hgv-10q_20180930.htm

10-Q 1 hgv-10q_20180930.htm 10-Q hgv-10q_20180930.htm

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, 2018

☐	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)

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 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.


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 26, 2018 was 96,911,130.

HILTON GRAND VACATIONS INC.

FORM 10-Q TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.		Financial Statements	2
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.		Controls and Procedures	55

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		56
Item 1A.	Risk Factors		56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		56
Item 3.	Defaults Upon Senior Securities		56
Item 4.	Mine Safety Disclosures		56
Item 5.	Other Information		56
Item 6.	Exhibits		57
	Signatures

PART I FINANCIAL INFORMATION

Item 1.

Financial Statements

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

	September 30,		December 31,
	2018		2017
	(unaudited)
ASSETS
Cash and cash equivalents	$	145	$	246
Restricted cash		67		51
Accounts receivable, net of allowance for doubtful accounts of $12 and $9		151		112
Timeshare financing receivables, net		1,103		1,071
Inventory		582		509
Property and equipment, net		538		238
Investment in unconsolidated affiliates		33		41
Intangible assets, net		73		72
Other assets		121		44
TOTAL ASSETS (variable interest entities - $691 and $471)	$	2,813	$	2,384
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other	$	337	$	339
Advanced deposits		100		104
Debt, net		530		482
Non-recourse debt, net		806		583
Deferred revenues		263		109
Deferred income tax liabilities		215		249
Total liabilities (variable interest entities - $688 and $455)		2,251		1,866
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, 2018 and December 31, 2017		—		—
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 96,906,759 issued and outstanding as of September 30, 2018 and 99,136,304 issued and outstanding as of December 31, 2017		1		1
Additional paid-in capital		174		162
Accumulated retained earnings		387		355
Total equity		562		518
TOTAL LIABILITIES AND EQUITY	$	2,813	$	2,384

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues
Sales of VOIs, net	$	99		$	145		$	427		$	406
Sales, marketing, brand and other fees		152			127			423			401
Financing		40			38			117			109
Resort and club management		40			37			116			108
Rental and ancillary services		60			45			164			138
Cost reimbursements		36			34			110			102
Total revenues		427			426			1,357			1,264
Expenses
Cost of VOI sales		29			40			109			107
Sales and marketing		174			171			528			492
Financing		12			11			35			32
Resort and club management		11			12			33			32
Rental and ancillary services		37			30			95			88
General and administrative		31			23			84			75
Depreciation and amortization		9			7			25			21
License fee expense		25			22			73			65
Cost reimbursements		36			34			110			102
Total operating expenses		364			350			1,092			1,014
Gain on foreign currency transactions		—			1			—			1
Interest expense		(7	)		(7	)		(22	)		(21	)
Equity in earnings from unconsolidated affiliates		1			1			—			1
Other loss		(1	)		—			(1	)		—
Income before income taxes		56			71			242			231
Income tax expense		(15	)		(28	)		(64	)		(87	)
Net income	$	41		$	43		$	178		$	144
Earnings per share:
Basic	$	0.42		$	0.43		$	1.82		$	1.45
Diluted	$	0.42		$	0.43		$	1.81		$	1.44

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

	Nine Months Ended September 30,
	2018			2017
Operating Activities
Net income	$	178		$	144
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		25			21
Amortization of deferred financing costs and other		4			4
Provision for loan losses		50			45
Gain on foreign currency transactions		—			(1	)
Other loss		1			—
Share-based compensation		13			13
Deferred tax benefits		(21	)		(5	)
Equity in earnings from unconsolidated affiliates		—			(1	)
Distributions received from unconsolidated affiliates		2			—
Net changes in assets and liabilities:
Accounts receivable, net		(39	)		19
Timeshare financing receivables, net		(83	)		(75	)
Inventory		(15	)		38
Purchases of real estate for future conversion to inventory		(299	)		—
Other assets		(61	)		(11	)
Accounts payable, accrued expenses and other		(15	)		96
Advanced deposits		13			(1	)
Deferred revenues		42			13
Net cash (used in) provided by operating activities		(205	)		299
Investing Activities
Capital expenditures for property and equipment		(29	)		(25	)
Software capitalization costs		(12	)		(12	)
Return of investment from unconsolidated affiliates		11			—
Investment in unconsolidated affiliates		(5	)		(40	)
Net cash used in investing activities		(35	)		(77	)
Financing Activities
Issuance of debt		215			—
Issuance of non-recourse debt		663			350
Repurchase and retirement of common stock		(112	)		—
Repayment of debt		(168	)		(7	)
Repayment of non-recourse debt		(436	)		(428	)
Debt issuance costs		(6	)		(5	)
Proceeds from stock options exercises		—			1
Payment of withholding taxes on vesting of restricted stock units		(4	)		—
Capital contribution		3			—
Net cash provided by (used in) financing activities		155			(89	)
Net (decrease) increase in cash, cash equivalents and restricted cash		(85	)		133
Cash, cash equivalents and restricted cash, beginning of period		297			151
Cash, cash equivalents and restricted cash, end of period	$	212		$	284

Supplemental disclosure of non-cash operating activities:
Cumulative effect of adoption of new accounting standards	$	38		$	—

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in millions)


						Additional			Accumulated
	Common Stock					Paid-in			Retained			Total
	Shares			Amount		Capital			Earnings			Equity
Balance as of December 31, 2017		99		$	1	$	162		$	355		$	518
Net income		—			—		—			178			178
Activity related to share-based compensation		—			—		9			—			9
Repurchase and retirement of common stock		(2	)		—		(3	)		(109	)		(112	)
Revenue recognition cumulative-effect adjustment		—			—		—			(38	)		(38	)
Capital contribution		—			—		3			—			3
Other		—			—		3			1			4
Balance as of September 30, 2018		97		$	1	$	174		$	387		$	562

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization

Our Business

Hilton Grand Vacations Inc. (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”) is a global timeshare company engaged in developing, marketing, selling 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; and managing our points-based Hilton Grand Vacations Club exchange program (the “Club”). As of September 30, 2018, we had 51 properties, comprised of 8,367 units, located in the United States (“U.S.”), Japan and Europe.

Our Spin-off from Hilton Worldwide Holdings Inc.

On January 3, 2017, the previously announced spin-off of Hilton Grand Vacations from Hilton Worldwide Holdings Inc. (“Hilton”) was completed. As a result of the spin-off, we became an independent public company, and our common stock is listed on the New York Stock Exchange under the symbol “HGV.” Following the spin-off, 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 Grand Vacations brand. The unaudited condensed consolidated financial statements reflect the effect of these agreements. For the three months ended September 30, 2018 and 2017, we incurred $38 million and $39 million, respectively, and for the nine months ended September 30, 2018 and 2017, we incurred $135 million and $137 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, 2017 for further information.

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 as well as all entities in which we have a controlling financial interest. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All material intercompany transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2018.

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.

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (commonly referred to as Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”). We adopted ASC 606 using the modified retrospective method in which the cumulative effect of applying the new standard has been recognized at the date of initial application with an adjustment to our opening balance of retained earnings. This approach applies to all contracts as of January 1, 2018. The new standard, as amended, replaces all current U.S. GAAP guidance on this topic and eliminates all industry-specific guidance.

The reported results as of and for the three and nine months ended September 30, 2018 reflects the application of ASC 606 while the reported financial position as of December 31, 2017 and results for the three and nine months ended September 30, 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”) and ASC 978-605, Real Estate – Time-Sharing Activities, Revenue Recognition, which is also referred to herein as the “previous accounting guidance.”

Summary of Significant Accounting Policies

Revenue Recognition

In accordance with ASC 606, revenue is recognized upon the transfer of control of promised goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve the core principle of the new guidance, we take the following steps: (i) identify the contract with the customer; (ii) determine whether the promised goods or services are separate performance obligations in the contract; (iii) determine the transaction price, including considering the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract based on the standalone selling price or estimated standalone selling price of the good or service; and (v) recognize revenue when (or as) we satisfy each performance obligation.

Contracts with Multiple Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. For arrangements that contain multiple goods or services, we determine whether such goods or services are distinct performance obligations that should be accounted for separately in the arrangement. When allocating the transaction price in the arrangement, we may not have observable standalone sales for all the performance obligations in these contracts; therefore, we exercise significant judgement when determining the standalone selling price of certain performance obligations. In order to estimate the standalone selling prices, we primarily rely on the expected cost plus margin and adjusted market assessment approaches. We then recognize the revenue allocated to each performance obligation as the related performance obligation is satisfied as discussed below.

•

Sales of VOIs, net — Customers who purchase vacation ownership products, whether paid in cash or financed, enter into multiple contracts, which we combine and account for as a single contract. Revenue from VOI sales is recognized at the point in time when control of the VOI is transferred to the customer which is when the customer has executed a binding sales contract, collectability is reasonably assured, the purchaser’s period to cancel for a refund has expired and the customer has the right to use the VOI. Revenue from sales of VOIs under construction is deferred until the point in time when construction activities are deemed to be completed, occupancy of the development is permissible, and the above criteria has been met. For financed sales, we estimate the variable consideration to be received under such contracts and recognize revenue net of amounts deemed uncollectible as the VOI is returned to inventory upon customer default. Variable consideration which has not been included within the transaction price is presented as a reserve on the financing receivable. See Note 5: Timeshare Financing Receivables for more information regarding our estimate of variable consideration.

We award Club Bonus Points (“Bonus Points”) to our customers as an incentive for purchasing a VOI. These Bonus Points are valid for a maximum of two years and may be redeemed for reservations at Club resorts, hotel reservations within Hilton’s system, and VOI exchanges with other third-party vacation ownership exchanges. At the time of the VOI sale, we estimate the fair value of the incentives to be redeemed, including an adjustment for breakage, to determine the standalone selling price of the first day incentive (“FDI”). We defer a portion of the total transaction price for the combined VOI contract as a liability for the FDI and recognize the corresponding revenue at the point in time when the customer receives the benefits of the FDI, which is upon the customer’s redemption of the Bonus Points. At that time, we also determine whether we are principal or agent for the redeemed good or service and recognize revenue on a gross or net basis accordingly.

•

Sales, marketing, brand and other fees — We enter into contracts with third-party developers to sell VOIs on their behalf through fee-for-service agreements for which we earn sales commissions and other fees. These commissions are variable as they are based on the sales and marketing results, which are subject to the constraint on variable consideration and resolved on a monthly basis over the contract term. We estimate such commissions to the extent that it is probable that a significant reversal of such revenue will not occur and recognize the commissions as the developer receives and consumes the benefits of the services. Any changes in these estimates would affect revenue and earnings in the period such variances are realized.

Additionally, we enter into contracts to sell prepaid vacation packages. Our obligation in such contracts is satisfied when customers stay at our property; therefore, we recognize revenue for these packages when they are redeemed. On a portfolio basis, we exercise judgement to estimate the amount of expected breakage related to unused prepaid vacation packages and recognize such breakage in proportion to the pattern of packages utilized by our portfolio of customers.

•

Financing — We offer financing as an option to qualifying customers purchasing our VOI. Revenue from the financing of timeshare sales is recognized on the accrual method as earned based on the outstanding principal, interest rate and terms stated in each individual financing agreement. We also recognize revenue from servicing the loans provided by third-party developers to purchasers of their VOIs over the period services are rendered. The adoption of ASC 606 had no impact to the current financing revenue recognition method.

•

Resort and club management — As part of our VOI sales, our customers enter into a Club arrangement which gives the customer an annual allotment of Club points that allow the customer to exchange the Club points for a number of vacation options. We manage the Club, receiving Club activation fees, annual dues and transaction fees from member exchanges. Club activation fees and the member's first year of annual dues are paid at the time of the VOI sale. The Club activation fee relates to activities we are required to undertake at or near contract inception to fulfill the contract, and does not result in the transfer of a promised good or service. Since our customers are granted the opportunity to renew their membership on an annual basis for no additional activation fee, we defer and amortize the activation fee on a straight-line basis over the seven year average inventory holding period. Annual dues for membership renewals are billed each year, and we recognize revenue from these annual dues over the period services are rendered. A member may elect to enter into an optional exchange transaction with their allotted Club points at which point the member pays their required transaction fee. This option does not represent a material right as the transactions are priced at their standalone selling price. Revenue related to the transaction is recognized when the services are rendered.

As part of our resort operations, we contract with homeowner’s associations (“HOAs”) to provide day-to-day-management services, including housekeeping services, operation of a reservation system, maintenance, and certain accounting and administrative services. We receive compensation for such management services, which is generally based on a percentage of costs to operate the resorts, on a monthly basis. These fees represent a form of variable consideration and are estimated and recognized over time as the HOAs receive and consume the benefits of the management services. Management fees received related to the portion of unsold VOIs at each resort which we own are recognized on a net basis given we retain these VOIs in our inventory.

•

Rental and ancillary services — Our rental and ancillary services consist primarily of rental revenues on unoccupied vacation ownership units and ancillary revenues. Rental revenue is recognized when occupancy has occurred. Advance deposits on the rental unit and the corresponding revenue is deferred and recognized upon the customer’s vacation stay. Ancillary revenues consist of food and beverage, retail, spa offerings and other guest services. We recognize ancillary revenue when goods have been provided and/or services have been rendered.

We account for rental operations of unsold VOIs, including accommodations provided through the use of our vacation sampler programs, as incidental operations. Incremental carrying costs in excess of incremental revenues are recognized in the period incurred. In all periods presented, incremental carrying costs exceeded incremental revenues and all revenues and expenses are recognized in the period earned or incurred.

•

Cost reimbursements — As part of our management agreements with HOAs, we receive cost reimbursements for performing the day to day management services, including direct and indirect costs that HOAs and developers reimburse to us. These costs primarily consist of payroll and payroll related costs for management of the HOAs and other services we provide where we are the employer. Cost reimbursements are based upon actual expenses with no added margin, and are billed to the HOA on a monthly basis. We recognize cost reimbursements when we incur the related reimbursable costs as the HOA receives and consumes the benefits of the management services.

We capitalize all incremental costs incurred to obtain a contract when such costs would not have been incurred if the contract had not been obtained. We elect to expense costs incurred to obtain a contract when the amortization period would be one year or less. Commissions for VOI sales for resorts under construction are expensed when the associated VOI revenue is recognized which is upon completion of the resort. These commissions are classified as Sales and marketing expense in our unaudited condensed consolidated statements of operations.

As of September 30, 2018, the ending asset balance for cost to obtain a contract was $24 million. For the three and nine months ended September 30, 2018, the related amortization or incurred expense was $1 million and $20 million, respectively, with no associated impairment losses.

Recently Issued Accounting Pronouncements Other Than ASC 606

Adopted Accounting Standards

In August 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which in part requires entities to assess whether distributions of cash from unconsolidated entities represent a return on the investment or a return of the investment to appropriately classify the distributions in the statement of cash flows. We have made an accounting policy election to use the cumulative earnings approach. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized will be treated as returns on investment as operating cash flows and those in excess of that amount will be treated as returns of investment as investing cash flows. On January 1, 2018, we adopted ASU 2016-15 which had no impact to our historical consolidated financial statements.

Accounting Standards Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), which supersedes existing guidance on accounting for leases in Leases (Topic 840). Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. Subsequent to ASU 2016-02, the FASB has issued ASU No. 2018-01 (“ASU 2018-01”) Leases (Topic 842): Land Easement Practical Expedient for Transition which clarifies the application of lease easements and eases adoption efforts for some land easements. The provisions of ASU 2016-02 as clarified are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of this ASU are to be applied using a modified retrospective approach. We expect to elect the initial application on January 1, 2019 and not to recast the comparative periods in transition but recognize a cumulative-effect adjustment to retained earnings as of January 1, 2019. We will choose to elect the package of practical expedients available to us upon adoption and are assessing lease software solutions. We continue to evaluate the effect that this ASU will have on our consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07 (“ASU 2018-07”), Compensation – Stock Compensation (Topic 718). Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions, with the exception of specific guidance related to attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The provisions of this ASU are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 8420): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the requirements associated with the hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The provisions of this ASU are effective for reporting periods after December 15, 2019; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15 (“ASU 2018-15”), Customer’s Accounting Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. ASU 2018-15 generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. The provisions of this ASU are effective for reporting periods after December 15, 2019; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

Note 3: Revenue from Contracts with Customers

Financial Statement Impact of Adopting ASC 606

The cumulative effect of applying the new guidance to all contracts with customers as of January 1, 2018 was recorded as an adjustment to retained earnings as of the adoption date. The following unaudited cumulative adjustments were made to the condensed consolidated balance sheet as of January 1, 2018:

•

Sales of VOIs, net — Under the previous accounting guidance, we recognized revenue for sales of VOIs under construction in accordance with the percentage of completion method. Under ASC 606, the timing of revenue recognition for Sales of VOIs under construction and all related direct costs have been deferred until construction is complete.

•

Sales, marketing, brand and other fees — Under the previous accounting guidance, we recognized breakage revenue from prepaid vacation packages when the likelihood of redemption was remote post expiration. Under ASC 606, using a portfolio approach, we have recognized the expected breakage revenue on packages not expected to be redeemed as Sales, marketing, brand and other fees proportionately when our other customers redeem their packages.

The table below shows the adjustments that were made to the condensed consolidated balance sheet as of January 1, 2018:

	December 31, 2017		Adjustments			January 1, 2018
($ in millions)
ASSETS
Cash and cash equivalents	$	246	$	—		$	246
Restricted cash		51		—			51
Accounts receivable, net of allowance for doubtful accounts		112		—			112
Timeshare financing receivables, net		1,071		—			1,071
Inventory		509		30			539
Property and equipment, net		238		—			238
Investment in unconsolidated affiliate		41		—			41
Intangible assets, net		72		—			72
Other assets		44		16			60
TOTAL ASSETS	$	2,384	$	46		$	2,430
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other	$	339	$	2		$	341
Advanced deposits		104		(17	)		87
Debt, net		482		—			482
Non-recourse debt, net		583		—			583
Deferred revenues		109		112			221
Deferred income tax liabilities		249		(13	)		236
Total liabilities		1,866		84			1,950
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of December 31, 2017		—		—			—
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 99,136,304 issued and outstanding as of December 31, 2017		1		—			1
Additional paid-in capital		162		—			162
Accumulated retained earnings		355		(38	)		317
Total equity		518		(38	)		480
TOTAL LIABILITIES AND EQUITY	$	2,384	$	46		$	2,430

Disaggregation of Revenue

The following tables show our disaggregated revenues by segment from contracts with customers. We operate our business in the following two segments: (i) Real estate sales and financing and (ii) Resort operations and club management. Please refer to Note 18: Business Segments below for more details related to our segments.

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
($ in millions)
Real Estate and Financing Segment
Sales of VOIs, net	$	99	$	427
Sales, marketing, brand and other fees		152		423
Interest income		35		103
Other financing revenue		5		14
Real estate and financing segment revenues	$	291	$	967

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
($ in millions)
Resort Operations and Club Management Segment
Club management	$	25	$	71
Resort management		15		45
Rental ⁽¹⁾		53		144
Ancillary services		7		20
Resort operations and club management segment revenues	$	100	$	280

⁽¹⁾	Includes intersegment eliminations.

Contract Balances

The following table provides information on our accounts receivable and contract asset from contracts with customers which are included in Accounts Receivable, net on our condensed consolidated balance sheets:

($ in millions)	January 1, 2018		September 30, 2018
Receivables⁽¹⁾	$	97	$	135
Contract asset		—		5

⁽¹⁾	Does not include financing receivables from sales of VOI. See Note 5: Timeshare Financing Receivables for additional information.

The following table presents changes in our contract liabilities for the nine months ended September 30, 2018.


($ in millions)	January 1, 2018		Additions		Subtractions			September 30, 2018
Contract liabilities:
Advanced deposits	$	87	$	128	$	(115	)	$	100
Deferred revenue⁽¹⁾		197		256		(215	)		238
Club Bonus Point incentive liability⁽²⁾		52		39		(31	)		60

⁽¹⁾	The deferred revenues balance is primarily comprised of (i) sales of VOI under construction, (ii) Club activation fees that are paid at the closing of a VOI purchase, which grants access to our points-based Club and (iii) annual dues for Club membership renewals.

⁽²⁾

Amounts related to the Club Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our unaudited condensed consolidated balance sheets. This liability is comprised of revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.

Revenue earned during the three and nine months ended September 30, 2018 that was included in the contract liabilities balance at January 1, 2018 was approximately $58 million and $202 million, respectively.

Accounts receivable for the nine months ended September 30, 2018 include amounts associated with our contractual right to consideration for completed performance obligations related primarily to our fee-for-service arrangements and are realized 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. For the nine months ended September 30, 2018, there were no associated impairment losses. Refer to Note 5: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our Timeshare financing receivables.

Contract asset relates to incentive fees that can be earned for meeting certain target on sales of VOIs at properties under our fee-for-service arrangements; however, our right to consideration is conditional upon completing the requirements of the incentive fee period.

Contract liabilities include payments received or due in advance of satisfying our performance obligations, offset by revenues recognized. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues 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 includes revenue and direct costs expected to be recognized in the future related to sales of VOIs under construction as of September 30, 2018:


	Remaining		Expected Recognition Period
($ in millions)	Performance Obligation			Q4 2018
Deferred revenues	$	154		$	154
Deferred expenses		72			72

The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Club Bonus Points as of September 30, 2018:

($ in millions)	Remaining Transaction Price		Recognition Period	Recognition Method
Advanced deposits	$	100	18 months	Upon customer stays
Club activation fees		61	7 years	Straight-line basis over average inventory holding period
Club Bonus Points		60	24 months	Upon redemption

ASC 606 provides certain practical expedients that facilitate the disclosure around performance obligations. We have elected the following practical expedients options:

•

to not disclose the variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation for which revenue recognition criteria have been met; and

•

to not disclose the transaction price allocated to remaining performance obligations that are part of a contract that has an original expected duration of one year or less.

Our performance obligations under the management service arrangements and fee-for-service arrangements are satisfied over time and the related fees represent variable consideration that meets the first practical expedient option. Fees for management services are variable consideration as these fees are based off of costs to operate the resorts in a given annual period, which is resolved on a monthly basis over the contract term.

Impact of New Revenue Guidance on Financial Statement Line Items

The following tables compare the reported condensed consolidated balance sheet and statement of operations as of and for the three and nine months ended September 30, 2018, as well as the cash flows for the nine months ended September 30, 2018, to the previous accounting guidance:

	September 30, 2018
	As Reported		Effects of ASC 606			Previous Accounting Guidance
(in millions)
ASSETS
Cash and cash equivalents	$	145	$	—		$	145
Restricted cash		67		—			67
Accounts receivable, net of allowance for doubtful accounts		151		(5	)		146
Timeshare financing receivables, net		1,103		—			1,103
Inventory		582		(47	)		535
Property and equipment, net		538		—			538
Investment in unconsolidated affiliates		33		—			33
Intangible assets, net		73		—			73
Other assets		121		(20	)		101
TOTAL ASSETS	$	2,813	$	(72	)	$	2,741
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other	$	337	$	(29	)	$	308
Advanced deposits		100		17			117
Debt, net		530		—			530
Non-recourse debt, net		806		—			806
Deferred revenues		263		(142	)		121
Deferred income tax liabilities		215		30			245
Total liabilities		2,251		(124	)		2,127
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of September 30, 2018		—		—			—
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 96,906,759 issued and outstanding as of September 30, 2018		1		—			1
Additional paid-in capital		174		—			174
Accumulated retained earnings		387		52			439
Total equity		562		52			614
TOTAL LIABILITIES AND EQUITY	$	2,813	$	(72	)	$	2,741

Total reported assets and liabilities were $72 million and $124 million, respectively, greater than the balance if the previous accounting guidance were in effect as of September 30, 2018. This was primarily due to the deferral of all direct costs and revenue recognition for Sales of VOIs until construction is complete. In addition, total reported liabilities were partially offset by releasing the advanced deposits liability to recognize expected breakage revenue on prepaid vacation packages proportionally as our customers redeem their packages.

	Three Months Ended September 30, 2018
($ in millions)	As Reported			Effects of ASC 606			Previous Accounting Guidance
Revenues
Sales of VOIs, net	$	99		$	58		$	157
Sales, marketing, brand and other fees		152			(2	)		150
Financing		40			—			40
Resort and club management		40			—			40
Rental and ancillary services		60			—			60
Cost reimbursements		36			—			36
Total revenues		427			56			483
Expenses
Cost of VOI sales		29			18			47
Sales and marketing		174			11			185
Financing		12			—			12
Resort and club management		11			—			11
Rental and ancillary services		37			—			37
General and administrative		31			—			31
Depreciation and amortization		9			—			9
License fee expense		25			—			25
Cost reimbursements		36			—			36
Total operating expenses		364			29			393
Interest expense		(7	)		—			(7	)
Equity in earnings from unconsolidated affiliates		1			—			1
Other loss		(1	)		—			(1	)
Income before income taxes		56			27			83
Income tax expense		(15	)		(6	)		(21	)
Net income	$	41		$	21		$	62
Earnings per share:
Basic	$	0.42		$	0.21		$	0.63
Diluted	$	0.42		$	0.21		$	0.63

	Nine Months Ended September 30, 2018
($ in millions)	As Reported			Effects of ASC 606			Previous Accounting Guidance
Revenues
Sales of VOIs, net	$	427		$	30		$	457
Sales, marketing, brand and other fees		423			4			427
Financing		117			—			117
Resort and club management		116			—			116
Rental and ancillary services		164			—			164
Cost reimbursements		110			—			110
Total revenues		1,357			34			1,391
Expenses
Cost of VOI sales		109			16			125
Sales and marketing		528			14			542
Financing		35			—			35
Resort and club management		33			—			33
Rental and ancillary services		95			—			95
General and administrative		84			—			84
Depreciation and amortization		25			—			25
License fee expense		73			—			73
Cost reimbursements		110			—			110
Total operating expenses		1,092			30			1,122
Interest expense		(22	)		—			(22	)
Other loss		(1	)		—			(1	)
Income before income taxes		242			4			246
Income tax expense		(64	)		(1	)		(65	)
Net income	$	178		$	3		$	181
Earnings per share:
Basic	$	1.82		$	0.03		$	1.85
Diluted	$	1.81		$	0.03		$	1.84

The following summarizes the significant changes to our condensed consolidated statement of operations for the three and nine months ended September 30, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to if we had continued to recognize revenues under the previous accounting guidance:

•

Under ASC 606, the timing of revenue recognition for sales of VOIs under construction and all related direct costs have been deferred until construction is complete. Under the previous accounting guidance, we recognized revenue for sales of VOIs under construction in accordance with the percentage of completion method. This resulted in a lower Sales of VOIs, net, Cost of VOI sales and Total operating expenses;

•

Under ASC 606, using a portfolio approach, we have recognized the expected breakage revenue on packages not expected to be redeemed as Sales, marketing, brand and other fees proportionately when our other customers redeem their packages. Under the previous accounting guidance, we recognized breakage revenue from prepaid vacation packages when the likelihood of redemption was remote post expiration; and

•

Under ASC 606, certain sales incentives where we are acting as the agent are recognized on a net basis, therefore, resulted in a lower Sales, marketing, brand and other fees and Total operating expenses. Under the previous accounting guidance, we recognized certain sales incentives on a gross basis which resulted in higher Sales, marketing, brand and other fees and Total operating expenses.

The adoption of ASC 606 had no impact on our total cash flows provided by operating activities or used by investing and financing activities. ASC 606 resulted in offsetting shifts in cash flows throughout net income and various changes in working capital balances.

	Nine Months Ended September 30, 2018
($ in millions)	As Reported			Previous Accounting Guidance
Net income	$	178		$	181
Adjustments to reconcile net income to net used in by operating activities		74			74
Changes in operating assets and liabilities
Accounts receivable, net		(39	)		(35	)
Timeshare financing receivables, net		(83	)		(83	)
Inventory		(15	)		1
Purchases of real estate for future conversion to inventory		(299	)		(299	)
Other assets		(61	)		(56	)
Accounts payable, accrued expenses and other		(15	)		(15	)
Advanced deposits		13			13
Deferred revenues		42			14
Net cash used in operating activities	$	(205	)	$	(205	)

Note 4: Restricted Cash

Restricted cash was as follows:

	September 30,		December 31,
($ in millions)	2018		2017
Escrow deposits on VOI sales	$	40	$	29
Reserves related to non-recourse debt⁽¹⁾		27		22
	$	67	$	51

⁽¹⁾	See Note 12: Debt & Non-recourse Debt for further discussion.

Note 5: Timeshare Financing Receivables

Timeshare financing receivables were as follows:

	September 30, 2018
($ in millions)	Securitized and Pledged			Unsecuritized⁽¹⁾			Total
Timeshare financing receivables	$	705		$	567		$	1,272
Less: allowance for loan loss		(47	)		(122	)		(169	)
	$	658		$	445		$	1,103

	December 31, 2017
($ in millions)	Securitized and Pledged			Unsecuritized⁽¹⁾			Total
Timeshare financing receivables	$	471		$	741		$	1,212
Less: allowance for loan loss		(27	)		(114	)		(141	)
	$	444		$	627		$	1,071

⁽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 upcoming securitization.

As of September 30, 2018 and December 31, 2017, we had $198 million and $143 million, respectively, of gross timeshare financing receivables securing the outstanding debt balance of our Timeshare Facility. We recognize interest income on our timeshare financing receivables as earned. We record an estimate of variable consideration for estimated defaults as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale.

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, 2018, our timeshare financing receivables had interest rates ranging from 5.3 percent to 20.5 percent, a weighted average interest rate of 12.2 percent, a weighted average remaining term of 7.8 years and maturities through 2030.

In September 2018, we completed a securitization of $350 million of gross timeshare financing receivables and issued approximately $268 million of 3.54 percent notes, $54 million of 3.70 percent notes and $28 million of 4.0 percent notes, which have a stated maturity date of February 25, 2032. The securitization transaction did not qualify as a sale 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”). The proceeds were primarily used to pay down a portion of our Timeshare Facility and general corporate operating expenses.

Our timeshare financing receivables as of September 30, 2018 mature as follows:

($ in millions)	Securitized and Pledged			Unsecuritized			Total
Year
2018 (remaining)	$	22		$	26		$	48
2019		90			46			136
2020		90			50			140
2021		89			54			143
2022		86			58			144
Thereafter		328			333			661
		705			567			1,272
Less: allowance for loan loss		(47	)		(122	)		(169	)
	$	658		$	445		$	1,103

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 quality of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for determining our allowance for loan loss 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.

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

	September 30,		December 31,
($ in millions)	2018		2017
FICO score
700+	$	826	$	770
600-699		236		225
<600		28		28
No score⁽¹⁾		182		189
	$	1,272	$	1,212

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

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

ceased accruing interest once the loan is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the loan is 121 days past due and, subsequently, we write off the uncollectible note against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.

As of September 30, 2018 and December 31, 2017, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $69 million and $49 million, respectively. The following tables detail an aged analysis of our gross timeshare financing receivables balance:

	September 30, 2018
($ in millions)	Securitized and Pledged		Unsecuritized		Total
Current	$	697	$	489	$	1,186
31 - 90 days past due		4		13		17
91 - 120 days past due		2		4		6
121 days and greater past due		2		61		63
	$	705	$	567	$	1,272

	December 31, 2017
($ in millions)	Securitized and Pledged		Unsecuritized		Total
Current	$	462	$	685	$	1,147
31 - 90 days past due		6		10		16
91 - 120 days past due		1		4		5
121 days and greater past due		2		42		44
	$	471	$	741	$	1,212

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

	September 30, 2018
($ in millions)	Securitized and Pledged			Unsecuritized			Total
Balance as of December 31, 2017	$	27		$	114		$	141
Write-offs		—			(22	)		(22	)
Securitization		30			(30	)		—
Provision for loan loss⁽¹⁾		(10	)		60			50
Balance as of September 30, 2018	$	47		$	122		$	169

	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

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

Note 6: Inventory

Inventory was as follows:

	September 30,		December 31,
($ in millions)	2018		2017
Completed unsold VOIs	$	233	$	191
Construction in process		76		60
Land, infrastructure and other		273		258
	$	582	$	509

We benefited from $10 million in costs of sales true-ups relating to VOI products for the nine months ended September 30, 2018, which resulted in a $10 million increase to the carrying value of inventory as of September 30, 2018. We benefited from $4 million in costs of sales true-ups relating to VOI products for the year ended December 31, 2017, which resulted in a $4 million increase to the carrying value of inventory as of December 31, 2017. Shown below are 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 September 30,				Nine Months Ended September 30,
($ in millions)	2018		2017		2018		2017
Cost of VOI sales related to fee-for-service upgrades	$	8	$	8	$	23	$	28

Note 7: Property and Equipment

Property and equipment were as follows:

	September 30,			December 31,
($ in millions)	2018			2017
Land		268			53
Building and leasehold improvements		286			182
Furniture and equipment		56			48
Construction in progress		8			20
		618			303
Accumulated depreciation		(80	)		(65	)
	$	538		$	238

In June 2018, we acquired an operating hotel in New York City, New York for $176 million for future conversion to timeshare inventory. In September 2018, we acquired land in Honolulu, Hawaii for $123 million which will be used to construct a timeshare resort. Both transactions were accounted for as an asset acquisition with purchase price being allocated to land, building and leasehold improvements and furniture and equipment.

Note 8: Consolidated Variable Interest Entities

As of September 30, 2018 and December 31, 2017, we consolidated four and three, respectively, variable interest entities (“VIEs”) that issued Securitized Debt, backed by pledged assets consisting primarily of a pool of timeshare financing receivables, which is without recourse to us. We are the primary beneficiaries of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we are required to replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. Only 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,
($ in millions)	2018		2017
Restricted cash	$	23	$	18
Timeshare financing receivables, net		658		445
Non-recourse debt⁽¹⁾		686		454

⁽¹⁾	Net of deferred financing costs.

During the nine months ended September 30, 2018 and 2017, we did not provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.

Note 9: Investment in Unconsolidated Affiliates

In March 2018, we entered into an agreement with SCG 1776, LLC, an affiliate of Strand Capital Group, LLC and formed 1776 Holding, LLC, a VIE. Because we are not the primary beneficiary, we do not consolidate 1776 Holding, LLC. Pursuant to the agreement, we contributed $5 million in cash for a 50 percent interest in 1776 Holding, LLC, which will construct an approximately 99-unit timeshare resort in Charleston, South Carolina. Our investment in 1776 Holdings, LLC is included in the condensed consolidated balance sheets as Investment in unconsolidated affiliates.

During the nine months ended September 30, 2018, we received cash distributions of $13 million from our investment in BRE Ace LLC, also a non-consolidated VIE, of which $10 million was considered a return of investment.

We held investments in our two unconsolidated affiliates with aggregated debt balances of $483 million and $488 million as of September 30, 2018 and December 31, 2017, respectively. The debt is secured by their assets and is without recourse to us. Our maximum exposure to loss as a result of our investment interests in the two unconsolidated affiliates is primarily limited to (i) the carrying amount of the investments which totals $33 million and $41 million as of September 30, 2018 and December 31, 2017, respectively and (ii) receivables for commission and other fees earned under a fee-for-service arrangement. See Note 17: Related Party Transactions for additional information.

Note 10: Other Assets

Other assets were as follows:

	September 30,		December 31,
($ in millions)	2018		2017
Inventory deposits	$	43	$	—
Deferred selling, marketing, general and administrative expenses		22		3
Prepaid expenses		28		18
Other		28		23
	$	121	$	44

In February 2018, we entered into a commitment to acquire $41 million of real estate for future conversion to timeshare inventory. In July 2018, we executed a sale and purchase agreement to acquire a portion of an operating hotel for future conversion to timeshare inventory for $50 million of which we made an initial deposit of $2 million. Both transactions were recorded as inventory deposits.

Note 11: Deferred Revenues

Deferred revenues were as follows:

	September 30,		December 31,
($ in millions)	2018		2017
Deferred VOI sales	$	174	$	45
Club activation fees		61		54
Club membership fees		15		—
Other		13		10
	$	263	$	109

Note 12: Debt & Non-recourse Debt

Debt

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

	September 30,			December 31,
($ in millions)	2018			2017
Debt⁽¹⁾
Senior secured credit facilities:
Term loan with an average rate of 4.511%, due 2021	$	182		$	190
Revolver with an average rate of 4.511%, due 2021		55			—
Senior notes with a rate of 6.125%, due 2024		300			300
		537			490
Less: unamortized deferred financing costs and discount⁽²⁾⁽³⁾		(7	)		(8	)
	$	530		$	482

⁽¹⁾	For the nine months ended September 30, 2018 and year ended December 31, 2017, weighted average interest rates were 5.412 percent and 5.229 percent, respectively.

⁽²⁾	Amount includes deferred financing costs related to our term loan and senior notes of $1 million and $6 million, respectively, as of September 30, 2018 and $1 million and $7 million, respectively, as of December 31, 2017.

⁽³⁾	Amount does not include deferred financing costs of $1 million as of September 30, 2018 and $2 million as of December 31, 2017, relating to our revolving facility included in Other Assets in our condensed consolidated balance sheets.

During the nine months ended September 30, 2018, we borrowed $215 million and repaid $160 million under the revolving credit facility with an interest rate based on one month LIBOR plus 2.25 percent.

As of September 30, 2018 and December 31, 2017, we had $1 million of outstanding letter of credit under the revolving credit facility. We were in compliance with all applicable financial covenants as of September 30, 2018.

Non-recourse Debt

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

	September 30,			December 31,
($ in millions)	2018			2017
Non-recourse debt⁽¹⁾
Timeshare Facility with an average rate of 3.302%, due 2021	$	120		$	129
Securitized Debt with a rate of 2.280%, due 2026		38			54
Securitized Debt with an average rate of 1.810%, due 2026		82			112
Securitized Debt with an average rate of 2.711%, due 2028		224			293
Securitized Debt with an average rate of 3.602%, due 2032		350			—
		814			588
Less: unamortized deferred financing costs⁽²⁾		(8	)		(5	)
	$	806		$	583

⁽¹⁾	For the nine months ended September 30, 2018 and year ended December 31, 2017, weighted average interest rates were 3.070 percent and 2.492 percent, respectively.

⁽²⁾	Amount relates to Securitized Debt only and does not include deferred financing costs of $3 million and $2 million as of September 30, 2018 and December 31, 2017, respectively, relating to our Timeshare Facility included in Other Assets in our condensed consolidated balance sheets.

In September 2018, we completed a securitization of $350 million of gross timeshare financing receivables and issued approximately $268 million of 3.54 percent notes, $54 million of 3.70 percent notes and $28 million of 4.0 percent notes due February 2032. In connection with the securitization, we incurred $4 million in debt issuance costs recorded in other assets. 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 interest. The Securitized Debt is a non-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral to the debt. The proceeds from the securitization were primarily used to pay down a portion of our Timeshare Facility and general corporate operating expenses.

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. In March 2018, we extended the commitment termination date to March 2020. The maturity date was extended 12 months from the commitment date to March 2021. As a result of this extension, we incurred $2 million in debt issuance costs recorded in other assets. During the nine months ended September 30, 2018, we borrowed $313 million and repaid $322 million under the Timeshare Facility.

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 $27 million and $22 million as of September 30, 2018 and December 31, 2017, 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, 2018 were as follows:

($ in millions)	Debt		Non-recourse Debt		Total
Year
2018 (remaining)	$	2	$	44	$	46
2019		10		189		199
2020		10		166		176
2021		215		208		423
2022		—		64		64
Thereafter		300		143		443
	$	537	$	814	$	1,351

Note 13: Fair Value Measurements

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

	September 30, 2018
			Hierarchy Level
($ in millions)	Carrying Amount		Level 1		Level 3
Assets:
Timeshare financing receivables, net⁽¹⁾	$	1,103	$	—	$	1,339
Liabilities:
Debt, net⁽²⁾		530		309		244
Non-recourse debt, net⁽²⁾		806		—		796

_____________________

⁽¹⁾	Carrying amount net of allowance for loan loss.

⁽²⁾	Carrying amount net of unamortized deferred financing costs and discount.

	December 31, 2017
			Hierarchy Level
($ in millions)	Carrying Amount		Level 1		Level 3
Assets:
Timeshare financing receivables, net⁽¹⁾	$	1,071	$	—	$	1,292
Liabilities:
Debt, net⁽²⁾		482		329		194
Non-recourse debt, net⁽²⁾		583		—		577

⁽¹⁾	Carrying amount net of allowance for loan loss.

⁽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 was based on prices in active debt markets. The estimated fair value of our Level 3 debt and non-recourse debt were as follows:

•

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.

We do not have any assets or liabilities measured at fair value on a recurring basis as of September 30, 2018.

Note 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 income or loss, which is subject to federal, foreign, state and local income taxes. The effective income tax rate for the nine months ended September 30, 2018 and 2017 was approximately 27 percent and 38 percent, respectively, which decreased primarily due to a decrease in the federal corporate income tax rate as a result of the Tax Cut and Jobs Act (the “Act”) that was passed on December 22, 2017.

We are applying the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”) when accounting for the enactment-date effects of the Act. As of September 30, 2018, there has been no adjustment to the provisional amounts of the Act’s effects on the one-time repatriation tax as we continue to expect to report approximately $1 million or less (net of applicable foreign tax credit) as the one-time deemed repatriation transition tax on unrepatriated foreign earnings upon our filing of the 2017 federal income tax return. Upon the enactment of the Act on December 22, 2017, we have re-measured certain deferred tax assets and liabilities using the new corporate tax rate of 21 percent, rather than the previous corporate tax rate of 35 percent, resulting in a $132 million decrease in our income tax expense for the year ended December 31, 2017. As of September 30, 2018, the re-measurement of our deferred tax balances continues to remain provisional without additional change as we continue to monitor additional guidance from the U.S. Department of the Treasury.

Furthermore, we have not yet elected an accounting policy to account for the tax upon Global Intangible Low-Taxed Income (“GILTI”) in either of the following ways: 1) as a period charge in the future period the tax arises or 2) as part of deferred taxes related to the investment or subsidiary, given the complexities of the GILTI taxation. As of September 30, 2018, we have an insignificant amount of GILTI tax net of applicable foreign tax credit.

Note 15: Share-Based Compensation

Stock Plan

We issue time-vesting restricted stock units (“RSUs”), time and performance-vesting restricted stock units (“PSUs”) and nonqualified stock options (“options”) to certain employees and directors. We recognized share-based compensation expense of $5 million during the three months ended September 30, 2018 and 2017 and $13 million during the nine months ended September 30, 2018 and 2017. As of September 30, 2018, unrecognized compensation costs for unvested awards were approximately $20 million, which is expected to be recognized over a weighted average period of 2.0 years. As of September 30, 2018, there were 7,324,752 shares of common stock available for future issuance.

RSUs

During the nine months ended September 30, 2018, we issued 290,786 RSUs with a weighted average grant date fair value of $45.90, which generally vest in equal annual installments over three years from the date of grant.

Options

During the nine months ended September 30, 2018, we issued 312,141 options with a weighted average exercise price of $46.48, which vest over three years from the date of the grant.

The weighted average grant date fair value of these options was $14.78, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:

Expected volatility⁽¹⁾	26.6	%
Dividend yield⁽²⁾	—	%
Risk-free rate⁽³⁾	2.7	%
Expected term (in years)⁽⁴⁾	6.0

⁽¹⁾

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

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

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

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

As of September 30, 2018, we had 373,282 options outstanding that were exercisable.

Performance Shares

During the nine months ended September 30, 2018, we issued 92,578 PSUs with a weighted average grant date fair value of $42.94. The PSUs are settled at the end of a three-year performance period, with 70 percent of the PSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization. This metric is further adjusted by sales of VOIs under construction. The remaining 30 percent of the PSUs are subject to the achievement of certain VOI sales targets. We determined that the performance conditions for these awards are probable of achievement and, as of September 30, 2018, we recognized compensation expense based on the number of PSUs we expect to vest.

Note 16: Earnings Per Share

The following table presents the calculation of our basic and diluted earnings per share (“EPS”). The weighted average shares outstanding used to compute basic EPS and diluted EPS for the three months ended September 30, 2018 is 96,840,685 and 97,432,015, respectively, and for the nine months ended September 30, 2018 is 97,407,644 and 98,142,238, respectively. The weighted average shares outstanding used to compute basic EPS and diluted EPS for the three months ended September 30, 2017 was 98,981,557 and 99,730,483, respectively, and for the nine months ended September 30, 2017 was 98,916,894 and 99,530,534, respectively.

	Three Months Ended September 30,				Nine Months Ended September 30,
($ and shares outstanding in millions, except per share amounts)	2018		2017		2018		2017
Basic EPS:
Numerator:
Net Income⁽¹⁾	$	41	$	43	$	178	$	144
Denominator:
Weighted average shares outstanding		97		99		97		99
Basic EPS	$	0.42	$	0.43	$	1.82	$	1.45
Diluted EPS:
Numerator:
Net Income⁽¹⁾	$	41	$	43	$	178	$	144
Denominator:
Weighted average shares outstanding		97		100		98		100
Diluted EPS	$	0.42	$	0.43	$	1.81	$	1.44

⁽¹⁾	Net income for the three months ended September 30, 2018 and 2017 was $40,533,279 and $42,700,978, respectively, and for the nine months ended September 30, 2018 and 2017 was $177,564,538 and $143,742,500, respectively.

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

For the three and nine months ended September 30, 2018, we excluded 533,721 and 359,127 share-based compensation awards, respectively, because their effect would have been anti-dilutive under the treasury stock method.

Note 17: Related Party Transactions

HNA Tourism Group Co., Ltd.

On March 13, 2018, we and HNA Tourism Group Co., Ltd. (“HNA”) and HNA HLT Holdco I LLC (the “Selling Stockholder”), an affiliate of HNA, entered into a Master Amendment and Option Agreement (the “Master Amendment and Option Agreement”) to make certain amendments to the Stockholders Agreement, dated October 24, 2016, between us and HNA (the “Stockholders Agreement”) and the Registration Rights Agreement, dated October 24, 2016, between us and HNA (the “Registration Rights Agreement”), among other things, (i) to permit the sale of up to all 24,750,000 shares of our common stock owned by the Selling Stockholder prior to the expiration of the two-year restricted period originally contained in the Stockholders Agreement, (ii) grant us a right to repurchase up to 4,340,000 shares of our common stock held by the Selling Stockholder, (iii) provide that HNA has customary “demand” registration rights effective March 13, 2018, (iv) require HNA to pay all expenses incurred under the Registration Rights Agreement for registrations or offerings occurring prior to a certain date and (v) eliminate HNA’s right to designate a certain number of directors to our board of directors. We exercised the repurchase option from the Selling Stockholder with respect to 2,500,000 shares at a price of approximately $44.75 per share.

On March 14, 2018, HGV and HNA entered into an underwriting agreement with several underwriters, pursuant to which the underwriters agreed to purchase from the Selling Stockholder 22,250,000 shares of common stock, $0.01 par value per share, of the Company at a price of approximately $44.75 per share. The sale was completed on March 19, 2018; consequently, HNA ceased to be a related party. We did not receive any proceeds from the sale.

On March 19, 2018, the repurchase was completed and the shares were retired.

The Blackstone Group

In September 2017, Blackstone completed the sale of substantially all of our common stock that it owned and ceased to be a related party. For the three and nine months ended September 30, 2017, we earned $42 million and $135 million, respectively, in commission and other fees related to a fee-for-service arrangement with Blackstone affiliates to sell VOIs on their behalf.

BRE Ace LLC

In July 2017, we acquired a 25 percent ownership interest in BRE Ace LLC, a VIE, which owns a timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations.” During the three months ended September 30, 2018, we recorded $1 million in Equity in earnings from unconsolidated affiliates included in our condensed consolidated statements of operation. There was no Equity in earnings from unconsolidated affiliates for the nine months ended September 30, 2018. Additionally, we earn commissions and other fees related to a fee-for-service agreement with the investee to sell VOIs at Elara, by Hilton Grand Vacations. These amounts are summarized in the following table and included in our condensed consolidated statements of operations as of the date they became a related party.

	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2018		2017		2018		2017
Commission and other fees	$	32	$	43	$	96	$	43

Also related to the fee-for-service agreement, as of September 30, 2018, we have outstanding receivables of $27 million.

1776 Holding, LLC

On March 23, 2018, we entered into an agreement with SCG 1776, LLC to form 1776 Holding, LLC. In conjunction with this agreement we contributed $5 million in cash for a 50 percent ownership interest in 1776 Holding LLC. For the three and nine months ended September 30, 2018, we recorded less than $1 million loss included in the condensed consolidated statements of operations as Equity in losses from unconsolidated affiliates. See Note 9: Investment in Unconsolidated Affiliates for additional information.

Note 18: Business Segments

We operate our business through the following two segments:

•

Real estate sales and financing – We market and sell VOIs that we own. We also source VOIs 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.

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) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.

We do not include equity in earnings (losses) from unconsolidated affiliate in our measures of segment revenues. The following table presents revenues for our reportable segments reconciled to consolidated amounts:

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2018			2017			2018			2017
Revenues:
Real estate sales and financing	$	291		$	310		$	967		$	916
Resort operations and club management⁽¹⁾⁽²⁾		108			90			304			270
Total segment revenues		399			400			1,271			1,186
Cost reimbursements		36			34			110			102
Intersegment eliminations⁽¹⁾⁽²⁾		(8	)		(8	)		(24	)		(24	)
Total revenues	$	427		$	426		$	1,357		$	1,264

⁽¹⁾

Includes charges to the real estate sales and financing segment from the resort operations and club management segment for discounted stays at properties resulting from marketing packages. These charges totaled $8 million and $7 million for the three months ended September 30, 2018 and 2017, respectively, and $24 million and $23 million for the nine months ended September 30, 2018 and 2017, respectively.

⁽²⁾	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 $1 million for the three and nine months ended September 30, 2017.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2018			2017			2018			2017
Adjusted EBITDA:
Real estate sales and financing⁽¹⁾	$	67		$	81		$	274		$	263
Resort operations and club management⁽¹⁾		62			50			179			153
Segment Adjusted EBITDA		129			131			453			416
General and administrative		(31	)		(23	)		(84	)		(75	)
Depreciation and amortization		(9	)		(7	)		(25	)		(21	)
License fee expense		(25	)		(22	)		(73	)		(65	)
Gain on foreign currency transactions		—			1			—			1
Interest expense		(7	)		(7	)		(22	)		(21	)
Income tax expense		(15	)		(28	)		(64	)		(87	)
Equity in earnings from unconsolidated affiliates		1			1			—			1
Other loss		(1	)		—			(1	)		—
Other adjustment items		(1	)		(3	)		(6	)		(5	)
Net income	$	41		$	43		$	178		$	144

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

Note 19: Commitments and Contingencies

We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of September 30, 2018, we were committed to purchase approximately $501 million of inventory and land over a period of seven years. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. During the nine months ended September 30, 2018 and 2017, we purchased $18 million and $9 million, respectively, of VOI inventory as required under our commitments. As of September 30, 2018, our remaining obligation pursuant to these arrangements was expected to be incurred as follows:

($ in millions)	Purchase Obligations
Year
2018 (remaining)	$	—
2019		127
2020		160
2021		79
2022		52
Thereafter		83
Total	$	501

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which possible losses are not reasonably estimable. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of September 30, 2018, will not have a material effect on our unaudited condensed consolidated financial statements.

Note 20: Condensed Consolidating Guarantor Financial Information

The following schedules present the condensed consolidating financial information as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017 for the Parent, Subsidiary Issuers, Guarantors and Non-Guarantors.

	September 30, 2018
($ in millions)	Parent		Issuers		Guarantors		Non- Guarantors		Eliminations			Total
ASSETS
Cash and cash equivalents	$	—	$	—	$	134	$	11	$	—		$	145
Restricted cash		—		—		41		26		—			67
Accounts receivable, net		—		—		154		9		(12	)		151
Timeshare financing receivables, net		—		—		267		836		—			1,103
Inventory		—		—		558		24		—			582
Property and equipment, net		—		—		533		5		—			538
Investment in unconsolidated affiliates		—		—		33		—		—			33
Intangible assets, net		—		—		73		—		—			73
Other assets		—		1		70		50		—			121
Investments in subsidiaries		562		1,091		143		—		(1,796	)		—
TOTAL ASSETS	$	562	$	1,092	$	2,006	$	961	$	(1,808	)	$	2,813
LIABILITIES AND EQUITY
Accounts payable, accrued expenses and other	$	—	$	—	$	337	$	12	$	(12	)	$	337
Advanced deposits		—		—		100		—		—			100
Debt, net		—		530		—		—		—			530
Non-recourse debt, net		—		—		—		806		—			806
Deferred revenues		—		—		263		—		—			263
Deferred income tax liabilities		—		—		215		—		—			215
Total equity		562		562		1,091		143		(1,796	)		562
TOTAL LIABILITIES AND EQUITY	$	562	$	1,092	$	2,006	$	961	$	(1,808	)	$	2,813

	December 31, 2017
($ in millions)	Parent		Issuers		Guarantors		Non- Guarantors			Eliminations			Total
ASSETS
Cash and cash equivalents	$	—	$	—	$	230	$	16		$	—		$	246
Restricted cash		—		—		29		22			—			51
Accounts receivable, net		—		—		113		5			(6	)		112
Timeshare financing receivables, net		—		—		457		614			—			1,071
Inventory		—		—		509		—			—			509
Property and equipment, net		—		—		232		6			—			238
Investment in unconsolidated affiliate		—		—		41		—			—			41
Intangible assets, net		—		—		72		—			—			72
Other assets		—		2		36		7			(1	)		44
Investments in subsidiaries		518		999		81		—			(1,598	)		—
TOTAL ASSETS	$	518	$	1,001	$	1,800	$	670		$	(1,605	)	$	2,384
LIABILITIES AND EQUITY
Accounts payable, accrued expenses and other	$	—	$	1	$	338	$	7		$	(7	)	$	339
Advanced deposits		—		—		104		—			—			104
Debt, net		—		482		—		—			—			482
Non-recourse debt, net		—		—		—		583			—			583
Deferred revenues		—		—		109		—			—			109
Deferred income tax liabilities		—		—		250		(1	)		—			249
Total equity		518		518		999		81			(1,598	)		518
TOTAL LIABILITIES AND EQUITY	$	518	$	1,001	$	1,800	$	670		$	(1,605	)	$	2,384

	For the Three Months Ended September 30, 2018
($ in millions)	Parent		Issuers			Guarantors			Non- Guarantors		Eliminations			Total
Revenues
Sales of VOI’s, net	$	—	$	—		$	97		$	2	$	—		$	99
Sales, marketing, license and other fees		—		—			151			1		—			152
Financing		—		—			17			26		(3	)		40
Resort and club management		—		—			40			—		—			40
Rental and ancillary service		—		—			59			1		—			60
Cost reimbursements		—		—			35			1		—			36
Total revenues		—		—			399			31		(3	)		427
Expenses
Cost of VOI sales		—		—			29			—		—			29
Sales and marketing		—		—			172			2		—			174
Financing		—		—			4			11		(3	)		12
Resort and club management		—		—			11			—		—			11
Rental and ancillary service		—		—			36			1		—			37
General and administrative		—		—			30			1		—			31
Depreciation and amortization		—		—			9			—		—			9
License fee expense		—		—			25			—		—			25
Cost reimbursements		—		—			35			1		—			36
Total operating expenses		—		—			351			16		(3	)		364
Interest expense		—		(7	)		—			—		—			(7	)
Equity in earnings from unconsolidated affiliates		—		—			1			—		—			1
Other loss		—		—			(1	)		—		—			(1	)
Income (loss) before income taxes		—		(7	)		48			15		—			56
Income tax expense		—		—			(15	)		—		—			(15	)
Income (loss) before equity in earnings (loss) from subsidiaries		—		(7	)		33			15		—			41
Equity in earnings from subsidiaries		41		48			15			—		(104	)		—
Net income	$	41	$	41		$	48		$	15	$	(104	)	$	41

	For the Three Months Ended September 30, 2017
($ in millions)	Parent		Issuers			Guarantors			Non- Guarantors			Eliminations			Total
Revenues
Sales of VOI’s, net	$	—	$	—		$	137		$	8		$	—		$	145
Sales, marketing, license and other fees		—		—			133			—			(6	)		127
Financing		—		—			19			21			(2	)		38
Resort and club management		—		—			37			—			—			37
Rental and ancillary service		—		—			44			1			—			45
Cost reimbursements		—		—			34			—			—			34
Total revenues		—		—			404			30			(8	)		426
Expenses
Cost of VOI sales		—		—			40			—			—			40
Sales and marketing		—		—			172			5			(6	)		171
Financing		—		—			4			9			(2	)		11
Resort and club management		—		—			12			—			—			12
Rental and ancillary service		—		—			30			—			—			30
General and administrative		—		—			23			—			—			23
Depreciation and amortization		—		—			7			—			—			7
License fee expense		—		—			22			—			—			22
Cost reimbursements		—		—			34			—			—			34
Total operating expenses		—		—			344			14			(8	)		350
Gain on foreign currency transaction		—		—			1			—			—			1
Interest expense		—		(7	)		—			—			—			(7	)
Equity in earnings from unconsolidated affiliates		—		—			1			—			—			1
Income (loss) before income taxes		—		(7	)		62			16			—			71
Income tax expense		—		—			(27	)		(1	)		—			(28	)
Income (loss) before equity in earnings (loss) from subsidiaries		—		(7	)		35			15			—			43
Equity in earnings from subsidiaries		43		50			15			—			(108	)		—
Net income	$	43	$	43		$	50		$	15		$	(108	)	$	43

	For the Nine Months Ended September 30, 2018
($ in millions)	Parent		Issuers			Guarantors			Non- Guarantors		Eliminations			Total
Revenues
Sales of VOI’s, net	$	—	$	—		$	422		$	5	$	—		$	427
Sales, marketing, license and other fees		—		—			424			3		(4	)		423
Financing		—		—			54			68		(5	)		117
Resort and club management		—		—			116			—		—			116
Rental and ancillary service		—		—			162			2		—			164
Cost reimbursements		—		—			107			3		—			110
Total revenues		—		—			1,285			81		(9	)		1,357
Expenses
Cost of VOI sales		—		—			109			—		—			109
Sales and marketing		—		—			526			6		(4	)		528
Financing		—		—			14			26		(5	)		35
Resort and club management		—		—			33			—		—			33
Rental and ancillary service		—		—			93			2		—			95
General and administrative		—		—			83			1		—			84
Depreciation and amortization		—		—			25			—		—			25
License fee expense		—		—			73			—		—			73
Cost reimbursements		—		—			107			3		—			110
Total operating expenses		—		—			1,063			38		(9	)		1,092
Interest expense		—		(22	)		—			—		—			(22	)
Other loss		—		—			(1	)		—		—			(1	)
Income (loss) before income taxes		—		(22	)		221			43		—			242
Income tax expense		—		—			(64	)		—		—			(64	)
Income (loss) before equity in earnings (loss) from subsidiaries		—		(22	)		157			43		—			178
Equity in earnings from subsidiaries		178		200			43			—		(421	)		—
Net income	$	178	$	178		$	200		$	43	$	(421	)	$	178

	For the Nine Months Ended September 30, 2017
($ in millions)	Parent		Issuers			Guarantors			Non- Guarantors			Eliminations			Total
Revenues
Sales of VOI’s, net	$	—	$	—		$	380		$	26		$	—		$	406
Sales, marketing, license and other fees		—		—			407			2			(8	)		401
Financing		—		—			50			64			(5	)		109
Resort and club management		—		—			106			2			—			108
Rental and ancillary service		—		—			136			2			—			138
Cost reimbursements		—		—			99			3			—			102
Total revenues		—		—			1,178			99			(13	)		1,264
Expenses
Cost of VOI sales		—		—			105			2			—			107
Sales and marketing		—		—			487			13			(8	)		492
Financing		—		—			13			24			(5	)		32
Resort and club management		—		—			30			2			—			32
Rental and ancillary service		—		—			87			1			—			88
General and administrative		—		—			72			3			—			75
Depreciation and amortization		—		—			21			—			—			21
License fee expense		—		—			65			—			—			65
Cost reimbursements		—		—			99			3			—			102
Total operating expenses		—		—			979			48			(13	)		1,014
Gain on foreign currency transactions		—		—			1			—			—			1
Interest expense		—		(21	)		—			—			—			(21	)
Equity in earnings from unconsolidated affiliates		—		—			1			—			—			1
Income (loss) before income taxes		—		(21	)		201			51			—			231
Income tax expense		—		—			(86	)		(1	)		—			(87	)
Income (loss) before equity in earnings (loss) from subsidiaries		—		(21	)		115			50			—			144
Equity in earnings from subsidiaries		144		165			50			—			(359	)		—
Net income	$	144	$	144		$	165		$	50		$	(359	)	$	144

	For the Nine Months Ended September 30, 2018
($ in millions)	Parent		Issuers			Guarantors			Non- Guarantors			Eliminations			Total
Operating Activities
Net cash (used in) provided by operating activities	$	—	$	(20	)	$	10		$	(241	)	$	46		$	(205	)
Investing Activities
Capital expenditures for property and equipment		—		—			(25	)		(4	)		—			(29	)
Software capitalization costs		—		—			(12	)		—			—			(12	)
Return of investment from unconsolidated affiliates		—		—			11			—			—			11
Investment in unconsolidated affiliate		—		—			(5	)		—			—			(5	)
Net cash used in investing activities		—		—			(31	)		(4	)		—			(35	)
Financing Activities
Issuance of debt		—		215			—			—			—			215
Issuance of non-recourse debt		—		—			—			663			—			663
Repurchase and retirement of common stock		—		(112	)		—			—			—			(112	)
Repayment of debt		—		(168	)		—			—			—			(168	)
Repayment of non-recourse debt		—		—			—			(436	)		—			(436	)
Debt issuance costs		—		—			—			(6	)		—			(6	)
Payment of withholding taxes on vesting of restricted stock units		—		(4	)		—			—			—			(4	)
Capital contribution		—		3			—			—			—			3
Intercompany transfers		—		86			(63	)		23			(46	)		—
Net cash provided by (used in) financing activities		—		20			(63	)		244			(46	)		155
Net decrease in cash, cash equivalents and restricted cash		—		—			(84	)		(1	)		—			(85	)
Cash, cash equivalents and restricted cash, beginning of period		—		—			259			38			—			297
Cash, cash equivalents and restricted cash, end of period	$	—	$	—		$	175		$	37		$	—		$	212

	For the Nine Months Ended September 30, 2017
($ in millions)	Parent		Issuers			Guarantors			Non- Guarantors			Eliminations			Total
Operating Activities
Net cash provided by operating activities	$	—	$	(16	)	$	135		$	190		$	(10	)	$	299
Investing Activities
Capital expenditures for property and equipment		—		—			(23	)		(2	)		—			(25	)
Software capitalization costs		—		—			(12	)		—			—			(12	)
Investment in unconsolidated affiliates		—		—			(40	)		—			—			(40	)
Net cash used in investing activities		—		—			(75	)		(2	)		—			(77	)
Financing Activities
Issuance of non-recourse debt		—		—			—			350			—			350
Repayment of debt		—		(7	)		—			—			—			(7	)
Repayment of non-recourse debt		—		—			—			(428	)		—			(428	)
Debt issuance costs		—		—			—			(5	)		—			(5	)
Proceeds from stock option exercises		—		—			1			—			—			1
Intercompany transfers		—		23			60			(93	)		10			—
Net cash (used in) provided by financing activities		—		16			61			(176	)		10			(89	)
Net increase in cash, cash equivalents and restricted cash		—		—			121			12			—			133
Cash, cash equivalents and restricted cash, beginning of period		—		—			128			23			—			151
Cash, cash equivalents and restricted cash, end of period	$	—	$	—		$	249		$	35		$	—		$	284

Note 21: Subsequent Events

In October 2018, the construction on a property in Hawaii was completed and the deferred revenue and direct related costs of $154 million and $72 million, respectively, will be recognized in the fourth quarter.

Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2017.

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”). These forward-looking statements are based on our management’s beliefs, expectations and assumptions and information currently available to our management, and are subject to risks and uncertainties. Actual results could differ materially because of factors such as: inherent business, financial and operating risks of the timeshare industry; adverse economic or market conditions that may affect the purchasing and vacationing decisions of consumers or otherwise harm our business; intense competition in the timeshare industry, which could lead to lower revenue or operating margins; the termination of material fee-for-service agreements with third parties; the ability of the Company to manage risks associated with our international activities, including complying with laws and regulations affecting our international operations; exposure to increased economic and operational uncertainties from expanding global operations, including the effects of foreign currency exchange; potential liability under anti-corruption and other laws resulting from our global operations; changes in tax rates and exposure to additional tax liabilities; the impact of future changes in legislation, regulations or accounting pronouncements; acquisitions, joint ventures, and strategic alliances that that may not result in expected benefits and that may have an adverse effect on our business; our dependence on development activities to secure inventory; cyber-attacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position; disclosure of personal data that could cause liability and harm to our reputation; abuse of our advertising or social platforms that may harm our reputation or user engagement; outages, data losses, and disruptions of our online services; claims against us that may result in adverse outcomes in legal disputes; risks associated with our debt agreements and instruments, including variable interest rates, operating and financial restrictions, and our ability to service our indebtedness; the continued service and availability of key executives and employees; and catastrophic events or geopolitical conditions that may disrupt our business. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.

You should not put undue reliance on any forward-looking statements in this Quarterly Report on Form 10-Q. The risk factors discussed in our filings with the Securities and Exchange Commission, including “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017, “Part II – Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, “Part II-Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, and those described from time to time in our future reports could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. We undertake no obligation to publicly update or review any forward-looking statement or information to conform to actual results, whether as a result of new information, future developments, changes in the Company’s expectations, or otherwise, except as required by law.

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” and “rooms” refer to the timeshare properties managed, franchised, owned or leased by us. Of these properties and rooms, a portion are directly owned or leased by us or joint ventures in which we have an interest and the remaining properties and rooms are owned by third-party owners.

“Developed” refers VOI inventory that is sourced from projects developed by HGV.

“Fee for service” refers to VOI inventory that we sell and manage on behalf of third-party developers.

“Just-in-time” refers to VOI inventory that is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.

“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, transient rate, earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and segment Adjusted EBITDA. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-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

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. During the nine months ended September 30, 2018, among other new developments and asset acquisitions, we added two new resorts in New York and one resort in Odawara, Japan, representing 265 units. As of September 30, 2018, we have 51 properties, representing 8,367 units, which are located in iconic vacation destinations such as the Hawaiian Islands, New York City, Orlando and Las Vegas, and feature spacious, condominium-style accommodations with superior amenities and quality service. As of September 30, 2018, we have approximately 304,000 Hilton Grand Vacations Club (the “Club”) members. Club members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 14 industry-leading brands across more than 5,000 properties, as well as numerous experiential vacation options, such as cruises and guided tours.

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

Real Estate Sales and Financing

Our primary product is the marketing and selling of fee-simple VOIs deeded in perpetuity, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week annually at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In 2010, we began sourcing VOIs 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. 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 nine months ended September 30, 2018, sales from fee-for-service, just-in-time and developed inventory sources were 55 percent, 22 percent and 23 percent, respectively, of contract sales. See “—Real Estate Sales Metrics” for additional discussion of contract sales. Based on our trailing twelve months sales pace, we have access to approximately six years of future inventory, with capital efficient arrangements representing approximately 66 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 loans for members purchasing our developed and acquired inventory which generate interest income. Our loans 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 9 percent to 18 percent per annum.

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

	Nine Months Ended September 30,
	2018		2017
Weighted average FICO score		748		738

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 loans have been pledged as collateral in our securitization transactions, which have in the past and may in the future provide funding for our business activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and cash deposits. For additional information see Note 5: 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.

Resort Operations and Club Management

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

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

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

Key Business and Financial Metrics and Terms Used by Management

Real Estate Sales Metrics

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

•

Contract sales represents the total amount of VOI products under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales is not a recognized term under 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.

•

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

•

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

•

Tour flow represents the number of sales presentations given at our sales centers during the period.

•

Volume per guest (“VPG”) represents the sales attributable to tours at our sales locations and is calculated by dividing Contract sales, excluding telesales, by tour flow. We consider VPG to be an important operating measure because it measures the effectiveness of our sales process, combining the average transaction price with closing rate.

Resort and Club Management and Rental Metrics

•

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

For further information see Item 8. Financial Statements and Supplementary Data - Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2017.

EBITDA and Adjusted EBITDA

EBITDA, presented herein, is a financial measure that is not recognized under U.S. GAAP that reflects net income (loss), before interest expense on debt (excluding non-recourse debt), provision for income taxes and depreciation and amortization. Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and certain other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under U.S. GAAP. Some of these limitations are:

•

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

•

EBITDA and Adjusted EBITDA do not reflect our interest expense (excluding interest expense on non-recourse debt), or the cash requirements necessary to service interest or principal payments on our indebtedness;

•

EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;

•

EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

•

EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

•

EBITDA and Adjusted EBITDA do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and

•

EBITDA and Adjusted EBITDA may be calculated differently from other companies in our industry limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

Recent Events

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (commonly referred to as Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”)). We adopted ASC 606 using the modified retrospective method in which the cumulative effect of applying the new standard has been recognized at the date of initial application with an adjustment to our opening balance of retained earnings. This approach applies to all contracts as of January 1, 2018. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements for additional information.

Related Party Transaction

On March 19, 2018, the repurchase was completed and the shares were retired.

Investment in Unconsolidated Affiliates

On March 23, 2018, we entered into an agreement with SCG 1776, LLC, a Delaware limited liability company, an affiliate of Strand Capital Group, LLC and formed 1776 Holding, LLC, a variable interest entity. Because we are not the primary beneficiary, we do not consolidate 1776 Holding, LLC. Pursuant to the agreement, we contributed $5 million in cash for a 50 percent interest in 1776 Holding, LLC, which will construct an approximately 99-unit timeshare resort in Charleston, South Carolina.

Property and Equipment, Inventory and Other Assets

In February 2018, we entered into a commitment to acquire $41 million of real estate for future conversion to timeshare inventory and was recorded in Other assets in our unaudited condensed consolidated financial statements.

In June 2018, we acquired an operating hotel in New York City, New York for $176 million for future conversion to timeshare inventory.

In June 2018, we entered into a commitment to purchase inventory for $52 million in multiple phases through year 2021. In September 2018, the first phase closed for $13 million and was recorded in Inventory in our unaudited condensed consolidated financial statements.

In July 2018, we executed a sale and purchase agreement to acquire a portion of an operating hotel for future conversion to timeshare inventory for $50 million of which we made an initial deposit of $2 million which was recorded as in Other assets in our unaudited condensed consolidated financial statements.

In September 2018, we acquired land in Honolulu, Hawaii for $123 million which will be used to construct a timeshare resort.

See Note 7: Property and Equipment and Note 10: Other Assets in our unaudited condensed consolidated financial statements for additional information.

Debt and Non-recourse Debt

In March 2018, we extended the commitment termination dated on our Timeshare Facility to March 2020. The maturity date was extended 12 months from the commitment date to March 2021. As a result of the extension, we incurred $2 million in debt issuance costs recorded in other assets. During the nine months ended September 30, 2018, we borrowed $313 million and repaid $322 million under the Timeshare Facility.

During the nine months ended September 30, 2018, we borrowed $215 million and repaid $160 million under our revolving credit facility.

See Note 12: Debt and Non-recourse debt in our unaudited condensed consolidated financial statements for additional information.

Other

In May 2018, Kilauea volcano erupted on the southern end of the Big Island of Hawaii forcing two thousand residents to evacuate. Our three Waikoloa resorts are on the Big Island’s western coast, approximately 100 miles from Kilauea volcano. The eruption has not had a material impact on our operations.

In September 2018, Hurricane Florence made landfall in the Carolinas causing flooding along coastal areas. Although certain of our resorts in South Carolina were temporarily closed during the aftermath of Hurricane Florence, neither HGV’s operations or financial performance were significantly impacted by this storm.

Results of Operations

We adopted ASC 606 as of January 1, 2018 using the modified retrospective method. The reported results for the three and nine months ended September 30, 2018 reflects the application of ASC 606 while the reported results for the three and nine months ended September 30, 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”) and ASC 978-605, Real Estate – Time-Sharing Activities, Revenue Recognition, which is also referred to herein as the “previous accounting guidance.”

The following table shows the impact that ASC 606 would have had to our quarterly and annual 2017 operating results, EBITDA and Adjusted EBITDA if we had adopted ASC 606 utilizing the full retrospective method of adoption. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies and Note 3: Revenue from Contracts with Customers in our unaudited condensed consolidated financial statements for additional information.

	2017 Results Adjusted for ASC 606 Adoption
(in millions, except per share data)	First Quarter		Second Quarter		Third Quarter			Fourth Quarter			Full Year
Total revenues	$	387	$	414	$	411		$	424		$	1,636
Total operating expenses		307		340		342			344			1,333
Net income		47		41		39			166			293
Earnings per share:
Basic	$	0.48	$	0.41	$	0.39		$	1.67		$	2.95
Diluted	$	0.48	$	0.41	$	0.39		$	1.66		$	2.94

Net income	$	47	$	41	$	39		$	166		$	293
Interest expense		7		7		7			6			27
Income tax expense (benefit)		26		26		25			(92	)		(15	)
Depreciation and amortization		7		7		7			6			27
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates		—		—	2				1			3
EBITDA		87		81		80			87			335
Other (gain) loss, net		—		—		(1	)		1			—
Share-based compensation expense		3		5		5			2			15
Other adjustment items ⁽¹⁾		1		3		3			5			12
Adjusted EBITDA	$	91	$	89	$	87		$	95		$	362

⁽¹⁾	For the year ended December 31, 2017, amount includes $8 million of costs associated with the spin-off transaction.

Supplemental Information Regarding the Adoption of ASC 606

During periods of construction, we defer revenues and certain related direct expenses from the sales of VOIs until construction is completed. The following tables provide supplemental information for project(s) under construction or completed for the periods presented under the previous accounting guidance:

	2018
($ in millions)	First Quarter		Second Quarter			Third Quarter		Fourth Quarter		Full Year
Sales of VOIs ⁽¹⁾	$	59	$	(87	)	$	58	$	—	$	30
Cost of VOI sales ⁽¹⁾		18		(20	)		18		—		16
Sales, marketing, general and administrative expense ⁽¹⁾		8		(11	)		8		—		5

Number of projects in sales and under construction		2		1			1		—	N/A

⁽¹⁾	Amounts represent increases (decreases) from current accounting guidance to previous accounting guidance.

In all quarters presented for 2017, we deferred revenue and related direct expenses from sales of VOIs for one project under construction.

	2017
($ in millions)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Full Year
Sales of VOIs ⁽¹⁾	$	9	$	13	$	11	$	17	$	50
Cost of VOI sales ⁽¹⁾		5		3		3		5		16
Sales, marketing, general and administrative expense ⁽¹⁾		1		2		2		2		7

⁽¹⁾	Amounts represent increases from current accounting guidance to previous accounting guidance.

Three and Nine Months Ended September 30, 2018 Compared with the Three and Nine Months Ended September 30, 2017

Segment Results

We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 18: Business Segments in our unaudited condensed consolidated financial statements. We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment revenues. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses it to manage our business and material limitations on its usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” The following tables set forth revenues and Adjusted EBITDA by segment:

	Three Months Ended September 30,						Variance						Nine Months Ended September 30,						Variance
($ in millions)	2018			2017			$			%			2018			2017			$		%
Revenues:
Real estate sales and financing	$	291		$	310		$	(19	)		(6.1	)%	$	967		$	916		$	51		5.6	%
Resort operations and club management		108			90			18			20.0			304			270			34		12.6
Segment revenues		399			400			(1	)		(0.3	)		1,271			1,186			85		7.2
Cost reimbursements		36			34			2			5.9			110			102			8		7.8
Intersegment eliminations⁽¹⁾		(8	)		(8	)		—			—			(24	)		(24	)		—		—
Total revenues	$	427		$	426		$	1			0.2		$	1,357		$	1,264		$	93		7.4

⁽¹⁾	Refer to Note 18: Business Segments in our unaudited condensed consolidated financial statements for details on the intersegment eliminations.

The following table reconciles net income, our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:

	Three Months Ended September 30,					Variance						Nine Months Ended September 30,					Variance
($ in millions)	2018		2017			$			%			2018		2017			$			%
Net Income	$	41	$	43		$	(2	)		(4.7	)%	$	178	$	144		$	34			23.6	%
Interest expense		7		7			—			—			22		21			1			4.8
Income tax expense		15		28			(13	)		(46.4	)		64		87			(23	)		(26.4	)
Depreciation and amortization		9		7			2			28.6			25		21			4			19.0
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates		1		2			(1	)		(0.5	)		3		2			1			50
EBITDA		73		87			(14	)		(16.1	)		292		275			17			6.2
Other loss		1		—			1		NM⁽¹⁾				1		—			1		NM⁽¹⁾
Gain on foreign currency transactions		—		(1	)		1			100.0			—		(1	)		1			100.0
Share-based compensation expense		5		5			—			—			13		13			—			—
Other adjustment items⁽²⁾		1		3			(2	)		66.7			11		7			4			57.1
Adjusted EBITDA	$	80	$	94		$	(14	)		(14.9	)	$	317	$	294		$	23			7.8

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

⁽²⁾	Includes costs associated with the spin-off transaction of $2 million for both three months ended September 30, 2018 and 2017 and $9 million and $5 million for the nine months ended September 30, 2018 and 2017, respectively.

The following table shows our segment Adjusted EBITDA to Adjusted EBITDA.

	Three Months Ended September 30,						Variance						Nine Months Ended September 30,						Variance
($ in millions)	2018			2017			$			%			2018			2017			$			%
Adjusted EBITDA:
Real estate sales and financing⁽²⁾	$	67		$	81		$	(14	)		(17.3	)%	$	274		$	263		$	11			4.2	%
Resort operations and club management⁽²⁾		62			50			12			24.0			179			153			26			17.0
Segment Adjusted EBITDA		129			131			(2	)		(1.5	)		453			416			37			8.9
Adjustments:
Adjusted EBITDA from unconsolidated affiliates		2			3			(1	)		(33.3	)		3			3			—			—
License fee expense		(25	)		(22	)		(3	)		13.6			(73	)		(65	)		(8	)		12.3
General and administrative⁽³⁾		(26	)		(18	)		(8	)		44.4			(66	)		(60	)		(6	)		10.0
Adjusted EBITDA	$	80		$	94		$	(14	)		(14.9	)	$	317		$	294		$	23			7.8

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

⁽²⁾ Includes intersegment eliminations and other adjustments.

⁽³⁾ Excludes share-based compensation and other adjustment items.

Real Estate Sales and Financing

Real estate sales and financing segment revenues decreased by $19 million for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) a $18 million decrease in sales revenue and (ii) a $3 million decrease in marketing revenue and other fees, partially offset by an increase of $2 million in financing revenue. The decrease in sales revenue of $18 million was primarily related to the deferral of revenue recognition on a project under construction, partially offset by a $28 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. The decrease in marketing revenue was partially due to the recognition of certain sales incentives on a net versus gross basis as a result of ASC 606. The increase in financing revenue was primarily due to an increase in interest income from higher outstanding timeshare financing receivables balances. Real

estate sales and financing segment Adjusted EBITDA decreased by $14 million for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to the decrease in revenue associated with the segment discussed above as well as a $4 million increase in sales and marketing and financing expenses, partially offset by a $11 million decrease in cost of VOI sales.

Real estate sales and financing segment revenues increased by $51 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) a $61 million increase in sales revenue and (ii) a $8 million increase in financing revenue, partially offset by a decrease of $18 million in marketing revenue and other fees. The increase in sales revenue of $61 million was primarily due to (i) an increase related to revenue recognized from the completion of a timeshare resort under construction partially offset by an increase in sales from a project under construction which are deferred until construction is completed and (ii) a $40 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. The increase in financing revenue was primarily due to an increase in interest income from higher outstanding timeshare financing receivable balances. The decrease in marketing revenue was primarily due to (i) a $10 million one-time benefit recognized in the second quarter of 2017 related to a reduction of expected redemptions of expired discounted vacation packages and (ii) recognition of certain sales incentives on a net versus gross basis as a result of ASC 606. Real estate sales and financing segment Adjusted EBITDA increased by $11 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to the increase in revenues associated with the segment discussed above, partially offset by (i) a $39 million increase in sales and marketing and financing expense and (ii) a $2 million increase in cost of VOI sales.

Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.

Resort Operations and Club Management

Resort operations and club management segment revenues increased by $18 million for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) an increase of $3 million in resort and club management revenues primarily due to an increase in Club members and (ii) an increase of $15 million in rental and ancillary services revenues as a result of higher rental room revenue from transient guests primarily due to the acquisition of an operating hotel in New York City, New York in June 2018 (see Recent Events for additional information) and higher club inventory rentals at our developed and fee-for-service properties. Resort operations and club management segment Adjusted EBITDA increased by $12 million for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to the increases in revenues associated with the segment, partially offset by an increase of $6 million in segment expenses.

Resort operations and club management segment revenues increased by $34 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) an increase of $8 million in resort and club management revenues primarily due to an increase in Club members and (ii) an increase of $26 million in rental and ancillary services revenues as a result of higher rental room revenue from transient guests primarily due to the acquisition of an operating hotel in New York City, New York in June 2018 (see Recent Events for additional information) and higher club inventory rentals at our developed and fee-for-service properties. Resort operations and club management segment Adjusted EBITDA increased by $26 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to the increases in revenues associated with the segment, partially offset by an increase of $8 million in segment expenses. Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.

Real Estate Sales and Financing Segment

Real Estate

	Three Months Ended September 30,					Variance						Nine Months Ended September 30,						Variance
($ in millions, except Tour flow and VPG)	2018		2017			$			%			2018			2017			$		%
Sales of VOIs, net	$	99	$	145		$	(46	)		(31.7	)%	$	427		$	406		$	21		5.2	%
Adjustments:
Fee-for-service sales⁽²⁾		211		169			42			24.9			574			508			66		13.0
Loan loss provision		20		19			1			5.3			50			45			5		11.1
Reportability and other⁽³⁾		34		(7	)		41		NM⁽¹⁾				(1	)		(23	)		22	NM⁽¹⁾
Contract sales	$	364	$	326		$	38			11.7		$	1,050		$	936		$	114		12.2
Tour flow		94,816		87,346			7,470			8.6			266,785			246,865			19,920		8.1
VPG	$	3,648	$	3,555		$	93			2.6		$	3,732		$	3,590		$	142		4.0

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

⁽²⁾	Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.

⁽³⁾	Includes adjustments for revenue recognition, including deferrals related to sales of VOIs under construction and rescission, sales incentives, as well as adjustments related to granting credit to customers for their existing ownership when upgrading into fee-for-service and developed projects.

Contract sales increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to an increase in tour flow which drives the increase in marketing expense. VPG increased due to a 0.2 percent and 1.0 percent increase in average transaction price for the three and nine months ended September 30, 2018, respectively.

	Three Months Ended September 30,						Variance						Nine Months Ended September 30,						Variance
($ in millions)	2018			2017			$			%			2018			2017			$			%
Sales of VOIs, net	$	99		$	145		$	(46	)		(31.7	)%	$	427		$	406		$	21			5.2	%
Sales, marketing, brand and other fees		152			127			25			19.7			423			401			22			5.5
Less:
Marketing revenue and other fees		31			34			(3	)		(8.8	)		91			109			(18	)		(16.5	)
Sales revenue		220			238			(18	)		(7.6	)		759			698			61			8.7
Less:
Cost of VOI sales		29			40			(11	)		(27.5	)		109			107			2			1.9
Sales and marketing expense, net⁽¹⁾		135			132			3			2.3			413			363			50			13.8
Real estate margin	$	56		$	66			(10	)		(15	)	$	237		$	228		$	9			3.9
Real estate margin percentage		25.5	%		27.7	%								31.2	%		32.7	%

⁽¹⁾

Includes revenue recognized through our marketing programs for existing owners and prospective first-time buyers. In December 2017, we revised our definition of Sales and marketing expense, net to include revenues associated with sales incentives, title service and document compliance revenue to better align with how we evaluate the results of our real estate operations. This adjustment was retrospectively applied to prior period(s) to conform to current presentation.

Sales revenue decreased for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to the deferral of revenue recognition from the sales of a project under construction, partially offset by a $28 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. Cost of VOI sales decreased for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to the deferral of direct expenses from the sales of a project under construction. Sales and marketing expense, net increased for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to higher sales and marketing expense which drove higher contract sales.

Sales revenue increased for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) a $112 million increase related to revenue recognized from the completion of a timeshare resort under

construction partially offset by an increase in sales from a project under construction which are deferred until construction is completed and (ii) a $40 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. Cost of VOI sales and Sales and marketing expense, net, increased for the nine months ended September 30, 2018, compared to the same period in 2017, primarily as a result of (i) higher expenses as a result of the completion of a resort which was previously deferred, partially offset by deferred expenses from sales of a project under construction, (ii) a $10 million reduction of marketing revenue due to a one-time benefit recognized in the second quarter of 2017 related to a reduction of expected redemptions of expired discounted vacation packages and (iii) higher sales and marketing expense which drove higher contract sales.

The decrease in real estate margin and margin percentage for the three months ended September 30, 2018, as well as real estate margin percentage for the nine months ended September 30, 2018, compared to the same periods in 2017, was primarily due to the aforementioned decreases in revenue associated with the deferral of revenues and direct expenses of a timeshare resort under construction for which certain indirect selling costs are not deferred. The increase in real estate margin for the nine months ended September 30, 2018, compared to the same period in 2017, is primarily due to an increase in revenue, partially offset by an increase in expense.

Financing

	Three Months Ended September 30,						Variance					Nine Months Ended September 30,						Variance
($ in millions)	2018			2017			$		%			2018			2017			$		%
Interest income	$	35		$	33		$	2		6.1	%	$	103		$	97		$	6		6.2	%
Other financing revenue		5			5			—		—			14			12			2		16.7
Financing revenue		40			38			2		5.3			117			109			8		7.3
Consumer financing interest expense		6			6			—		—			16			16			—		—
Other financing expense		6			5			1		20.0			19			16			3		18.8
Financing expense		12			11			1		9.1			35			32			3		9.4
Financing margin	$	28		$	27		$	1		3.7		$	82		$	77		$	5		6.5
Financing margin percentage		70.0	%		71.1	%							70.1	%		70.6	%

Financing revenue increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to an increase of $2 million and $6 million, respectively, in interest income resulting from a higher average outstanding timeshare financing receivables balance during the three and nine months ended September 30, 2018. Financing margin increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to the aforementioned increases in revenue, partially offset by expense. Financing margin percentage remaining relatively flat for the three and nine months ended September 30, 2018.

Resort Operations and Club Management Segment

Resort and Club Management

	Three Months Ended September 30,						Variance						Nine Months Ended September 30,						Variance
($ in millions)	2018			2017			$			%			2018			2017			$		%
Club management revenue	$	25		$	22		$	3			13.6	%	$	71		$	63		$	8		12.7	%
Resort management revenue		15			15			—			—			45			45			—		—
Resort and club management revenues		40			37			3			8.1			116			108			8		7.4
Club management expense		6			7			(1	)		(14.3	)		19			18			1		5.6
Resort management expense		5			5			—			—			14			14			—		—
Resort and club management expenses		11			12			(1	)		(8.3	)		33			32			1		3.1
Resort and club management margin	$	29		$	25		$	4			16.0		$	83		$	76		$	7		9.2
Resort and club management margin percentage		72.5	%		67.6	%								71.6	%		70.4	%

Resort and club management revenues increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to a trailing twelve months increase of approximately 21,000 in Club members and higher rates pertaining to annual dues and transaction fees.

Resort and club management margin and margin percentage increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to the aforementioned increases in revenues.

Rental and Ancillary Services

	Three Months Ended September 30,						Variance					Nine Months Ended September 30,						Variance
($ in millions)	2018			2017			$		%			2018			2017			$		%
Rental revenues	$	53		$	39		$	14		35.9	%	$	144		$	120		$	24		20.0	%
Ancillary services revenues		7			6			1		16.7			20			18			2		11.1
Rental and ancillary services revenues		60			45			15		33.3			164			138			26		18.8
Rental expenses		30			25			5		20.0			78			73			5		6.8
Ancillary services expense		7			5			2		40.0			17			15			2		13.3
Rental and ancillary services expenses		37			30			7		23.3			95			88			7		8.0
Rental and ancillary services margin	$	23		$	15		$	8		53.3		$	69		$	50		$	19		38.0
Rental and ancillary services margin percentage		38.3	%		33.3	%							42.1	%		36.2	%

Rental and ancillary services revenues increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to an increase of $14 million and $24 million, respectively, in rental revenues as a result of higher rental room revenue from transient guests due to the acquisition of an operating hotel in New York City, New York in June 2018 (see Recent Events for additional information) and higher club inventory rentals at our developed and fee-for-service properties.

Rental and ancillary services margin and margin percentage increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primary due to the aforementioned increases in revenues.

Other Operating Expenses

	Three Months Ended September 30,				Variance					Nine Months Ended September 30,				Variance
($ in millions)	2018		2017		$		%			2018		2017		$		%
General and administrative	$	31	$	23	$	8		34.8	%	$	84	$	75	$	9		12.0	%
Depreciation and amortization		9		7		2		28.6			25		21		4		19.0
License fee expense		25		22		3		13.6			73		65		8		12.3

Other operating expenses increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to (i) higher consulting and software license fees relating to the Oracle cloud based information system implemented during second quarter of 2018, (ii) higher depreciation and amortization due to additional software placed into service and (iii) higher license fee expense as a result of increases in revenues subject to license fees.

Non-Operating Expenses

	Three Months Ended September 30,						Variance						Nine Months Ended September 30,					Variance
($ in millions)	2018			2017			$			%			2018		2017			$			%
Interest expense	$	7		$	7		$	—			—		$	22	$	21		$	1			4.8	%
Equity in earnings from unconsolidated affiliates		(1	)		(1	)		—			—			—		(1	)		1			(100.0	)
Gain on foreign currency transactions		—			(1	)		1			(100.0	)		—		(1	)		1			(100.0	)
Other loss		1			—			1		NM⁽¹⁾				1		—			1		NM⁽¹⁾
Income tax expense		15			28			(13	)		(46.4	)		64		87			(23	)		(26.4	)

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

Equity in earnings from unconsolidated affiliates relates primarily to our 25 percent interest in BRE Ace LLC. See Note 9: Investment in unconsolidated affiliate in our Annual Report on Form 10-K for the year ended December 31, 2017 in our audited consolidated financial statements for additional information.

Income tax expense decreased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to a decrease in the corporate income tax rate as a result of the Tax Cut and Jobs Act that was enacted on December 22, 2017.

Liquidity and Capital Resources

Overview

As of September 30, 2018, we had total cash and cash equivalents of $212 million, including $67 million of restricted cash. The restricted cash balance relates to escrowed cash from our sales of our VOIs and reserves related to our non-recourse debt. See Note 12: Debt and Non-Recourse Debt in our unaudited condensed consolidated financial statements for additional information.

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including payroll and related benefits, legal costs, operating costs associated with the operation of our resorts and sales centers, interest and scheduled principal payments on our outstanding indebtedness and capital expenditures for renovations and maintenance at our offices and sales centers. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, purchase commitments (near and long-term) and costs associated with potential acquisitions and development projects.

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

Sources and Uses of Our Cash

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

	Nine Months Ended September 30,						Variance
($ in millions)	2018			2017			$			%
Net cash (used in) provided by:
Operating activities	$	(205	)	$	299		$	(504	)	NM⁽¹⁾
Investing activities		(35	)		(77	)		42			(54.5	)%
Financing activities		155			(89	)		244		NM⁽¹⁾

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

Operating Activities

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

sales mix of VOIs; over time, we generally receive more cash from the sale of an owned VOI as compared to that from a fee-for-service sale.

Net cash flows (used in) provided by operating activities decreased by $504 million during the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) purchases of real estate for future conversion to inventory of $299 million, (ii) deposits of $43 million related to an inventory purchase commitments, (iii) a federal tax payment of $63 million made in January 2018 that was deferred from 2017 pursuant to a tax relief program for regions impacted by Hurricane Irma (iv) an increase in inventory spending and (v) a license fee payment pertaining to the amount accrued in the fourth quarter of 2017.

The following table exhibits our VOI inventory spending for the nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30,
($ in millions)	2018		2017
VOI spending - owned properties	$	77	$	31
VOI spending - fee-for-service upgrades		35		41
Real estate for future conversion into inventory		299		—
Inventory deposits		43		—
Total VOI inventory spending	$	454	$	72

Investing Activities

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

	Nine Months Ended September 30,						Variance
($ in millions)	2018			2017			$			%
Capital expenditures for property and equipment	$	(29	)	$	(25	)	$	(4	)		16.0	%
Software capitalization costs		(12	)		(12	)		—			—
Return of investment from unconsolidated affiliates		11			—			11		NM⁽¹⁾
Investment in unconsolidated affiliates		(5	)		(40	)		35			(87.5	)
Net cash used in investing activities	$	(35	)	$	(77	)	$	42			(54.5	)

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

The change in net cash used in investing activities for the nine months ended September 30, 2018, compared to the same period in 2017, was primarily due to (i) a reduction in investment in unconsolidated affiliates and (ii) an $11 million distribution received from our 25 percent interest in BRE Ace LLC, partially offset by higher capital expenditures for property and equipment.

Our capital expenditures include spending related to technology, buildings and leasehold improvements used to support sales and marketing locations, resort operations and corporate activities. We believe the renovations of our existing assets are necessary to stay competitive in the markets in which we operate.

Financing Activities

The following table summarizes our net provided by cash (used in) financing activities:

	Nine Months Ended September 30,						Variance
($ in millions)	2018			2017			$			%
Issuance of debt	$	215		$	—		$	215		NM⁽¹⁾
Issuance of non-recourse debt		663			350			313			89.4	%
Repurchase and retirement of common stock		(112	)		—			(112	)	NM⁽¹⁾
Repayment of debt		(168	)		(7	)		(161	)	NM⁽¹⁾
Repayment of non-recourse debt		(436	)		(428	)		(8	)		1.9
Debt issuance costs		(6	)		(5	)		(1	)		20.0
Proceeds from stock option exercises		—			1			(1	)		(100.0	)
Payment of withholding taxes on vesting of restricted stock units		(4	)		—			(4	)	NM⁽¹⁾
Capital contribution		3			—			3		NM⁽¹⁾
Net cash provided by (used in) financing activities	$	155		$	(89	)	$	244		NM⁽¹⁾

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

The change in net cash provided by (used in) financing activities for the nine months ended September 30, 2018, compared to the same period in 2017, was primarily due to (i) borrowings of $215 million and $313 million, respectively, under our revolving credit facility and Timeshare Facility to facilitate the funding of development and asset acquisitions (see Recent Events for additional information) as well as working capital needs, (ii) the issuance of $350 million securitized debt at favorable interest rates, of which $322 million was used to repay a portion of our Timeshare Facility for collateral utilized in the securitization, (iii) the repurchase of 2,500,000 shares of our common stock from HNA (see Recent Events for additional information), (iv) repayments $114 million under our other securitized debts and (vi) repayments of $160 million and $8 million, respectively, under our revolving credit facility and senior secured term loan.

Contractual Obligations

The following table summarizes our significant contractual obligations as of September 30, 2018:

	Payments Due by Period
($ in millions)	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Debt⁽¹⁾	$	683	$	39	$	76	$	247	$	321
Non-recourse debt⁽¹⁾		879		189		449		131		110
Purchase commitments		501		127		239		100		35
Total contractual obligations	$	2,063	$	355	$	764	$	478	$	466

⁽¹⁾	Includes principal, as well as estimated interest payments. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 2.26 percent as of September 30, 2018.

As of September 30, 2018, our contractual obligations relating to our operating leases has not materially changed from what was reported in our Annual Report on Form 10-K for the year ended December 31, 2017.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of September 30, 2018 consisted of $501 million of certain commitments with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under the Hilton Grand Vacations brand. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 19: Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.

Subsequent Event

In October 2018, the construction on a property in Hawaii was completed, and the deferred revenue and direct related costs of $154 million and $72 million, respectively, will be recognized in the fourth quarter.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2017. We have updated our revenue recognition policies in conjunction with our adoption of ASC 606 as further described in Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements.

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates and currency exchange rates. We manage our exposure to these risks by monitoring available financing alternatives and through pricing policies that may take into account currency exchange rates. Our exposure to market risk has not materially changed from what we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

Interest Rate Risk

We are exposed to interest rate risk on our variable-rate debt, comprised of the term loans, revolver and our timeshare facility, of which the timeshare facility is without recourse to us. The interest rates are based on one-month LIBOR and we are most vulnerable to changes in this rate.

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

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

The following table sets forth the contractual maturities, weighted-average interest rates and the total fair values as of September 30, 2018, for our financial instruments that are materially affected by interest rate risk:

				Maturities by Period
($ in millions)	Weighted Average Interest Rate⁽¹⁾			2018		2019		2020		2021		2022		There- after		Total⁽²⁾		Fair Value
Assets:
Fixed-rate securitized timeshare financing receivables		11.893	%	$	22	$	90	$	90	$	89	$	86	$	328	$	705	$	741
Fixed-rate unsecuritized timeshare financing receivables		12.682	%		26		46		50		54		58		333		567		598
Liabilities:⁽³⁾
Fixed-rate debt		3.964	%		44		189		166		88		64		443		994		985
Variable-rate debt⁽⁴⁾		4.105	%		2		10		10		335		—		—		357		364

⁽¹⁾	Weighted-average interest rate as of September 30, 2018.

⁽²⁾	Amount excludes unamortized deferred financing costs.

⁽³⁾	Includes debt and non-recourse debt.

⁽⁴⁾	Variable-rate debt includes principal outstanding debt of $237 million and non-recourse debt of $120 million as of September 30, 2018. See Note 12: Debt & Non-recourse Debt in our unaudited condensed consolidated financial statements for additional information.

Foreign Currency Exchange Rate Risk

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

ITEM 4.

Controls and Procedures

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Accounting Officer (person currently performing functions similar to those performed by a principal financial officer), does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) or our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated.

In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1.

Legal Proceedings

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which are not reasonably estimable. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of September 30, 2018 will not have a material effect on our unaudited condensed consolidated financial statements.

Item 1A.

Risk Factors

As of September 30, 2018, there have been no material changes from the risk factors previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2017 and in Item 1A of Part II of our Quarterly Report on Form 10-Q for the period ended June 30, 2018, in each case under the heading “Risk Factors.” These risk factors may be important to understanding statements in this Form 10-Q and should be read in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

The risks described in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our Quarterly Report on Form 10-Q for the period ended June 30, 2018 contain forward-looking statements, and they may not be the only risks facing the Company. The business, financial condition and operating results of the Company can be affected by the risk factors described in the foregoing reports and by other factors currently unknown or that management presently believes not to be material. Any one or more of such factors could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and the trading price of our common stock. Because of these factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.Exhibits

Exhibit No.		Description

10.1		Form of Amended and Restated Performance and Service Based Restricted Stock Unit Agreement (for use for all named executive officers other than Mr. Mark Wang) (incorporated by reference to Exhibit 10.1 to Hilton Grand Vacation Inc.’s Current Report on Form 8-K (File No. 001-37794) filed on August 9, 2018). †

10.2		Form of Amended and Restated Performance and Service Based Restricted Stock Unit Agreement (for Mr. Mark Wang) (incorporated by reference to Exhibit 10.2 to Hilton Grand Vacation Inc.’s Current Report on Form 8-K (File No. 001-37794) filed on August 9, 2018). †

10.3		Hilton Resorts Corporation 2017 Executive Deferred Compensation Plan (as amended and restated effective as of September 1, 2018). †**

11.1		Statement regarding computation of earnings per share. See condensed consolidated statements of operations on page 3 of this Form 10-Q

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Label Linkbase Document.

101.PRE		XBRL Taxonomy Presentation Linkbase Document.

†	Denotes management contract or compensatory plan or arrangement.

**	Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 1^st day of November 2018.


HILTON GRAND VACATIONS INC.

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

By:	/s/ Allen J. Klingsick
Name:	Allen J. Klingsick
Title:	Senior Vice President and Chief Accounting Officer (currently performing functions substantially similar to those performed by a Principal Financial Officer)