UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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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
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of |
(I.R.S. Employer |
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Incorporation or Organization) |
Identification No.) |
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(Address of Principal Executive Offices) |
(Zip Code) |
Registrant’s Telephone Number, Including Area Code (
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
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.
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Accelerated Filer |
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Non-Accelerated Filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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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).
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 24, 2020 was
HILTON GRAND VACATIONS INC.
FORM 10-Q TABLE OF CONTENTS
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Item 1. |
2 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
25 |
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Item 3. |
42 |
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Item 4. |
43 |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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1
PART I FINANCIAL INFORMATION
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Item 1. |
Financial Statements |
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
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June 30, |
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December 31, |
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2020 |
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2019 |
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(unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Accounts receivable, net of allowance for credit losses of $ |
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Timeshare financing receivables, net |
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Inventory |
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Property and equipment, net |
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Operating lease right-of-use assets, net |
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Investments in unconsolidated affiliates |
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Intangible assets, net |
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Other assets |
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TOTAL ASSETS (variable interest entities - $ |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Liabilities: |
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Accounts payable, accrued expenses and other |
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$ |
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$ |
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Advanced deposits |
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Debt, net |
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Non-recourse debt, net |
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Operating lease liabilities |
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Deferred revenues |
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Deferred income tax liabilities |
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Total liabilities (variable interest entities - $ |
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Commitments and contingencies - see Note 19 |
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Equity: |
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Preferred stock, $ issued or outstanding as of June 30, 2020 and December 31, 2019 |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated retained earnings |
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Total equity |
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TOTAL LIABILITIES AND EQUITY |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
2
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in millions, except per share amounts)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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Revenues |
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Sales of VOIs, net |
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$ |
— |
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$ |
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$ |
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$ |
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Sales, marketing, brand and other fees |
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Financing |
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Resort and club management |
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Rental and ancillary services |
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Cost reimbursements |
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Total revenues |
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Expenses |
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Cost of VOI sales |
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(1 |
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Sales and marketing |
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Financing |
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Resort and club management |
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Rental and ancillary services |
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General and administrative |
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Depreciation and amortization |
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License fee expense |
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Cost reimbursements |
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Total operating expenses |
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Interest expense |
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( |
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Equity in earnings from unconsolidated affiliates |
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Other loss, net |
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( |
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( |
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( |
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Income (Loss) before income taxes |
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( |
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( |
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Income tax benefit (expense) |
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( |
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( |
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Net income (loss) |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Earnings (Loss) per share: |
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Basic |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Diluted |
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$ |
( |
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$ |
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$ |
( |
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$ |
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See notes to unaudited condensed consolidated financial statements.
3
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
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Six Months Ended June 30, |
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2020 |
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2019 |
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Operating Activities |
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Net income (loss) |
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$ |
( |
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$ |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Amortization of deferred financing costs, contract costs, and other |
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Provision for financing receivables losses |
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Other loss, net |
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Share-based compensation |
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Deferred income tax benefit |
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( |
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Equity in earnings from unconsolidated affiliates |
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( |
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( |
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Net changes in assets and liabilities: |
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Accounts receivable, net |
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( |
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Timeshare financing receivables, net |
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( |
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Inventory |
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( |
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( |
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Purchases and development of real estate for future conversion to inventory |
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( |
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Other assets |
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( |
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( |
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Accounts payable, accrued expenses and other |
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( |
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Advanced deposits |
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Deferred revenues |
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Net cash provided by operating activities |
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Investing Activities |
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Capital expenditures for property and equipment |
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( |
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( |
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Software capitalization costs |
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( |
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( |
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Investments in unconsolidated affiliates |
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— |
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( |
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Net cash used in investing activities |
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( |
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( |
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Financing Activities |
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Issuance of debt |
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Issuance of non-recourse debt |
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Repayment of debt |
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( |
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( |
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Repayment of non-recourse debt |
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( |
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( |
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Debt issuance costs |
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( |
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( |
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Repurchase and retirement of common stock |
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( |
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( |
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Payment of withholding taxes on vesting of restricted stock units |
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( |
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( |
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Proceeds from employee stock plan purchases |
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— |
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Other financing activity |
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( |
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( |
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Net cash provided by (used in) financing activities |
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( |
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Net increase in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
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$ |
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$ |
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Supplemental disclosure of non-cash operating activities: |
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Non-cash transfers from Inventory to Property and Equipment(1) |
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$ |
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$ |
— |
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Supplemental disclosure of non-cash financing activities: |
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Issuance of other debt |
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$ |
— |
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$ |
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(1) |
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See notes to unaudited condensed consolidated financial statements.
4
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in millions)
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Additional |
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Accumulated |
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Common Stock |
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Paid-in |
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Retained |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Equity |
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Balance as of December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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Net income |
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Activity related to share-based compensation |
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( |
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Repurchase and retirement of common stock |
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( |
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( |
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( |
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( |
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Balance as of March 31, 2020 |
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Net loss |
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( |
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( |
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Activity related to share-based compensation |
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Balance as of June 30, 2020 |
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$ |
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$ |
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$ |
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Additional |
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Accumulated |
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Common Stock |
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Paid-in |
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Retained |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Equity |
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Balance as of December 31, 2018 |
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$ |
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$ |
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$ |
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$ |
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Net income |
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Activity related to share-based compensation |
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Repurchase and retirement of common stock |
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( |
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( |
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( |
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( |
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Balance as of March 31, 2019 |
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Net income |
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Activity related to share-based compensation |
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Repurchase and retirement of common stock |
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( |
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( |
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( |
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( |
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Balance as of June 30, 2019 |
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$ |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
5
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; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts; and managing our points-based Hilton Grand Vacations Club exchange program (collectively the “Club”). As of June 30, 2020, we had
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, 2019, included in our Annual Report on Form 10-K filed with the SEC on March 2, 2020.
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.
COVID-19
The novel coronavirus (“COVID-19”) pandemic has significantly negatively impacted the hospitality, travel and leisure industries due to various mandates and orders to close non-essential businesses, impose travel restrictions, require “stay-at-home” and/or self-quarantine, and require similar actions. Such restrictions and directives have resulted in cancellations and significant reductions in travel around the world, as well as the negative global economic conditions resulting from the impact of COVID-19. As a result of the reduction in travel, during the first quarter of 2020 we closed substantially all of our resorts and sales centers.
In addition, in response to the impact of COVID-19, we have taken actions to ensure the continuity of our business and operations, including furloughing approximately 67 percent of our employees, implementing salary reductions for the remaining active employees, eliminating all discretionary spending, and reducing our planned investment in new inventory by approximately $
Prior to re-opening our resorts and sales centers, we introduced the HGV Enhanced Care Guidelines, designed to provide owners, guests and team members with the highest level of cleaning protocols and safety standards recommended by the Center for Disease Control and Prevention and cleaning solutions approved by the Environmental Protection Agency in response to the COVID-19 pandemic. Along with providing personal protective equipment to team members, these Enhanced Care Guidelines include low-touch arrivals and departures, frequent and thorough cleaning, reduction of paper
6
items, reduced capacity for our pool decks and fitness centers, and new technologies. While operations were suspended, essential resort personnel worked diligently maintaining the resorts for a safe re-opening. Annual deep cleanings, typically scheduled during slower seasons, were moved up and completed, allowing the resorts to be in top shape when owners and guests arrive.
Beginning in May 2020, various states and counties started to allow gradual relaxation of restrictions on activities and a resumption of businesses. In response, we began a phased reopening of resorts and resumption of our business activities during the second quarter of 2020, but under new operating guidelines and with safety measures. As of June 30, 2020, we have approximately two thirds of our resorts and sales centers open and currently operating however, many of our resorts and sales centers are operating with significant capacity constraints and subject to various safety measures.
While we plan to continue to reopen our resorts and resume our business as conditions permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity. Further, various state and local government officials may issue new or revised orders that are different than current ones under which we are operating. Accordingly, there remains significant uncertainty as to the degree of impact and duration of the conditions stemming from the ongoing pandemic on our revenues, net income and other operating results, as well as our business and operations generally. Any significantly extended duration or worsening of the conditions associated with the pandemic may adversely impact our liquidity in the longer term, including our ability to finance our day-to-day business and operations, and may adversely affect our ability to comply with our financial covenants under our debt obligations notwithstanding the recent amendments discussed above.
Summary of Significant Accounting Policies
Accounts Receivable and Allowance for Credit Losses
Accounts receivable primarily consists of trade receivables and is reported at the customers’ outstanding balances, less any allowance for credit losses. The expected credit losses are measured using an expected-loss model that reflects the risk of loss and considers the losses expected over the outstanding period of the receivable.
Cloud Computing Arrangements
We capitalize certain costs associated with cloud computing arrangements (“CCAs”). These costs are included in Other assets in our condensed consolidated balance sheets and are expensed in the same line as the hosting arrangement in our condensed consolidated statements of operations using the straight-line method over the assets’ estimated useful lives, which is generally three to
Derivative Instruments
We use derivative instruments as part of our overall strategy to manage our exposure to market risks primarily associated with fluctuations in interest rates and do not use derivatives for trading or speculative purposes. We record the derivative instrument at fair value either as an asset or liability. We assess the effectiveness of our hedging instruments quarterly and record changes in fair value in accumulated other comprehensive income (“AOCI”) for the effective portion of the hedge and record the ineffectiveness of a hedge immediately in earnings in our condensed consolidated statements of operations. We release the derivative’s gain or loss from AOCI to match the timing of the underlying hedged items’ effect on earnings.
7
Recently Issued Accounting Pronouncements
Adopted Accounting Standards
On January 1, 2020, we adopted Accounting Standards Update (ASU) No. 2016-13, (“ASU 2016-13”), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), using the modified retrospective approach. The new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis are measured using an expected-loss model, replacing the current incurred-loss model, and recorded through an allowance for credit losses. The adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements and related disclosures and no cumulative adjustment was recorded primarily as our timeshare financing receivables are recorded net of an allowance that is calculated in accordance with ASC 606, Revenue from Contracts with Customers.
On January 1, 2020, we adopted 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. This ASU has been adopted using the retrospective approach. Accordingly, previously reported financial information has been restated to reflect the application of the new standard to the comparative periods presented. The adoption of ASU 2018-15 did not have a material impact on our condensed consolidated financial statements.
In March 2020, the SEC issued a final rule, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, which simplifies the disclosure requirements related to registered securities under Rule 3-10 of Regulation S-X. The rule replaces the requirement for a parent entity to provide detailed disclosures with regard to guarantors of registered debt offerings within the footnotes to the consolidated financial statements. Under the final rule, a parent entity is required to present summarized financial information of the issuers’ and guarantors’ balance sheets and statements of operations on a consolidated basis. It also requires qualitative disclosures with respect to information about guarantors and the terms and conditions of guarantees. These disclosures may be provided outside the footnotes to the Company’s consolidated financial statements. We early adopted the reporting requirements of the rule in the second quarter of 2020 and elected to provide these disclosures in Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Accounting Standards Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and which also clarifies and amends existing guidance to improve consistent application. The provisions of this ASU are effective for reporting periods after December 15, 2020. We are currently evaluating the effect that this ASU will have on our condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the effect that this ASU will have on our condensed consolidated financial statements.
8
Note 3: Revenue from Contracts with Customers
Disaggregation of Revenue
The following tables show our disaggregated revenues by segment from contracts with customers. We operate our business in the following
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Real Estate and Financing Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOIs, net |
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Sales, marketing, brand and other fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Interest income |
|
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|
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|
|
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|
Other financing revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate and financing segment revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Resort Operations and Club Management Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Club management |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Resort management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
Ancillary services |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations and club management segment revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Contract Balances
The following table provides information on our accounts receivable from contracts with customers which are included in Accounts receivable, net on our condensed consolidated balance sheets:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Receivables |
|
$ |
|
|
|
$ |
|
|
The following table presents the composition of our contract liabilities.
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Contract liabilities: |
|
|
|
|
|
|
|
|
|
Advanced deposits |
|
$ |
|
|
|
$ |
|
|
|
Deferred Sales of VOIs of projects under construction |
|
|
|
|
|
|
|
|
|
Club activation fees, annual dues and other |
|
|
|
|
|
|
|
|
|
Club Bonus Point incentive liability(1) |
|
|
|
|
|
|
|
|
|
(1) |
|
Revenue earned for the three and six months ended June 30, 2020 that was included in the contract liabilities balance at December 31, 2019 was approximately $
9
Our accounts receivables that relate to our contracts with customers includes amounts associated with our contractual right to consideration for completed performance obligations related primarily to our fee-for-service arrangements and homeowners’ associations (“HOA”) management agreements and are settled when the related cash is received. Accounts receivable are recorded when the right to consideration becomes unconditional and is only contingent on the passage of time. Refer to Note 6: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our timeshare financing receivables.
Contract assets relate 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 annual incentive fee period.
Contract liabilities include payments received or due in advance of satisfying our performance obligations. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues related to sales of VOIs of projects under construction, club activation fees and annual dues 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.
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Sales of VOIs, net |
|
$ |
|
|
|
$ |
|
|
|
Cost of VOI sales(1) |
|
|
|
|
|
|
|
|
|
Sales and marketing expense |
|
|
|
|
|
|
|
|
|
(1) |
|
We expect to recognize the revenue, costs of VOI sales and direct selling costs upon completion of the projects in 2021.
The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Club Bonus Points as of June 30, 2020:
|
($ in millions) |
|
Remaining Transaction Price |
|
|
Recognition Period |
|
Recognition Method |
|
|
Advanced deposits |
|
$ |
|
|
|
|
|
|
|
Club activation fees |
|
|
|
|
|
|
|
Straight-line basis over average inventory holding period |
|
Club Bonus Points |
|
|
|
|
|
|
|
|
10
Note 4: Restricted Cash
Restricted cash was as follows:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Escrow deposits on VOI sales |
|
$ |
|
|
|
$ |
|
|
|
Reserves related to non-recourse debt(1) |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
Note 5: Accounts Receivable
The following table represents our accounts receivable, net of allowance for credit losses. Following the adoption of ASC 326 on January 1, 2020, accounts receivable within the scope of ASC 326 are measured at amortized cost.
|
($ in millions) |
June 30, 2020 |
|
|
|
Fee-for-service commissions(1) |
$ |
|
|
|
Real estate and financing |
|
|
|
|
Resort and club operations |
|
|
|
|
Tax receivables |
|
|
|
|
Other receivables(2) |
|
|
|
|
Total |
$ |
|
|
|
(1) |
Net of allowance. |
|
(2) |
Primarily includes individually insignificant accounts receivable recognized in the ordinary course of business, the allowances for which are individually insignificant. |
Our accounts receivable are all due within one year of origination. We use delinquency status and economic factors as credit quality indicators to monitor our receivables within the scope of ASC 326 and use these as a basis for how we develop our expected loss estimates.
We sell VOIs on behalf of third-party developers using the Hilton Grand Vacations brand in exchange for sales, marketing and brand fees. We use historical losses and economic factors as a basis to develop our allowance for credit losses. Under these fee-for-service arrangements, we earn commission fees based on a percentage of total interval sales. Additionally, the terms include provisions requiring the reduction of fees earned for defaults and cancellations.
The changes in our allowance for fee-for-service commissions were as follows:
|
($ in millions) |
June 30, 2020 |
|
|
|
Balance as of December 31, 2019 |
$ |
|
|
|
Current period provision for expected credit losses |
|
|
|
|
Write-offs charged against the allowance |
|
( |
) |
|
Balance at June 30, 2020 |
$ |
|
|
11
Note 6: Timeshare Financing Receivables
Timeshare financing receivables were as follows:
|
|
|
June 30, 2020 |
|
|||||||||
|
($ in millions) |
|
Securitized |
|
|
Unsecuritized(1) |
|
|
Total |
|
|||
|
Timeshare financing receivables |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Less: allowance for financing receivables losses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
December 31, 2019 |
|
|||||||||
|
($ in millions) |
|
Securitized |
|
|
Unsecuritized(1) |
|
|
Total |
|
|||
|
Timeshare financing receivables |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Less: allowance for financing receivables losses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
As of June 30, 2020, we had timeshare financing receivables with a carrying value of $
In June 2020, we completed a securitization of $
Our timeshare financing receivables as of June 30, 2020 mature as follows:
|
($ in millions) |
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
|
Year |
|
|
|
|
|
|
|
|
|
|
|
|
2020 (remaining) |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for financing receivables losses |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
12
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 estimating expected defaults and determining our allowance for financing receivables losses on our timeshare financing receivables. For static pool analysis, we use certain key dimensions to stratify our portfolio, including FICO scores, equity percentage at the time of sale and certain other factors. The adequacy of the related allowance is determined by management through analysis of several factors, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio including assumed default rates, aging and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio.
We recognize interest income on our timeshare financing receivables as earned. As of June 30, 2020, and December 31, 2019 we had $
Our gross timeshare financing receivables balances by average FICO score were as follows:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
FICO score |
|
|
|
|
|
|
|
|
|
700+ |
|
$ |
|
|
|
$ |
|
|
|
600-699 |
|
|
|
|
|
|
|
|
|
<600 |
|
|
|
|
|
|
|
|
|
No score(1) |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
The following table details the origination year of our gross timeshare financing receivables by average FICO score as of June 30, 2020:
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|
Prior |
|
|
Total |
|
|||||||
|
FICO score |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700+ |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
600-699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No score(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
Timeshare financing receivables without a FICO score are primarily related to foreign borrowers. |
We apply payments we receive for timeshare financing receivables, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a receivable is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for receivables for which we had previously ceased accruing interest once the receivable is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the receivable is 121 days past due and, subsequently, we write off the uncollectible balance against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.
13
As of June 30, 2020 and December 31, 2019, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $
|
|
|
June 30, 2020 |
|
|||||||||
|
($ in millions) |
|
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
|
Current |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
31 - 90 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
91 - 120 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
121 days and greater past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
December 31, 2019 |
|
|||||||||
|
($ in millions) |
|
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
|
Current |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
31 - 90 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
91 - 120 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
121 days and greater past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The changes in our allowance for financing receivables losses were as follows:
|
|
|
June 30, 2020 |
|
|||||||||
|
($ in millions) |
|
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
|
Balance as of December 31, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Write-offs |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Provision for financing receivables losses(1) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Securitization |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
Balance as of June 30, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
June 30, 2019 |
|
|||||||||
|
($ in millions) |
|
Securitized |
|
|
Unsecuritized |
|
|
Total |
|
|||
|
Balance as of December 31, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Write-offs |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Provision for financing receivables losses(1) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
Note 7: Inventory
Inventory was as follows:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Completed unsold VOIs |
|
$ |
|
|
|
$ |
|
|
|
Construction in process |
|
|
|
|
|
|
|
|
|
Land, infrastructure and other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
During the six months ended June 30, 2020, we recorded non-cash operating activity transfers from Property and equipment to Inventory. See Note 8: Property and Equipment.
14
Shown below are costs of sales true-ups relating to VOI products and the related impacts to the carrying value of inventory.
|
|
|
Six Months Ended June 30, |
|
|||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Cost of sales true-up(1) |
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
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 June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Cost of VOI sales related to fee-for-service upgrades |
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 8: Property and Equipment
Property and equipment was as follows:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Land |
|
$ |
|
|
|
$ |
|
|
|
Building and leasehold improvements |
|
|
|
|
|
|
|
|
|
Furniture and equipment |
|
|
|
|
|
|
|
|
|
Construction in progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
During the six months ended June 30, 2020, we recorded non-cash operating activity transfers of $
Note 9: Consolidated Variable Interest Entities
As of June 30, 2020 and December 31, 2019, we consolidated
Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Restricted cash |
|
$ |
|
|
|
$ |
|
|
|
Timeshare financing receivables, net |
|
|
|
|
|
|
|
|
|
Non-recourse debt(1) |
|
|
|
|
|
|
|
|
|
(1) |
|
15
During the six months ended June 30, 2020 and 2019, we did
Note 10: Investments in Unconsolidated Affiliates
As of June 30, 2020, we have
We held investments in our
Note 11: Debt & Non-recourse Debt
Debt
The following table details our outstanding debt balance and its associated interest rates:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Debt(1) |
|
|
|
|
|
|
|
|
|
Senior secured credit facilities: |
|
|
|
|
|
|
|
|
|
Term loan with a rate of |
|
$ |
|
|
|
$ |
|
|
|
Revolver with a weighted average rate of |
|
|
|
|
|
|
|
|
|
Senior notes with a rate of |
|
|
|
|
|
|
|
|
|
Other debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: unamortized deferred financing costs and discount(2)(3) |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
|
(2) |
|
|
(3) |
|
In May 2020, we amended our Credit Agreement with respect to certain terms of our credit facilities (the “Amendment”) to provide flexibility with respect to satisfying certain financial covenant ratios as may be needed due to the ongoing and uncertain future impact of the COVID-19 pandemic on our business and operations. The borrowing capacity under the Credit Agreement remained the same. In connection with the Amendment we incurred $
During the six months ended June 30, 2020, we borrowed $
16
We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt. As of June 30, 2020, we had approximately $
As of June 30, 2020 and December 31, 2019, we had $
Non-recourse Debt
The following table details our outstanding non-recourse debt balance and its associated interest rates:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Non-recourse debt(1) |
|
|
|
|
|
|
|
|
|
Securitized Debt with an average rate of |
|
$ |
|
|
|
$ |
|
|
|
Securitized Debt with an average rate of |
|
|
|
|
|
|
|
|
|
Securitized Debt with an average rate of |
|
|
|
|
|
|
|
|
|
Securitized Debt with an average rate of |
|
|
|
|
|
|
|
|
|
Securitized Debt with an average rate of |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Less: unamortized deferred financing costs(2) |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
|
(2) |
|
In June 2020, we completed a securitization of $
The Timeshare Facility is a non-recourse obligation with a borrowing capacity of $
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 $
17
Debt Maturities
The contractual maturities of our debt and non-recourse debt as of June 30, 2020 were as follows:
|
($ in millions) |
|
Debt |
|
|
Non-recourse Debt |
|
|
Total |
|
|||
|
Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 (remaining) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 12: Fair Value Measurements
The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:
|
|
|
June 30, 2020 |
|
|||||||||
|
|
|
|
|
|
|
Hierarchy Level |
|
|||||
|
($ in millions) |
|
Carrying Amount |
|
|
Level 1 |
|
|
Level 3 |
|
|||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Timeshare financing receivables, net(1) |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, net(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse debt, net(2) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
(1) |
|
|
(2) |
|
|
|
|
December 31, 2019 |
|
|||||||||
|
|
|
|
|
|
|
Hierarchy Level |
|
|||||
|
($ in millions) |
|
Carrying Amount |
|
|
Level 1 |
|
|
Level 3 |
|
|||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Timeshare financing receivables, net(1) |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, net(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse debt, net(2) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
(1) |
Carrying amount net of allowance for financing receivables losses. |
|
(2) |
Carrying amount net of unamortized deferred financing costs and discount. |
Our estimates of the fair values were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values. The table above excludes cash and cash equivalents, restricted cash, accounts receivable, accounts payable, advance deposits and accrued liabilities, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
The estimated fair values of our timeshare financing receivables were determined using a discounted cash flow model. Our model incorporates default rates, coupon rates, credit quality and borrowing terms respective to the portfolio based on current market assumptions for similar types of arrangements.
18
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
Note 13: Leases
We lease sales centers, office space and equipment under operating leases. Our leases expire at various dates from
We recognize rent expense on leases with both contingent and non-contingent lease payment terms. Rent associated with non-contingent lease payments are recognized on a straight-line basis over the lease term. Rent expense for all operating leases for the three months ended June 30, 2020 and 2019 was $
Supplemental cash flow information related to operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
|
|
|
$ |
|
|
|
Right-of-use assets obtained in exchange for new lease liabilities: |
|
|
|
|
|
|
|
|
|
Operating Leases |
|
|
|
|
|
|
|
|
Supplemental balance sheet information related to operating leases was as follows:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Weighted-average remaining lease term of operating leases (in years) |
|
|
|
|
|
|
||
|
Weighted-average discount rate of operating leases |
|
|
|
% |
|
|
|
% |
Future minimum lease payments under noncancelable operating leases, due in each of the next five years and thereafter as of June 30, 2020, are as follows:
|
($ in millions) |
|
Operating Leases |
|
|
|
Year |
|
|
|
|
|
2020 (remaining) |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total future minimum lease payments |
|
$ |
|
|
|
Less: imputed interest |
|
|
( |
) |
|
Present value of lease liabilities |
|
$ |
|
|
19
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 tax rate is determined by the level and composition of pre-tax ordinary income or loss, which is subject to federal, foreign and state and local income taxes. The effective tax rate for the six months ended June 30, 2020 and 2019 was approximately
We have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27, 2020. The effect of tax law changes is required to be recognized either in the interim period in which the legislation is enacted or reflected in the computation of the annual effective tax rate, depending on the nature of the change. As of June 30, 2020, we evaluated the income tax provisions of the CARES Act and have determined there to be no effect on either the June 30, 2020 tax rate or the computation of the estimated effective tax rate for the year. We will continue to evaluate the income tax provisions of the CARES Act and monitor the developments in the jurisdictions where we have significant operations for tax law changes that could have income tax accounting and disclosure implications.
We have requested a change in accounting method effective for the taxable year beginning on January 1, 2020 and ending on December 31, 2020 which is pending IRS review. The impact of the requested method change will be included in the financial statements upon IRS consent.
Note 15: Share-Based Compensation
Stock Plan
We issue service-based restricted stock units (“Service RSUs”), service and performance-based restricted stock units (“Performance RSUs”) and nonqualified stock options (“Options”) to certain employees and directors. We recognized share-based compensation expense of $
Service RSUs
During the six months ended June 30, 2020, we issued
Options
During the six months ended June 30, 2020, we issued
The weighted-average grant date fair value of these options was $
|
Expected volatility |
|
|
|
% |
|
Dividend yield |
|
|
|
% |
|
Risk-free rate |
|
|
|
% |
|
Expected term (in years) |
|
|
|
|
As of June 30, 2020, we had
20
Performance Shares
During the six months ended June 30, 2020, we issued
Employee Stock Purchase Plan
In March 2017, the Board of Directors adopted the Hilton Grand Vacations Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective during 2017. In connection with the Plan, we issued
Note 16: Earnings (Loss) Per Share
The following table presents the calculation of our basic and diluted earnings (loss) per share (“EPS”). The weighted- average shares outstanding used to compute basic EPS and diluted EPS for the three months ended June 30, 2020 was
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
($ and shares outstanding in millions, except per share amounts) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(1) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(1) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
(1) |
|
The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period. Potentially dilutive shares of
For the three and six months ended June 30, 2020, we excluded
21
Note 17: Related Party Transactions
BRE Ace LLC and 1776 Holding, LLC
We hold a
We hold a
We record Equity in earnings (losses) from our unconsolidated affiliates in our condensed consolidated statements of operations. See Note 10: Investments in Unconsolidated Affiliates for additional information. Additionally, we earn commissions and other fees related to fee-for-service agreements with the investees to sell VOIs at Elara, by Hilton Grand Vacations and Liberty Place Charleston, by Hilton Club.
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Equity in earnings from unconsolidated affiliates |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Commissions and other fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We also have $
Note 18: Business Segments
We operate our business through the following
|
|
• |
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 receivables to customers to finance their purchase of VOIs and revenue from servicing the timeshare financing receivables. We also generate fee revenue from servicing the timeshare financing receivables 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 affiliates in our measures of segment operating performance.
22
The following table present revenues for our reportable segments reconciled to consolidated amounts:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Resort operations and club management(1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost reimbursements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment eliminations(1)(2) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
|
(2) |
|
The following table presents Segment Adjusted EBITDA for our reportable segments reconciled to net income:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing(1) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Resort operations and club management(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
License fee expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Other loss, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Equity in earnings from unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustment items(2) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net income (loss) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
(1) |
|
|
(2) |
|
23
Note 19: Commitments and Contingencies
We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units or other real estate at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of June 30, 2020, we were committed to purchase approximately $
|
($ in millions) |
|
2020 (remaining) |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
Thereafter |
|
|
Total |
|
|||||||
|
Inventory purchase obligations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Other commitments(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has evaluated these legal matters and we believe that possible losses derived from an unfavorable outcome that is reasonably possible or remote is not reasonably estimable. While the actual results of claims and litigation cannot be predicted with certainty, we expect that the resolution of all pending or threatened claims and litigation as of June 30, 2020, will
Note 20: Subsequent Events
Management has evaluated all subsequent events through July 30, 2020, the date the unaudited consolidated financial statements were available to be issued. The results of management’s analysis indicated no significant subsequent events have occurred that required consideration as adjustments to our disclosures in the unaudited financial statements.
24
|
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, 2019.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements convey management’s expectations as to our future, and are based on management’s beliefs, expectations, assumptions and such plans, estimates, projections and other information available to management at the time we make such statements. Forward-looking statements include all statements that are not historical facts, including those related to our revenues, earnings, cash flow and operations, and may be identified by terminology such as the words “outlook,” “believe,” “expect,” “potential,” “goal,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” predicts,” “intends,” “plans,” “estimates,” “anticipates” “future,” “guidance,” “target,” or the negative version of these words or other comparable words.
We caution you that our forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that are beyond our control, that may cause our actual results, performance or achievements to be materially different from the future results. Factors that could cause our actual results to differ materially from those contemplated by our forward-looking statements include: the material impact of the COVID-19 pandemic on our business, operating results, and financial condition; the extent and duration of the impact of the COVID-19 pandemic on global economic conditions; our ability to meet our liquidity needs; risks related to our indebtedness; inherent business risks, market trends and competition within the timeshare and hospitality industries; our ability to successfully source inventory and market, sell and finance VOIs; default rates on our financing receivables; the reputation of and our ability to access Hilton brands and programs, including the risk of a breach or termination of our license agreement with Hilton; compliance with and changes to United States and global laws and regulations, including those related to anti-corruption and privacy; risks related to our acquisitions, joint ventures, and other partnerships; our dependence on third-party development activities to secure just-in-time inventory; the performance of our information technology systems and our ability to maintain data security; regulatory proceedings or litigation; our ability to attract and retain key executives and employees with skills and capacity to meet our needs; and natural disasters or adverse geo-political conditions. Any one or more of the foregoing factors could adversely impact our operations, revenue, operating margins, financial condition and/or credit rating.
For additional information regarding factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements in this Report, please see the risk factors discussed in “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented and updated by the risk factors discussed in “Part II-Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and this Report, as well as those described from time to time other periodic reports that we file with the SEC. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments, changes in management’s expectations, or otherwise.
Terms Used in this Quarterly Report on Form 10-Q
Except where the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Hilton Grand Vacations,” “HGV,” “the Company,” “we,” “us” and “our” refer to Hilton Grand Vacations Inc., together with its consolidated subsidiaries. Except where the context requires otherwise, references to our “properties” or “resorts” and “units” refer to the timeshare properties that we manage or own. Of these resorts and units, a portion is directly owned by us or our joint ventures in which we have an interest and the remaining resorts and units are owned by our third-party owners.
“Developed” refers to VOI inventory that is sourced from projects developed by HGV.
“Fee for service” refers to VOI inventory that we sell and manage on behalf of third-party developers.
“Just-in-time” refers to VOI inventory that is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.
“VOI” refers to vacation ownership intervals.
25
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q includes discussion of terms that are not recognized terms under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), and financial measures that are not calculated in accordance with U.S. GAAP, including earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA, free cash flow and adjusted free cash flow.
Operational Metrics
This Quarterly Report on Form 10-Q includes discussion of key business operational metrics including contract sales, sales revenue, real estate margin, tour flow, volume per guest and transient rate.
See “Key Business and Financial Metrics and Terms Used by Management” and “-Results of Operations” for a discussion of the meanings of these terms, the Company’s reasons for providing non-GAAP financial measures, and reconciliations of non-GAAP financial measures to measures calculated in accordance with U.S. GAAP.
Overview
Our Business
We are a timeshare company that markets and sells VOIs, manages resorts in top leisure and urban destinations, and operates a points-based vacation club. As of June 30, 2020, we have 60 properties, representing 9,595 units, that are primarily located in vacation destinations such as Orlando, Las Vegas, the Hawaiian Islands, New York City, Washington D.C., and South Carolina and feature spacious, condominium-style accommodations with superior amenities and quality service. As of June 30, 2020, we have approximately 327,000 Hilton Grand Vacations Club and Hilton Club (collectively the “Club”) members. Club members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 18 industry-leading brands across approximately 6,100 properties, as well as numerous experiential vacation options, such as cruises and guided tours. Our business has been and continues to be adversely impacted by the COVID-19 pandemic and its effects on the global economy, including the various government orders and mandates for closures of non-essential businesses. Please see “Recent Events” and other discussions throughout this Report for additional information regarding such impacts.
We operate our business across two segments: (1) real estate sales and financing; and (2) resort operations and club management.
Real Estate Sales and Financing
Our primary product is the marketing and selling of fee-simple VOIs deeded in perpetuity and right to use real estate interests, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week on an annual basis, at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. We source VOIs through fee-for-service and just-in-time agreements with third-party developers and have focused our inventory strategy on developing an optimal inventory mix focused on developed properties as well as fee-for-service and just-in-time agreements. The fee-for-service agreements enable us to generate fees from the sales and marketing of the VOIs and Club memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs. The just-in-time agreements enable us to source VOI inventory in a manner that allows us to correlate the timing of acquisition of the inventory with the sale to purchasers. Sales of owned, including just-in-time inventory, generally result in greater Adjusted EBITDA contributions, while fee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory and fee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital.
For the six months ended June 30, 2020, sales from fee-for-service, just-in-time and developed inventory sources were 53 percent, 24 percent and 23 percent, respectively, of contract sales. See “Key Business and Financial Metrics and Terms Used by Management——Real Estate Sales Metrics” for additional discussion of contract sales. Based on our trailing twelve months sales pace, we have access to approximately nine years of future inventory, with capital efficient arrangements representing approximately 52 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.
26
We sell our vacation ownership products under the Hilton Grand Vacations brand primarily through our distribution network of both in-market and off-site sales centers. Our products are currently marketed for sale throughout the United States and the Asia-Pacific region. We operate sales distribution centers in major markets and popular leisure destinations with year-round demand and a history of being a friendly environment for vacation ownership. We have sales distribution centers in Las Vegas, Orlando, Oahu, Japan, New York, Myrtle Beach, Waikoloa, Washington D.C., Hilton Head, Park City, Chicago, Korea and Carlsbad. Our marketing and sales activities are based on targeted direct marketing and a highly personalized sales approach. We use targeted direct marketing to reach potential members who are identified as having the financial ability to pay for our products and have an affinity with Hilton and are frequent leisure travelers. Tour flow quality impacts key metrics such as close rate and VPG, defined in “Key Business and Financial Metrics and Terms Used by Management——Real Estate Sales Metrics.” Additionally, the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables. For the six months ended June 30, 2020, 57 percent of our contract sales were to our existing owners.
We provide financing for members purchasing our developed and acquired inventory and generate interest income. Our timeshare financing receivables are collateralized by the underlying VOIs and are generally structured as 10-year, fully-amortizing loans that bear a fixed interest rate typically ranging from 9 percent to 18 percent per annum. Financing propensity was 63 percent and 66 percent for the six months ended June 30, 2020 and 2019, respectively. We calculate financing propensity as contract sales volume of financed contracts originated in the period divided by contract sales volume of all contracts originated in the period.
The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the loan term. The weighted-average FICO score for new loans to U.S. and Canadian borrowers at the time of origination were as follows:
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Weighted-average FICO score |
|
|
735 |
|
|
|
737 |
|
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 timeshare financing receivables have been pledged as collateral in our securitization transactions, which have in the past and may in the future provide funding for our business activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and related cash deposits. For additional information see Note 6: Timeshare Financing Receivables in our unaudited condensed consolidated financial statements.
In addition, we earn fees from servicing the loans provided by third-party developers of our fee-for-service projects to purchasers of their VOIs and from our securitized timeshare financing receivables.
Resort Operations and Club Management
We enter into management agreements with the HOAs of the VOI owners for timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprised of owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services include day-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The initial term of our management agreements typically ranges from three to five years and the agreements are subject to periodic renewal for one to three-year periods. Many of these agreements renew automatically unless either party provides advance notice of termination before the expiration of the term.
We also manage and operate the 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 owners purchase a VOI, they are generally enrolled in the Club and given an annual allotment of points that allow the member to exchange their 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.
27
We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges through our club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.
Key Business and Financial Metrics and Terms Used by Management
Real Estate Sales Operating Metrics
We measure our performance using the following key operating metrics:
|
|
• |
Contract sales represents the total amount of VOI products (fee-for-service and developed) under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales differ from revenues from the Sales of VOIs, net that we report in our condensed consolidated statements of operations due to the requirements for revenue recognition, as well as adjustments for incentives. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business and is used to manage the performance of the sales organization. While we do not record the purchase price of sales of VOI products developed by fee-for-service partners as revenue in our condensed consolidated financial statements, rather recording the commission earned as revenue in accordance with U.S. GAAP, we believe contract sales to be an important operational metric, reflective of the overall volume and pace of sales in our business and believe it provides meaningful comparability of our results to the results of our competitors which may source their VOI products differently. |
We believe that the presentation of contract sales on a combined basis (fee-for-service and developed) is most appropriate for the purpose of the operating metric, additional information regarding the split of contract sales, is included in “—Real Estate” below. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our audited consolidated financial statements included in Item 8 in our Annual Report on form 10-K for the year ended December 31, 2019, for additional information on Sales of VOI, net.
|
|
• |
Sales revenue represents Sales of VOIs, net, 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, 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 the 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, 2019.
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 (excluding non-recourse debt), a provision for income taxes and depreciation and amortization.
Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) 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.
28
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; |
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|
• |
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 Related to the COVID-19 Pandemic and Impact on Our Results of Operations, Financial Condition, and Business During the Three and Six Months Ended June 30, 2020.
In March 2020, a National Public Health Emergency was declared in response to the coronavirus, known as COVID-19. As a result, many local, county and state government officials have issued, and continue to issue, various mandates and orders to close non-essential businesses, impose travel restrictions, and require “stay-at-home” and/or self-quarantine in certain cases, all in an effort to protect the health and safety of individuals and aimed at slowing and ultimately stopping the spread and transmission of the virus.
Accordingly, commencing in March 2020, we started to temporarily close substantially all of our properties and suspended our U.S sales operations and closed such sales offices. In addition, we took a number of other actions to reduce our expenses and preserve liquidity, including furloughing more than 6,100 of our approximately 9,100 employees, implementing salary reductions for the remaining active employees, implementing hiring freezes, eliminating all discretionary spending, and reducing our planned investment in new inventory by approximately $200 million.
Furthermore, we believe the following actions will provide adequate capital to meet our short-and long-term liquidity requirements for anticipated operating expenses and other expenditures, including payroll and related benefits, legal costs, and additional costs related to complying with various regulatory requirements and best practices for opening under the current environment resulting from the pandemic, and to finance our long-term growth plan and capital expenditures for the foreseeable future.
|
|
• |
In March 2020, we drew down the substantial remainder of our borrowing capacity under our revolver facility through net borrowings of $445 million as a precautionary measure to ensure liquidity for a sustained period in the economic environment resulting from the COVID-19 pandemic. We expect the proceeds would be used for general corporate and working capital purposes in the ordinary course of business. |
29
|
|
• |
In April 2020, we amended certain key definitions related to delinquency level calculations of underlying timeshare loans that are used as collateral for borrowings under our Timeshare Facility, and generated added flexibility to manage any potential increase in the rate of delinquency as a result of the impact of the COVID-19 pandemic. |
|
|
• |
In May 2020, we amended our Credit Agreement which amended certain terms of the credit facilities (“Senior Secured Credit Facilities”) to provide us with both near-term and long-term flexibility with respect to satisfying certain negative and financial covenant ratios as may be needed due to the ongoing and uncertain future impact of the COVID-19 pandemic on our business and operations. |
|
|
• |
In June 2020, we completed a securitization of $300 million of gross timeshare financing receivables and used the proceeds to pay down the $195 million outstanding balance on our Timeshare Facility and for general corporate operating expenses. As of June 30, 2020, we have $450 million remaining borrowing capacity under our Timeshare Facility. See Note 11: Debt and Non-Recourse Debt for additional information. |
The closure of our resorts and sales centers, and the related suspensions of our operations, expectedly have had a materially adverse impact on our revenues, net income and other operating results during the second quarter, as well as our business and operations generally, as more fully discussed below. As discussed in further detail below, substantially all of the unfavorable changes in our operating results during the three and six months ended June 30, 2020 as compared to prior periods were as a result of the closure of substantially all of our resorts, operations and sales activities.
Outlook
The COVID-19 pandemic has created an unprecedented and challenging time. Our current focus is on taking critical actions that are aimed at positioning the Company in a sound position from an operational, liquidity, credit access, and compliance perspective for a strong recovery when the impact of COVID-19 subsides. As discussed above, we have taken several steps to enhance our liquidity, preserve cash, reduce our expenditures and provide financial flexibility. We will continue to assess the evolving COVID-19 pandemic, including the various government mandates and orders that impact the re-opening of our properties and any new recommended or required business practices, and will take additional actions as appropriate.
Prior to re-opening our resorts and sales centers, we introduced the HGV Enhanced Care Guidelines, designed to provide owners, guests and team members with the highest level of cleaning protocols and safety standards recommended by the Center for Disease Control and Prevention and cleaning solutions approved by the Environmental Protection Agency in response to the COVID-19 pandemic. Along with providing personal protective equipment to team members, these Enhanced Care Guidelines include low-touch arrivals and departures, frequent and thorough cleaning, reduction of paper items, reduced capacity for our pool decks and fitness centers, and new technologies. While operations were suspended, essential resort personnel worked diligently maintaining the resorts for a safe re-opening. Annual deep cleanings, typically scheduled during slower seasons, were moved up and completed, allowing the resorts to be in top shape when owners and guests arrive.
Beginning in May 2020, various states and counties started to allow gradual relaxation of restrictions on activities and a resumption of businesses. In response, we began a phased reopening of resorts and resumption of our business activities during the second quarter of 2020, but under new operating guidelines and with safety measures. As of July 2020, we have nearly three quarters of our resorts and sales centers open and currently operating however, many of our resorts and sales centers are operating with significant capacity constraints and subject to various safety measures.
Although we have started re-opening our sales centers, they have initially been operating at lower levels of utilization than they were prior to the temporary shutdown. This includes lower levels of sales staff, modified operating schedules to stagger tours in compliance with social distancing rules, and running a reduced weekly operating calendar. As we respond to changes in tour flow, we intend to adjust our sales operations accordingly while complying with all applicable social distancing rules and our own safety measures.
While we plan to continue to reopen our resorts and resume our business as conditions and applicable rules and regulations permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity. Further, various state and local government officials, including Florida, Hawaii and New York, where we have a significant concentration of our properties and units, may issue new or revised orders that are different than current ones under which we are operating.
30
Accordingly, there remains significant uncertainty as to the degree of impact and duration of the conditions stemming from the ongoing pandemic on our revenues, net income and other operating results, as well as our business and operations generally. Any significantly extended duration or worsening of the conditions associated with the pandemic may adversely impact our liquidity in the longer term, including our ability to finance our day-to-day business and operations, and may adversely affect our ability to comply with our financial covenants under our debt obligations notwithstanding the recent amendments discussed above. Please review carefully the risk factors contained in our 2019 10-K and, in particular, those that are included in our first quarter 2020 10-Q and this Report for discussions of various factors and uncertainties related to the pandemic that may materially impact us.
Results of Operations
Three and Six Months Ended June 30, 2020 Compared with the Three and Six Months Ended June 30, 2019
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 operating performance. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses them to manage our business and material limitations on their usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” The following tables set forth revenues and Adjusted EBITDA by segment:
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|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing |
|
$ |
56 |
|
|
$ |
308 |
|
|
$ |
(252 |
) |
|
|
(81.8 |
)% |
|
$ |
262 |
|
|
$ |
615 |
|
|
$ |
(353 |
) |
|
|
(57.4 |
)% |
|
Resort operations and club management |
|
|
44 |
|
|
|
114 |
|
|
|
(70 |
) |
|
|
(61.4 |
) |
|
|
148 |
|
|
|
224 |
|
|
|
(76 |
) |
|
|
(33.9 |
) |
|
Segment revenues |
|
|
100 |
|
|
|
422 |
|
|
|
(322 |
) |
|
|
(76.3 |
) |
|
|
410 |
|
|
|
839 |
|
|
|
(429 |
) |
|
|
(51.1 |
) |
|
Cost reimbursements |
|
|
23 |
|
|
|
43 |
|
|
|
(20 |
) |
|
|
(46.5 |
) |
|
|
72 |
|
|
|
85 |
|
|
|
(13 |
) |
|
|
(15.3 |
) |
|
Intersegment eliminations(1) |
|
|
— |
|
|
|
(11 |
) |
|
|
11 |
|
|
|
(100.0 |
) |
|
|
(8 |
) |
|
|
(20 |
) |
|
|
12 |
|
|
|
(60.0 |
) |
|
Total revenues |
|
$ |
123 |
|
|
$ |
454 |
|
|
$ |
(331 |
) |
|
|
(72.9 |
) |
|
$ |
474 |
|
|
$ |
904 |
|
|
$ |
(430 |
) |
|
|
(47.6 |
) |
|
(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 (loss), our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
Net income (loss) |
|
$ |
(48 |
) |
|
$ |
39 |
|
|
$ |
(87 |
) |
|
NM(1) |
|
|
$ |
(40 |
) |
|
$ |
94 |
|
|
$ |
(134 |
) |
|
NM(1) |
|
||
|
Interest expense |
|
|
12 |
|
|
|
11 |
|
|
|
1 |
|
|
|
9.1 |
% |
|
|
22 |
|
|
|
21 |
|
|
|
1 |
|
|
|
4.8 |
% |
|
Income tax (benefit) expense |
|
|
(8 |
) |
|
|
15 |
|
|
|
(23 |
) |
|
NM(1) |
|
|
|
(7 |
) |
|
|
35 |
|
|
|
(42 |
) |
|
NM(1) |
|
||
|
Depreciation and amortization |
|
|
11 |
|
|
|
12 |
|
|
|
(1 |
) |
|
|
(8.3 |
) |
|
|
23 |
|
|
|
20 |
|
|
|
3 |
|
|
|
15.0 |
|
|
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates |
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(100.0 |
) |
|
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
(50.0 |
) |
|
EBITDA |
|
|
(33 |
) |
|
|
78 |
|
|
|
(111 |
) |
|
NM(1) |
|
|
|
(1 |
) |
|
|
172 |
|
|
|
(173 |
) |
|
NM(1) |
|
||
|
Other loss, net |
|
|
3 |
|
|
|
1 |
|
|
|
2 |
|
|
NM(1) |
|
|
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
(50.0 |
) |
|
|
Share-based compensation expense(2) |
|
|
6 |
|
|
|
7 |
|
|
|
(1 |
) |
|
|
(14.3 |
) |
|
|
4 |
|
|
|
12 |
|
|
|
(8 |
) |
|
|
(66.7 |
) |
|
Other adjustment items(3) |
|
|
5 |
|
|
|
4 |
|
|
|
1 |
|
|
|
25.0 |
|
|
|
10 |
|
|
|
6 |
|
|
|
4 |
|
|
|
66.7 |
|
|
Adjusted EBITDA |
|
$ |
(19 |
) |
|
$ |
90 |
|
|
$ |
(109 |
) |
|
NM(1) |
|
|
$ |
14 |
|
|
$ |
192 |
|
|
$ |
(178 |
) |
|
|
(92.7 |
) |
|
31
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
|
(2) |
As of March 31, 2020, we determined that the performance conditions for our 2018, 2019, and 2020 Performance RSUs were improbable of achievement therefore we reversed $8 million of share-based compensation expense recognized in prior years and ceased accruing expenses related to Performance RSUs granted in 2018, 2019, and 2020, during the three months ended March 31, 2020. As of June 30, 2020, we determined the performance conditions continue to be improbable of achievement and therefore no expense was recognized for our Performance RSUs in the current period. |
|
(3) |
For the three and six months ended June 30, 2020 and 2019, this amount includes costs associated with restructuring, one-time charges and other non-cash items. |
The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA:
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing(2) |
|
$ |
(14 |
) |
|
$ |
69 |
|
|
$ |
(83 |
) |
|
NM(1) |
|
|
$ |
1 |
|
|
$ |
149 |
|
|
$ |
(148 |
) |
|
|
(99.3 |
)% |
|
|
Resort operations and club management(2) |
|
|
15 |
|
|
|
66 |
|
|
|
(51 |
) |
|
|
(77.3 |
)% |
|
|
70 |
|
|
|
131 |
|
|
|
(61 |
) |
|
|
(46.6 |
) |
|
Segment Adjusted EBITDA |
|
|
1 |
|
|
|
135 |
|
|
|
(134 |
) |
|
|
(99.3 |
) |
|
|
71 |
|
|
|
280 |
|
|
|
(209 |
) |
|
|
(74.6 |
) |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA from unconsolidated affiliates |
|
|
1 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(66.7 |
) |
|
|
5 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
License fee expense |
|
|
(6 |
) |
|
|
(26 |
) |
|
|
20 |
|
|
|
(76.9 |
) |
|
|
(28 |
) |
|
|
(49 |
) |
|
|
21 |
|
|
|
(42.9 |
) |
|
General and administrative(3) |
|
|
(15 |
) |
|
|
(22 |
) |
|
|
7 |
|
|
|
(31.8 |
) |
|
|
(34 |
) |
|
|
(44 |
) |
|
|
10 |
|
|
|
(22.7 |
) |
|
Adjusted EBITDA |
|
$ |
(19 |
) |
|
$ |
90 |
|
|
$ |
(109 |
) |
|
NM(1) |
|
|
$ |
14 |
|
|
$ |
192 |
|
|
$ |
(178 |
) |
|
|
(92.7 |
) |
|
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
|
(2) |
Includes intersegment transactions, share-based compensation, depreciation and other adjustments attributable to the segments. |
|
(3) |
Excludes segment related share-based compensation, depreciation and other adjustment items. |
Real Estate Sales and Financing
In accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), revenue and the related costs to fulfill and acquire the contract (“direct costs”) from sales of VOIs under construction are deferred until the point in time when construction activities are deemed to be completed. The Real estate sales and financing segment is impacted by construction related deferral and recognition activity. In periods where Sales of VOIs and related direct costs of projects under construction are deferred, margin percentages will generally contract as the indirect marketing and selling costs associated with these sales are recognized as incurred in the current period. In periods where previously deferred Sales of VOIs and related direct costs are recognized upon construction completion, margin percentages will generally expand as the indirect marketing and selling costs associated with these sales were recognized in prior periods.
32
The following table represents deferrals and recognitions of Sales of VOI revenue and direct costs for properties under construction:
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
||||||
|
Sales of VOIs (deferrals) |
|
$ |
(4 |
) |
|
$ |
(34 |
) |
|
$ |
30 |
|
|
$ |
(51 |
) |
|
$ |
(34 |
) |
|
$ |
(17 |
) |
|
Sales of VOIs recognitions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net Sales of VOIs (deferrals) recognitions |
|
|
(4 |
) |
|
|
(34 |
) |
|
|
30 |
|
|
|
(51 |
) |
|
|
(34 |
) |
|
|
(17 |
) |
|
Cost of VOI sales (deferrals)(1) |
|
|
— |
|
|
|
(11 |
) |
|
|
11 |
|
|
|
(13 |
) |
|
|
(11 |
) |
|
|
(2 |
) |
|
Cost of VOI sales recognitions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net Cost of VOI sales (deferrals) recognitions(1) |
|
|
— |
|
|
|
(11 |
) |
|
|
11 |
|
|
|
(13 |
) |
|
|
(11 |
) |
|
|
(2 |
) |
|
Sales and marketing expense (deferrals) |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
4 |
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(3 |
) |
|
Sales and marketing expense recognitions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net Sales and marketing expense (deferrals) recognitions |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
4 |
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(3 |
) |
|
Net construction (deferrals) recognitions |
|
$ |
(3 |
) |
|
$ |
(18 |
) |
|
$ |
15 |
|
|
$ |
(30 |
) |
|
$ |
(18 |
) |
|
$ |
(12 |
) |
|
(1) |
Includes anticipated Costs of VOI sales of VOIs under construction that will be acquired under a just-in-time arrangement once construction is complete for the six months ended June 30, 2020. |
Real estate sales and financing segment revenues decreased by $252 million for the three months ended June 30, 2020 and $353 million for the six months ended June 30, 2020, compared to the same periods in 2019, primarily due to decreases in sales revenue and marketing revenue as a result of the temporary closure of substantially all of our properties and suspension of our sales and related operations as a result of the COVID-19 pandemic.
Real estate sales and financing segment Adjusted EBITDA decreased by $83 million and $148 million for the three and six months ended June 30, 2020, compared to the same periods in 2019, primarily due to the decreases in segment revenues associated with segment performance discussed herein partially offset by decreases in related expenses. In addition, real estate sales and financing segment Adjusted EBITDA was impacted by $15 million in one-time payroll related expenses, net of an employee retention credit granted under the CARES Act, primarily related to payments made to employees as a result of operational closures caused by the COVID-19 pandemic for the six months ended June 30, 2020, respectively.
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 decreased $70 million and $76 million for the three and six months ended June 30, 2020, compared to the same periods in 2019, primarily due to decreases in rental and ancillary revenues. Resort operations and club management segment Adjusted EBITDA decreased $51 million and $61 million for the three and six months ended June 30, 2020, compared to the same periods in 2019, primarily due to the decreases in segment margin associated with segment performance discussed herein.
Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.
33
Real Estate Sales and Financing Segment
Real Estate
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions, except Tour flow and VPG) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
Sales of VOIs, net |
|
$ |
— |
|
|
$ |
120 |
|
|
$ |
(120 |
) |
|
|
(100.0 |
)% |
|
$ |
56 |
|
|
$ |
245 |
|
|
$ |
(189 |
) |
|
|
(77.1 |
)% |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee-for-service sales(2) |
|
|
19 |
|
|
|
185 |
|
|
|
(166 |
) |
|
|
(89.7 |
) |
|
|
149 |
|
|
|
375 |
|
|
|
(226 |
) |
|
|
(60.3 |
) |
|
Provision for financing receivables losses |
|
|
8 |
|
|
|
24 |
|
|
|
(16 |
) |
|
|
(66.7 |
) |
|
|
45 |
|
|
|
38 |
|
|
|
7 |
|
|
|
18.4 |
|
|
Reportability and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferral (recognition) of sales of VOIs under construction(3) |
|
|
4 |
|
|
|
34 |
|
|
|
(30 |
) |
|
|
(88.2 |
) |
|
|
51 |
|
|
|
34 |
|
|
|
17 |
|
|
|
50.0 |
|
|
Fee-for-service sale upgrades, net |
|
|
(1 |
) |
|
|
(10 |
) |
|
|
9 |
|
|
|
(90.0 |
) |
|
|
(9 |
) |
|
|
(24 |
) |
|
|
15 |
|
|
|
(62.5 |
) |
|
Other(4) |
|
|
5 |
|
|
|
10 |
|
|
|
(5 |
) |
|
|
(50.0 |
) |
|
|
(13 |
) |
|
|
17 |
|
|
|
(30 |
) |
|
NM(1) |
|
|
|
Contract sales |
|
$ |
35 |
|
|
$ |
363 |
|
|
$ |
(328 |
) |
|
|
(90.4 |
) |
|
$ |
279 |
|
|
$ |
685 |
|
|
$ |
(406 |
) |
|
|
(59.3 |
) |
|
Tour flow |
|
|
5,810 |
|
|
|
101,712 |
|
|
|
(95,902 |
) |
|
|
(94.3 |
) |
|
|
72,775 |
|
|
|
184,356 |
|
|
|
(111,581 |
) |
|
|
(60.5 |
) |
|
VPG |
|
$ |
4,786 |
|
|
$ |
3,393 |
|
|
$ |
1,393 |
|
|
|
41.1 |
|
|
$ |
3,608 |
|
|
$ |
3,520 |
|
|
$ |
88 |
|
|
|
2.5 |
|
|
(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) |
Represents the net impact of deferred revenues related to the Sales of VOIs under construction that are recognized when construction is complete. |
|
(4) |
Includes adjustments for revenue recognition, including amounts in rescission and sales incentives. |
Contract sales decreased $328 million and $406 million for the three and six months ended June 30, 2020, respectively, primarily due to a decrease in tour flow related to the temporary closure of substantially all of our properties and suspension of sales and related operations due to the COVID-19 pandemic. Beginning in May 2020, we began a phased reopening of resorts and resumption of our business activities however, many of our resorts and sales centers are operating with significant capacity constraints and are subject to various safety measures. As of June 30, 2020, we have approximately two thirds of our resorts and sales centers open and currently operating.
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
Sales, marketing, brand and other fees |
|
$ |
13 |
|
|
$ |
145 |
|
|
$ |
(132 |
) |
|
|
(91.0 |
)% |
|
$ |
119 |
|
|
$ |
286 |
|
|
$ |
(167 |
) |
|
|
(58.4 |
)% |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing revenue and other fees |
|
|
4 |
|
|
|
38 |
|
|
|
(34 |
) |
|
|
(89.5 |
) |
|
|
29 |
|
|
|
68 |
|
|
|
(39 |
) |
|
|
(57.4 |
) |
|
Commissions and brand fees |
|
|
9 |
|
|
|
107 |
|
|
|
(98 |
) |
|
|
(91.6 |
) |
|
|
90 |
|
|
|
218 |
|
|
|
(128 |
) |
|
|
(58.7 |
) |
|
Sales of VOIs, net |
|
|
— |
|
|
|
120 |
|
|
|
(120 |
) |
|
|
(100.0 |
) |
|
|
56 |
|
|
|
245 |
|
|
|
(189 |
) |
|
|
(77.1 |
) |
|
Sales revenue |
|
|
9 |
|
|
|
227 |
|
|
|
(218 |
) |
|
|
(96.0 |
) |
|
|
146 |
|
|
|
463 |
|
|
|
(317 |
) |
|
|
(68.5 |
) |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
(1 |
) |
|
|
32 |
|
|
|
(33 |
) |
|
NM(1) |
|
|
|
13 |
|
|
|
68 |
|
|
|
(55 |
) |
|
|
(80.9 |
) |
|
|
Sales and marketing expense, net(2) |
|
|
56 |
|
|
|
139 |
|
|
|
(83 |
) |
|
|
(59.7 |
) |
|
|
181 |
|
|
|
270 |
|
|
|
(89 |
) |
|
|
(33.0 |
) |
|
Real estate margin |
|
$ |
(46 |
) |
|
$ |
56 |
|
|
$ |
(102 |
) |
|
NM(1) |
|
|
$ |
(48 |
) |
|
$ |
125 |
|
|
$ |
(173 |
) |
|
NM(1) |
|
||
|
Real estate margin percentage |
|
NM(1) |
|
|
|
24.7 |
% |
|
|
|
|
|
|
|
|
|
|
(32.9 |
)% |
|
|
27.0 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
|
(2) |
Includes revenue recognized through our marketing programs for existing owners and prospective first-time buyers and revenue associated with sales incentives, title service and document compliance. |
34
Sales revenue decreased for the three and six months ended June 30, 2020, compared to the same period in 2019, due to decreases in sales revenue, commission and brand fees and related expenses as a result of the temporary closure of substantially all of our properties and suspension of our sales and related operations as a result of the COVID-19 pandemic.
Financing
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
Interest income |
|
$ |
36 |
|
|
$ |
36 |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
74 |
|
|
$ |
72 |
|
|
$ |
2 |
|
|
|
2.8 |
% |
|
Other financing revenue |
|
|
7 |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
12 |
|
|
|
1 |
|
|
|
8.3 |
|
|
Financing revenue |
|
|
43 |
|
|
|
43 |
|
|
|
— |
|
|
|
— |
|
|
|
87 |
|
|
|
84 |
|
|
|
3 |
|
|
|
3.6 |
|
|
Consumer financing interest expense |
|
|
7 |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
14 |
|
|
|
— |
|
|
|
— |
|
|
Other financing expense |
|
|
6 |
|
|
|
5 |
|
|
|
1 |
|
|
|
20.0 |
|
|
|
12 |
|
|
|
11 |
|
|
|
1 |
|
|
|
9.1 |
|
|
Financing expense |
|
|
13 |
|
|
|
12 |
|
|
|
1 |
|
|
|
8.3 |
|
|
|
26 |
|
|
|
25 |
|
|
|
1 |
|
|
|
4.0 |
|
|
Financing margin |
|
$ |
30 |
|
|
$ |
31 |
|
|
$ |
(1 |
) |
|
|
(3.2 |
) |
|
$ |
61 |
|
|
$ |
59 |
|
|
$ |
2 |
|
|
|
3.4 |
|
|
Financing margin percentage |
|
|
69.8 |
% |
|
|
72.1 |
% |
|
|
|
|
|
|
|
|
|
|
70.1 |
% |
|
|
70.2 |
% |
|
|
|
|
|
|
|
|
Financing revenue remained flat for the three months ended June 30, 2020 and increased $3 million for the six months ended June 30, 2020, compared to the same periods in 2019 due to higher interest income resulting from an increase in the weighted average interest rate we receive on our timeshare financing receivables balance and an increase in other financing revenue related to higher loan servicing fees.
Financing margin and margin percentage decreased for the three months ended June 30, 2020, compared to the same period in 2019 related to the increase in other financing expenses. Financing margin increased for the six months ended June 30, 2020 while margin percentage remained relatively flat, compared to the same period in 2019 driven by an increase in interest income and other financing revenue partially offset by an increase in other financing expenses.
Resort Operations and Club Management Segment
Resort and Club Management
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
Club management revenue |
|
$ |
22 |
|
|
$ |
26 |
|
|
$ |
(4 |
) |
|
|
(15.4 |
)% |
|
$ |
47 |
|
|
$ |
52 |
|
|
$ |
(5 |
) |
|
|
(9.6 |
)% |
|
Resort management revenue |
|
|
17 |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
36 |
|
|
|
33 |
|
|
|
3 |
|
|
|
9.1 |
|
|
Resort and club management revenues |
|
|
39 |
|
|
|
43 |
|
|
|
(4 |
) |
|
|
(9.3 |
) |
|
|
83 |
|
|
|
85 |
|
|
|
(2 |
) |
|
|
(2.4 |
) |
|
Club management expense |
|
|
5 |
|
|
|
7 |
|
|
|
(2 |
) |
|
|
(28.6 |
) |
|
|
12 |
|
|
|
14 |
|
|
|
(2 |
) |
|
|
(14.3 |
) |
|
Resort management expense |
|
|
1 |
|
|
|
5 |
|
|
|
(4 |
) |
|
|
(80.0 |
) |
|
|
6 |
|
|
|
9 |
|
|
|
(3 |
) |
|
|
(33.3 |
) |
|
Resort and club management expenses |
|
|
6 |
|
|
|
12 |
|
|
|
(6 |
) |
|
|
(50.0 |
) |
|
|
18 |
|
|
|
23 |
|
|
|
(5 |
) |
|
|
(21.7 |
) |
|
Resort and club management margin |
|
$ |
33 |
|
|
$ |
31 |
|
|
$ |
2 |
|
|
|
6.5 |
|
|
$ |
65 |
|
|
$ |
62 |
|
|
$ |
3 |
|
|
|
4.8 |
|
|
Resort and club management margin percentage |
|
|
84.6 |
% |
|
|
72.1 |
% |
|
|
|
|
|
|
|
|
|
|
78.3 |
% |
|
|
72.9 |
% |
|
|
|
|
|
|
|
|
Resort and club management revenues decreased for the three and six months ended 2020, compared to the same periods in 2019, primarily due to a decrease in club management revenue related to the refunding and waiving of club transaction fees to accommodate our guests impacted by the COVID-19 pandemic partially offset by (i) an increase of approximately 10,000 Club members and (ii) an increase in resort management revenue from the launch of new properties. Resort and club management margin percentage increased for the three and six months ended 2020, compared to the same periods in 2019, primarily due to a reduction in resort and club management expenses driven by the temporary closure and suspension of substantially all of our resort operations as a result of the COVID-19 pandemic.
35
Rental and Ancillary Services
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
Rental revenues |
|
$ |
5 |
|
|
$ |
53 |
|
|
$ |
(48 |
) |
|
|
(90.6 |
)% |
|
$ |
52 |
|
|
$ |
105 |
|
|
$ |
(53 |
) |
|
|
(50.5 |
)% |
|
Ancillary services revenues |
|
|
— |
|
|
|
7 |
|
|
|
(7 |
) |
|
|
(100.0 |
) |
|
|
5 |
|
|
|
14 |
|
|
|
(9 |
) |
|
|
(64.3 |
) |
|
Rental and ancillary services revenues |
|
|
5 |
|
|
|
60 |
|
|
|
(55 |
) |
|
|
(91.7 |
) |
|
|
57 |
|
|
|
119 |
|
|
|
(62 |
) |
|
|
(52.1 |
) |
|
Rental expenses |
|
|
22 |
|
|
|
30 |
|
|
|
(8 |
) |
|
|
(26.7 |
) |
|
|
54 |
|
|
|
59 |
|
|
|
(5 |
) |
|
|
(8.5 |
) |
|
Ancillary services expense |
|
|
2 |
|
|
|
7 |
|
|
|
(5 |
) |
|
|
(71.4 |
) |
|
|
7 |
|
|
|
13 |
|
|
|
(6 |
) |
|
|
(46.2 |
) |
|
Rental and ancillary services expenses |
|
|
24 |
|
|
|
37 |
|
|
|
(13 |
) |
|
|
(35.1 |
) |
|
|
61 |
|
|
|
72 |
|
|
|
(11 |
) |
|
|
(15.3 |
) |
|
Rental and ancillary services margin |
|
$ |
(19 |
) |
|
$ |
23 |
|
|
$ |
(42 |
) |
|
NM(1) |
|
|
$ |
(4 |
) |
|
$ |
47 |
|
|
$ |
(51 |
) |
|
NM(1) |
|
||
|
Rental and ancillary services margin percentage |
|
NM(1) |
|
|
|
38.3 |
% |
|
|
|
|
|
|
|
|
|
|
(7.0 |
)% |
|
|
39.5 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
Rental and ancillary services revenue and expense decreased for the three and six months ended June 30, 2020, compared to the same periods in 2019, due to the temporary closure and suspension of substantially all of our resort operations as a result of the COVID-19 pandemic. Rental and ancillary services margin and margin percentage decreased for the three and six months ended June 30, 20120, compared to the same period in 2019, primarily due to the decreases in revenues and expenses discussed above. Beginning in May 2020, we began a phased reopening of resorts and resumption of our business activities however, many of our resorts are operating with significant capacity constraints and are subject to various safety measures. As of June 30, 2020, we have approximately two thirds of our resorts open and currently operating.
Other Operating Expenses
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
General and administrative |
|
$ |
22 |
|
|
$ |
30 |
|
|
$ |
(8 |
) |
|
|
(26.7 |
)% |
|
$ |
43 |
|
|
$ |
57 |
|
|
$ |
(14 |
) |
|
|
(24.6 |
)% |
|
Depreciation and amortization |
|
|
11 |
|
|
|
12 |
|
|
|
(1 |
) |
|
|
(8.3 |
) |
|
|
23 |
|
|
|
20 |
|
|
|
3 |
|
|
|
15.0 |
|
|
License fee expense |
|
|
6 |
|
|
|
26 |
|
|
|
(20 |
) |
|
|
(76.9 |
) |
|
|
28 |
|
|
|
49 |
|
|
|
(21 |
) |
|
|
(42.9 |
) |
The change in other operating expenses for the three and six months ended June 30, 2020, compared to the same periods in 2019, is driven by a decrease in General and administrative expenses related to (i) decreases in salaries and wages resulting from the furloughs and pay decreases announced during the first quarter of 2020, (ii) the reversal of previously recognized expense related to our 2018 and 2019 Performance RSUs which are not expected to achieve certain performance targets during the first quarter of 2020 and (iii) lower license fee expense related to the corresponding decrease in real estate sales and resort operations revenue.
Non-Operating Expenses
|
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||||||
|
Interest expense |
|
$ |
12 |
|
|
$ |
11 |
|
|
$ |
1 |
|
|
|
9.1 |
% |
|
$ |
22 |
|
|
$ |
21 |
|
|
$ |
1 |
|
|
|
4.8 |
% |
|
Equity in earnings from unconsolidated affiliates |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
1 |
|
|
|
(50.0 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
33.3 |
|
|
Other loss, net |
|
|
3 |
|
|
|
1 |
|
|
|
2 |
|
|
NM(1) |
|
|
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
(50.0 |
) |
|
|
Income tax (benefit) expense |
|
|
(8 |
) |
|
|
15 |
|
|
|
(23 |
) |
|
NM(1) |
|
|
|
(7 |
) |
|
|
35 |
|
|
|
(42 |
) |
|
NM(1) |
|
||
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
36
The change in non-operating expenses for the three and six months ended June 30, 2020, compared to the same periods in 2019, is primarily due to a decrease in income tax expense due to a decrease in income before taxes combined with a decrease in the effective tax rate. See Note 14: Income Taxes for additional information.
Liquidity and Capital Resources
Overview
Our cash management objectives are to maintain the availability of liquidity, minimize operational costs, make debt payments and fund future acquisitions and development projects. Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including payroll and related benefits, legal costs, operating costs associated with the operation of our resorts and sales centers, interest and scheduled principal payments on our outstanding indebtedness, inventory-related purchase commitments, and capital expenditures for renovations and maintenance at our offices and sales centers. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, inventory-related purchase commitments and costs associated with potential acquisitions and development projects.
We finance our short- and long-term liquidity needs primarily through cash and cash equivalents, cash generated from our operations, draws on our senior secured credit facility and our non-recourse revolving timeshare credit facility (“Timeshare Facility”), and through periodic securitizations of our timeshare financing receivables.
|
|
• |
In March 2020, we drew down the substantial remainder of our borrowing capacity under the revolver facility through net borrowings of $445 million as a precautionary measure to ensure liquidity for a sustained period in the economic environment resulting from the COVID-19 pandemic. We do not have a plan for the use of the proceeds other than for general corporate and working capital purposes in the ordinary course of business. As of June 30, 2020, we have $39 million remaining borrowing capacity under the revolver facility (“Revolver”) which includes $29 million of undrawn borrowing capacity available for letters of credit and $10 million available under short-term borrowings. See Note 11: Debt and Non-Recourse Debt for additional information. |
|
|
• |
In April 2020, we amended certain key definitions related to delinquency level calculations of underlying timeshare loans that are used as collateral for borrowings under our Timeshare Facility, and generated added flexibility to manage any potential increase in the rate of delinquency as a result of the impact of the COVID-19 pandemic. |
|
|
• |
In May 2020, we amended our Credit Agreement which amended certain terms of the credit facilities (“Senior Secured Credit Facilities”) to provide us with both near-term and long-term flexibility with respect to satisfying certain negative and financial covenant ratios as may be needed due to the ongoing and uncertain future impact of the COVID-19 pandemic on our business and operations. |
|
|
• |
In June 2020, we completed a securitization of $300 million of gross timeshare financing receivables and used the proceeds to pay down the $195 million outstanding balance on our Timeshare Facility and for general corporate operating expenses. As of June 30, 2020, we have $450 million remaining borrowing capacity under our Timeshare Facility. See Note 11: Debt and Non-Recourse Debt for additional information. |
|
|
• |
As of June 30, 2020, we had total cash and cash equivalents of $823 million, including $90 million of restricted cash. The restricted cash balance relates to escrowed cash from sales of our VOIs and reserves related to our non-recourse debt. |
To optimize our liquidity and access to capital in light of the significant adverse impact of the COVID-19 pandemic, particularly as substantially all of our properties were temporarily closed and substantially all of our sales, operations and other activities were suspended during the first and second quarter of 2020, in addition to the steps discussed above, we have undertaken efforts to increase our capital and decrease our expenses. These include the furlough of approximately 67 percent of our employees, temporary salary reductions for the remaining employees, eliminating discretionary spending, and reducing our planned investment in new inventory by approximately $200 million. We have also suspended the share repurchase program that was initially authorized by our Board in March 2020.
We believe that these actions, together with drawing on available borrowings under our Revolver and preserving our capacity under our Timeshare Facility as described above, will provide adequate capital to meet our short- and long-term liquidity requirements for operating expenses and other expenditures, including payroll and related benefits, legal costs, and additional costs related to complying with various regulatory requirements and best practices for opening under the current environment resulting from the pandemic, and to finance our long-term growth plan and capital expenditures for the foreseeable future.
37
In addition, as noted previously, beginning in May 2020, in response to various states and counties starting to allow gradual relaxation of restrictions on activities and a resumption of businesses, we began a phased reopening of resorts and resumption of our business activities, including our sales activities. However, we are operating under new guidelines and with safety measures that did not exist prior to the onset of the pandemic. As of July 2020, we have nearly three quarters of our resorts and sales centers open and currently operating however, many of our resorts and sales centers are operating with significant capacity constraints and subject to various safety measures. While we plan to continue to reopen our resorts and resume our business as conditions permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity. Accordingly, there remains significant uncertainty as to the degree of impact and duration of the conditions stemming from the ongoing pandemic on our revenues, net income and other operating results, as well as our business and operations generally and, accordingly, our future cash flows and our liquidity in the longer term. Any sustained material adverse impact on our revenues, net income (loss) and other operating results due to COVID-19 could adversely affect our ability to comply with our financial covenants under our debt obligations.
Sources and Uses of Our Cash
The following table summarizes our net cash flows and key metrics related to our liquidity:
|
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|||
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
88 |
|
|
$ |
71 |
|
|
$ |
17 |
|
|
Investing activities |
|
|
(15 |
) |
|
|
(29 |
) |
|
|
14 |
|
|
Financing activities |
|
|
598 |
|
|
|
(35 |
) |
|
|
633 |
|
Operating Activities
Cash flow provided by operating activities is primarily generated from (1) sales and financing of VOIs and (2) net cash generated from managing our resorts, Club operations and providing related ancillary services. Cash flows used in operating activities primarily include spending for the purchase and development of real estate for future conversion to inventory and funding our working capital needs. Our cash flows from operations generally vary due to the following factors related to the sale of our VOIs; the degree to which our owners finance their purchase and our owners’ repayment of timeshare financing receivables; the timing of management and sales and marketing services provided; and cash outlays for VOI inventory acquisition and development. Additionally, cash flow from operations will also vary depending upon our sales mix of VOIs; over time, we generally receive more cash from the sale of an owned VOI as compared to that from a fee-for-service sale.
The change in net cash flows provided by operating activities for the six months ended June 30, 2020, compared to the same period in 2019 was primarily due to a reduction in the purchase and development of real estate for future conversion to inventory, partially offset by decreased sources of cash from working capital.
The following table exhibits our VOI inventory spending:
|
|
|
Six Months Ended June 30, |
|
|||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
VOI spending - owned properties |
|
$ |
41 |
|
|
$ |
54 |
|
|
VOI spending - fee-for-service upgrades(1) |
|
|
9 |
|
|
|
24 |
|
|
Purchases and development of real estate for future conversion to inventory |
|
|
19 |
|
|
|
80 |
|
|
Total VOI inventory spending |
|
$ |
69 |
|
|
$ |
158 |
|
|
(1) |
Includes expense related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects from developed projects of $5 million and $16 million recorded in Costs of VOI sales for the six months ended June 30, 2020 and 2019, respectively. |
38
Investing Activities
The following table summarizes our net cash used in investing activities:
|
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|||
|
Capital expenditures for property and equipment |
|
$ |
(4 |
) |
|
$ |
(17 |
) |
|
$ |
13 |
|
|
Software capitalization costs |
|
|
(11 |
) |
|
|
(10 |
) |
|
|
(1 |
) |
|
Investments in unconsolidated affiliates |
|
|
— |
|
|
|
(2 |
) |
|
|
2 |
|
|
Net cash used in investing activities |
|
$ |
(15 |
) |
|
$ |
(29 |
) |
|
$ |
14 |
|
The change in net cash used in investing activities for the six months ended June 30, 2020, compared to the same period in 2019, was primarily due to a reduction of property and equipment spending.
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 cash provided by financing activities:
|
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|||
|
Issuance of debt |
|
$ |
495 |
|
|
$ |
410 |
|
|
$ |
85 |
|
|
Issuance of non-recourse debt |
|
|
495 |
|
|
|
15 |
|
|
|
480 |
|
|
Repayment of debt |
|
|
(60 |
) |
|
|
(105 |
) |
|
|
45 |
|
|
Repayment of non-recourse debt |
|
|
(313 |
) |
|
|
(79 |
) |
|
|
(234 |
) |
|
Debt issuance costs |
|
|
(6 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
|
Repurchase and retirement of common stock |
|
|
(10 |
) |
|
|
(271 |
) |
|
|
261 |
|
|
Payment of withholding taxes on vesting of restricted stock units |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
1 |
|
|
Proceeds from employee stock plan purchases |
|
|
— |
|
|
|
2 |
|
|
|
(2 |
) |
|
Other financing activity |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
1 |
|
|
Net cash provided by (used in) financing activities |
|
$ |
598 |
|
|
$ |
(35 |
) |
|
$ |
633 |
|
The change in net cash provided by (used in) financing activities for the six months ended June 30, 2020, compared to the same period in 2019, was primarily due to (i) the debt borrowings and repayments under our Revolver of $85 million and $45 million, respectively, (ii) the issuance of $300 million of securitized debt offset by additional repayments of $39 million of our other securitized debt, (iii) the additional borrowing of $180 million on our Timeshare Facility offset by a repayment of our outstanding balance of $195 million, and (iv) a reduction in repurchases and retirement of common stock.
39
Contractual Obligations
The following table summarizes our significant contractual obligations as of June 30, 2020:
|
|
|
Payments Due by Period |
|
|||||||||||||||||
|
($ in millions) |
|
Total |
|
|
Less Than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More Than 5 Years |
|
|||||
|
Debt |
|
$ |
1,269 |
|
|
$ |
12 |
|
|
$ |
22 |
|
|
$ |
1,212 |
|
|
$ |
23 |
|
|
Non-recourse debt |
|
|
937 |
|
|
|
261 |
|
|
|
367 |
|
|
|
188 |
|
|
|
121 |
|
|
Interest on debt(1) |
|
|
232 |
|
|
|
63 |
|
|
|
104 |
|
|
|
50 |
|
|
|
15 |
|
|
Operating leases |
|
|
86 |
|
|
|
18 |
|
|
|
28 |
|
|
|
23 |
|
|
|
17 |
|
|
Inventory purchase commitments |
|
|
464 |
|
|
|
108 |
|
|
|
244 |
|
|
|
98 |
|
|
|
14 |
|
|
Other commitments(2) |
|
|
26 |
|
|
|
13 |
|
|
|
12 |
|
|
|
1 |
|
|
|
— |
|
|
Total contractual obligations |
|
$ |
3,014 |
|
|
$ |
475 |
|
|
$ |
777 |
|
|
$ |
1,572 |
|
|
$ |
190 |
|
|
(1) |
Includes interest on our debt and non-recourse debt. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 0.16 percent, subject to a 0.25 percent floor, as of June 30, 2020. |
|
(2) |
Primarily relates to commitments related to information technology and brand licensing under the normal course of business. |
We have made commitments with developers to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of June 30, 2020, our inventory-related purchase commitments totaled $464 million over 11 years of which we expect to purchase $17 million for the remaining of 2020.
We utilize surety bonds related to the sales of VOIs in order to meet regulatory requirements of certain states. The availability, terms and conditions and pricing of such bonding capacity are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating. We have commitments from surety providers in the amount of $576 million as of June 30, 2020 which primarily consist of escrow and construction related bonds.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of June 30, 2020 consisted of $464 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 our Hilton Grand Vacations brand and $26 million of other commitments under the normal course of business. 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.
Guarantor Financial Information
Certain subsidiaries, which are listed on Exhibit 22 of this Quarterly Report on Form 10-Q, have guaranteed our obligations related to our senior unsecured notes (the “Notes”). The notes were issued in November 2016 with an aggregate principal balance of $300 million, an interest rate of 6.125 percent, and maturity in December 2024.
Our senior unsecured notes were co-issued by Hilton Grand Vacations Borrower LLC and Hilton Grand Vacations Borrower Inc. (the “Issuers”) and are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Hilton Grand Vacations Inc. (the “Parent”), Hilton Grand Vacations Parent LLC (the “Intermediate Parent”), the Issuers, and each of the Issuer’s existing and future wholly owned domestic restricted subsidiaries (all entities that guarantee the Notes, collectively, the “Obligor group”).
The Notes rank equally in right of payment with all of our existing and future senior unsecured obligations, are senior in right of payment to any of our Guarantor’s subordinated indebtedness, and are subordinate to all existing and future liabilities of our entities that do not guarantee the Notes and our secured indebtedness, including our senior secured credit facilities and securitized non-recourse debt.
The guarantee of each guarantor subsidiary is limited to a maximum amount, subject to applicable U.S. and non-U.S. laws. The guarantees can also be released upon the sale or transfer of a guarantor subsidiary’s capital stock or substantially all of its assets, becoming designated as an unrestricted subsidiary, or upon its consolidation into a co-Issuer or another subsidiary Guarantor.
40
The following tables provide summarized financial information of the Obligor group on a combined basis after elimination of (i) intercompany transactions and balances between the Parent Company and the subsidiary Guarantors and (ii) investments in and equity in the earnings of non-Guarantor subsidiaries and unconsolidated affiliates:
Summarized Financial Information
|
|
|
June 30, |
|
|
December 31, |
|
||
|
($ in millions) |
|
2020 |
|
|
2019 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
690 |
|
|
$ |
35 |
|
|
Restricted cash |
|
|
39 |
|
|
|
59 |
|
|
Accounts receivable, net - due from non-guarantor subsidiaries |
|
|
14 |
|
|
|
41 |
|
|
Accounts receivable, net - due from related parties |
|
|
2 |
|
|
|
25 |
|
|
Accounts receivable, net - other |
|
|
67 |
|
|
|
126 |
|
|
Timeshare financing receivables, net |
|
|
149 |
|
|
|
449 |
|
|
Inventory |
|
|
824 |
|
|
|
524 |
|
|
Property and equipment, net |
|
|
474 |
|
|
|
718 |
|
|
Operating lease right-of-use assets, net |
|
|
57 |
|
|
|
58 |
|
|
Intangible assets, net |
|
|
79 |
|
|
|
77 |
|
|
Other assets |
|
|
98 |
|
|
|
69 |
|
|
Total assets |
|
$ |
2,493 |
|
|
$ |
2,181 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other - due from non-guarantor subsidiaries |
|
$ |
14 |
|
|
$ |
41 |
|
|
Accounts payable, accrued expenses and other - other |
|
|
229 |
|
|
|
288 |
|
|
Advanced deposits |
|
|
116 |
|
|
|
115 |
|
|
Debt, net |
|
|
1,263 |
|
|
|
828 |
|
|
Operating lease liabilities |
|
|
73 |
|
|
|
74 |
|
|
Deferred revenues |
|
|
268 |
|
|
|
186 |
|
|
Deferred income tax liabilities |
|
|
228 |
|
|
|
259 |
|
|
Total liabilities |
|
$ |
2,191 |
|
|
$ |
1,791 |
|
|
|
|
Six Months Ended June 30, |
|
|
|
($ in millions) |
|
2020 |
|
|
|
Total revenues - transactions with non-guarantor subsidiaries |
|
$ |
3 |
|
|
Total revenues - other |
|
|
408 |
|
|
Operating loss |
|
|
(65 |
) |
|
Net loss |
|
|
(80 |
) |
Subsequent Events
Management has evaluated all subsequent events through July 30, 2020, the date the unaudited consolidated financial statements were available to be issued. The results of management’s analysis indicated no significant subsequent events have occurred that required consideration as adjustments to our disclosures in the unaudited financial statements.
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 the reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2019.
41
|
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, 2019.
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 primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt.
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 continue to have variable-rate borrowings and continue to 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. While we have entered into certain hedging transactions to address such potential risk, such transactions and any future 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 June 30, 2020, for our financial instruments that are materially affected by interest rate risk:
|
|
|
|
|
|
|
Maturities by Period |
|
|||||||||||||||||||||||||||||
|
($ in millions) |
|
Weighted Average Interest Rate(1) |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
There- after |
|
|
Total(2) |
|
|
Fair Value |
|
|||||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate securitized timeshare financing receivables |
|
|
12.248 |
% |
|
$ |
55 |
|
|
$ |
112 |
|
|
$ |
115 |
|
|
$ |
118 |
|
|
$ |
119 |
|
|
$ |
437 |
|
|
$ |
956 |
|
|
$ |
961 |
|
|
Fixed-rate unsecuritized timeshare financing receivables |
|
|
13.528 |
% |
|
|
13 |
|
|
|
26 |
|
|
|
28 |
|
|
|
30 |
|
|
|
33 |
|
|
|
177 |
|
|
|
307 |
|
|
|
315 |
|
|
Liabilities:(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
|
3.914 |
% |
|
|
161 |
|
|
|
259 |
|
|
|
166 |
|
|
|
117 |
|
|
|
400 |
|
|
|
161 |
|
|
|
1,264 |
|
|
|
1,251 |
|
|
Variable-rate debt(4) |
|
|
2.000 |
% |
|
|
5 |
|
|
|
10 |
|
|
|
10 |
|
|
|
917 |
|
|
|
— |
|
|
|
— |
|
|
|
942 |
|
|
|
927 |
|
|
(1) |
Weighted-average interest rate as of June 30, 2020. |
|
(2) |
Amount excludes unamortized deferred financing costs. |
|
(3) |
Includes debt and non-recourse debt. |
|
(4) |
Variable-rate debt includes principal outstanding debt of $942 million as of June 30, 2020. See Note 11: 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 change our gross timeshare financing receivables by less than $1 million. A 10 percent change in the foreign exchange rate of Mexican Peso to U.S. dollar would change our gross VAT receivable by less than $1 million.
42
|
ITEM 4. |
Controls and Procedures |
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 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 Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial 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 Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We will continue to assess the adequacy of our disclosure controls and procedures and make any appropriate changes given the various government mandates and orders of business closures and the resulting remote working conditions as a result of the COVID-19 pandemic.
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 June 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will continue to assess the effectiveness of our internal controls over financial reporting consistent with past practice, particularly in light of the various government mandates and orders of business closures and the resulting remote working conditions as a result of the COVID-19 pandemic.
43
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 evaluated these legal matters and we believe an unfavorable outcome is either reasonably possible or remote 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 June 30, 2020 will not have a material effect on our unaudited condensed consolidated financial statements.
|
Item 1A. |
Risk Factors |
The following represents important changes and updates to the risk factors previously disclosed in Item 1A. of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 10-K”) and Item 1A. of Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (our “Prior 10-Q”). The risk factors discussed below and the risk factors included in our 2019 10-K and our Prior 10-Q are important to understanding our business, operation, results of operations, financial condition, and prospects, especially during the current environment, and our statements generally in this Form 10-Q. Therefore, they should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.
In addition, the following risks and those risks described in our 2019 Form 10-K and our Prior 10-Q contain forward-looking statements, and they may not be the only risks facing the Company. The future business, results of operations and financial condition of the Company can be affected by the risk factors described in such reports and by other factors currently unknown, that management presently believes not to be material, that management has made certain forward looking projections, estimates or assumptions, or that may rapidly evolve, develop or change, including those that are caused, directly or indirectly, by the COVID-19 pandemic. Any one or more of such factors could, directly or indirectly, cause our actual financial condition and results of operations to vary materially from past, or from anticipated future, financial condition and results of operations. Any of these factors, in whole or in part, could materially and adversely affect our business, results of operations and financial condition and the trading price of our common stock. Because of these factors affecting our financial condition 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.
The COVID-19 pandemic and related events, including the various measures implemented or adopted to respond to the pandemic, have had, and will continue to have, a material adverse effect on our business, financial condition and results of operations for the foreseeable future.
The global COVID-19 pandemic and the various measures taken or implemented by governments and other authorities in the United States and around the world, businesses, organizations and individuals have had, and will continue to have, a significant adverse impact on domestic and international travel, consumer demand for travel, commercial activities across the travel, lodging and hospitality industries, businesses generally, and consequently, on our business and operations. The COVID-19 pandemic also has had, and will continue to have, significant adverse impacts on global economic, capital market, financial, healthcare, societal, and government regulatory conditions. In response to the growing pandemic and various governmental orders, we took certain significant actions to ensure the continuity of our business and operations between the end of the first quarter 2020 and during the second quarter 2020, including temporarily closing operations at substantially all of our resorts, closing substantially all of our sales centers, implementing salary reductions, furloughing over 6,100 of our approximately 9,100 employees, implementing hiring freezes, drawing down substantial amounts under our credit facility as a precautionary measure to ensure liquidity and amending both our credit facility and our warehouse facility to provide near-term flexibility on certain financial and operating covenant ratios. All of these actions have had, and will likely continue to have, a material adverse effect on our results of operations, financial condition, and business.
During May 2020, various cities, counties and states in the US started to allow gradual relaxation of restrictions on activities and a resumption of businesses. We began a phased reopening of our resorts and resumption of our sales activities in accordance with applicable orders, and we plan to continue to reopen our resorts as conditions permit. However, we have implemented a variety of measures that are required, or we believe are advisable for our business with the goal of keeping our customers, owners, team members, and the communities we serve as safe as reasonably feasible from the COVID-19 virus. These measures include additional cleaning and sanitation of our resorts and common areas, providing our team
44
members with personal protective equipment, requiring our guests and owners use face masks based on CDC or other federal, state, or local health guidelines, and implementing physical distancing practices.
Despite these reopening trends, the situations caused by the pandemic continues to be unprecedented and rapidly changing and fluid. Accordingly, there remains significant uncertainties and risks around the duration and severity of the pandemic in the US and around the world, the breadth and duration of business disruptions resulting from COVID-19, the pandemic’s impact on the global economy, consumer confidence, various businesses, and, consequently, our business and operations.
Some of these uncertainties and risks may include the following:
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resurgences, new outbreaks, increases in the rate of infection, and/or increasing death rates related to the COVID-19 virus, including as recently seen in certain regions and locations where we have a significant number of resorts and concentration of units, including the states of Florida, Hawaii, and New York and the various cities and counties located within such states, which may lead to another series of temporary closures, either out of abundance of caution or as may be required by new regulations; |
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potentiality of "second waves" of outbreak and spreading of the disease later in 2020 as certain healthcare officials have warned, which may result in further disruptions and additional governmental COVID-19 restrictions, closure orders and/or or “shelter in place” health orders, or similar restrictions; |
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ongoing issuances of new orders, amendments to existing orders, and conflicting directives by different governmental bodies, including, without limitation, certain key states identified above, which could disrupt, change, or otherwise adversely impact our safety protocols and measures that are intended to protect our guests, owners, and team members; |
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travel bans, quarantine requirements upon entry, and significant restrictions on travel among the states within the U.S., including the states of Florida, Hawaii and New York, as well as between the U.S. and specific countries, including restrictions placed by foreign governments on citizens of the U.S. flying into their countries; |
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continued closures and/or curtailment of operations at many popular tourist destinations, reducing the demand for leisure travel; |
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changing behavior of individuals and unwillingness to travel and stay at hotels, resorts, timeshares, and other lodging facilities due to the pandemic; |
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various safety measures that— |
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may continue to be challenging to implement due to uncertainties in how to correctly implement such measures, lack of availability of needed supplies or other issues, |
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we have already adopted but may need to change rapidly based on the status of the pandemic, any applicable governmental actions, industry practices, and guidance or recommendations from leading healthcare experts, |
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may result in significant costs to us, or |
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may cause guests to not visit our resorts because they do not want to abide by such measures, do not fully understand or agree with such requested measures, and/or are wary of the risk of infection despite such measures, |
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potential cases of infection and transmission at our resorts despite the implementation of our safety measures efforts, which would be disruptive and may lead to exposure to assertions of liability, |
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other actions we have taken or may take, or decisions we have made or may make, as a consequence of the COVID-19 pandemic that may result in investigations, legal claims (with or without merit) or litigation against us, and |
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inability to repay on time or at all the significant increases in our indebtedness and inadequacies of our liquidity and recent amendments to our credit facility and warehouse facility despite our recent efforts if the pandemic worsens and continues for significant duration. |
In addition to the foregoing, the COVID-19 pandemic and the resulting adverse conditions are likely to continue to implicate or exacerbate the risk factors that we identified in our 2019 10-K and our prior 10-Q. We encourage you to review such risk factors and related disclosure in such filings, together with the foregoing supplemental risk factors.
Any of the foregoing or other risks, factors, and events that are not foreseeable can result in significant negative impact on our results of operations, financial condition, business and operations, and reputation.
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
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Item 3. |
Defaults Upon Senior Securities |
None.
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Item 4. |
Mine Safety Disclosures |
Not applicable.
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Item 5. |
Other Information |
None.
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Item 6. |
Exhibits |
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Exhibit No. |
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Description |
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3.1 |
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3.2 |
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3.3 |
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4.1 |
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10.1 |
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10.2 |
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10.3 |
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10.4 |
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22 |
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List of Issuer Subsidiaries of Guaranteed Securities and Guarantor Subsidiaries. * |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
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Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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Exhibit No. |
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Description |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Calculation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Label Linkbase Document. |
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101.PRE |
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Inline XBRL Taxonomy Presentation Linkbase Document. |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* |
Filed herewith. |
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+ |
Compensatory arrangement. |
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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 30th day of July 2020.
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HILTON GRAND VACATIONS INC. |
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By: |
/s/ Mark D. Wang |
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Name: |
Mark D. Wang |
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Title: |
President and Chief Executive Officer |
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By: |
/s/ Daniel J. Mathewes |
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Name: |
Daniel J. Mathewes |
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Title: |
Executive Vice President and Chief Financial Officer |
50