Hilton common stock, in each case, held by such stockholder onstock. As a result of the record date. Hilton did not distribute any fractional shares of HGV common stock. Instead, the distribution agent aggregated fractional shares into whole shares, sold the whole shares in the open market at prevailing market prices and distributed the aggregate net cash proceeds from the sales pro rata to each holder who would otherwise have been

entitled to receive a fractional share in thespin-off.spin-off, Also on January 3, 2017, we became a separate publicly tradedpublicly-traded company on the New York Stock Exchange under the ticker symbol “HGV,”“HGV” and Hilton did not retain any ownership interest in our company.us.

In connection with the completion of thespin-off, we entered into agreements with Hilton (who at the time was a related party) and other third parties, including licenses to use the Hilton Brand.brand. SeeKey Agreements Related to theSpin-Offsection inPart I - Item 1. Businessof our Annual Report on Form10-K for the year ended December 31, 2016 for further information.

On March 15, 2017, Blackstone completed the previously announced sale of 24,750,000 shares of our common stock to HNA, representing approximately 25 percent of the outstanding shares of our common stock. Blackstone retained 15,008,689 shares, or approximately 15 percent of our common stock upon the completion of the sale.

In connection with the consummation of the sale, we adopted our amended and restatedby-laws, effective March 15, 2017, to remove references to Blackstone’s ownership of at least 40 percent of the total voting power of our common stock and revised certain provisions referencing the Blackstone Stockholders Agreement, as appropriate, to include references to the HNA Stockholder Agreement.

On May 25, 2017, Blackstone filed a Registration Statement on FormS-1 and registered all of our common stock held by them.On June 14, 2017, Blackstone entered into an underwriting agreement with J.P. Morgan Securities LLC pursuant to which J.P. Morgan Securities LLC agreed to purchase from Blackstone 9,650,000 shares of our common stock at a price of $35.40 per share. The sale was completed on June 20, 2017. We did not receive any proceeds from the sale. As of June 30, 2017, Blackstone held approximately five percent of the outstanding shares of our common stock.

Tax Matters Agreement

Subsequent to thespin-off, we have no unrecognized taxes that, if recognized, would have impacted our effective tax rate. As a large taxpayer, Hilton is continuously under audit by the IRS and other taxing authorities. HGV has joined in the Hilton U.S. Federal tax consolidated filing for prior tax years up to the date of thespin-off. Although we do not anticipate that a significant impact to our unrecognized tax balance will occur during the next fiscal year as a result of these audits, it remains possible that the amount of our liability for unrecognized taxes could change over that time period. Pursuant to the Tax Matters Agreement, Hilton is liable and shall pay the relevant tax authority for all taxes related to the taxable income prior to thespin-off. HGV will be responsible for its portion of any amounts Hilton is deemed liable by a taxing authority according to the Tax Matters Agreement. HGV is responsible for tax years subsequent to thespin-off.

Our Business

We are a rapidly growing timeshare company that markets and sells vacation ownership intervals (“VOIs”), manages resorts in top leisure and urban destinations, and operates a points-based vacation club. As of March 31,June 30, 2017, we have 48 resorts, representing 8,0858,101 units, which are located in iconic vacation destinations such as the Hawaiian Islands, New York City, Orlando and Las Vegas, and feature spacious, condominium-style accommodations with superior amenities and quality service. As of March 31,June 30, 2017, we have approximately 273,000278,000 Hilton Grand Vacations Club (the “Club”) members. Club members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 14 industry-leading brands across more than 4,9005,000 properties, as well as numerous experiential vacation options, such as cruises and guided tours.

We operate our business across two segments: (1) real estate sales and financing; and (2) resort operations and club management.

Real Estate Sales and Financing

Our primary product is the marketing and selling offee-simple VOIs deeded in perpetuity, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week annually at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In 2010, we began sourcing VOIs throughfee-for-service andjust-in-time agreements with third-party developers and have successfully transformed from a capital-intensive business to one that is highly capital-efficient. Thefee-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. Thejust-in-time agreements enable us to source VOI inventory in a manner that allows us to correlate the timing of acquisition of the inventory by us with the sale to purchasers. Sales of owned inventory, including purchasedjust-in-time inventory, generally result in greater Adjusted EBITDA contributions, whilefee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory andfee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital.

For the threesix months ended March 31,June 30, 2017, sales fromfee-for-service,just-in-time and developed inventory sources were 6056 percent, 1619 percent and 2425 percent, respectively, of contract sales. See “-Real Estate Sales Metrics” for additional discussion of contract sales. Based on our trailing twelve months sales pace, we have access to more than five years of future inventory, with capital efficient arrangements representing approximately 8988 percent of that supply. TheWe 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 originate loans for members purchasing our developed and acquired inventory andwhich generate interest income. Our loans are collateralized by the underlying VOIs and are generally structured as10-year, fully-amortizing loans that bear a fixed interest rate typically ranging from 9 percent to 18 percent per annum.

The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile country of residence and the loan term. The weighted average FICO score for new loans to U.S. and Canadian borrowers at the time of origination were as follows:

 

       Three Months Ended March 31,    
   2017 2016

Weighted average FICO score

  743 741
   Six Months Ended June 30, 
   2017   2016 

Weighted average FICO score

   745    742 

Prepayment is permitted without penalty. When a member defaults, we ultimately return their VOI to inventory for resale and that member no longer participates in our Club. Historical default rate, which represents annual defaults as a percentage of each year’s beginning gross timeshare financing receivables balance, was 3.67 percent for the year ended December 31, 2016 and has not materially changed for the three months ended March 31, 2017.

Some of our loans 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 cash deposits. For additional information see Note 4:Timeshare Financing Receivables in our unaudited condensed consolidated financial statements.

In addition, we earn fees from servicing our securitized loan portfolio and the loans provided by third-party developers of ourfee-for-service projects to purchasers of their VOIs.

Resort Operations and Club Management

We enter into a management agreement with the homeowners’ association (“HOA”) of the VOI owners for timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprising owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services includeday-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providingon-site services. The initial term of our management agreements typically ranges from three to five years and the agreements are subject to periodic renewal for one to three year periods. Many of these agreements renew automatically unless either party provides advance notice of termination before the expiration of the term.

We also manage and operate the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Club members. When an owner purchases a VOI, he or she is generally automatically enrolled in the Club and given an annual allotment of points that allow the member to exchange his or her annual usage rights in the VOI that they own for a number of vacation and travel options. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system.

We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges through our club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.

Key Business and Financial Metrics and Terms Used by Management

Real Estate Sales Metrics

The following are not recognized terms under U.S. GAAP:

 

  Contract salesrepresents the total amount of VOI products under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales is not a recognized term under United States generally accepted accounting principles (“U.S. GAAP”)GAAP and should not be considered in isolation or as an alternative toSales of VOIs, net or any other comparable operating measure derived in accordance with U.S. GAAP. Contract sales differ from revenues from theSales 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 and other administrative fee revenues. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business.

 

  Sales revenue represents sale of VOIs, net and commissions and brand fees earned from the sale offee-for-service intervals.

 

  Real estate marginrepresents sales revenue less the cost of VOI sales and sales and marketing costs, net of marketing revenue. Real estate margin percentage is calculated by dividing real estate margin by sales revenue. We consider this to be an important operating measure because it measures the efficiency of our sales and marketing spending and management of inventory costs.

 

  Tour flowrepresents 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 closing rate.

 

  Capital efficiency ratiorepresents the ratio of cost of VOI sales to VOI inventory spend, includingfee-for-service upgrades. We consider this to be an important operating measure because capital efficiency allows us to reduce inventory investment requirements while continuing to generate growth in revenues and cash flows.

Resort and Club Management and Rental Metrics

 

  Transient raterepresents the total rental room revenue for transient guests divided by total number of transient room nights sold in a given period and excludes room rentals associated with marketing programs, owner usage and the redemption of Club Bonus Points.

For further information see Item 8. Financial Statements and Supplementary Data - Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our Annual Report on Form10-K for the year ended December 31, 2016.

EBITDA and Adjusted EBITDA

EBITDA, presented herein, is a financial measure that is not recognized under U.S. GAAP that reflects net income (loss), before interest expense, a provision for income taxes and depreciation and amortization. During the first quarter of 2017, we revised our definition of EBITDA to exclude the adjustment of interest expense relating to ournon-recourse debt as a reconciling item to arrive at net income (loss) in order to conform to the presentation of the timeshare industry following the consummation of thespin-off from Hilton. The revised definition was applied to prior period(s) to conform with current presentation. Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements;(iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and certain other compensation expenses; (vii) costs related to thespin-off; and (viii) other items.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) 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 makeday-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported 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 onnon-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;

 

(i)although depreciation and amortization arenon-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
EBITDA and Adjusted EBITDA do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized;

 

(ii)other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.
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.

Results of Operations

Three and Six Months Ended March 31,June 30, 2017 Compared with the Three and Six Months Ended March 31,June 30, 2016

Segment Results

We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 13:Business Segments in our unaudited condensed consolidated financial statements. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses it to manage our business and material limitations on its usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” The following table sets forth revenues and Adjusted EBITDA by segment, reconciled to consolidated amount, including net income, our most comparable U.S. GAAP financial measure:

 

     Three Months Ended March 31,       Variance   Three Months Ended
June 30,
 Variance Six Months Ended
June 30,
 Variance 
($ in millions) 2017 2016             $                       %             2017 2016 $ % 2017 2016 $ % 

Revenues:

               

Real estate sales and financing

 $283   $266    $17    6.4%   $323  $276 ��$47  17.0 $606  $542  $64  11.8

Resort operations and club management

 88   81       8.6       92  89  3  3.4  180  170  10  5.9 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

  

Segment revenues

 371   347    24    6.9       415  365  50  13.7  786  712  74  10.4 

Cost reimbursements

 34   29       17.2       34  32  2  6.3  68  61  7  11.5 

Intersegment eliminations(1)

 (6)  (6)    —     —       (10 (6 (4 (66.7 (16 (12 (4 (33.3
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

  

Total revenues

 $399   $370    $29    7.8      $439  $391  $48  12.3  $838  $761  $77  10.1 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

  

 

(1)Refer to Note 13:Business Segments in our unaudited 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 March 31,       Variance 
 ($ in millions) 2017  2016               $                         %           

Net Income

 $50   $48    $    4.2% 

Interest expense

     —         NM(1)   

Allocated Parent interest expense

  —        (6)    (100.0)   

Income tax expense

  26    32     (6)    (18.8)   

Depreciation and amortization

             40.0    
 

 

 

  

 

 

   

 

 

   

EBITDA

  90    91     (1)    (1.1)   

Share-based compensation expense

             50.0    

Other adjustment items(2)

         (2)    (66.7)   
 

 

 

  

 

 

   

 

 

   

Adjusted EBITDA

 $94   $96    $(2)    (2.1)   
 

 

 

  

 

 

   

 

 

   

   Three Months Ended
June 30,
  Variance  Six Months Ended
June 30,
  Variance 
($ in millions)  2017   2016  $  %  2017   2016  $  % 

Net Income

  $51   $47  $4   8.5 $101   $95  $6   6.3

Interest expense

   7    —     7   NM(1)   14    —     14   NM(1) 

Allocated Parent interest expense

   —      7   (7  (100.0  —      13   (13  (100.0

Income tax expense

   33    33   —     —     59    65   (6  (9.2

Depreciation and amortization

   7    6   1   16.7   14    11   3   27.3 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

EBITDA

   98    93   5   5.4   188    184   4   2.2 

Other loss, net

   —      1   (1  (100.0  —      1   (1  (100.0

Gain on foreign currency transactions

   —      (1  1   (100.0  —      (1  1   (100.0

Share-based compensation expense

   5    3   2   66.7   8    5   3   60.0 

Other adjustment items(2)

   3    7   (4  (57.1  4    10   (6  (60.0
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

Adjusted EBITDA

  $106   $103  $3   2.9  $200   $199  $1   0.5 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

(1)Fluctuation in terms of percentage change is not meaningful.
(2)For the three and six months ended March 31,June 30, 2017, amount represents $1$2 million and $3million, respectively, of costs associated with thespin-off transaction.

    Three Months Ended March 31,       Variance 
 ($ in millions) 2017  2016               $                       %           

Adjusted EBITDA:

      

Real estate sales and financing(1)

 $83   $81    $    2.5% 

Resort operations and club management(1)

  51    46         10.9    
 

 

 

  

 

 

   

 

 

   

Segment Adjusted EBITDA

  134    127         5.5    

Less:

      

License fee expense

  20    19         5.3    

General and administrative (2)

  20    12         66.7    
 

 

 

  

 

 

   

 

 

   

Adjusted EBITDA

 $94   $96    $(2)    (2.1)   
 

 

 

  

 

 

   

 

 

   

   Three Months Ended
June 30,
   Variance  Six Months Ended
June 30,
   Variance 
($ in millions)  2017   2016   $   %  2017   2016   $   % 

Adjusted EBITDA:

               

Real estate sales and financing(1)

  $99   $84   $15    17.9 $182   $165   $17    10.3

Resort operations and club management(1)

   52    51    1    2.0   103    97    6    6.2 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

Segment Adjusted EBITDA

   151    135    16    11.9   285    262    23    8.8 

Less:

               

License fee expense

   23    20    3    15.0   43    39    4    10.3 

General and administrative (2)

   22    12    10    83.3   42    24    18    75.0 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

Adjusted EBITDA

  $106   $103   $3    2.9  $200   $199   $1    0.5 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

(1)Includes intersegment eliminations and other adjustments.
(2)Excludes share-based compensation and other adjustment items.

Real Estate Sales and Financing

Real estate sales and financing segment revenues increased for the three months ended March 31,June 30, 2017, compared to the same period in 2016, primarily due to a $10$30 million increase in sales revenue, a $5$15 million increase in marketing revenue and a $3$2 million increase in financing revenues. The increase in sales revenue was primarily due to a $7$29 million increase in sales of VOIs, net, due to sales at our newly developed projects beginning in the second half of 2016 and a $1 million increase in commissions and brand fees, due to the launch of a newfee-for-service property in Orlando, Florida in the second quarter of 2016,2016. The increase in marketing revenue was due to a $10 million reduction of our expected redemptions of expired discounted vacation packages and a $3$4 million increase in the actual redemption of discounted vacation packages. Real estate sales and financing segment Adjusted EBITDA increased by $15 million for the three months ended June 30, 2017, compared to the same period in 2016, primarily due to an increase in revenues associated with the segment, partially offset by a $6 million increase in cost of VOI sales and a $18 million increase in sales and marketing expense.

Real estate sales and financing segment revenues increased for the six months ended June 30, 2017, compared to the same period in 2016, primarily due to a $40 million increase in sales revenue, a $20 million increase in marketing revenue and a $5 million increase in financing revenues. The increase in sales revenue was primarily due to a $32 million increase in sales of VOIs, net, due to sales at our newly developed projects beginning in the second half of 2016 and a $8 million increase in commissions and brand fees, due to the launch of a newfee-for-service property in Orlando, Florida in the second quarter of 2016. The increase in marketing revenue was primarily due to (i) a $10 million reduction of our expected redemptions of expired discounted vacation packages, (ii) a $5 million increase in the actual redemption of discounted vacation packages and (iii) a $3 million increase in title related service revenue. Real estate sales and financing segment Adjusted EBITDA increased by $2$17 million for the threesix months ended March 31,June 30, 2017, compared to the same period in 2016, primarily due to an increase in revenues associated with the segment, and a decrease in cost of VOI sales primarily due to completion of two projects during the same period in 2016, partially offset by a $17$35 million increase in sales and marketing expense.expense and $1 million increase in costs of VOI sales.

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 and segment Adjusted EBITDA increased for the three months ended March 31,June 30, 2017, compared to the same period in 2016, primarily due to a $3 million increase in club operations revenue, a $2 million increase in resort management revenue from the launch of new properties during and a $2 million increase in rental revenue.subsequent to the second quarter of 2016. Resort operations and club management segment Adjusted EBITDA increased for the three months ended June 30, 2017, compared to the same period in 2016, primarily due to the increases in resort and club management revenues associated with the segment, partially offset by a $2 million increase in resort operations and club management expenses.

Resort operations and club management segment revenues increased for the six months ended June 30, 2017, compared to the same period in 2016, primarily due to a $4 million increase in resort management revenue from the launch of new properties during and subsequent to the second quarter of 2016. Resort operations and club management segment Adjusted EBITDA increased for the six months ended June 30, 2017, compared to the same period in 2016, primarily due to increases in revenues associated with the segment, partially offset by a $4 million increase in resort operations and club management expenses.

Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.

Real Estate Sales and Financing Segment

Real Estate

 

    Three Months Ended March 31,       Variance 
 ($ in millions, except Tour flow and VPG) 2017  2016               $                         %           

Sales of VOIs, net

 $118   $115    $    2.6% 

Adjustments:

      

Fee-for-service sales(1)

  173    160     13     8.1    

Loan loss provision

  11    10         10.0    

Reportability and other(2)

  (15)   (23)        (34.8)   
 

 

 

  

 

 

   

 

 

   

Contract sales

 $287   $262    $                25     9.5    
 

 

 

  

 

 

   

 

 

   
      

Tour flow

  72,405    70,988     1,417     2.0    

VPG

 $3,737   $3,457    $280     8.1    

   Three Months Ended
June 30,
  Variance  Six Months Ended
June 30,
  Variance 
($ in millions, except Tour flow and VPG)  2017  2016  $  %  2017  2016  $   % 

Sales of VOIs, net

  $143  $114  $29   25.4 $261  $229  $32    14.0

Adjustments:

          

Fee-for-service sales(1)

   166   171   (5  (2.9  339   331   8    2.4 

Loan loss provision

   15   13   2   15.4   26   23   3    13.0 

Reportability and other(2)

   (1  (7  6   (85.7  (16  (30  14    (46.7
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

Contract sales

  $323  $291  $32   11.0  $610  $553  $57    10.3 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

Tour flow

   87,114   79,557   7,557   9.5   159,519   150,545   8,974    6.0 

VPG

  $3,503  $3,447  $56   1.6  $3,609  $3,452  $157    4.5 

 

(1)Represents contract sales fromfee-for-service properties on which we earn commissions and brand fees.

(2)Includes adjustments for revenue recognition, includingpercentage-of-completion deferrals and amount in rescission, and sales incentives, as well as adjustments related to granting credit to customers for their existing ownership when upgrading intofee-for-service projects.

Contract sales increased for the three and six months ended March 31,June 30, 2017, compared to the same periodperiods in 2016, primarily due to an increase in tour flow which correlates to the increases in marketing expense, telesales and VPG. VPG increased due to a 4.71.1 percent and 2.8 percent increase in average transaction price for the three and a higher close rate.six months ended June 30, 2017, respectively.

 

    Three Months Ended March 31,       Variance 
 ($ in millions) 2017  2016               $                         %           

Sales of VOIs, net

 $118     $115      $3      2.6% 

Sales, marketing, brand and other fees

  130      118                       12      10.2    

Less:

      

Marketing revenue and other fees

  32      27       5      18.5    
 

 

 

  

 

 

   

 

 

   

Sales revenue

  216      206       10      4.9    
 

 

 

  

 

 

   

 

 

   

Less:

      

Cost of VOI sales

  33      38       (5)     (13.2)   

Sales and marketing expense, net(1)

  122      107       15      14.0    
 

 

 

  

 

 

   

 

 

   

Real estate margin

 $61     $61      $—      —    
 

 

 

  

 

 

   

 

 

   

Real estate margin percentage

  28.2%   29.6%     

   Three Months Ended
June 30,
  Variance  Six Months Ended
June 30,
  Variance 
($ in millions)  2017  2016  $   %  2017  2016  $   % 

Sales of VOIs, net

  $143  $114  $29    25.4 $261  $229  $32    14.0

Sales, marketing, brand and other fees

   144   128   16    12.5   274   246   28    11.4 

Less:

           

Marketing revenue and other fees

   43   28   15    53.6   75   55   20    36.4 
  

 

 

  

 

 

  

 

 

    

 

 

  

 

 

  

 

 

   

Sales revenue

   244   214   30    14.0   460   420   40    9.5 
  

 

 

  

 

 

  

 

 

    

 

 

  

 

 

  

 

 

   

Less:

           

Cost of VOI sales

   34   28   6    21.4   67   66   1    1.5 

Sales and marketing expense, net(1)

   130   124   6    4.8   252   231   21    9.1 
  

 

 

  

 

 

  

 

 

    

 

 

  

 

 

  

 

 

   

Real estate margin

  $80  $62  $18    29.0  $141  $123  $18    14.6 
  

 

 

  

 

 

  

 

 

    

 

 

  

 

 

  

 

 

   

Real estate margin percentage

   32.8  29.0     30.7  29.3   

 

(1)Includes revenue recognized through our marketing programs for existing owners and prospective first-time buyers.

Sales revenue increased for the three and six months ended March 31,June 30, 2017, compared to the same periodperiods in 2016, primarily as a result of a $7$29 million and $32 million, respectively, increase in sales of VOIs, net due to sales at our newly developed projects beginning the second half of 2016, in Washington, DC and New York, NY and a $1 million and $8 million, respectively, increase in commissions and brand fees due to the launch of one newfee-for-service property in the second quarter of 2016. In addition, marketing revenue increased for the three and six months ended June 30, 2017, compared to the same periods in 2016, andprimarily due to a $3$10 million reduction of our expected redemptions of expired discounted vacation packages, an increase in salesthe actual redemption of VOIs, net due to sales at our newly developed projects beginning the second half of 2016.discounted vacation packages and an increase in title related service revenue.

Real estate margin and real estate margin percentage were flatincreased for the three and six months ended March 31,June 30, 2017, compared to the same periodperiods in 2016, as result of increaseddue to the aforementioned increases in sales revenue and decreased cost of VOI sales,marketing revenues partially offset by an increase in costs of VOI sales and sales and marketing expense driven by higher contract sales volume. The decrease in cost of VOI sales is partially due to a decline in existing owners upgrading intofee-for-service projects.

Financing

 

   Three Months Ended March 31,     Variance   Three Months Ended
June 30,
 Variance Six Months Ended
June 30,
 Variance 
($ in millions) 2017 2016             $                       %             2017 2016 $ % 2017 2016 $   % 

Interest income

 $32     $30      $   6.7%   $32  $30  $2  6.7 $64  $60  $4    6.7

Other financing revenue

 3     2         50.0       4  4   —     —    7  6  1    16.7 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Financing revenue

 35     32         9.4       36  34  2  5.9  71  66  5    7.6 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Consumer financing interest expense

 4     3         33.3       6  3  3  100.0  10  6  4    66.7 

Other financing expense

 6     5         20.0       5  5   —     —    11  10  1    10.0 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Financing expense

 10     8         25.0       11  8  3  37.5  21  16  5    31.3 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Financing margin

 $25     $24      $   4.2      $25  $26  $(1 (3.8 $50  $50  $—      —   
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Financing margin percentage

 71.4%  75.0%        69.4 76.5   70.4 75.8   

Financing revenue and margin increased for the three and six months ended March 31,June 30, 2017, compared to the same periodperiods in 2016, primarily due to an increase of $2 million and $4 million, respectively, in interest income resulting from a higher outstanding timeshare financing receivables balance during the three and six months ended March 31,June 30, 2017. Financing margin percentage decreased for the three and six months ended March 31,June 30, 2017, compared to the same periodperiods in 2016, primarily due to highernon-recourse debt balance associated with the additional drawdown on our timeshare facility in December 2016. See Note 7:Debt &Non-recourse debtfor additional information.

Resort Operations and Club Management Segment

Resort and Club Management

 

   Three Months Ended March 31,     Variance   Three Months Ended
June 30,
 Variance Six Months Ended
June 30,
 Variance 
($ in millions) 2017 2016             $                       %             2017 2016 $ % 2017 2016 $   % 

Club management revenue

 $21     $18      $   16.7%   $20  $21  $(1 (4.8)%  $41  $39  $2    5.1

Resort management revenue

 15     13         15.4       15  13  2  15.4  30  26  4    15.4 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Resort and club management revenues

 36     31         16.1       35  34  1  2.9  71  65  6    9.2 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Club management expense

 5     5       —     —       6  5  1  20.0  11  10  1    10.0 

Resort management expense

 5     3         66.7       4  3  1  33.3  9  6  3    50.0 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Resort and club management expenses

 10     8         25.0       10  8  2  25.0  20  16  4    25.0 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Resort and club management margin

 $26     $23      $   13.0      $25  $26  $(1 (3.8 $51  $49  $2    4.1 
 

 

  

 

   

 

     

 

  

 

  

 

   

 

  

 

  

 

   

Resort and club management margin percentage

 72.2%  74.2%        71.4 76.5   71.8 75.4   

Resort and club management revenues increased for the three and six months ended March 31,June 30, 2017, compared to the same periods in 2016, primarily due to (i) an increase in resort management revenue from the launch of new properties during and subsequent to the second quarter of 2016 and (ii) an increase of approximately 19,000 in Club members resulting in higher annual dues and transaction fees. These increases were partially offset by aone-time fees earned in 2016 on a prepaid contract and higher resort and club management expenses due to an increase in costs for servicing additional Club members and operating expenses.

Resort and club management margin decreased for the three months ended June 30, 2017, compared to the same period in 2016, primarily due to (i) an increase of approximately 18,000aone-time fees earned in Club members resulting2016 on a prepaid contract, partially offset by the aforementioned increases in higher net Club management revenuesegment revenues as well as activation and transaction fees, (ii) ana $2 million increase in transaction volume per Club memberresort and (iii) increases in fees earned on additional units underclub management of nine percent, partially offset by an increase in costs for servicing additional Club members.expenses.

Resort and club management margin increased for the threesix months ended March 31, 2017, compared to the same period in 2016, due to increases in segment revenues, partially offset by $2 million increases in resort and club management expenses.

Rental and Ancillary Services

    Three Months Ended March 31,       Variance 
 ($ in millions) 2017  2016               $                         %           

Rental revenues

 $41     $39      $2      5.1% 

Ancillary services revenues

  5      6       (1)     (16.7)   
 

 

 

  

 

 

   

 

 

   

Rental and ancillary services revenues

  46      45       1      2.2    
 

 

 

  

 

 

   

 

 

   

Rental expenses

  23      21       2      9.5    

Ancillary services expense

  4      5       (1)     (20.0)   
 

 

 

  

 

 

   

 

 

   

Rental and ancillary services expenses

  27      26       1      3.8    
 

 

 

  

 

 

   

 

 

   

Rental and ancillary services margin

 $19     $19      $—      —    
 

 

 

  

 

 

   

 

 

   

Rental and ancillary services margin percentage

  41.3%   42.2%     

Rental and ancillary services revenues increased for the three months ended March 31,June 30, 2017, compared to the same period in 2016, primarily due to rental income at our newthe aforementioned increases in segment revenues, partially offset by aone-time fees earned in 2016 on a prepaid contract as well as a $4 million increase in resort The District, in Washington DC which opened in May 2016, and aclub management expenses.

6.4 percent increase in transient rate.Rental and Ancillary Services

   Three Months Ended
June 30,
  Variance  Six Months Ended
June 30,
  Variance 
($ in millions)  2017  2016  $  %  2017  2016  $  % 

Rental revenues

  $40  $42  $(2  (4.8)%  $81  $81  $—     

Ancillary services revenues

   7   7   —     —     12   13   (1  (7.7
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

Rental and ancillary services revenues

   47   49   (2  (4.1  93   94   (1  (1.1
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

Rental expenses

   25   23   2   8.7   48   44   4   9.1 

Ancillary services expense

   6   7   (1  (14.3  10   12   (2  (16.7
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

Rental and ancillary services expenses

   31   30   1   3.3   58   56   2   3.6 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

Rental and ancillary services margin

  $16  $19  $(3  (15.8 $35  $38  $(3  (7.9
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

Rental and ancillary services margin percentage

   34.0  38.8    37.6  40.4  

Rental and ancillary services revenues decreased for the three and six months ended March 31,June 30, 2017, compared to the same periodperiods in 2016, primarily due to aone-time insurance claim payment of $2 million received in 2016 as well as a reduction in access fees received due to higher quantity of access fees sold in 2016. Rental and ancillary services margin decreased for the three and six months ended June 30, 2017, compared to the same periods in 2016, due to lower foodaforementioned decreases in segment revenues and beverage and other salesincreases in subsidy expenses from new properties with unsold inventory as well as an increase in Hilton Honors expense due to our resort guests.higher Club members.

Other Operating Expenses

 

    Three Months Ended March 31,         Variance   Three Months Ended
June 30,
   Variance Six Months Ended
June 30,
   Variance 
($ in millions)  2017   2016                  $                             %              2017   2016   $ % 2017   2016   $ % 

Unallocated general and administrative

  $23    $12      $11       91.7%   $29   $15   $14  93.3 $52   $27   $25  92.6

Allocated general and administrative

   —           (4)      (100.0)      —      6    (6 (100.0  —      10    (10 (100.0
  

 

   

 

     

 

       

 

   

 

   

 

   

 

   

 

   

 

  

General and administrative

  $23    $16      $      43.8      $29   $21   $8  38.1  $52   $37   $15  40.5 
  

 

   

 

     

 

       

 

   

 

   

 

   

 

   

 

   

 

  

Unallocated general and administrative expenses increased for the three and six months ended March 31,June 30, 2017, compared to the same periodperiods in 2016, primarily due to an increase in expenses relating to regulatory filings, professional fees and other costs as a result of becoming an independent publicly traded company. Allocated general and administrative were expenses allocated to us from Hilton relating to thespin-off which was completed on January 3, 2017.

 

    Three Months Ended March 31,         Variance   Three Months Ended
June 30,
   Variance Six Months Ended
June 30,
   Variance 
($ in millions)  2017   2016                  $                             %              2017   2016   $   % 2017   2016   $   % 

Depreciation and amortization

  $   $     $      40.0%   $7   $6   $1    16.7 $14   $11   $3    27.3

License fee expense

   20     19             5.3       23    20    3    15.0  43    39    4    10.3 

Depreciation and amortization expense increased for the three and six months ended March 31,June 30, 2017, compared to the same periodperiods in 2016, primarily due to asset transfers from Hilton during the fourth quarter of 2016, some of which we hold as property and equipment for future conversion into inventory. The increase in license fee expense was as a result of the increase in revenues.

Non-Operating Expenses

 

     Three Months Ended March 31,         Variance 
 ($ in millions)  2017   2016                  $                             %            

Allocated Parent interest expense

  $—    $     $(6)      (100.0)% 

Interest expense

       —             NM(1)  

Income tax expense

   26     32       (6)      (18.8)    

   Three Months Ended
June 30,
  Variance  Six Months Ended
June 30,
  Variance 
($ in millions)  2017   2016  $  %  2017   2016  $  % 

Gain on foreign currency transactions

  $—     $(1 $1   (100.0)%  $—     $(1 $1   (100.0)% 

Allocated Parent interest expense

   —      7   (7  (100.0  —      13   (13  (100.0

Interest expense

   7    —     7   NM(1)   14    —     14   NM(1) 

Other loss, net

   —      1   (1  (100.0  —      1   (1  (100.0

Income tax expense

   33    33   —     —     59    65   (6  (9.2

 

(1)Fluctuation in terms of percentage change is not meaningful.

The Allocated Parent interest expense included in our condensed consolidated statements of operations for the three and six months ended March 31,June 30, 2016 relates to an unconditional obligation to guarantee certain Hilton allocated debt balances which was released in November 2016.

The increase in interest expense for the three and six months ended March 31,June 30, 2017, compared to the same periodperiods in 2016 is directly related to the financing transactions closed during and subsequent to the fourth quarter of 2016.

Income tax expense decreased for the threesix months ended March 31,June 30, 2017, compared to the same period in 2016, primarily due to a reduction in 2017 pretax income, a decrease in the cumulative installment sale interest liability, offset by an increase in tax due to the cumulative effect of a change in the state effective tax rate.

Liquidity and Capital Resources

Overview

Prior to the fourth quarter of 2016, any net cash generated by our business has been transferred to Hilton, where it has been centrally managed. Transfers of cash to and from Hilton have been reflected as a component ofNet transfers (to) from Parent in our condensed consolidated statements of cash flows.

As of March 31,June 30, 2017, we had total cash and cash equivalents of $274$253 million, including $78$62 million of restricted cash. The restricted cash balance relates to escrowed cash from our sales of our VOIs and consumer financing receivables pledged to ournon-recourse revolving timeshare receivable credit facility or securitizations.

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 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, purchase commitments and costs associated with potential acquisitions and development projects.

We finance our business activities primarily with existing cash and cash equivalents, cash generated from our operations and through securitizations of our timeshare financing receivables. We believe that this cash will be adequate to meet anticipated requirements for operating expenses and other expenditures, including payroll and related benefits, legal costs and capital expenditures for the foreseeable future. The objectives of our cash management policy are to maintain the availability of liquidity, minimize operational costs, make debt payments and fund future acquisitions and development projects. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments.

Sources and Uses of Our Cash

The following table summarizes our net cash flows and key metrics related to our liquidity:

 

    Three Months Ended March 31,       Variance 
 ($ in millions) 2017  2016                 $                             %             

Net cash provided by (used in):

      

Operating activities(2)

 $135   $36    $99     NM(1)  

Investing activities

  (10)   (10)    —     —      

Financing activities(2)

  (2)   (21)    19     (90.5)% 

   Six Months Ended June 30,   Variance 
($ in millions)  2017   2016   $   % 

Net cash provided by (used in):

        

Operating activities(2)

  $177   $86   $91    NM(1) 

Investing activities

   (21   (17   (4   23.5

Financing activities(2)

   (54   (73   19    (26.0

 

(1)(1)Fluctuation in terms of percentage change is not meaningful.

(2)

Reflects the adoption of Accounting Standards Update (“ASU”)No. 2016-18, (“ASU2016-18”)Statement of Cash Flows (Topic 230): Restricted Cash.See Note 2: Recently Issued Accounting Pronouncements in our unaudited condensed financial statements for further discussion.

Operating Activities

Cash flow provided by operating activities is primarily generated from (1) sales and financing of VOIs and (2) net cash generated from managing our resorts, Club operations and providing related ancillary services. Cash flows used in operating activities primarily include spending for the acquisition of inventory, development of new phases of existing resorts and funding our working capital needs. Our cash flows from operations generally vary due to the following factors related to the sale of our VOIs: the degree to which our owners finance their purchase and our owners’ repayment of timeshare financing receivables; the timing of management and sales and marketing services provided; and cash outlays for VOI inventory acquisition and development. Additionally, cash flow from operations will also vary depending upon our sales mix of VOIs; over time, we generally receive more cash from the sale of an owned VOI as compared to that from afee-for-service sale.

Net cash flows provided by operating activities increased by $99$91 million during the threesix months ended March 31,June 30, 2017, compared to the same period in 2016, primarily as a result of improved operating results in both segmentsthe real estate sales and financing segment and increased sources of cash for working capital requirements.

Capital efficiency allows us to reduce inventory investment requirements and to generate growth in revenues and cash flows. Over a short-term period, depending on the timing of inventory spend, our capital efficiency may vary; however, generally, over the long-term, we generally target a 50/50 mix of owned andfee-for-service inventory, which allowswe expect will allow us to expand partner relationships and to provide a strong inventory supply without the upfront capital investment. In addition, we continue to move towards morejust-in-time owned inventory sourcing arrangements that we expect to also drive capital efficiency. TheOver the long-term, we consider a ratio of VOI inventory spend to cost of VOI sales approximates aof 1:1 ratio for each of the three months ended March 31, 2017 and 2016,to be indicative of capital efficiency. The change for the six months ended June 30, 2017, compared to the same period in 2016, is primarily due to reduced inventory spending while maintaining a consistent sales pace and fewerfee-for-service upgrades.

The following is a summary of our Capital Efficiency Ratio:

 

     Three Months Ended March 31,   
 ($ in millions)  2017  2016 

VOI spending - owned properties

  $10    $35   

VOI spending -fee-for-service upgrades

   16     18   
  

 

 

  

 

 

 

Total VOI inventory spending(1)

  $26    $53   
  

 

 

  

 

 

 
   

Cost of VOI sales(1)

  $33    $38   

Capital Efficiency Ratio

   1.3     0.7   

   Six Months Ended June 30, 
($ in millions)  2017   2016 

VOI spending - owned properties

  $18   $32 

VOI spending -fee-for-service upgrades

   28    40 
  

 

 

   

 

 

 

Total VOI inventory spending(1)

  $46   $72 
  

 

 

   

 

 

 

Cost of VOI sales(1)

  $67   $66 

Capital Efficiency Ratio

   1.5    0.9 

 

(1)Includes costs of VOI sales related to the cost of reacquiring inventory that we have developed from existing owners upgrading intofee-for-service projects. Excludesnon-cash asset transfers from Hilton andnon-cash inventory accruals.

Investing Activities

The following table summarizes our net cash used in investing activities:

 

    Three Months Ended March 31,         Variance   Six Months Ended June 30,   Variance 
($ in millions)  2017   2016                  $                             %              2017   2016   $   % 

Capital expenditures for property and equipment

  $(8)   $(9)     $      (11.1)%   $(15  $(14  $(1   7.1

Software capitalization costs

   (2)    (1)      (1)      100.0         (6   (3   (3   100.0 
  

 

   

 

     

 

       

 

   

 

   

 

   

Net cash used in investing activities

  $(10)   $(10)     $—       —       $(21  $(17  $(4   23.5 
  

 

   

 

     

 

       

 

   

 

   

 

   

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 maintenance and renovations of our existing assets are necessary to stay competitive in the markets in which we operate.

Financing Activities

The following table summarizes our net cash used in financing activities:

 

    Three Months Ended March 31,       Variance   Six Months Ended June 30,   Variance 
($ in millions)  2017   2016                $                             %              2017   2016   $   % 

Issuance ofnon-recourse debt

  $350    $—     $350       NM(1)    $350   $—     $350    NM(1) 

Repayment ofnon-recourse debt

   (344)    (29)     (315)      NM(1)     (395   (58   (337   NM(1) 

Repayment of debt

   (3)    —      (3)      NM(1)     (5   —      (5   NM(1) 

Debt issuance costs

   (5)    —      (5)      NM(1)     (5   —      (5   NM(1) 

Net transfers from Parent(2)

   —          (8)      (100.0)% 

Net transfers to Parent(2)

   —      (15   15    (100.0)% 

Proceeds from stock option exercises

   1    —      1    NM(1) 
  

 

   

 

    

 

       

 

   

 

   

 

   

Net cash used in financing activities

  $(2)   $(21)    $19       (90.5)      $(54  $(73  $19    (26.0
  

 

   

 

    

 

       

 

   

 

   

 

   

 

(1)Fluctuation in terms of percentage change is not meaningful.

(2)All transactions between HGV and Hilton have been settled in connection with thespin-off.

The change in net cash used in financing activities for the threesix months ended March 31,June 30, 2017, compared to the same period in 2016, was primarily due to our financing transactions.transactions that occurred in the first quarter of 2017. During the threesix months ended March 31,June 30, 2017, we issued $350 million innon-recourse securitized debt and paid $5 million in debt issuance costs. The proceeds received from thenon-recourse securitized debt were used to pay down a portion of our timeshare facility. We also paid $3$5 million of the principal amount of the senior secured term loan. See Note 7:Debt & Non -recourse debtin our unaudited condensed consolidated financial statements for further discussion. Additionally, following thespin-off date we no longer receive transfers from Hilton.

Contractual Obligations

The following table summarizes our significant contractual obligations as of March 31,June 30, 2017:

 

   Payments Due by Period 
 ($ in millions)          Total              Less Than 1   
Year
        1-3 Years             3-5 Years          More Than 5  
Years
 

Debt(1)

  $665     $26     $68     $217     $354   

Non-recourse debt(1)

   745      131      381      160      73   

Purchase commitments

   212      4      190      18      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $1,622     $161     $639     $395     $427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   Payments Due by Period 
($ in millions)  Total   Less Than 1
Year
   1-3 Years   3-5 Years   More Than 5
Years
 

Debt(1)

  $658   $35   $69   $210   $344 

Non-recourse debt(1)

   691    142    370    113    66 

Purchase commitments

   212    7    196    9    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $1,561   $184   $635   $332   $410 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes principal, as well as estimated interest payments. For our variable-rate debt, we have assumed a constant30-day LIBOR rate of 0.981.22 percent as of March 31,June 30, 2017.

As of March 31,June 30, 2017, our contractual obligations relating to our operating leases have not materially changed from what aswas reported in our Annual Report on Form10-K for the year ended December 31, 2016.

Off-Balance Sheet Arrangements

Ouroff-balance sheet arrangements as of March 31,June 30, 2017 consisted of $212 million of certain commitments with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under the Hilton Grand Vacations brand. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 14:Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of ouroff-balance sheet arrangements.

Subsequent Events

On July 18, 2017, we entered into an agreement with BRE Ace Holdings, an affiliate of Blackstone and formed BRE Ace LLC. Pursuant to the agreement, we contributed $40 million in cash for a 25 percent interest in BRE Ace LLC, which owns, a1,201-key timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations,” located in Las Vegas Nevada. See Note 15:Subsequent Events in our unaudited condensed consolidated financial statements for additional information.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect 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 Form10-K for the year ended December 31, 2016. Since the date of our Annual Report on Form10-K, there have been no material changes to our critical accounting policies or the methods or assumptions we apply under them.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

ITEM 3.Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates, currency exchange rates and debt prices. 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 Form10-K for the year ended December 31, 2016.

Interest Rate Risk

We are exposed to interest rate risk on our variable-rate debt, comprised of the Term Loansterm loans and our Timeshare Facility,timeshare facility, of which the Timeshare Facilitytimeshare facility is without recourse to us. The interest rate is based onone-month LIBOR and we are most vulnerable to changes in this rate.

We intend to securitize timeshare financing receivables in the asset-backed financing market on a regular basis. We expect to secure fixed rate funding to match our fixed rate timeshare financing receivables. However, if we have floating rate debt in the future, we will monitor the interest rate risk and evaluate opportunities to mitigate such risk through the use of derivative instruments.

To the extent we utilize variable rate indebtedness in the future, any increase in interest rates beyond amounts covered under any corresponding derivative financial instruments, particularly if sustained, could have an adverse effect on our net income, cash flows and financial position. We cannot assure that any hedgingHedging transactions we enter into willmay not adequately mitigate the adverse effects of interest rate increases or that counterparties in those transactions will honor their obligations.

The following table sets forth the contractual maturities, weighted average interest rates and the total fair values as of March 31,June 30, 2017, for our financial instruments that are materially affected by interest rate risk:

 

     Maturities by Period       
 ($ in millions) Weighted
Average
Interest
    Rate(1)    
       2017            2018            2019            2020            2021       There-
     after     
      Total(2)      Fair
     Value     
 

Assets:

         

Fixed-rate securitized timeshare financing receivables

  11.883%   $82    $82    $80    $77    $70    $186    $577    $568   

Fixed-rate unsecuritized timeshare financing receivables

  12.163%    58     51     54     57     59     285     564     574   

Liabilities:(3)

         

Fixed-rate debt

  3.693%    119     132     99     88     66     370     874     888   

Variable-rate debt(4)

  2.795%    8     10     138     10     160     —     326     321   

      Maturities by Period 
($ in millions)  Weighted
Average
Interest
Rate(1)
  2017   2018   2019   2020   2021   There-
after
   Total(2)   Fair
Value
 

Assets:

                 

Fixed-rate securitized timeshare financing receivables

   11.880 $39   $79   $78   $75   $69   $201   $541   $620 

Fixed-rate unsecuritized timeshare financing receivables

   12.210  39    52    56    61    64    351    623    679 

Liabilities:(3)

                 

Fixed-rate debt

   3.772  127    116    108    79    29    364    823    842 

Variable-rate debt(4)

   3.031  10    10    138    10    155    —      323    330 

 

(1)Weighted average interest rate as of March 31,June 30, 2017.
(2)Amount excludes unamortized deferred financing costs.
(3)Includes debt andnon-recourse debt.
(4)Variable-rate debt includes principal outstanding debt of $198$195 million andnon-recourse debt of $128 million as of March 31,June 30, 2017. See Note 7: Debt &Non-recourse debt in our unaudited condensed consolidated financial statements for additional information.

Foreign Currency Exchange Rate Risk

Though the majority of our operations are conducted in United States dollar (“U.S. dollar”), we are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from our timeshare financing receivables denominated in Japanese yen, the value of which could change materially in reference to our reporting currency, the U.S. dollar. A 10 percent increase in the foreign exchange rate of Japanese yen to U.S. dollar would increase our gross timeshare financing receivables by less than $1 million.

ITEM 4. Controls and Procedures

ITEM 4.Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form10-Q, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), and management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature, can provide only reasonable assurance about management’s control objectives. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving the desired control objectives. However, you should note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based upon the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and operating to provide reasonable assurance that we record, process, summarize and report the information we are required to disclose in the reports that we file or submit under the Exchange Act within the time periods specified in the rules and forms of the SEC, and to provide reasonable assurance that we accumulate and communicate such information to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions about required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on FormForm 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Item 1.Legal Proceedings

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of March 31,June 30, 2017 will not have a material effect on our condensed consolidated results of operations, financial position or cash flows.

Item 1A.Risk Factors

Item 1A. Risk Factors

As of March 31, 2017, there have been noSet forth below are the material changes fromto the risk factors previously discloseddiscussed in “Part I Item 1A. Risk Factors”1A of ourPart 1 of the Annual Report on Form10-K for the year ended December 31, 2016. In addition to the other information set forth in this Quarterly Report on Form10-Q, you should carefully consider the risk factors discussed below and in Item 1A of Part 1 of the Annual Report on Form10-K for the year ended December 31, 2016, which could materially and adversely affect our business, financial condition, results of operations and stock price. The risks described below and in the Annual Report on Form10-K are not the only risks facing HGV. Additional risks and uncertainties not presently known to management or that management presently believes not to be material may also result in material and adverse effects on our business, financial condition, results of operations and stock price.

Partnership or joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on partners’ orco-venturers’ financial condition, disputes between us and our partners orco-venturers and our obligation to guaranty certain obligations beyond the amount of our investments.

We mayco-invest in the future with other third parties through partnerships, joint ventures or other entities, acquiringnon-controlling interests in, or sharing responsibility for managing the affairs, of a timeshare property, partnership, joint venture or other entity. For example, we recently entered into the Joint Venture Agreement with Blackstone, pursuant to which we acquired anon-managing 25 percent interest in the Elara Joint Venture. Consequently, with respect to any such third-party arrangements, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity, and may, under certain circumstances, be exposed to risks not present if a third party were not involved, including the possibility that partners orco-venturers might become bankrupt or fail to fund their share of required capital contributions, and we may be forced to make contributions to maintain the value of the property. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner orco-venturer may have full control over the partnership or joint venture. We and our respective partners orco-venturers may each have the right to trigger abuy-sell right or forced sale arrangement, which could cause us to sell our interest, or acquire our partners’ orco-venturers’ interest, or to sell the underlying asset, either on unfavorable terms or at a time when we otherwise would not have initiated such a transaction. In addition, a sale or transfer by us to a third party of our interests in the partnership or joint venture may be subject to consent rights or rights of first refusal in favor of our partners orco-venturers, which would in each case restrict our ability to dispose of our interest in the partnership or joint venture. For example, our joint venture partner in the Elara Joint Venture generally has exclusive authority to manage the business and affairs of the Elara Joint Venture, and has the discretion to call for additional capital contributions at any time. In addition, it has certain rights to transfer or sell some or all of its interests in the Elara Joint Venture and/or the Property without our consent or, in certain situations, require us to sell our interests at the same time, while we are not permitted to sell or transfer our interest without their consent. Any or all of these factors could adversely affect the value of our investment, our ability to exit, sell or dispose of our investment at times that are beneficial to us, or our financial commitment to maintaining our interest in the joint ventures.

Our joint ventures may be subject to debt and the refinancing of such debt, and we may be required to provide certain guarantees or be responsible for the full amount of the debt in certain circumstances in the event of a default beyond the amount of our equity investment. Our joint venture partners may take actions that are inconsistent with the interests of the partnership or joint venture, or in violation of the financing arrangements and trigger our guaranty, which may expose us to substantial financial obligation and commitment that are beyond our ability to fund. In addition, partners orco-venturers may have economic or other business interests or goals that are inconsistent with our business interests or goals and may be in a position to take action or withhold consent contrary to our policies or objectives. In some instances, partners orco-venturers may have competing interests in our markets that could create conflict of interest issues. Disputes between us and partners orco-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers from focusing their time and effort on our business. Consequently, actions by or disputes with partners orco-venturers might result in subjecting assets owned by the partnership or joint venture to additional risk. In addition, we may, in certain circumstances, be liable for the actions of our third-party partners orco-venturers.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Item 3.Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

Item 5. Other InformationNone.

Section 13(r) Disclosure

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) of the Exchange Act, we hereby incorporate by reference herein Exhibit 99.1 of this report, which includes disclosures regarding activities at NCR Corporation, which may be considered an affiliate of Blackstone and, therefore, our affiliate.

Item 6.   Exhibits

Item 6.Exhibits

 

Exhibit

No.

  

Description

2.1  Distribution Agreement among Hilton Worldwide Holdings Inc., Park Hotels & Resorts Inc. and Hilton Grand Vacations Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on January 4, 2017).
3.1  Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on March 17, 2017).
3.2  Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on March 17, 2017).
  10.12017 Declaration of Amendment to Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A (FileNo. 001-37794) filed on March 24, 2017).*
10.1    10.2  

Employee MattersEmployment Letter Agreement, among Hilton Worldwide Holdings Inc., Park Hotels & Resorts Inc.dated April 17, 2017, between Mark D. Wang and Hilton Grand Vacations Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on January 4,April 17, 2017).

*
10.2    10.3  

Tax MattersSeverance Agreement, among Hilton Worldwide Holdings Inc., Park Hotels & Resorts Inc.dated April 17, 2017, between Mark D. Wang and Hilton Grand Vacations Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on January 4,April 17, 2017).

*
10.3    10.4  

Master Transition ServicesSeverance Agreement, dated April 17, 2017, between Hilton Worldwide Holdings Inc.James E. Mikolaichik and Hilton Grand Vacations Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on January 4,April 17, 2017).

*
10.4    10.5  

LicenseSeverance Agreement, by and among Hilton Worldwide Holdings Inc.dated April 17, 2017, between Stan R. Soroka and Hilton Grand Vacations Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on January 4,April 17, 2017).

*
  10.5  10.6  

Severance Agreement, dated April 17, 2017, between Barbara L. Hollkamp and Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.810.5 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on January 4,April 17, 2017).*

  10.6  

Indemnification Agreement entered into between Hilton Grand Vacations Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement onForm 10-12B/A(File No. 001-37794) filed on November 14, 2016).

  10.7  

Severance Agreement, dated April 17, 2017, between Charles R. Corbin and Hilton Grand Vacations, Inc. 2017 Stock Plan forNon-Employee Directors (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on January 4, 2017).*

  10.8  

Hilton Resorts Corporation 2017 Executive Deferred CompensationGrand Vacations Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on January 4, 2017).*

  10.9  

Registration Rights Agreement, dated as of October 24, 2016, among Hilton Grand Vacations Inc. and HNA Tourism Group Co., Ltd. (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement onForm 10-12B/A (FileNo. 001-37794) filed on November 14, 2016).

10.10  

Stockholders Agreement, dated as of October 24, 2016, by and among Hilton Grand Vacations, Inc., HNA Tourism Group Co., Ltd. and HNA Group Co., Ltd. (incorporated by reference to Exhibit 10.1899.1 to the Company’s Registration Statement on Form10-12B/AS-8 (FileNo. 001-37794)333-218056) filed on November 14, 2016).

10.11  

Stockholders Agreement, dated as of January 2, 2017, among Hilton Grand Vacations Inc. and the other parties thereto (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form8-K(File No. 001-37794) filed on January 4, 2017).

10.12  Stockholders Agreement, dated as of January 2, 2017 by and among Hilton Worldwide Holdings Inc., Hilton Grand Vacations Inc., and the Blackstone Holders (as defined therein) (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on January 4, 2017).
10.13  (a)      Form of Restricted Stock Unit Agreement Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on March 15,May 17, 2017).*
10.13  (b)Form of Performance Share Agreement (Converted Award - 2014 Grant) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.13  (c)Form of Restricted Stock Unit Agreement (Converted Award - 2014 Grant) (Time-Based) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.13  (d)Form of Restricted Stock Unit Agreement (Converted Award - 2015 Grant) (Performance-Based) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.13  (e)Form of Restricted Stock Unit Agreement (Converted Award - 2015 Grant) (Time-Based) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.13  (f)Form of Restricted Stock Unit Agreement (Converted Award - 2016 Grant) (Performance-Based) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.13  (g)Form of Restricted Stock Unit Agreement (Converted Award - 2016 Grant) (Time-Based) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.14  (a)Form ofNon-Qualified Stock Option Award Agreement Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form8-K (FileNo. 001-37794) filed on March 15, 2017).*
10.14  (b)Form ofNon-Qualified Stock Option Agreement (Converted Award - 2014 Grant) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.14  (c)Form ofNon-Qualified Stock Option Agreement (Converted Award - 2015 Grant) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.14  (d)Form ofNon-Qualified Stock Option Agreement (Converted Award - 2016 Grant) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.15  (a)Form of Restricted Stock Agreement (Converted Award - 2015 Grant) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.15  (b)Form of Restricted Stock Agreement (Converted Award - 2016 Grant) Under Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan.*
10.16  Form of Restricted Stock Unit Agreement Under Hilton Grand Vacations Inc. 2017 Stock Plan forNon-Employee Directors.*
  11.1  Statement regarding computation of earnings per share. See condensed consolidated statements of operations on page 3 of this Form10-Q.
  31.1  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  99.1  Section 13(r) Disclosures.
101.INS  XBRL Instance Document.
101.SCH  
101.SCH  XBRL Taxonomy Extension Schema Document.
101.CAL  
101.CAL  XBRL Taxonomy Calculation Linkbase Document.
101.DEF  
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB  
101.LAB  XBRL Taxonomy Label Linkbase Document.
101.PRE  
101.PRE  XBRL Taxonomy Presentation Linkbase Document.

 

  *Denotes management contract or compensatory plan or arrangement.

*Denotes management contract or compensatory plan or arrangement.

SIGNATURES

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 4th3rd day of May,August, 2017.

 

HILTON GRAND VACATIONS INC.
By: 

 /s//s/ Mark D. Wang

Name: Mark D. Wang
Title: President and Chief Executive Officer
By: 

 /s//s/ James E. Mikolaichik

Name: 
Name:  James E. Mikolaichik
Title: Executive Vice President and Chief Financial Officer