UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2021
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 number 001-37794
Hilton Grand Vacations Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 81-2545345 |
(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 par value per share | HGV | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. 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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer |
| Accelerated Filer | ☐ |
Non-Accelerated Filer |
| 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 in Rule 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 October 27, 2017April 23, 2021 was 99,088,973.
85,542,182.
HILTON GRAND VACATIONS INC.
FORM 10-Q TABLE OF CONTENTS
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Item 1. | 2 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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| 55 |
PART I FINANCIALFINANCIAL INFORMATION
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (unaudited) |
|
|
|
|
|
| (unaudited) |
|
|
|
|
| ||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 226 |
|
| $ | 48 |
|
| $ | 400 |
|
| $ | 428 |
|
Restricted cash |
|
| 58 |
|
|
| 103 |
|
|
| 105 |
|
|
| 98 |
|
Accounts receivable, net of allowance for doubtful accounts of $10 and $6 |
|
| 104 |
|
|
| 123 |
| ||||||||
Accounts receivable, net of allowance for doubtful accounts of $17 and $20 |
|
| 111 |
|
|
| 119 |
| ||||||||
Timeshare financing receivables, net |
|
| 1,055 |
|
|
| 1,025 |
|
|
| 940 |
|
|
| 974 |
|
Inventory |
|
| 475 |
|
|
| 513 |
|
|
| 720 |
|
|
| 702 |
|
Property and equipment, net |
|
| 266 |
|
|
| 256 |
|
|
| 501 |
|
|
| 501 |
|
Investment in unconsolidated affiliate |
|
| 41 |
|
|
| — |
| ||||||||
Operating lease right-of-use assets, net |
|
| 48 |
|
|
| 52 |
| ||||||||
Investments in unconsolidated affiliates |
|
| 53 |
|
|
| 51 |
| ||||||||
Intangible assets, net |
|
| 72 |
|
|
| 70 |
|
|
| 80 |
|
|
| 81 |
|
Land and infrastructure held for sale |
|
| 41 |
|
|
| 41 |
| ||||||||
Other assets |
|
| 51 |
|
|
| 42 |
|
|
| 115 |
|
|
| 87 |
|
TOTAL ASSETS (variable interest entities - $500 and $258) |
| $ | 2,348 |
|
| $ | 2,180 |
| ||||||||
TOTAL ASSETS (variable interest entities - $733 and $800) |
| $ | 3,114 |
|
| $ | 3,134 |
| ||||||||
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
| ||||||||
Accounts payable, accrued expenses and other |
| $ | 324 |
|
| $ | 231 |
|
| $ | 260 |
|
| $ | 252 |
|
Advanced deposits |
|
| 102 |
|
|
| 103 |
|
|
| 114 |
|
|
| 117 |
|
Debt |
|
| 484 |
|
|
| 490 |
| ||||||||
Non-recourse debt |
|
| 612 |
|
|
| 694 |
| ||||||||
Debt, net |
|
| 1,156 |
|
|
| 1,159 |
| ||||||||
Non-recourse debt, net |
|
| 698 |
|
|
| 766 |
| ||||||||
Operating lease liabilities |
|
| 63 |
|
|
| 67 |
| ||||||||
Deferred revenues |
|
| 119 |
|
|
| 106 |
|
|
| 336 |
|
|
| 262 |
|
Deferred income tax liabilities |
|
| 374 |
|
|
| 389 |
|
|
| 118 |
|
|
| 137 |
|
Total liabilities (variable interest entities - $484 and $245) |
|
| 2,015 |
|
|
| 2,013 |
| ||||||||
Commitments and contingencies - see Note 15 |
|
|
|
|
|
|
|
| ||||||||
Total liabilities (variable interest entities - $703 and $771) |
|
| 2,745 |
|
|
| 2,760 |
| ||||||||
Commitments and contingencies - see Note 19 |
|
|
|
|
|
|
|
| ||||||||
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of September 30, 2017 and December 31, 2016 |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 99,088,973 issued and outstanding as of September 30, 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, NaN issued or outstanding as of March 31, 2021 and December 31, 2020 |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 85,537,477 shares issued and outstanding as of March 31, 2021 and 85,205,012 shares issued and outstanding as of December 31, 2020 |
|
| 1 |
|
|
| 1 |
| ||||||||
Additional paid-in capital |
|
| 160 |
|
|
| 138 |
|
|
| 194 |
|
|
| 192 |
|
Accumulated retained earnings |
|
| 172 |
|
|
| 28 |
|
|
| 174 |
|
|
| 181 |
|
Total equity |
|
| 333 |
|
|
| 167 |
|
|
| 369 |
|
|
| 374 |
|
TOTAL LIABILITIES AND EQUITY |
| $ | 2,348 |
|
| $ | 2,180 |
|
| $ | 3,114 |
|
| $ | 3,134 |
|
See notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in millions, except per share amounts)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOIs, net |
| $ | 145 |
|
| $ | 130 |
|
| $ | 406 |
|
| $ | 359 |
|
Sales, marketing, brand and other fees |
|
| 127 |
|
|
| 136 |
|
|
| 401 |
|
|
| 382 |
|
Financing |
|
| 38 |
|
|
| 34 |
|
|
| 109 |
|
|
| 100 |
|
Resort and club management |
|
| 37 |
|
|
| 33 |
|
|
| 108 |
|
|
| 98 |
|
Rental and ancillary services |
|
| 45 |
|
|
| 41 |
|
|
| 138 |
|
|
| 135 |
|
Cost reimbursements |
|
| 34 |
|
|
| 33 |
|
|
| 102 |
|
|
| 94 |
|
Total revenues |
|
| 426 |
|
|
| 407 |
|
|
| 1,264 |
|
|
| 1,168 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
| 40 |
|
|
| 44 |
|
|
| 107 |
|
|
| 110 |
|
Sales and marketing |
|
| 171 |
|
|
| 157 |
|
|
| 492 |
|
|
| 443 |
|
Financing |
|
| 11 |
|
|
| 8 |
|
|
| 32 |
|
|
| 24 |
|
Resort and club management |
|
| 12 |
|
|
| 9 |
|
|
| 32 |
|
|
| 25 |
|
Rental and ancillary services |
|
| 30 |
|
|
| 30 |
|
|
| 88 |
|
|
| 86 |
|
General and administrative |
|
| 23 |
|
|
| 24 |
|
|
| 75 |
|
|
| 61 |
|
Depreciation and amortization |
|
| 7 |
|
|
| 6 |
|
|
| 21 |
|
|
| 17 |
|
License fee expense |
|
| 22 |
|
|
| 22 |
|
|
| 65 |
|
|
| 61 |
|
Cost reimbursements |
|
| 34 |
|
|
| 33 |
|
|
| 102 |
|
|
| 94 |
|
Total operating expenses |
|
| 350 |
|
|
| 333 |
|
|
| 1,014 |
|
|
| 921 |
|
Gain on foreign currency transactions |
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
|
| 2 |
|
Allocated Parent interest expense |
|
| — |
|
|
| (7 | ) |
|
| — |
|
|
| (20 | ) |
Interest expense |
|
| (7 | ) |
|
| — |
|
|
| (21 | ) |
|
| — |
|
Equity in earnings from unconsolidated affiliate |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
Other loss, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
Income before income taxes |
|
| 71 |
|
|
| 68 |
|
|
| 231 |
|
|
| 228 |
|
Income tax expense |
|
| (28 | ) |
|
| (33 | ) |
|
| (87 | ) |
|
| (98 | ) |
Net income |
| $ | 43 |
|
| $ | 35 |
|
| $ | 144 |
|
| $ | 130 |
|
Earnings per share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.43 |
|
| $ | 0.35 |
|
| $ | 1.45 |
|
| $ | 1.31 |
|
Diluted |
| $ | 0.43 |
|
| $ | 0.35 |
|
| $ | 1.44 |
|
| $ | 1.31 |
|
|
|
See notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
|
| Nine Months Ended September 30, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 144 |
|
| $ | 130 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 21 |
|
|
| 17 |
|
Amortization of deferred financing costs and other |
|
| 4 |
|
|
| 3 |
|
Provision for loan losses |
|
| 45 |
|
|
| 37 |
|
Other loss, net |
|
| — |
|
|
| 1 |
|
Gain on foreign currency transactions |
|
| (1 | ) |
|
| (2 | ) |
Share-based compensation |
|
| 13 |
|
|
| — |
|
Deferred income (benefit) taxes |
|
| (5 | ) |
|
| 12 |
|
Equity in earnings from unconsolidated affiliate |
|
| (1 | ) |
|
| — |
|
Net changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivables, net |
|
| 19 |
|
|
| (28 | ) |
Timeshare financing receivables, net |
|
| (75 | ) |
|
| (52 | ) |
Inventory |
|
| 38 |
|
|
| (10 | ) |
Other assets |
|
| (11 | ) |
|
| (7 | ) |
Accounts payable, accrued expenses and other |
|
| 96 |
|
|
| 17 |
|
Advanced deposits |
|
| (1 | ) |
|
| 6 |
|
Deferred revenues |
|
| 13 |
|
|
| 10 |
|
Other |
|
| — |
|
|
| (1 | ) |
Net cash provided by operating activities |
|
| 299 |
|
|
| 133 |
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures for property and equipment |
|
| (25 | ) |
|
| (16 | ) |
Software capitalization costs |
|
| (12 | ) |
|
| (5 | ) |
Investment in unconsolidated affiliate |
|
| (40 | ) |
|
| — |
|
Net cash used in investing activities |
|
| (77 | ) |
|
| (21 | ) |
Financing Activities |
|
|
|
|
|
|
|
|
Issuance of non-recourse debt |
|
| 350 |
|
|
| — |
|
Repayment of non-recourse debt |
|
| (428 | ) |
|
| (85 | ) |
Repayment of debt |
|
| (7 | ) |
|
| — |
|
Debt issuance costs |
|
| (5 | ) |
|
| (6 | ) |
Allocated Parent debt activity |
|
| — |
|
|
| 111 |
|
Net transfers to Parent |
|
| — |
|
|
| (114 | ) |
Proceeds from stock option exercises |
|
| 1 |
|
|
| — |
|
Net cash used in financing activities |
|
| (89 | ) |
|
| (94 | ) |
Net increase in cash, cash equivalents and restricted cash |
|
| 133 |
|
|
| 18 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
| 151 |
|
|
| 79 |
|
Cash, cash equivalents and restricted cash, end of period |
| $ | 284 |
|
| $ | 97 |
|
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Revenues |
|
|
|
|
|
|
|
|
Sales of VOIs, net |
| $ | 33 |
|
| $ | 56 |
|
Sales, marketing, brand and other fees |
|
| 53 |
|
|
| 106 |
|
Financing |
|
| 37 |
|
|
| 44 |
|
Resort and club management |
|
| 45 |
|
|
| 44 |
|
Rental and ancillary services |
|
| 32 |
|
|
| 52 |
|
Cost reimbursements |
|
| 35 |
|
|
| 49 |
|
Total revenues |
|
| 235 |
|
|
| 351 |
|
Expenses |
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
| 3 |
|
|
| 14 |
|
Sales and marketing |
|
| 82 |
|
|
| 157 |
|
Financing |
|
| 13 |
|
|
| 13 |
|
Resort and club management |
|
| 8 |
|
|
| 12 |
|
Rental and ancillary services |
|
| 31 |
|
|
| 37 |
|
General and administrative |
|
| 36 |
|
|
| 21 |
|
Depreciation and amortization |
|
| 11 |
|
|
| 12 |
|
License fee expense |
|
| 14 |
|
|
| 22 |
|
Impairment expense |
|
| 1 |
|
|
| — |
|
Cost reimbursements |
|
| 35 |
|
|
| 49 |
|
Total operating expenses |
|
| 234 |
|
|
| 337 |
|
Interest expense |
|
| (15 | ) |
|
| (10 | ) |
Equity in earnings from unconsolidated affiliates |
|
| 2 |
|
|
| 3 |
|
Other (loss) gain, net |
|
| (1 | ) |
|
| 2 |
|
(Loss) income before income taxes |
|
| (13 | ) |
|
| 9 |
|
Income tax benefit (expense) |
|
| 6 |
|
|
| (1 | ) |
Net (loss) income |
| $ | (7 | ) |
| $ | 8 |
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | (0.08 | ) |
| $ | 0.09 |
|
Diluted |
| $ | (0.08 | ) |
| $ | 0.09 |
|
See notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS (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 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 144 |
|
|
| 144 |
|
Deferred intercompany transaction (1) |
|
| — |
|
|
| — |
|
|
| 9 |
|
|
| — |
|
|
| 9 |
|
Activity related to share-based compensation |
|
| — |
|
|
| — |
|
|
| 11 |
|
|
| — |
|
|
| 11 |
|
Other |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
Balance as of September 30, 2017 |
|
| 99 |
|
| $ | 1 |
|
| $ | 160 |
|
| $ | 172 |
|
| $ | 333 |
|
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Operating Activities |
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (7 | ) |
| $ | 8 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 11 |
|
|
| 12 |
|
Amortization of deferred financing costs, contract costs, and other |
|
| 6 |
|
|
| 4 |
|
Provision for financing receivables losses |
|
| 16 |
|
|
| 37 |
|
Impairment expense |
|
| 1 |
|
|
| — |
|
Other loss (gain), net |
|
| 1 |
|
|
| (2 | ) |
Share-based compensation |
|
| 4 |
|
|
| (2 | ) |
Deferred income tax benefit |
|
| (21 | ) |
|
| (8 | ) |
Equity in earnings from unconsolidated affiliates |
|
| (2 | ) |
|
| (3 | ) |
Net changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| 8 |
|
|
| 16 |
|
Timeshare financing receivables, net |
|
| 19 |
|
|
| (3 | ) |
Inventory |
|
| (14 | ) |
|
| (10 | ) |
Purchases and development of real estate for future conversion to inventory |
|
| (6 | ) |
|
| (5 | ) |
Other assets |
|
| (27 | ) |
|
| (42 | ) |
Accounts payable, accrued expenses and other |
|
| 2 |
|
|
| (42 | ) |
Advanced deposits |
|
| (3 | ) |
|
| 2 |
|
Deferred revenues |
|
| 74 |
|
|
| 91 |
|
Net cash provided by operating activities |
|
| 62 |
|
|
| 53 |
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures for property and equipment |
|
| (1 | ) |
|
| (3 | ) |
Software capitalization costs |
|
| (4 | ) |
|
| (5 | ) |
Net cash used in investing activities |
|
| (5 | ) |
|
| (8 | ) |
Financing Activities |
|
|
|
|
|
|
|
|
Issuance of debt |
|
| — |
|
|
| 495 |
|
Issuance of non-recourse debt |
|
| — |
|
|
| 195 |
|
Repayment of debt |
|
| (2 | ) |
|
| (57 | ) |
Repayment of non-recourse debt |
|
| (69 | ) |
|
| (58 | ) |
Debt issuance costs |
|
| (3 | ) |
|
| — |
|
Repurchase and retirement of common stock |
|
| — |
|
|
| (10 | ) |
Payment of withholding taxes on vesting of restricted stock units |
|
| (5 | ) |
|
| (2 | ) |
Proceeds from stock option exercises |
|
| 2 |
|
|
| — |
|
Other financing activity |
|
| (1 | ) |
|
| (1 | ) |
Net cash (used in) provided by financing activities |
|
| (78 | ) |
|
| 562 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
| (21 | ) |
|
| 607 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
| 526 |
|
|
| 152 |
|
Cash, cash equivalents and restricted cash, end of period |
| $ | 505 |
|
| $ | 759 |
|
|
|
See notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in millions)
|
|
|
|
|
|
|
|
|
| Additional |
|
| Accumulated |
|
|
|
|
| ||
|
| Common Stock |
|
| Paid-in |
|
| Retained |
|
| Total |
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Equity |
| |||||
Balance as of December 31, 2020 |
|
| 84 |
|
| $ | 1 |
|
| $ | 192 |
|
| $ | 181 |
|
| $ | 374 |
|
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (7 | ) |
|
| (7 | ) |
Activity related to share-based compensation |
|
| 0 |
|
|
| 0 |
|
|
| 2 |
|
|
| 0 |
|
|
| 2 |
|
Balance as of March 31, 2021 |
|
| 84 |
|
| $ | 1 |
|
| $ | 194 |
|
| $ | 174 |
|
| $ | 369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
| Accumulated |
|
|
|
|
| ||
|
| Common Stock |
|
| Paid-in |
|
| Retained |
|
| Total |
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Equity |
| |||||
Balance as of December 31, 2019 |
|
| 85 |
|
| $ | 1 |
|
| $ | 179 |
|
| $ | 390 |
|
| $ | 570 |
|
Net income |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 8 |
|
|
| 8 |
|
Activity related to share-based compensation |
|
| 0 |
|
|
| 0 |
|
|
| (5 | ) |
|
| 0 |
|
|
| (5 | ) |
Repurchase and retirement of common stock |
|
| (1 | ) |
|
| 0 |
|
|
| (2 | ) |
|
| (8 | ) |
|
| (10 | ) |
Balance as of March 31, 2020 |
|
| 84 |
|
| $ | 1 |
|
| $ | 172 |
|
| $ | 390 |
|
| $ | 563 |
|
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
Our Spin-off from Hilton Worldwide Holdings Inc.Business
On January 3, 2017, the previously announced spin-off was completed by way of a pro rata distribution of Hilton Grand Vacations Inc.’s (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”) common stock to Hilton Worldwide Holdings Inc. (“Hilton”) stockholders. Each Hilton stockholder received one share of our common stock for every ten shares of Hilton common stock. As a result of the spin-off, we became a separate publicly-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 the spin-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 September 30, 2017 and 2016, we incurred $39 million and $46 million, respectively, and for the nine months ended September 30, 2017 and 2016, we incurred $137 million and $150 million, respectively, in costs relating to the agreements entered with Hilton. See Key Agreements Related to the Spin-Off section in Part I - Item 1. Business of our Annual Report on Form 10-K for the year ended December 31, 2016 for further information.
Prior to the spin-off, Hilton maintained a share-based compensation plan for the benefit of its officers, directors and employees which was presented as a component of Net transfers (to) from Parent, a financing activity, on the condensed consolidated statements of cash flows. Subsequent to the spin-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 resorts; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange program (the(collectively the “Club”). As of September 30, 2017,March 31, 2021, we had 48 timeshare62 properties, comprised of 8,101 units,499,616 VOIs, located in the United States (“U.S.”), Japan, the United Kingdom, Italy, Barbados and Europe.Mexico. A significant number of our properties and VOIs are concentrated in Florida, Hawaii, Nevada, New York, and South Carolina.
Note 2: Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements presented herein include 100 percent of our assets, liabilities, revenues, expenses and cash flows andas well as all entities in which we have a controlling financial interest. ThroughIn our opinion, the date of the spin-off, theaccompanying unaudited condensed consolidated financial statements presented herein were prepared onreflect all adjustments, including normal recurring items, considered necessary for a stand-alone basisfair presentation of the interim periods. All material intercompany transactions and were derived from the unaudited consolidated financial statements and accounting records of Hilton.balances have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2016,2020, included in our Annual Report on Form 10-K filed with the SEC on March 2, 2017.1, 2021.
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
Impact of the interim periods. All material intercompany transactionsCOVID-19 Pandemic
The novel coronavirus (“COVID-19”) pandemic that started in early 2020 significantly negatively impacted the hospitality, travel and balancesleisure industries due to various mandates and orders to close non-essential businesses, impose travel restrictions, require “stay-at-home” and/or self-quarantine, and require similar actions. Such restrictions and directives have been eliminatedresulted in consolidation.
We reviewcancellations and significant reductions in travel around the world and caused various other negative global economic conditions. In response to these events, we closed substantially all of our estimateresorts and sales centers during early 2020, but began a phased reopening of resorts and resumption of our business activities during the second quarter 2020 under new operating guidelines and with enhanced safety measures as mandates and orders for business closures, quarantine and travel restrictions began to ease. With the anticipated continuation of the expected redemptionpandemic receding, as well as COVID-19 vaccinations becoming more widespread, such mandates and orders have continued to ease, resulting in consumer confidence increasing to resume normal activities, including travel and leisure, and more businesses to continue to resume operations. Accordingly, the positive trends in leisure travel and stays at our properties have continued. For example, as of expired prepaid discounted vacation packages (“packages”) on an ongoing basis.March 31, 2021, we have approximately 80 percent of our resorts and nearly all of our sales centers open and currently operating, although many are operating in markets with various capacity constraints, social distancing requirements and other safety measures, which are impacting consumer demand for resorts in those markets. We only reduce the liability for expired packages when a package is redeemedplan to continue to reopen our resorts and resume our normal business as conditions permit, but there can be no assurance that such positive trends will continue or the likelihoodthat there will not be any increases of redemption is remote. This review considers factorsnew infections or new variants that may impede or reverse recovery and such as historical experience, current business practices for pursuing individuals to redeempositive trends.
expired packages
In response to the impact of COVID-19, we took a variety of actions in 2020 and to date in 2021 to ensure the sufficiencycontinuity of our business and reliabilityoperations and to secure our liquidity position to provide financial flexibility. These actions include amending certain financial covenant ratios in the fourth quarter of data available following a change in those redemption2020 through the third quarter of 2021, as may be needed due to the ongoing and uncertain future impact of the COVID-19 pandemic on our business practices. Previously, we concluded that redemption of an expired package was remote once a package had been expired for six months and therefore retained the liability until six months after expiration. During the reviewoperations. We also furloughed team members beginning in the second quarter of 2017,2020 and completed a workforce reduction plan in the fourth quarter of 2020 that impacted approximately 1,500 team members. As of March 31, 2021, 1,100 team members continue to be furloughed.
Prior to re-opening our resorts and sales centers, we determinedintroduced the HGV Enhanced Care Guidelines, designed to provide owners, guests and team members with the highest level of cleaning protocols and safety standards recommended by the Center for Disease Control and Prevention and cleaning solutions approved by the Environmental Protection Agency in response to the COVID-19 pandemic.
While we then had sufficiently reliable updated information under current business practiceshope that conditions in the hospitality and travel industries continue to revise our estimate of expired packagesreflect the improvement that we expect to redeem. As a resultsaw during the second quarterMarch travel season, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity. Further, various state and local government officials may issue new or revised orders that are different than current ones under which we are operating. Accordingly, there remains significant uncertainty as to the degree of 2017, we changed our accounting estimate for expected redemptions of expired packages to relieve a portioncontinuing impact and duration of the remaining liability post expiration and recorded an $11 million reduction toconditions stemming from the Advanced Deposits liability, with corresponding increases to Sales, marketing, brandongoing pandemic on our revenues, net income and other fees revenue of $10 millionoperating results, as well as our business and Accounts payable, accrued expenses and other for the related sales tax liability of $1 million. As a result, for the nine months ended September 30, 2017, our net income increased by $10 million and basic and diluted earnings per share increased by $0.10.
Note 2: Significant Accounting Policies
Investments in Unconsolidated Affiliates
We account for investments in unconsolidated affiliates under the equity method of accounting when we exercise significant influence, but do not maintain a controlling financial interest over the affiliates. We evaluate our investments in affiliates for impairment when there are indicators that the fair value of our investment may be less than our carrying value.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of three months or less.
operations generally.
Recently Issued Accounting Pronouncements
Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issuedOn January 1, 2021 we adopted Accounting Standards Update (“ASU”) No. 2016-092019-12 (“ASU 2016-09”2019-12”), Compensation - Stock CompensationIncome Taxes (Topic 718)740): ImprovementsSimplifying the Accounting for Income Taxes. ASU 2019-12 simplifies various aspects related to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions intended to simplify several aspects of the accounting and presentation of share-based payments. These provisions include the recognition of thefor 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 uptaxes by removing certain exceptions to the employee’s maximum individual tax rate without resultinggeneral principles in liability classification of the award, permitting entitiesTopic 740 and clarifies and amends existing guidance to make a policy election to account for forfeitures as they occur, and changes to the classification of 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 ASU 2016-09 was effective for reporting periods beginning after December 15, 2016. We adopted ASU 2016-09 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 ASU No. 2016-18, (“ASU 2016-18”) 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 reconciling beginning-of-period and end-of-period total amounts on the statement of cash flows. We elected, as permitted by the standard, to early adopt ASU 2016-18 retrospectively as of January 1, 2017 and have applied it to all periods presented herein.improve consistent application. The adoption of ASU 2016-182019-12 did not have a material impact to our unaudited condensed consolidated financial statements. The effect of the adoption of ASU 2016-18 on our condensed consolidated financial 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 ASU No. 2017-01 (“ASU 2017-01”), 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 ASU 2017-01 prospectively as of January 1, 2017. The adoption of ASU 2017-01 did not have a material impact to our unaudited condensed consolidated financial statements.
Accounting Standards Not Yet Adoptedrelated disclosures.
In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), Note 3: Revenue from Contracts with Customers (Topic 606)
Disaggregation of Revenue
The following tables show our disaggregated revenues by segment from contracts with customers. We operate our business in the following 2 segments: (i) Real estate sales and financing and (ii) Resort operations and club management. This ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entitiesPlease refer to recognize revenueNote 18: Business Segments below for more details related to our segments.
|
| Three Months Ended March 31, |
| |||||
($ in millions) |
|
| 2021 |
|
|
| 2020 |
|
Real Estate and Financing Segment |
|
|
|
|
|
|
|
|
Sales of VOIs, net |
| $ | 33 |
|
| $ | 56 |
|
Sales, marketing, brand and other fees |
|
| 53 |
|
|
| 106 |
|
Interest income |
|
| 31 |
|
|
| 38 |
|
Other financing revenue |
|
| 6 |
|
|
| 6 |
|
Real estate and financing segment revenues |
| $ | 123 |
|
| $ | 206 |
|
|
| Three Months Ended March 31, |
| |||||
($ in millions) |
|
| 2021 |
|
|
| 2020 |
|
Resort Operations and Club Management Segment |
|
|
|
|
|
|
|
|
Club management |
| $ | 27 |
|
| $ | 25 |
|
Resort management |
|
| 18 |
|
|
| 19 |
|
Rental(1) |
|
| 30 |
|
|
| 47 |
|
Ancillary services |
|
| 2 |
|
|
| 5 |
|
Resort operations and club management segment revenues |
| $ | 77 |
|
| $ | 96 |
|
(1) | Excludes intersegment eliminations. See Note 18: Business Segments for additional information. |
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 ASU 2014-09, the FASB has issued several related ASUs amending the original ASU.
Contract Balances
The provisions of this ASUfollowing table provides information on our accounts receivable from contracts with customers which are to be applied retrospectively or using a modified retrospective approach for reporting periods beginning after December 15, 2017. A determination as to whether we will apply the retrospective or modified retrospective adoption method will be made onceincluded in Accounts receivable, net on our quantitative evaluation is complete and we commence quantifying the expected impacts later this year.condensed consolidated balance sheets:
|
| March 31, |
|
| December 31, |
| ||
($ in millions) |
| 2021 |
|
| 2020 |
| ||
Receivables |
| $ | 69 |
|
| $ | 64 |
|
We are currently evaluatingThe following table presents the effect that this ASU will have on our consolidated financial statements by analyzing both transactional and analytical data for eachcomposition of our revenue streams. The following is a status of our evaluation of impacts by significant revenue stream:contract liabilities.
|
| March 31, |
|
| December 31, |
| ||
($ in millions) |
| 2021 |
|
| 2020 |
| ||
Contract liabilities: |
|
|
|
|
|
|
|
|
Advanced deposits |
| $ | 114 |
|
| $ | 117 |
|
Deferred sales of VOIs of projects under construction |
|
| 201 |
|
|
| 169 |
|
Club activation fees, annual dues and other |
|
| 120 |
|
|
| 77 |
|
Club Bonus Point incentive liability(1) |
|
| 41 |
|
|
| 48 |
|
(1) | Amounts related to the Club Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our condensed consolidated balance sheets. This liability is comprised of unrecognized revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements. |
Sales
Revenue earned for the three months ended March 31, 2021 that was included in the contract liabilities balance at December 31, 2020 was approximately $35 million.
Our accounts receivables that relate to our contracts with customers includes amounts associated with our contractual right to consideration for completed performance obligations related primarily to our fee-for-service arrangements and homeowners’ associations (“HOA”) management agreements and are settled when the related cash is received. Accounts receivable are recorded when the right to consideration becomes unconditional and is only contingent on the passage of time. Refer to Note 6: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our timeshare financing receivables.
Contract liabilities include payments received or due in advance of satisfying our performance obligations. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues related to sales of VOIs net – of projects under construction, club activation fees and annual dues and the liability for Club Bonus Points awarded to our customers for purchase of VOIs at our properties or properties under our fee-for-service arrangements that may be redeemed in the future.
Transaction Price Allocated to Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Club Bonus Points that may be redeemed in the future.
The following table represents the deferred revenue, cost of VOI sales and direct selling costs from sales of VOIs related to projects under construction as of March 31, 2021:
|
| March 31, |
|
| December 31, |
| ||
($ in millions) |
| 2021 |
|
| 2020 |
| ||
Sales of VOIs, net |
| $ | 201 |
|
| $ | 169 |
|
Cost of VOI sales(1) |
|
| 60 |
|
|
| 50 |
|
Sales and marketing expense |
|
| 29 |
|
|
| 25 |
|
(1) | Includes anticipated Cost of VOI sales related to inventory associated with Sales of VOIs under construction that will be acquired under a just-in-time arrangement once construction is complete. |
We expect to recognize Salesthe revenue, costs of VOI net when controlsales and direct selling costs upon completion of the VOI passesprojects throughout the remainder of 2021.
The following table includes the remaining transaction price related to the customer, which generally occurs shortly after the expirationAdvanced deposits, Club activation fees and Club Bonus Points as of the purchaser’s period to cancel for a refund. We do not expect that this timing change will have a material impact on our accounting for Sales of VOIs, net. We expect our accounting for uncollectible timeshare financing receivables to remain unchanged.March 31, 2021:
($ in millions) |
| Remaining Transaction Price |
|
| Recognition Period |
| Recognition Method | |
Advanced deposits |
| $ | 114 |
|
| 18 months |
| Upon customer stays |
Club activation fees |
|
| 62 |
|
| 7 years |
| Straight-line basis over average inventory holding period |
Club Bonus Points |
|
| 41 |
|
| 24 months |
| Upon redemption |
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 the gross versus net presentation of certain sales incentives as sales incentives provided where we are acting as the agent (e.g., Hilton Honors) will be recognized on a net basis in Sales, marketing, brand and other fees. We expect this classification change to reduce Sales, marketing, brand and other fees and the related expenses by $29.7 million for the year ended December 31, 2016.
We plan to recognize the expected breakage on prepaid discounted vacation packages (“packages”) as revenue proportionately when our customers redeem their packages rather than when the likelihood of redemption is remote as we are entitled to the breakage amount. We are currently in the process of assessing the impact of this expected change.
We do not expect material changes to our accounting for our commissions, brand and other fees under fee-for-service arrangements.
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 expect immaterial impacts from changes to (i) timing of service fees charged on packages and (ii) classification of contract acquisition costs paid to fee-for-service customers.
We will continue to evaluate and disclose expected impacts that ASU 2014-09 will have on our unaudited condensed consolidated financial statements as more information becomes available.
In August 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash 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 ASU 2017-03 (“ASU 2017-03”), Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323). ASU 2017-03 requires 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. ASU 2017-03 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 3:4: Restricted Cash
Restricted cash was as follows:
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
Escrow deposits on VOI sales |
| $ | 36 |
|
| $ | 81 |
|
| $ | 76 |
|
| $ | 69 |
|
Reserves related to non-recourse debt(1) |
|
| 22 |
|
|
| 22 |
|
|
| 29 |
|
|
| 29 |
|
|
| $ | 58 |
|
| $ | 103 |
|
| $ | 105 |
|
| $ | 98 |
|
| See Note |
Note 5: Accounts Receivable
The following table represents our accounts receivable, net of allowance for credit losses. Accounts receivable within the scope of ASC 326 are measured at amortized cost.
($ in millions) | March 31, 2021 |
| |
Fee-for-service commissions(1) | $ | 22 |
|
Real estate and financing | 12 |
| |
Resort and club operations | 27 |
| |
Tax receivables | 41 |
| |
Other receivables(2) |
| 9 |
|
Total | $ | 111 |
|
(1) | Net of allowance. |
(2) | Primarily includes individually insignificant accounts receivable recognized in the ordinary course of business, the allowances for which are also individually insignificant. |
Our accounts receivable are all due within one year of origination. We use delinquency status and economic factors such as credit quality indicators to monitor our receivables within the scope of ASC 326 and use these as a basis for how we develop our expected loss estimates.
We sell VOIs on behalf of third-party developers using the Hilton Grand Vacations brand in exchange for sales, marketing and brand fees. We use historical losses and economic factors as a basis to develop our allowance for credit losses. Under these fee-for-service arrangements, we earn commission fees based on a percentage of total interval sales. Additionally, the terms of these arrangements include provisions requiring the reduction of fees earned for defaults and cancellations.
The changes in our allowance for fee-for-service commissions were as follows:
($ in millions) | March 31, 2021 |
| |
Balance as of December 31, 2020 | $ | 18 |
|
Current period provision for expected credit losses | 1 |
| |
Write-offs charged against the allowance |
| (5 | ) |
Balance as of March 31, 2021 | $ | 14 |
|
Note 4:6: Timeshare Financing Receivables
Timeshare financing receivables were as follows:
|
| September 30, 2017 |
|
| March 31, 2021 |
| ||||||||||||||||||
($ in millions) |
| Securitized and Pledged |
|
| Unsecuritized |
|
| Total |
|
| Securitized |
|
| Unsecuritized(1) |
|
| Total |
| ||||||
Timeshare financing receivables |
| $ | 506 |
|
| $ | 687 |
|
| $ | 1,193 |
|
| $ | 730 |
|
| $ | 417 |
|
| $ | 1,147 |
|
Less: allowance for loan loss |
|
| (29 | ) |
|
| (109 | ) |
|
| (138 | ) | ||||||||||||
Less: allowance for financing receivables losses |
|
| (54 | ) |
|
| (153 | ) |
|
| (207 | ) | ||||||||||||
|
| $ | 477 |
|
| $ | 578 |
|
| $ | 1,055 |
|
| $ | 676 |
|
| $ | 264 |
|
| $ | 940 |
|
|
| December 31, 2016 |
|
| December 31, 2020 |
| ||||||||||||||||||
($ in millions) |
| Securitized and Pledged |
|
| Unsecuritized |
|
| Total |
|
| Securitized |
|
| Unsecuritized(1) |
|
| Total |
| ||||||
Timeshare financing receivables |
| $ | 253 |
|
| $ | 892 |
|
| $ | 1,145 |
|
| $ | 805 |
|
| $ | 380 |
|
| $ | 1,185 |
|
Less: allowance for loan loss |
|
| (9 | ) |
|
| (111 | ) |
|
| (120 | ) | ||||||||||||
Less: allowance for financing receivables losses |
|
| (63 | ) |
|
| (148 | ) |
|
| (211 | ) | ||||||||||||
|
| $ | 244 |
|
| $ | 781 |
|
| $ | 1,025 |
|
| $ | 742 |
|
| $ | 232 |
|
| $ | 974 |
|
(1) | Includes amounts used as collateral to secure a non-recourse revolving timeshare receivable credit facility ("Timeshare Facility") as well as amounts held as future collateral for securitization activities. |
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 September 30, 2017, ourMarch 31, 2021 and December 31, 2020, we had timeshare financing receivables had interest rates ranging from 5.3 percent to 20.5 percent, a weighted average interest rate of 12.1 percent, a weighted average remaining term of 7.7 years and maturities through 2028.
We pledge a portion of our timeshare financing receivables as collateral to secure a non-recourse revolving timeshare receivable credit facility (“Timeshare Facility”) with a borrowing capacitycarrying value of $450 million. As of September 30, 2017 and December 31, 2016, we had $143$15 million and $509$17 million, respectively, of gross timeshare financing receivables securing the Timeshare Facility. We recognize interest income on our timeshareFacility in anticipation of future financing receivables as earned. activities.We record an estimate of uncollectibilityvariable consideration for estimated defaults 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 We record the difference between the timeshare financing receivable and the variable consideration included in the transaction price for the sale of approximately $357 million of gross timesharethe related VOI as an allowance for financing receivables and issued approximately $291record the receivable net of the allowance. In March 2020, we recorded an incremental $23 million revenue reduction related to the changes in estimates primarily driven by economic factors surrounding the COVID-19 pandemic. For the three months ended March 31, 2021 we recorded an adjustment to our estimate of 2.66 percent notes and approximately $59 millionvariable consideration 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 as non-recourse debt (collectively, the “Securitized Debt”). See Note 8: Debt & Non-recourse debt for further discussion.$16 million.
Our timeshare financing receivables as of September 30, 2017March 31, 2021 mature as follows:
($ in millions) |
| Securitized and Pledged |
|
| Unsecuritized |
|
| Total |
| |||
Year |
|
|
|
|
|
|
|
|
|
|
|
|
2017 (remaining) |
| $ | 19 |
|
| $ | 28 |
|
| $ | 47 |
|
2018 |
|
| 76 |
|
|
| 56 |
|
|
| 132 |
|
2019 |
|
| 75 |
|
|
| 60 |
|
|
| 135 |
|
2020 |
|
| 72 |
|
|
| 65 |
|
|
| 137 |
|
2021 |
|
| 67 |
|
|
| 70 |
|
|
| 137 |
|
Thereafter |
|
| 197 |
|
|
| 408 |
|
|
| 605 |
|
|
|
| 506 |
|
|
| 687 |
|
|
| 1,193 |
|
Less: allowance for loan loss |
|
| (29 | ) |
|
| (109 | ) |
|
| (138 | ) |
|
| $ | 477 |
|
| $ | 578 |
|
| $ | 1,055 |
|
($ in millions) | Securitized |
|
| Unsecuritized |
|
| Total |
| |||
Year |
|
|
|
|
|
|
|
|
|
|
|
2021 (remaining) | $ | 70 |
|
| $ | 28 |
|
| $ | 98 |
|
2022 |
| 95 |
|
|
| 37 |
|
|
| 132 |
|
2023 |
| 98 |
|
|
| 40 |
|
|
| 138 |
|
2024 |
| 100 |
|
|
| 42 |
|
|
| 142 |
|
2025 |
| 98 |
|
|
| 44 |
|
|
| 142 |
|
Thereafter |
| 269 |
|
|
| 226 |
|
|
| 495 |
|
|
| 730 |
|
|
| 417 |
|
|
| 1,147 |
|
Less: allowance for financing receivables losses |
| (54 | ) |
|
| (153 | ) |
|
| (207 | ) |
| $ | 676 |
|
| $ | 264 |
|
| $ | 940 |
|
We evaluate this portfolio collectively for purposes of estimating variable consideration, since we hold a large group of homogeneous timeshare financing receivables which are individually immaterial. We monitor the credit qualitycollectability of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for estimating expected defaults and determining our loan loss reserve requirementsallowance for financing receivables losses on our timeshare financing receivables. For static pool analysis, we use certain key dimensions to stratify our portfolio, including FICO scores, equity percentage at the time of sale and certain other factors. The adequacy of the related allowance is determined by management through analysis of several factors, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio including assumed default rates, aging and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio.
We recognize interest income on our timeshare financing receivables as earned. As of both March 31, 2021 and December 31, 2020, we hadinterest receivable outstanding of $7 million included in our condensed consolidated balance sheets. The interest rate charged on the notes correlates to the risk profile of the customer at the time of purchase and the percentage of the purchase that is financed, among other factors. As of March 31, 2021, our timeshare financing receivables had interest rates ranging from 1.5 percent to 19.5 percent, a weighted-average interest rate of 12.6 percent, a weighted-average remaining term of 7.4 years and maturities through 2036.
Our gross timeshare financing receivables balances by average FICO score were as follows:
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
FICO score |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700+ |
| $ | 763 |
|
| $ | 725 |
|
| $ | 685 |
|
| $ | 711 |
|
600-699 |
|
| 224 |
|
|
| 211 |
|
|
| 256 |
|
|
| 266 |
|
<600 |
|
| 28 |
|
|
| 28 |
|
|
| 35 |
|
|
| 36 |
|
No score(1) |
|
| 178 |
|
|
| 181 |
| ||||||||
No score(1) |
|
| 171 |
|
|
| 172 |
| ||||||||
|
| $ | 1,193 |
|
| $ | 1,145 |
|
| $ | 1,147 |
|
| $ | 1,185 |
|
(1) | Timeshare financing receivables without a FICO score are primarily related to foreign borrowers. |
The following table details the origination year of our gross timeshare financing receivables by the origination year and average FICO score as of March 31, 2021:
($ in millions) |
| 2021 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| Prior |
|
| Total |
| |||||||
FICO score |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700+ |
| $ | 42 |
|
| $ | 114 |
|
| $ | 196 |
|
| $ | 130 |
|
| $ | 85 |
|
| $ | 118 |
|
| $ | 685 |
|
600-699 |
|
| 13 |
|
|
| 43 |
|
|
| 72 |
|
|
| 48 |
|
|
| 30 |
|
|
| 50 |
|
|
| 256 |
|
<600 |
|
| 2 |
|
|
| 6 |
|
|
| 10 |
|
|
| 6 |
|
|
| 4 |
|
|
| 7 |
|
|
| 35 |
|
No score(1) |
|
| 13 |
|
|
| 32 |
|
|
| 45 |
|
|
| 30 |
|
|
| 16 |
|
|
| 35 |
|
|
| 171 |
|
|
| $ | 70 |
|
| $ | 195 |
|
| $ | 323 |
|
| $ | 214 |
|
| $ | 135 |
|
| $ | 210 |
|
| $ | 1,147 |
|
(1) | Timeshare financing receivables without a FICO score are primarily related to foreign borrowers. |
We apply payments we receive for loans,timeshare financing receivables, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a loanreceivable is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for loansreceivables for which we had previously ceased accruing interest once the loanreceivable is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the loanreceivable is 121 days past due and, subsequently, we write off the uncollectible notebalance against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $47$111 million and $38$117 million, respectively. The following tables detail an aged analysis of our gross timeshare financing receivables balance:
|
| September 30, 2017 |
|
| March 31, 2021 |
| ||||||||||||||||||
($ in millions) |
| Securitized and Pledged |
|
| Unsecuritized |
|
| Total |
|
| Securitized |
|
| Unsecuritized |
|
| Total |
| ||||||
Current |
| $ | 498 |
|
| $ | 635 |
|
| $ | 1,133 |
|
| $ | 710 |
|
| $ | 307 |
|
| $ | 1,017 |
|
31 - 90 days past due |
|
| 5 |
|
|
| 8 |
|
|
| 13 |
|
|
| 11 |
|
|
| 8 |
|
|
| 19 |
|
91 - 120 days past due |
|
| 2 |
|
|
| 2 |
|
|
| 4 |
|
|
| 4 |
|
|
| 2 |
|
|
| 6 |
|
121 days and greater past due |
|
| 1 |
|
|
| 42 |
|
|
| 43 |
|
|
| 5 |
|
|
| 100 |
|
|
| 105 |
|
|
| $ | 506 |
|
| $ | 687 |
|
| $ | 1,193 |
|
| $ | 730 |
|
| $ | 417 |
|
| $ | 1,147 |
|
|
| December 31, 2020 |
| |||||||||
($ in millions) |
| Securitized |
|
| Unsecuritized |
|
| Total |
| |||
Current |
| $ | 783 |
|
| $ | 265 |
|
| $ | 1,048 |
|
31 - 90 days past due |
|
| 11 |
|
|
| 9 |
|
|
| 20 |
|
91 - 120 days past due |
|
| 5 |
|
|
| 3 |
|
|
| 8 |
|
121 days and greater past due |
|
| 6 |
|
|
| 103 |
|
|
| 109 |
|
|
| $ | 805 |
|
| $ | 380 |
|
| $ | 1,185 |
|
| 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 lossfinancing receivables losses were as follows:
|
| September 30, 2017 |
| |||||||||
($ in millions) |
| Securitized and Pledged |
|
| Unsecuritized |
|
| Total |
| |||
Balance as of December 31, 2016 |
| $ | 9 |
|
| $ | 111 |
|
| $ | 120 |
|
Write-offs |
|
| — |
|
|
| (27 | ) |
|
| (27 | ) |
Securitization |
|
| 28 |
|
|
| (28 | ) |
|
| — |
|
Provision for loan loss(1) |
|
| (8 | ) |
|
| 53 |
|
|
| 45 |
|
Balance as of September 30, 2017 |
| $ | 29 |
|
| $ | 109 |
|
| $ | 138 |
|
|
| March 31, 2021 |
| |||||||||
($ in millions) |
| Securitized |
|
| Unsecuritized |
|
| Total |
| |||
Balance as of December 31, 2020 |
| $ | 63 |
|
| $ | 148 |
|
| $ | 211 |
|
Provision for financing receivables losses(1) |
|
| (9 | ) |
|
| 25 |
|
|
| 16 |
|
Write-offs |
|
| — |
|
|
| (20 | ) |
|
| (20 | ) |
Balance as of March 31, 2021 |
| $ | 54 |
|
| $ | 153 |
|
| $ | 207 |
|
|
| September 30, 2016 |
| |||||||||
($ in millions) |
| Securitized and Pledged |
|
| Unsecuritized |
|
| Total |
| |||
Balance as of December 31, 2015 |
| $ | 17 |
|
| $ | 89 |
|
| $ | 106 |
|
Write-offs |
|
| — |
|
|
| (27 | ) |
|
| (27 | ) |
Provision for loan loss(1) |
|
| (6 | ) |
|
| 43 |
|
|
| 37 |
|
Balance as of September 30, 2016 |
| $ | 11 |
|
| $ | 105 |
|
| $ | 116 |
|
|
| March 31, 2020 |
| |||||||||
($ in millions) |
| Securitized |
|
| Unsecuritized |
|
| Total |
| |||
Balance as of December 31, 2019 |
| $ | 54 |
|
| $ | 130 |
|
| $ | 184 |
|
Provision for financing receivables losses(1) |
|
| (6 | ) |
|
| 43 |
|
|
| 37 |
|
Write-offs |
|
| — |
|
|
| (9 | ) |
|
| (9 | ) |
Balance as of March 31, 2020 |
| $ | 48 |
|
| $ | 164 |
|
| $ | 212 |
|
(1) | Includes incremental provision for financing receivables losses, net of activity related to the repurchase of defaulted and upgraded securitized timeshare financing |
Note 5:7: Inventory
Inventory was as follows:comprised of the following:
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
Completed unsold VOIs |
| $ | 206 |
|
| $ | 233 |
|
| $ | 526 |
|
| $ | 515 |
|
Construction in process |
|
| 11 |
|
|
| 20 |
|
|
| 193 |
|
|
| 186 |
|
Land, infrastructure and other |
|
| 258 |
|
|
| 260 |
|
|
| 1 |
|
|
| 1 |
|
|
| $ | 475 |
|
| $ | 513 |
|
| $ | 720 |
|
| $ | 702 |
|
We benefited from $4 million inThe table below presents (i) costs of sales true-ups relating to VOI products forand the nine months ended September 30, 2017, which resulted in a $4 million increaserelated impacts to the carrying value of inventory as of September 30, 2017. We benefited from $10 million in costs of sales true-ups relating to VOI products for the year ended December 31, 2016, which resulted in a $10 million increase to the carrying value of inventory as of December 31, 2016. Shown below areand (ii) expenses incurred, recorded in Cost of VOI sales,, related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects.
|
| Three months ended March 31, |
| |||||
($ in millions) |
| 2021 |
|
| 2020 |
| ||
Cost of sales true-up(1) |
| $ | 6 |
|
| $ | 4 |
|
Cost of VOI sales related to fee-for-service upgrades |
|
| 1 |
|
|
| 5 |
|
(1) | Costs of sales true-up reduced costs of VOI sales and increased inventory in the periods presented. |
Note 8: Property and Equipment
Property and equipment were comprised of the following:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| March 31, |
|
| December 31, |
| ||||||||||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||||
Cost of VOI sales related to fee-for-service upgrades |
| $ | 8 |
|
| $ | 18 |
|
| $ | 28 |
|
| $ | 42 |
| ||||||||
Land |
| $ | 108 |
|
| $ | 109 |
| ||||||||||||||||
Building and leasehold improvements |
|
| 250 |
|
|
| 250 |
| ||||||||||||||||
Furniture and equipment |
|
| 62 |
|
|
| 65 |
| ||||||||||||||||
Construction in progress |
|
| 216 |
|
|
| 208 |
| ||||||||||||||||
|
|
| 636 |
|
|
| 632 |
| ||||||||||||||||
Accumulated depreciation |
|
| (135 | ) |
|
| (131 | ) | ||||||||||||||||
|
| $ | 501 |
|
| $ | 501 |
|
Note 6:9: Consolidated Variable Interest Entities
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, we consolidated three and two4 variable interest entities (“VIEs”), respectively, that issued Securitized Debt,non-recourse 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 the 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:
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
Restricted cash |
| $ | 19 |
|
| $ | 10 |
|
| $ | 29 |
|
| $ | 28 |
|
Timeshare financing receivables, net |
|
| 477 |
|
|
| 244 |
|
|
| 676 |
|
|
| 742 |
|
Non-recourse debt(1) |
|
| 484 |
|
|
| 244 |
|
|
| 698 |
|
|
| 766 |
|
(1) | Net of deferred financing costs. |
During the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, we did not0t 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: Investment10: Investments in Unconsolidated AffiliateAffiliates
On July 18, 2017,As of March 31, 2021, we entered into an agreement with BRE Ace Holdings LLC, a Delaware limited liability company (“BRE Ace Holdings”), an affiliate of The Blackstone Group L.P. (“Blackstone”) and formed BRE Ace LLC. Pursuant to the agreement, we contributed $40 million in cash for ahave 25 percent interestand 50 percent ownership interests in BRE Ace LLC which owns a 1,201-key timeshare resort property and related operations, commonly known1776 Holding LLC, respectively, that are deemed as “Elara, by Hilton Grand Vacations,” located in Las Vegas, Nevada.VIEs. We do not consolidate BRE Ace LLC and 1776 Holding LLC because we are not the primary beneficiary. Our investment interestinterests in and equity earned from BRE Ace LLCboth VIEs are included in the condensed consolidated balance sheets as InvestmentInvestments in unconsolidated affiliateaffiliates and in the condensed consolidated statements of operations as Equity in earnings (losses) from unconsolidated affiliateaffiliates, respectively.
BRE Ace LLC hadOur 2 unconsolidated affiliates have aggregated debt balances of $207$442 million and non-recourse debt of $235$454 million as of September 30, 2017.March 31, 2021 and December 31, 2020, respectively. The debt and non-recourse debt areis secured by itstheir assets and areis without recourse to us. Our maximum exposure to loss as a result of our investment interestinterests in BRE Ace LLCthe two unconsolidated affiliates is primarily limited to (i) the carrying amount of the investmentinvestments which totals $41$53 million and $51 million as of September 30, 2017, as well asMarch 31, 2021 and December 31, 2020, respectively and (ii) receivables for commission and other fees earned under a fee-for-service arrangement.arrangements. See Note 13: 17: Related Party Transactions for additional information.
Note 8:11: Debt & Non-recourse debtDebt
Debt
The following table details our outstanding debt balance and its associated interest rates:
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
Debt(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan with an average rate of 3.48%, due 2021 |
| $ | 193 |
|
| $ | 200 |
| ||||||||
Term loan with a rate of 3.75%, due 2023 |
| $ | 175 |
|
| $ | 177 |
| ||||||||
Revolver with a weighted average rate of 3.75%, due 2023 |
|
| 660 |
|
|
| 660 |
| ||||||||
Senior notes with a rate of 6.125%, due 2024 |
|
| 300 |
|
|
| 300 |
|
|
| 300 |
|
|
| 300 |
|
Other debt |
|
| 27 |
|
|
| 27 |
| ||||||||
|
|
| 493 |
|
|
| 500 |
|
|
| 1,162 |
|
|
| 1,164 |
|
Less: unamortized deferred financing costs and discount(2)(3) |
|
| (9 | ) |
|
| (10 | ) |
|
| (6 | ) |
|
| (5 | ) |
|
| $ | 484 |
|
| $ | 490 |
|
| $ | 1,156 |
|
| $ | 1,159 |
|
(1) |
|
(2) | Amount includes deferred financing costs |
(3) | Amount does not include deferred financing costs of |
In March 2021, we amended our Credit Agreement which amended certain terms related to financial covenants to permit the previously announced proposed acquisition of Dakota Holdings, Inc., (“Diamond”), which indirectly owns all of the interests in Diamond Resorts International Inc. (the “Merger”), pursuant to that certain Agreement and Plan of Merger dated March 10, 2021. Refer to Note 20: Planned Acquisition for further information regarding the Merger. The borrowing capacity under the Credit Agreement remained the same. In connection with the amendment, we incurred $1 million in debt issuance costs. In addition, we obtained a revolving credit facility commitment in connection with the Merger and incurred $2 million in debt issuance costs which were amortized over the term of the commitment in the first quarter of 2021. This was included in interest expense in our condensed consolidated statements of operations.
During the three months ended March 31, 2021, we repaid $2million (including recurring payments) under the senior secured credit facilities with an interest rate based on one month LIBOR plus 3.50percent, subject to a 0.25 percent floor.
We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt. As of March 31, 2021, we had approximately $175 million of our Term Loan subject to interest rate swaps. Such interest rate swaps converted the LIBOR-based variable rates on our Term Loan to an average fixed annual rate of 0.53 percent per annum through November 2023. Our interest rate swaps have been designated and qualify as cash flow hedges of interest rate risk and recorded as a liability in Accounts payable, accrued expenses and other in our condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020. We characterize payments we make in connection with these derivative instruments as interest expense and a reclassification of accumulated other comprehensive income for presentation purposes. For the three months ended March 31, 2021, we recorded less than $1 million in accumulated other comprehensive loss related to the hedge.
As of March 31, 2021 and December 31, 2020, we had $1 million of outstanding letters of credit under the revolving credit facility. We were in compliance with all applicable maintenance and financial covenants and ratios as of September 30, 2017.March 31, 2021.
The following table details our outstanding non-recourse debt balance and its associated interest rates:
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
Non-recourse debt(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timeshare Facility with an average rate of 2.54%, due 2019 |
| $ | 129 |
|
| $ | 450 |
| ||||||||
Securitized Debt with an average rate of 2.43%, due 2028 |
|
| 489 |
|
|
| 246 |
| ||||||||
Securitized Debt with a weighted average rate of 2.711%, due 2028 |
|
| 96 |
|
|
| 106 |
| ||||||||
Securitized Debt with a weighted average rate of 3.602%, due 2032 |
|
| 187 |
|
|
| 202 |
| ||||||||
Securitized Debt with a weighted average rate of 2.431%, due 2033 |
|
| 196 |
|
|
| 216 |
| ||||||||
Securitized Debt with a weighted average rate of 3.658%, due 2039 |
|
| 227 |
|
|
| 251 |
| ||||||||
|
|
| 618 |
|
|
| 696 |
|
|
| 706 |
|
|
| 775 |
|
Less: unamortized deferred financing costs(2) |
|
| (6 | ) |
|
| (2 | ) |
|
| (8 | ) |
|
| (9 | ) |
|
| $ | 612 |
|
| $ | 694 |
|
| $ | 698 |
|
| $ | 766 |
|
(1) |
|
(2) | Amount relates to Securitized Debt only and does not include deferred financing costs of |
The Timeshare Facility is a non-recourse obligation with a borrowing capacity of $450 million and is payable solely from the pool of timeshare financing receivables pledged as collateral and related assets.
As of March 31, 2021, and December 31, 2020, we had $450 million remaining borrowing capacity under our Timeshare Facility, respectively. In March 2017,2021, we completed a securitization of approximately $357 million of gross timeshare financing receivables 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 a non-recourse obligation and is payable solely from the pool of timeshare financing receivables pledgedamended our Timeshare Facility to align with our amended Credit Agreement, as collateral to the debt.described above.
We are required to deposit payments received from customers on the timeshare financing receivables securing the Timeshare Facility and Securitized Debt into depository accounts maintained by third parties. On a monthly basis, the depository accounts are utilized to make required principal, interest and other payments due under the respective loan agreements. The balances in the depository accounts were $22$29 million as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively, and were included in Restricted cash in our condensed consolidated balance sheets.
Debt Maturities
The contractual maturities of our debt and non-recourse debt as of September 30, 2017March 31, 2021 were as follows:
($ in millions) |
| Debt |
|
| Non-recourse Debt |
|
| Total |
| |||
Year |
|
|
|
|
|
|
|
|
|
|
|
|
2017 (remaining) |
| $ | 3 |
|
| $ | 30 |
|
| $ | 33 |
|
2018 |
|
| 10 |
|
|
| 134 |
|
|
| 144 |
|
2019 |
|
| 10 |
|
|
| 228 |
|
|
| 238 |
|
2020 |
|
| 10 |
|
|
| 120 |
|
|
| 130 |
|
2021 |
|
| 160 |
|
|
| 32 |
|
|
| 192 |
|
Thereafter |
|
| 300 |
|
|
| 74 |
|
|
| 374 |
|
|
| $ | 493 |
|
| $ | 618 |
|
| $ | 1,111 |
|
($ in millions) |
| Debt |
|
| Non-recourse Debt |
|
| Total |
| |||
Year |
|
|
|
|
|
|
|
|
|
|
|
|
2021 (remaining) |
| $ | 10 |
|
| $ | 104 |
|
| $ | 114 |
|
2022 |
|
| 11 |
|
|
| 174 |
|
|
| 185 |
|
2023 |
|
| 818 |
|
|
| 138 |
|
|
| 956 |
|
2024 |
|
| 300 |
|
|
| 115 |
|
|
| 415 |
|
2025 |
|
| — |
|
|
| 56 |
|
|
| 56 |
|
Thereafter |
|
| 23 |
|
|
| 119 |
|
|
| 142 |
|
|
| $ | 1,162 |
|
| $ | 706 |
|
| $ | 1,868 |
|
Note 9:12: Fair Value Measurements
The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:
|
| September 30, 2017 |
| |||||||||
|
|
|
|
|
| Hierarchy Level |
| |||||
($ in millions) |
| Carrying Amount |
|
| Level 1 |
|
| Level 3 |
| |||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Timeshare financing receivables(1) |
| $ | 1,055 |
|
| $ | — |
|
| $ | 1,394 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Debt(2) |
|
| 484 |
|
|
| 329 |
|
|
| 197 |
|
Non-recourse debt(2) |
|
| 612 |
|
|
| — |
|
|
| 617 |
|
|
| December 31, 2016 |
|
| March 31, 2021 |
| ||||||||||||||||||
|
|
|
|
|
| Hierarchy Level |
|
|
|
|
|
| Hierarchy Level |
| ||||||||||
($ in millions) |
| Carrying Amount |
|
| Level 1 |
|
| Level 3 |
|
| Carrying Amount |
|
| Level 1 |
|
| Level 3 |
| ||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timeshare financing receivables(1) |
| $ | 1,025 |
|
| $ | — |
|
| $ | 1,147 |
| ||||||||||||
Timeshare financing receivables, net(1) |
| $ | 940 |
|
| $ | — |
|
| $ | 1,209 |
| ||||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt(2) |
|
| 490 |
|
|
| 314 |
|
|
| 200 |
| ||||||||||||
Non-recourse debt(2) |
|
| 694 |
|
|
| — |
|
|
| 696 |
| ||||||||||||
Debt, net(2) |
|
| 1,156 |
|
|
| 314 |
|
|
| 872 |
| ||||||||||||
Non-recourse debt, net(2) |
|
| 698 |
|
|
| — |
|
|
| 657 |
|
(1) | Carrying amount net of allowance for |
(2) | Carrying amount net of unamortized deferred financing costs and discount. |
|
| December 31, 2020 |
| |||||||||
|
|
|
|
|
| Hierarchy Level |
| |||||
($ in millions) |
| Carrying Amount |
|
| Level 1 |
|
| Level 3 |
| |||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Timeshare financing receivables, net(1) |
| $ | 974 |
|
| $ | — |
|
| $ | 1,248 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Debt, net(2) |
|
| 1,159 |
|
|
| 315 |
|
|
| 871 |
|
Non-recourse debt, net(2) |
|
| 766 |
|
|
| — |
|
|
| 732 |
|
(1) | Carrying amount net of allowance for financing receivables losses. |
(2) | Carrying amount net 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 waswere based on prices in active debt markets. The estimated fair valuevalues of our Level 3 debt and non-recourse debt were based on the following:
• | Debt - based on indicative quotes obtained for similar issuances and projected future cash flows discounted at risk-adjusted rates. |
• | Non-recourse debt - based on projected future cash flows discounted at risk-adjusted rates. |
Non-recurring fair value measurements
Our assets that are measured at fair value on a non-recurring basis include land and infrastructure held for sale. These assets were measured to their estimated fair value as of December 31, 2020. We utilized the market approach for the land and cost approach for the infrastructure to determine their respective fair values. The fair value determinations involve judgement and are sensitive to key assumptions utilized, including comparative sales for land (level 2) and replacement costs for infrastructure (level 3). As of March 31, 2021 and December 31, 2020, the estimated fair value of these assets were as follows and their carrying values were reflected in Land and infrastructure held for sale in our condensed consolidated balance sheets.
|
| Hierarchy Level |
| |||||
($ in millions) |
| Level 2 |
|
| Level 3 |
| ||
Land held for sale |
| $ | 47 |
|
| $ | — |
|
Infrastructure held for sale |
|
| — |
|
|
| 5 |
|
Note 13: Leases
We lease sales centers, office space and equipment under operating leases. Our leases expire at various dates from 2021 through 2030, with varying renewal and termination options. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
We recognize rent expense on leases with both contingent and non-contingent lease payment terms. Rent associated with non-contingent lease payments are recognized on a straight-line basis over the lease term. Rent expense for all operating leases for the three months ended March 31, 2021 and 2020 was $4 million and $5 million, respectively. These amounts include $1 million of short-term and variable lease costs for the three months ended March 31, 2021 and 2020, respectively.
Supplemental cash flow information related to operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, |
| |||||
($ in millions) |
| 2021 |
|
| 2020 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash outflows from operating leases |
| $ | 5 |
|
| $ | 5 |
|
Right-of-use assets obtained in exchange for new lease liabilities: |
|
|
|
|
|
|
|
|
Operating Leases |
|
| — |
|
|
| 5 |
|
Supplemental balance sheet information related to operating leases was as follows:
|
| March 31, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Weighted-average remaining lease term of operating leases (in years) |
| 5.3 |
|
| 5.4 |
| ||
Weighted-average discount rate of operating leases |
|
| 4.98 | % |
|
| 4.95 | % |
Debt - based on indicative quotes obtained for similar issuances
The future minimum lease payments under noncancelable operating leases, due in each of the next five years and projected future cash flows discounted at risk-adjusted rates.thereafter as of March 31, 2021, are as follows:
($ in millions) |
| Operating Leases |
| |
Year |
|
|
|
|
2021 (remaining) |
| $ | 12 |
|
2022 |
|
| 13 |
|
2023 |
|
| 13 |
|
2024 |
|
| 11 |
|
2025 |
|
| 11 |
|
Thereafter |
|
| 11 |
|
Total future minimum lease payments |
| $ | 71 |
|
Less: imputed interest |
|
| (8 | ) |
Present value of lease liabilities |
| $ | 63 |
|
Non-recourse debt - based on projected future cash flows discounted at risk-adjusted rates.
Note 10:14: 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 of pre-tax ordinary income or loss, which is subject to federal, foreign and state and local income taxes. The effective income tax rate for the ninethree months ended September 30, 2017March 31, 2021 and 20162020 was approximately 3846 percent and 4311 percent, respectively, which decreasedrespectively. The effective tax rate is higher primarily due to the change in earnings mix of our worldwide income and the impact of a decrease in cumulative installment sale interest liability.
The Company was a party to several intercompany asset transfers with Hilton priornon-recurring discrete item recorded during the first quarter of 2021 as compared to the spin-off. As required under U.S.first quarter of 2020.
We have considered the income tax regulations, the gain resulting from the intercompany transfer of these assets should be deferredaccounting and no deferred tax asset or liability should be recognized until a recognition event occurs. On January 3, 2017, Hilton executed a tax-free spin-offdisclosure implications of the Company, which metrelief provided by the requirementAmerican Rescue Plan Act of a recognition event. On2021 enacted on March 11, 2021. As of March 31, 2021, we evaluated the spin-off date,income tax provisions of the American Rescue Plan Act and have determined there to be no effect on either the March 31, 2021 tax rate or the computation of the estimated effective tax rate for the assets transferred, we recognized a stepped upyear. We will continue to evaluate the income tax basis, re-measured the asset by applying applicable tax rate changes and evaluated the realizabilityprovisions of the asset. This resultedAmerican Rescue Plan Act and monitor the developments in a reduction to our net deferredthe jurisdictions where we have significant operations for tax liabilitylaw changes that could have income tax accounting and an increase in our Additional paid-in capital of $9 million on our condensed consolidated balance sheet as of September 30, 2017.disclosure implications.
Note 11:15: Share-Based Compensation
Stock Plan
We issue time-vestingservice-based restricted stock units (“Service RSUs”), service and performance-based restricted stock units (“Performance RSUs”) and nonqualified stock options (“options”Options”) to certain employees. All performance shares that were issued under the stock plan of Hilton, were converted to RSUs as of December 31, 2016.employees and directors. We recognized share-based compensation expense of $5$4 million and $2 million duringfor the three months ended September 30, 2017 and 2016, respectively and $13 million and $7 million duringMarch 31, 2021. For the ninethree months ended September 30, 2017 and 2016, respectively.March, 31, 2020, we recognized a credit to share-based compensation expense of $2 million due to the reversal of $8 million of expense recognized in prior years related to our Performance RSUs which were not expected to achieve certain performance targets. As of September 30, 2017,March 31, 2021, unrecognized compensation costs for unvested awards were approximately $13$49 million, which is expected to be recognized over a weighted average period of 2.01.6 years. As of September 30, 2017,March 31, 2021, there were 7,961,1514,024,218 shares of common stock available for future issuance.issuance under this plan.
Service RSUs
During the ninethree months ended September 30, 2017,March 31, 2021, we issued 530,674560,604 Service RSUs with a weighted average grant date fair value of $29.15,$38.22, which generally vest 25 percent in the first year, 25 percent in the second year and 50 percent in the third yearequal annual installments over three years from the date of grant.
Options
During the ninethree months ended September 30, 2017March 31, 2021, we issued 669,658 options542,793 Options with aan exercise price of $38.22, which vest over three years from the date of the grant.
The weighted-average grant date fair value of $8.66 and an exercise price of $28.30,these options was $13.30, 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:
Expected volatility |
|
|
| % |
Dividend yield |
|
|
| % |
Risk-free rate |
|
|
| % |
Expected term (in years) |
|
| 6.0 |
|
|
|
|
|
|
|
|
|
As of September 30, 2017,March 31, 2021, we had 169,926 options1,416,603 Options outstanding that were exercisable.
Performance Shares
During the three months ended March 31, 2021, we issued 124,711 Performance RSUs with a grant date fair value of $38.22. The Performance RSUs are settled at the end of a three-year performance period, with 50 percent of the Performance RSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization further adjusted for net deferral and recognition of revenues and related direct expenses related to sales of VOIs of projects under construction. The remaining 50 percent of the Performance RSUs are subject to the achievement of certain contract sales targets. We determined that the performance conditions for these awards are probable of achievement and, as of March 31, 2021, we recognized compensation expense based on the number of Performance RSUs we expect to vest.
Employee Stock Purchase Plan
In March 2017, the Board of Directors adopted the Hilton Grand Vacations Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective during 2017. In connection with the Plan, we issued 2.5 million shares of common stock which may be purchased under the ESPP. The ESPP allows eligible employees to purchase shares of our common stock at a price per share not less than 95 percent of the fair market value per share of common stock on the purchase date, up to a maximum threshold established by the plan administrator for the offering period. During the three months ended March 31, 2021 and 2020, we recognized less than $1 million of compensation expense related to this plan.
Note 12:16: (Loss) Earnings Per Share
The following table presents the calculation of our basic and diluted (loss) earnings per share (“EPS”). The weighted average shares outstanding for the three and nine months ended September 30, 2016 reflect 98,802,597 shares distributed on January 3, 2017, our spin-off date, to our stockholders. See Note 1: Organization and Basis of Presentation for further discussion. The weighted average shares outstanding used to compute basic EPS and diluted EPS for the three months ended September 30, 2017 is 98,981,557March 31, 2021 was 85,307,705.The weighted average shares outstanding used to compute basic EPS and 99,730,483, respectively anddiluted EPS for the ninethree months ended September 30, 2017 is 98,916,894March 31, 2020 was 85,519,151 and 99,530,534,86,044,525, respectively.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
($ and shares outstanding in millions, except per share amounts) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||||
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income(1) |
| $ | 43 |
|
| $ | 35 |
|
| $ | 144 |
|
| $ | 130 |
| ||||||||
Net (loss) income(1) |
| $ | (7 | ) |
| $ | 8 |
| ||||||||||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
| 99 |
|
|
| 99 |
|
|
| 99 |
|
|
| 99 |
|
|
| 85 |
|
|
| 86 |
|
Basic EPS |
| $ | 0.43 |
|
| $ | 0.35 |
|
| $ | 1.45 |
|
| $ | 1.31 |
|
| $ | (0.08 | ) |
| $ | 0.09 |
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income(1) |
| $ | 43 |
|
| $ | 35 |
|
| $ | 144 |
|
| $ | 130 |
| ||||||||
Net (loss) income(1) |
| $ | (7 | ) |
| $ | 8 |
| ||||||||||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
| 100 |
|
|
| 99 |
|
|
| 100 |
|
|
| 99 |
|
|
| 85 |
|
|
| 86 |
|
Diluted EPS |
| $ | 0.43 |
|
| $ | 0.35 |
|
| $ | 1.44 |
|
| $ | 1.31 |
|
| $ | (0.08 | ) |
| $ | 0.09 |
|
(1) | Net (loss) income for the three months ended |
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. Potentially dilutive shares of 943,373 for the three months ended March 31, 2021, were excluded from the calculation of diluted weighted average shares outstanding and diluted earnings per share as a result of our net loss position.
For the ninethree months ended September 30, 2017,March 31, 2021 and 2020, we excluded 224,783638,050 and1,754,656 share-based compensation awards, respectively, because their effect would have been anti-dilutive under the treasury stock method. For the three months ended September 30, 2017, we did not exclude any share-based compensation awards.
Note 13:17: Related Party Transactions
Relationship Between HGV and Hilton after the Spin-Off
On January 3, 2017, when the spin-off was completed, Hilton and Park Hotels & Resorts Inc. ceased to be related parties of HGV. In connection with the spin-off, we entered into certain agreements with Hilton (who at the time was a related party) and other third parties. See Key Agreements Related to the Spin-Off section in Part I - Item 1. Business of our Annual Report on Form 10-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 restated by-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
As of March 31, 2017, Blackstone held 15,008,689 shares, or approximately 15 percent of our outstanding common stock. On May 25, 2017, Blackstone filed a Registration Statement on Form S-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 $35.40 per share. The sale was completed on June 20, 2017. Subsequently, on September 25, 2017, Blackstone completed the sale of substantially all of the remaining shares of our common stock held by them to several institutional investors and ceased to be a related party of HGV. We did not receive any proceeds from either of these sales. As of September 30, 2017, Blackstone holds only a nominal number of shares of our common stock.
The following table summarizes amounts included in our condensed consolidated statements of operations related to a fee-for-service arrangement with Blackstone affiliates to sell VOIs on their behalf through September 30, 2017:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Commission and other fees |
| $ | 42 |
|
| $ | 54 |
|
| $ | 135 |
|
| $ | 142 |
|
Also related to the fee-for-service agreement, as of September 30, 2017 and December 31, 2016, we have outstanding receivables of $8 million and $20 million, respectively.
BRE Ace LLC and 1776 Holding, LLC
On July 18, 2017, we entered into an agreement with BRE Ace Holdings, an affiliate of Blackstone, to form BRE Ace LLC. In conjunction with this agreement we acquiredWe hold a 25 percent ownership interest in BRE Ace LLC. During the nine months ended September 30, 2017, we recorded $1 millionLLC, a VIE, which owns a timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations.”
We hold a 50 percent ownership interest in equity1776 Holding, LLC, a VIE, which is currently constructing a timeshare resort property, known as “Liberty Place Charleston, by Hilton Club.”
We record Equity in earnings from our unconsolidated affiliates, included in our condensed consolidated statements of operations. See Note 7: Investment10: Investments in Unconsolidated AffiliateAffiliates for additional information. In addition,Additionally, we earn commissions and other fees related to a fee-for-service agreementagreements with the investees to sell VOIs at Elara, by Hilton Grand Vacations.Vacations and Liberty Place Charleston, by Hilton Club. These amounts are summarized in the following table and are included in our condensed consolidated statements of operations as of the date they became a related party.parties.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||||
Commission and other fees |
| $ | 43 |
|
| $ | — |
|
| $ | 43 |
|
| $ | — |
| ||||||||
Equity in earnings from unconsolidated affiliates |
| $ | 2 |
|
| $ | 3 |
| ||||||||||||||||
Commissions and other fees |
|
| 13 |
|
|
| 23 |
|
AlsoWe also had $5 million and $7 million of outstanding receivables related to the fee-for-service agreement,agreements as of September 30, 2017 we have outstanding receivables of $29 million. March 31, 2021 and December 31, 2020, respectively.
Note 14:18: Business Segments
We operate our business through the following two2 segments:
Real estate sales and financing – We market and sell VOIs that we own. We also source VOIs through fee-for-service agreements with third-party developers. Related to the sales of the VOIs that we own, we provide consumer financing, which includes interest income generated from the origination of consumer loans to customers to finance their purchase of VOIs and revenue from servicing the loans. We also generate fee revenue from servicing the loans provided by third-party developers to purchasers of their VOIs.
• | Real estate sales and financing – We market and sell VOIs that we own. We also source VOIs through fee-for-service agreements with third-party developers. Related to the sales of the VOIs that we own, we provide consumer financing, which includes interest income generated from the origination of consumer loans to customers to finance their purchase of VOIs and revenue from servicing the loans. We also generate fee revenue from servicing the loans provided by third-party developers to purchasers of their VOIs. |
Resort operations and club management – We manage the 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.
• | Resort operations and club management – We manage the Club and earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We also earn fees for managing the timeshare properties. We generate rental revenue from unit rentals of unsold inventory and inventory made available due to ownership exchanges under our Club 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 (excluding non-recourse debt), 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) other gains, including asset dispositions; (ii)dispositions and foreign currency transactions; (iii)translations; (ii) debt restructurings/retirements; (iv)(iii) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi)(iv) share-based and other compensation expenses; (vii)and (v) other items, including but not limited to costs related to the spin-off;associated with acquisitions, restructuring and (viii) other items. During the first quarter of 2017, we revised our definition of EBITDA to exclude the adjustment of interest expense relating to our non-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 the spin-off from Hilton. This adjustment was retrospectively applied to prior period(s) to conform with the current presentation.non-cash and one-time charges.
We do not include equity in earnings (losses) from unconsolidated affiliateaffiliates in our measures of segment revenues.operating performance.
The following table presents revenues for our reportable segments reconciled to consolidated amounts:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing |
| $ | 310 |
|
| $ | 301 |
|
| $ | 916 |
|
| $ | 843 |
|
| $ | 123 |
|
| $ | 206 |
|
Resort operations and club management(2) |
|
| 90 |
|
|
| 81 |
|
|
| 270 |
|
|
| 251 |
| ||||||||
Resort operations and club management(1)(2) |
|
| 80 |
|
|
| 104 |
| ||||||||||||||||
Total segment revenues |
|
| 400 |
|
|
| 382 |
|
|
| 1,186 |
|
|
| 1,094 |
|
|
| 203 |
|
|
| 310 |
|
Cost reimbursements |
|
| 34 |
|
|
| 33 |
|
|
| 102 |
|
|
| 94 |
|
|
| 35 |
|
|
| 49 |
|
Intersegment eliminations |
|
| (8 | ) |
|
| (8 | ) |
|
| (24 | ) |
|
| (20 | ) |
|
| (3 | ) |
|
| (8 | ) |
Total revenues |
| $ | 426 |
|
| $ | 407 |
|
| $ | 1,264 |
|
| $ | 1,168 |
|
| $ | 235 |
|
| $ | 351 |
|
(1) |
|
| Includes charges to the real estate sales and financing segment from the resort operations and club management segment for fulfillment of discounted marketing package stays at |
| 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 |
The following table presents Adjusted EBITDA for our reportable segments reconciled to net (loss) income:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
($ in millions) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing(1) |
| $ | 81 |
|
| $ | 85 |
|
| $ | 263 |
|
| $ | 250 |
|
| $ | 27 |
|
| $ | 15 |
|
Resort operations and club management(1) |
|
| 50 |
|
|
| 42 |
|
|
| 153 |
|
|
| 139 |
|
|
| 42 |
|
|
| 55 |
|
Segment Adjusted EBITDA |
|
| 131 |
|
|
| 127 |
|
|
| 416 |
|
|
| 389 |
|
|
| 69 |
|
|
| 70 |
|
General and administrative |
|
| (23 | ) |
|
| (24 | ) |
|
| (75 | ) |
|
| (61 | ) |
|
| (36 | ) |
|
| (21 | ) |
Depreciation and amortization |
|
| (7 | ) |
|
| (6 | ) |
|
| (21 | ) |
|
| (17 | ) |
|
| (11 | ) |
|
| (12 | ) |
License fee expense |
|
| (22 | ) |
|
| (22 | ) |
|
| (65 | ) |
|
| (61 | ) |
|
| (14 | ) |
|
| (22 | ) |
Other loss, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) | ||||||||
Gain on foreign currency transactions |
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
|
| 2 |
| ||||||||
Allocated Parent interest expense(2) |
|
| — |
|
|
| (7 | ) |
|
| — |
|
|
| (20 | ) | ||||||||
Other (loss) gain, net |
|
| (1 | ) |
|
| 2 |
| ||||||||||||||||
Interest expense |
|
| (7 | ) |
|
| — |
|
|
| (21 | ) |
|
| — |
|
|
| (15 | ) |
|
| (10 | ) |
Income tax expense |
|
| (28 | ) |
|
| (33 | ) |
|
| (87 | ) |
|
| (98 | ) | ||||||||
Equity in earnings from unconsolidated affiliate(3) |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| ||||||||
Other adjustment items |
|
| (3 | ) |
|
| (1 | ) |
|
| (5 | ) |
|
| (3 | ) | ||||||||
Net income |
| $ | 43 |
|
| $ | 35 |
|
| $ | 144 |
|
| $ | 130 |
| ||||||||
Income tax benefit (expense) |
|
| 6 |
|
|
| (1 | ) | ||||||||||||||||
Equity in earnings from unconsolidated affiliates |
|
| 2 |
|
|
| 3 |
| ||||||||||||||||
Impairment expense |
|
| (1 | ) |
|
| — |
| ||||||||||||||||
Other adjustment items(2) |
|
| (6 | ) |
|
| (1 | ) | ||||||||||||||||
Net (loss) income |
| $ | (7 | ) |
| $ | 8 |
|
(1) | Includes intersegment |
(2) |
|
|
|
Note 15:19: Commitments and Contingencies
We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units or other real estate at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of September 30, 2017,March 31, 2021, we were committed to purchase approximately $208$453 million of inventory and land over a period of five years.10 years and $11 million of other commitments under the normal course of business. Additionally, we have committed to develop additional vacation ownership units at an existing resort in Japan. We are also committed to an agreement to exchange parcels of land in Hawaii, subject to the successful completion of zoning, land use requirements and other applicable regulatory requirements. The ultimateactual 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 ninethree months ended September 30, 2017 and 2016,March 31, 2021, we purchased $9$1 million and $11 million, respectively, of VOI inventory as required under our inventory-related purchase commitments.We did 0t make any purchases related to our commitments for the three months ended March 31, 2020. As of September 30, 2017,March 31, 2021, our remaining obligation pursuant to these arrangements waswere expected to be incurred as follows: $3 million in 2018, $187 million in 2019, $9 million in 2020, and $9 million in 2021.
($ in millions) |
| 2021 (remaining) |
|
| 2022 |
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| Thereafter |
|
| Total |
| |||||||
Inventory purchase obligations |
| $ | 226 |
|
| $ | 114 |
|
| $ | 58 |
|
| $ | 40 |
|
| $ | 3 |
|
| $ | 12 |
|
| $ | 453 |
|
Other commitments(1) |
|
| 9 |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11 |
|
Total |
| $ | 235 |
|
| $ | 116 |
|
| $ | 58 |
|
| $ | 40 |
|
| $ | 3 |
|
| $ | 12 |
|
| $ | 464 |
|
(1) | Primarily relates to commitments related to information technology and brand licensing under the normal course of business. |
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 otherevaluated these legal matters whereand we believe that possible losses derived from an unfavorable outcome that is reasonably possible and/or for which no estimate of possible losses can be made.is not reasonably estimable. While the ultimateactual 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 September 30, 2017,March 31, 2021, will not have a material effect on0t materially affect our unaudited condensed consolidated resultsfinancial statements.
Note 20: Planned Acquisition
On March 10, 2021, we and our wholly-owned subsidiary Hilton Grand Vacations Borrower LLC entered into an Agreement and Plan of operations, financial position orMerger (“Merger Agreement”) with Dakota Holdings, Inc. (“Diamond”), which is controlled by the investment funds and vehicles managed by affiliates of Apollo Global Management Inc. (“Apollo”) and certain stockholders of Diamond, under which we agreed to acquire Diamond, in a stock transaction with an equity fair value of approximately $1.4 billion as of that date. Under the Merger Agreement, Apollo and other Diamond stockholders are expected to receive approximately 34.5 million shares of our common stock, par value $0.01 per share, subject to customary adjustments. Upon transaction close, existing HGV shareholders are expected to own approximately 72% of the combined company and Apollo is expected to own approximately 28% of the combined company. The transaction has been approved by the Board of Directors for both companies. Consummation of this transaction is subject to customary conditions, including approval from shareholders of both us and Diamond, receipt of any required regulatory approvals and other customary closing conditions.
We intend to finance the transaction through a combination of cash flows.on hand, assumption of debt and incremental debt financing. The transaction is anticipated to close during the summer of 2021.
Note 16:21: Subsequent Events
On October 13, 2017, we acquired an 83-unit, ski-in mountain lodgeManagement has evaluated all subsequent events through April 29, 2021, the date the unaudited condensed consolidated financial statements were available to be issued. The results of management’s analysis indicated no significant subsequent events have occurred that required consideration or adjustment to our disclosures in Park City, Utah, known as “The Sunrise Lodge, a Hilton Grand Vacations Club.” Prior to the acquisition, HGV was providing marketing, sales and resort management services to the seller Sunrise Park City, LLC under a fee-for-service agreement. unaudited financial statements.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) thatamended. Forward-looking statements convey management’s expectations as to the future of HGV, and are based on our management’s beliefs, andexpectations, assumptions and on such plans, estimates, projections and other information currently available to our management. Forward-looking statements include, but are not limited to, statements related to our expectations regardingmanagement at the performance of our business, our financial results, our liquidity and capital resources, the benefits resulting from our spin-off, the effects of competition and the effects of future legislation or regulations and other non-historicaltime HGV makes such statements. Forward-looking statements include all statements that are not historical facts and canmay be identified by the use of forward-looking terminology such as the words “outlook,” “believes,“believe,” “expects,“expect,” “potential,” “goal,” “continues,” “may,” “will,” “should,” “could,”, “would”, “seeks,” “approximately,” “projects,” “predicts,predicts,” “intends,” “plans,” “estimates,” “anticipates” “future,” “guidance,” “target,” or the negative version of these words or other comparable words, although not all forward-looking statements may contain such words. The forward-looking statements contained in this Quarterly Report on Form 10-Q include statements related to HGV’s revenues, earnings, taxes, cash flow and related financial and operating measures, and expectations with respect to future operating, financial and business performance, and other anticipated future events and expectations that are not historical facts.
Forward-lookingHGV cautions you that our forward-looking statements involve known and unknown risks, uncertainties and assumptions. Actualother factors, including those that are beyond HGV’s control, that may cause the actual results, performance or achievements to be materially different from the future results. Factors that could cause HGV’s actual results to differ materially from those contemplated by its forward-looking statements include: the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; the inability to complete the proposed Merger due to the failure to obtain stockholder approval for the proposed Merger or the failure to satisfy other conditions to completion of the proposed Merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction; risks related to disruption of management’s attention from HGV’s ongoing business operations due to the transaction; the effect of the announcement of the proposed Merger on HGV’s relationships, operating results and business generally; the risk that the proposed Merger will not be consummated in a timely manner; exceeding the expected costs of the Merger; the material impact of the COVID-19 pandemic on HGV’s business, operating results, and financial condition; the extent and duration of the impact of the COVID-19 pandemic on global economic conditions; HGV’s ability to meet its liquidity needs; risks related to HGV’s indebtedness; inherent business risks, market trends and competition within the timeshare and hospitality industries; HGV’s ability to successfully source inventory and market, sell and finance VOIs; default rates on our financing receivables; the reputation of and our ability to access Hilton brands and programs, including the risk of a breach or termination of our license agreement with Hilton; compliance with and changes to United States and global laws and regulations, including those related to anti-corruption and privacy; risks related to HGV’s acquisitions, joint ventures, and other partnerships; HGV’s dependence on third-party development activities to secure just-in-time inventory; the performance of HGV’s information technology systems and our ability to maintain data security; regulatory proceedings or litigation; adequacy of our workforce to meet HGV’s business and operation needs; HGV’s ability to attract and retain key executives and employees with skills and capacity to meet our needs; and natural disasters or adverse geo-political conditions. Any one or more of the foregoing factors could adversely impact HGV’s operations, revenue, operating profits and margins, financial condition and/or credit rating.
For additional information regarding factors that could cause HGV’s actual results to differ materially from those expressed or implied in these forward-looking statements. You should not put undue reliance on anythe forward-looking statements in this Quarterly Report on Form 10-Q. We do not intend to update any of these forward-looking statement or publicly announce10-Q, please see 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 “Part I-ItemI—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 20162020, as supplemented and updated by the risk factors discussed in “Part II-Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q forand those described from time to time in other periodic reports that we file with the quarter ended September 30, 2017 could cause our results to differ materially from those expressed in forward-looking statements.SEC. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our resultsExcept for HGV’s ongoing obligations to differ materially from those expressed in forward-looking statements. Wedisclose material information under the federal securities laws, we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, changes in management’s expectations, or otherwise, except as required by law.otherwise.
Terms Used in this Quarterly Report on Form 10-Q
Except where the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Hilton Grand Vacations,” “HGV,” “the Company,” “we,” “us” and “our” refer to Hilton Grand Vacations Inc., together with its consolidated subsidiaries. Except where the context requires otherwise, references to our “properties” or “resorts” and “rooms”“VOIs” refer to the timeshare properties managed,
franchised, ownedthat we manage or leased by us.own. Of these propertiesresorts and rooms,VOIs, a portion areis directly owned or leased by us or our joint ventures in which we have an interest and the remaining propertiesresorts and roomsVOIs are owned by our 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. (together with its then consolidated subsidiaries, “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 to VOI inventory that is sourced from projects developed by HGV.
“Fee for service” refers to VOI inventory that we sell and manage on behalf of third-party developers.
“Just-in-time” refers to VOI inventory that is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.
“VOI” refers to vacation ownership intervals.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q includes discussion of terms that are not recognized terms 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 our non-recourse debt), taxes and depreciation and amortization (“EBITDA”), and Adjusted EBITDAEBITDA.
Operational Metrics
This Quarterly Report on Form 10-Q includes discussion of key business operational metrics including contract sales, sales revenue, real estate profit, tour flow, and segment Adjusted EBITDA. volume per guest (“VPG”).
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key“Key Business and Financial Metrics and Terms Used by Management” and “-Results of Operations” for a discussion of the meanings of these terms, the Company’s reasons for providing non-GAAP financial measures, and reconciliations of non-GAAP financial measures to measures calculated in accordance with U.S. GAAP.
Overview
Spin-Off Transactions
On January 3, 2017, the previously announced spin-off was completed by way of a pro rata distribution of the Company’s common stock to Hilton stockholders. Each Hilton stockholder received one share of our common stock for every ten shares of Hilton common stock. As a result of the spin-off, we became a separate publicly-traded company on the New York Stock Exchange under the ticker symbol “HGV” and Hilton did not retain any ownership interest in us.
In connection with the completion of the spin-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. See Key Agreements Related to the Spin-Off section in Part I – Item 1. Business of our Annual Report on Form 10-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 restated by-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 Form S-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. Subsequently, on September 25, 2017, Blackstone completed the sale of substantially all of the remaining shares of our common stock held by them to several institutional investors. We did not received any proceeds from either of these sales. As of September 30, 2017, Blackstone holds only a nominal number of shares of our common stock.
Subsequent to the spin-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 the spin-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 the spin-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 the spin-off.
Our Business
We are a rapidly growing timeshare company that markets and sells VOIs, manages resorts in top leisure and urban destinations, and operates a points-based vacation club. As of September 30, 2017,March 31, 2021, we have 48 resorts,62 properties, representing 8,101 units, which499,616 VOIs, that are primarily located in iconic vacation destinations such as Orlando, Las Vegas, the Hawaiian Islands, New York City, OrlandoWashington D.C., South Carolina, Barbados and Las Vegas,Mexico and feature spacious, condominium-style accommodations with superior amenities and quality service. As of September 30, 2017,March 31, 2021, we have approximately 284,000328,000 Hilton Grand Vacations Club (theand Hilton Club (collectively 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 1418 industry-leading brands across more than 5,000approximately 6,400 properties, as well as numerous experiential vacation options, such as cruises and guided tours. Our business has been and continues to be adversely impacted by the COVID-19 pandemic and its effects on the global economy, including the various government orders and mandates for closures of non-essential businesses. Please see “Recent Events Related to the COVID-19 Pandemic and Impact on Our Results of Operations, Financial Condition, and Business During the Three Months Ended March 31, 2021” and other discussions throughout this Report for additional information regarding such impacts.
We operate our business across two segments: (1) real estate sales and financing; and (2) resort operations and club management.
Real Estate Sales and Financing
Our primary product is the marketing and selling of fee-simple VOIs deeded in perpetuity and right to use real estate interests, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week annuallyon an annual basis, at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In 2010, we began sourcingWe source VOIs through fee-for-service and just-in-time agreements with third-party developers and have successfully transformed from a capital-intensive business to one that is highly capital-efficient.focused our inventory strategy on developing an optimal inventory mix focused on developed properties as well as fee-for-service and just-in-time agreements. The fee-for-service agreements enable us to generate fees from the sales and marketing of the VOIs and Club
memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs. The just-in-time agreements enable us to source VOI inventory in a manner that allows us to correlate the timing of acquisition of the inventory by us with the sale to purchasers. Sales of owned, inventory, including purchased just-in-time inventory, generally result in greater Adjusted EBITDA contributions, while fee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory and fee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital.
For the ninethree months ended September 30, 2017,March 31, 2021, sales from fee-for-service, just-in-time and developed inventory sources were 5440 percent, 2028 percent and 2632 percent, respectively, of contract sales. See “-Real“Key Business and Financial Metrics and Terms Used by Management——Real Estate Sales Operating Metrics” for additional discussion of contract sales. Based onThe estimated contract sales value related to our trailing twelve months sales pace, we have access toinventory that is currently available for sale at open or soon-to-be open projects and inventory at new or existing projects that will become available for sale in the future upon registration, delivery or construction is approximately five years of future inventory, with capital$10 billion at current pricing.
Capital efficient arrangements, representingcomprised of our fee-for-service and just-in-time inventory, represented approximately 8852 percent of that supply. We believe that the visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales, reduce capital investments, minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering into new markets.
We originate loanssell our vacation ownership products under the Hilton Grand Vacations brand primarily through our distribution network of both in-market and off-site sales centers. Our products are currently marketed for sale throughout the United States, Mexico and the Asia-Pacific region. We operate sales distribution centers in major markets and popular leisure destinations with year-round demand and a history of being a friendly environment for vacation ownership. We have sales distribution centers in Las Vegas, Orlando, Oahu, Japan, New York, Myrtle Beach, Waikoloa, Washington D.C., Hilton Head, Park City, Chicago, Korea, Carlsbad and Los Cabos. Our marketing and sales activities are based on targeted direct marketing and a highly personalized sales approach. We use targeted direct marketing to reach potential members who are identified as having the financial ability to pay for our products and have an affinity with Hilton and are frequent leisure travelers. Tour flow quality impacts key metrics such as close rate and VPG, defined in “Key Business and Financial Metrics and Terms Used by Management——Real Estate Sales Metrics.” Additionally, the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables. For the three months ended March 31, 2021, 66 percent of our contract sales were to our existing owners.
We provide financing for members purchasing our developed and acquired inventory whichand generate interest income. Our loanstimeshare financing receivables are collateralized by the underlying VOIs and are generally structured as 10-year, fully-amortizing loans that bear a fixed interest rate typically ranging from 94 percent to 18 percent per annum. Financing propensity was 65 percent and 63 percent for the three months ended March 31, 2021 and 2020, respectively. We calculate financing propensity as contract sales volume of financed contracts originated in the period divided by contract sales volume of all contracts originated in the period.
The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the loan term. The weighted averageweighted-average FICO score for new loans to U.S. and Canadian borrowers at the time of origination were as follows:
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| Nine Months Ended September 30, |
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| 2017 |
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| 2016 |
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Weighted average FICO score |
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| 738 |
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| 736 |
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| Three Months Ended March 31, |
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| 2021 |
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| 2020 |
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Weighted-average FICO score |
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| 735 |
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| 736 |
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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.
Some of our loanstimeshare financing receivables have been pledged as collateral in our securitization transactions, which have in the past and may in the future provide funding for our business activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and related cash deposits. For additional information see Note 4: 6: 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 our fee-for-service projects to purchasers of their VOIs.VOIs and from our securitized timeshare financing receivables.
Resort Operations and Club Management
We enter into a management agreementagreements with the homeowners’ association (“HOA”)HOAs of the VOI owners for timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprisingcomprised of owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services include day-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The initial term of our management agreements typically ranges from three to five years and the agreements are subject to periodic renewal for one to three yearthree-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 purchasesowners purchase a VOI, he or she isthey are generally automatically enrolled in the Club and given an annual allotment of points that allow the member to exchange his or hertheir 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 Clubclub programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.
Key Business and Financial Metrics and Terms Used by Management
Real Estate Sales Operating Metrics
TheWe measure our performance using the following are not recognized terms under U.S. GAAP:key operating metrics:
Contract sales
• | Contract sales represents the total amount of VOI products (fee-for-service and developed) under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales differ from revenues from the Sales of VOIs, net that we report in our condensed consolidated statements of operations due to the requirements for revenue recognition, as well as adjustments for incentives. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business and is used to manage the performance of the sales organization. While we do not record the purchase price of sales of VOI products developed by fee-for-service partners as revenue in our unaudited condensed consolidated financial statements, rather recording the commission earned as revenue in accordance with U.S. GAAP, we believe contract sales to be an important operational metric, reflective of the overall volume and pace of sales in our business and believe it provides meaningful comparability of our results to the results of our competitors which may source their VOI products differently. |
We believe that the presentation of contract sales on a combined basis (fee-for-service and developed) is most appropriate for the purpose of the operating metric, additional information regarding the split of contract sales, is included in “—Real Estate” below. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our audited consolidated financial statements included in Item 8 in our Annual Report on form 10-K for the year ended December 31, 2020, for additional information on Sales 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 U.S. GAAP and should not be considered in isolation or as an alternative to Sales of VOIs, net or any other comparable operating measure derived in accordance with U.S. GAAP. Contract sales differ from revenues from the Sales of VOIs, net that we report in our condensed consolidated statements of operations due to the requirements for revenue recognition, as well as adjustments for incentives 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.net.
• | Sales revenue represents Sales of VOIs, net, commissions and brand fees earned from the sale of fee-for-service intervals. |
Sales revenue represents sale of VOIs, net and commissions and brand fees earned from the sale of fee-for-service intervals.
Real estate margin