Hilton Grand Vacations Reports Full-Year and Fourth-Quarter 2018 Results

ORLANDO, Fla.–(BUSINESS WIRE)–Hilton
Grand Vacations Inc.
(NYSE:HGV) (“HGV” or “the Company”)
today reports its full-year and fourth-quarter 2018 results. Highlights
include:


KEY HIGHLIGHTS

Full-Year 2018 Results

  • Total revenues were $2.0 billion, net income was $298 million and
    diluted EPS was $3.05.
  • Adjusted EBITDA was $503 million, which was at the high end of
    guidance. Adjusted EBITDA includes a $79 million net benefit from
    recognitions related to sales that occurred prior to 2018.
  • Contract sales increased 10.6 percent and Net Owner Growth (NOG) was
    7.0 percent.
  • Adjusted free cash flow was ($44) million.
  • Increased credit facility to $1 billion and announced $200 million
    share repurchase authorization.
  • Repurchased 2.5 million shares for $71 million under the new
    authorization at an average price of $28.62.

Outlook

  • Increasing diluted EPS guidance to $2.74 to $2.89 from $2.68 to $2.84
    to reflect fourth quarter 2018 share repurchases.
  • Net income is projected to be between $260 million and $275 million.
  • Adjusted EBITDA is projected to be between $450 million and $470
    million.
  • Contract sales are projected to increase 9.0 to 11.0 percent.
  • Adjusted free cash flow is projected to be between $60 million and
    $120 million.
  • 2019 outlook assumes no construction-related deferrals, recognitions
    or additional share repurchases.

Overview – Full-Year 2018

2018 was a remarkable year as we saw 7 percent NOG growth and
double-digit contract sales and Adjusted EBITDA growth,” says Mark Wang,
president and CEO, Hilton Grand Vacations. “More importantly, we
successfully put in place a pipeline of high-return projects in
high-demand markets to accelerate our growth in 2019 and beyond. With
our recent project announcement, Maui joins Japan, Charleston, Cabo,
Chicago and Barbados on the roster of exciting new destinations we’ve
announced over the past 15 months. We believe our strong 2018 results
and the long-term outlook we shared at our recent Investor Day
demonstrate HGV’s ability to continue our momentum and drive long-term
value for our shareholders.”

For the year ended Dec. 31, 2018, total revenues were $2.0 billion
compared to $1.7 billion for the year ended Dec. 31, 2017. Diluted EPS
was $3.05 for the year ended Dec. 31, 2018, compared to $3.28 for the
year ended Dec. 31, 2017. Net income and Adjusted EBITDA was $298
million and $503 million, respectively, for the year ended Dec. 31,
2018, compared to $327 million and $395 million, respectively, for the
year ended Dec. 31, 2017.

Net income and Adjusted EBITDA for the year ended Dec. 31, 2018,
included a $79 million net benefit from recognitions related to sales at
The Residences property that occurred prior to 2018 that were deferred
until the second quarter of 2018 when construction of that project was
completed.

Net income for the year ended Dec. 31, 2017, included a deferred income
tax benefit of $129 million, which was mostly attributable to a benefit
of $132 million for the quarter ended Dec. 31, 2017, related to the
one-time re-measurement of net deferred income taxes under the new U.S.
federal income tax rate provided by the Tax Cuts and Jobs Act of 2017.

Segment Highlights Full Year 2018

Real Estate Sales and Financing

For the year ended Dec. 31, 2018, Real Estate Sales and Financing
segment revenues were $1.5 billion, an increase of 18.0 percent compared
to the year ended Dec. 31, 2017. Real Estate Sales and Financing segment
Adjusted EBITDA and Adjusted EBITDA margin was $447 million and 30.6
percent, respectively, for the year ended Dec. 31, 2018, compared to
$359 million and 29.0 percent, respectively, for the year ended Dec. 31,
2017.

Results for the year ended Dec. 31, 2018, included a $79 million net
benefit from recognitions related to sales at The Residences property
that occurred prior to 2018 that were deferred until the second quarter
of 2018 when construction of that project was completed.

For the year ended Dec. 31, 2018, contract sales increased 10.6 percent
to $1.4 billion compared to the year ended Dec. 31, 2017.
Fee-for-service contract sales represented 55.0 percent of contract
sales for the year ended Dec. 31, 2018, compared to 54.4 percent for the
prior year. For the year ended Dec. 31, 2018, tours increased 8.2
percent to 357,861 and VPG increased 2.4 percent to $3,743 compared to
the prior year.

Financing revenues were $158 million for the year ended Dec. 31, 2018,
an increase of 7.5 percent compared to the prior year.

The weighted average FICO score of new loans made to U.S. and Canadian
borrowers at the time of origination increased to 749 for the year ended
Dec. 31, 2018, from 743 for the year ended Dec. 31, 2017.

For the year ended Dec. 31, 2018, 65.8 percent of HGV’s sales were to
customers who financed part of their purchase.

As of Dec. 31, 2018, gross timeshare financing receivables were $1.3
billion with a weighted average interest rate of 12.3 percent and a
weighted average remaining term of 7.8 years. As of Dec. 31, 2018, 93.2
percent of HGV’s financing receivables were current, compared to 94.6
percent as of Dec. 31, 2017.

Resort Operations and Club Management

For the year ended Dec. 31, 2018, Resort Operations and Club Management
segment revenues were $422 million, an increase of 15.0 percent compared
to the year ended Dec. 31, 2017. Resort Operations and Club Management
segment Adjusted EBITDA and Adjusted EBITDA margin was $245 million and
58.1 percent, respectively, for the year ended Dec. 31, 2018, compared
to $204 million and 55.6 percent, respectively, for the year ended Dec.
31, 2017.

Overview – Fourth Quarter 2018

For the quarter ended Dec. 31, 2018, diluted EPS was $1.24 compared to
$1.83 for the quarter ended Dec. 31, 2017. Net income and Adjusted
EBITDA was $120 million and $186 million, respectively, for the quarter
ended Dec. 31, 2018, compared to $183 million and $101 million,
respectively, for the quarter ended Dec. 31, 2017. Total revenues for
the quarter ended Dec. 31, 2018, were $642 million compared to $447
million for the quarter ended Dec. 31, 2017.

Net income and Adjusted EBITDA for the quarter ended Dec. 31, 2018,
included an $81 million net benefit from recognitions related to sales
at the Ocean Tower property that occurred during the first nine months
of 2018 that were deferred until the fourth quarter of 2018 when
construction of that phase of the project was completed.

As noted, results for the quarter ended Dec. 31, 2017, included a
deferred income tax benefit of $132 million.

Segment Highlights Fourth Quarter 2018

Real Estate Sales and Financing

For the quarter ended Dec. 31, 2018, Real Estate Sales and Financing
segment revenues were $495 million, an increase of 53.3 percent compared
to the quarter ended Dec. 31, 2017. Real Estate Sales and Financing
segment Adjusted EBITDA and Adjusted EBITDA margin was $173 million and
34.9 percent, respectively, for the quarter ended Dec. 31, 2018,
compared to $96 million and 29.7 percent, respectively, for the quarter
ended Dec. 31, 2017.

Results for the quarter ended Dec. 31, 2018, included an $81 million net
benefit from recognitions related to sales at the Ocean Tower property
that occurred during the first nine months of 2018 that were deferred
until the fourth quarter of 2018 when construction of that phase of the
project was completed.

Contract sales for the quarter ended Dec. 31, 2018, increased
6.2 percent to $360 million compared to the quarter ended Dec. 31, 2017.
Fee-for-service contract sales represented 56.1 percent of contract
sales for the quarter ended Dec. 31, 2018, compared to 54.9 percent for
the quarter ended Dec. 31, 2017. For the quarter ended Dec. 31, 2018,
compared to the quarter ended Dec. 31, 2017, tours increased 8.5 percent
to 91,076 and VPG decreased 2.0 percent to $3,775.

Financing revenues were $41 million for the quarter ended Dec. 31, 2018,
an increase of 7.9 percent compared to the quarter ended Dec. 31, 2017.

Resort Operations and Club Management

For the quarter ended Dec. 31, 2018, Resort Operations and Club
Management segment revenue was $118 million, an increase of 21.6 percent
compared to the quarter ended Dec. 31, 2017. Resort Operations and Club
Management segment Adjusted EBITDA and Adjusted EBITDA margin was
$66 million and 55.9 percent, respectively, for the quarter ended Dec.
31, 2018, compared to $51 million and 52.6 percent, respectively, for
the quarter ended Dec. 31, 2017.

Inventory

The estimated contract sales value of HGV’s total pipeline is
approximately $9.9 billion at current pricing, which represents
approximately 7.0 years of sales at the current trailing 12-month sales
pace.

The total pipeline includes approximately 1.4 years of sales relating to
inventory that is currently available for sale at open or soon-to-open
projects. The remaining 5.6 years of sales is inventory at new or
existing projects that will become available for sale in the future upon
registration, delivery or construction.

Owned inventory represents 76 percent of HGV’s total pipeline.
Approximately 13 percent of the owned inventory pipeline is currently
available for sale.

Fee-for-service inventory represents 24 percent of HGV’s total pipeline.
Approximately 40 percent of the fee-for-service inventory pipeline is
currently available for sale.

With 32 percent of the pipeline consisting of just-in-time inventory and
24 percent consisting of fee-for-service inventory, capital-efficient
inventory represents 56 percent of HGV’s total pipeline.

Balance Sheet and Liquidity

Total cash and cash equivalents was $180 million as of Dec. 31, 2018,
including $72 million of restricted cash.

As of Dec. 31, 2018, HGV had $604 million of corporate debt, net
outstanding with a weighted average interest rate of 5.2 percent and
$759 million of non-recourse debt, net outstanding with a weighted
average interest rate of 3.1 percent.

Free cash flow was ($222) million for the year ended Dec. 31, 2018,
compared to $309 million in the prior period. Adjusted free cash flow
was ($44) million for the year ended Dec. 31, 2018, compared to $200
million in the prior period.

In November, the Company increased its credit facility to $1 billion
from $400 million, including the expansion of its revolver to $800
million from $200 million and refinanced and increased its existing term
loan to $200 million. The new facility includes incrementally better
pricing than the previous facility and provides HGV greater flexibility
to pursue its capital deployment strategies. As of Dec. 31, 2018, there
was $684 million of available capacity on the revolver.

Share Repurchase Program

On Nov. 28, 2018, the Company announced that its board of directors
approved a $200 million share repurchase program. Under the program,
repurchases may be carried out through open-market purchases, block
trades or other transactions subject to customary restrictions.

Under the new authorization, during the fourth quarter, the Company
repurchased 2.5 million shares for $71 million at an average price of
$28.62. This was the maximum amount permitted given daily trading volume
restrictions and the number of non-blackout trading days available
during the quarter.

Subsequent Event

Subsequent to the fourth quarter, HGV announced that it will develop its
first property on the Hawaiian island of Maui. Maui Bay Villas by Hilton
Grand Vacations will be HGV’s 10th property in Hawaii. The
multi-phase, 388-unit project is located on a 27-acre site on the
island’s southwestern coast with 740 feet of oceanfront. The resort will
offer a selection of one-, two- and three-bedroom suites across a
resort-style campus comprised of a dozen one- to four-story buildings.
The initial project phase, which is scheduled for completion in early
2021, includes 131 units within four buildings and all supporting
buildings and improvements. Planned amenities include a clubhouse with
restaurant, keiki club, fitness center, grab-and-go market, “super pool”
with pool bar, oceanfront beach club and over 15 acres of open-lawn
recreational space. Sales are anticipated to begin in early 2020. The
development costs for this project were included in the 2019-2021
inventory spending guidance the Company provided at its Investor Day on
Dec. 4, 2018.

Total Construction Deferrals and/or Recognitions Included in Results
Reported Under Accounting Standards Codification Topic 606 (“ASC 606”)

The Company’s Adjusted EBITDA as reported under ASC 606 includes
construction-related recognitions and deferrals of revenues and related
expenses as detailed in Table T-1. Under ASC 606, the Company defers
revenues and related expenses pertaining to sales at projects that occur
during periods when that project is under construction until the period
when construction is completed.

HGV deferred revenues and expense related to sales made at Ocean Tower
for the first three quarters of 2018 and recognized them in the fourth
quarter of 2018 when construction was completed on this project.
Likewise, HGV deferred revenues and expense related to sales made at The
Residences in the first quarter of 2018 and recognized them in the
second quarter of 2018 when construction was completed on this project.
These deferrals and recognitions of sales made in 2018 offset and there
was no net financial impact in 2018.

The $79 million net recognition impact for 2018 relates to the
recognition of revenues and expenses related to sales made at The
Residences prior to 2018 that were
recognized in the second quarter of 2018 when construction was
completed. A portion of these pre-2018 sales had been partially
recognized in prior periods under the previous accounting guidance, but
as part of the adoption of ASC 606 on Jan. 1, 2018, those recognitions
were reversed with a cumulative adjustment to retained earnings.

 
T-1
Total Construction Recognitions (Deferrals)
 
  2018
First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
  Full
Year
Net income $ 30 $ 107 $ 41 $ 120 $ 298
Interest expense 7 8 7 8 30
Income tax expense 10 39 15 41 105
Depreciation and amortization 8 8 9 11 36

Interest expense and depreciation and amortization included in
equity in earnings from unconsolidated affiliates

  1   1   1   1   4
EBITDA 56 163 73 181 473
Other (gain) loss, net 1 (1 ) 1 1
Share-based compensation expense 3 5 5 3 16
Other adjustment items   2   8   1   2   13
Adjusted EBITDA $ 62 $ 175 $ 80 $ 186 $ 503
 

NET CONSTRUCTION DEFERRAL ACTIVITY

Sales of VOI, net $ (66 ) $ 91 $ (45 ) $ 153 $ 133
Cost of VOI sales (21 ) 20 (13 ) 50 36
Sales, marketing, general and administrative expense   (8 )   11   (7 )   22   18
Net construction recognitions (deferrals) $ (37 ) $ 60 $ (25 ) $ 81 $ 79
 

Comparison of Reported Results Under ASC 606 Compared to Previous
Accounting Guidance

The following discussion relates to the reconciliation of HGV’s
financial results as reported under the current accounting guidance ASC
606 and the “previous accounting guidance,” ASC 605 as presented in
tables T-16 through T-21. Throughout 2018, to assist in the transition
from ASC 605 to ASC 606, HGV has been reconciling its reported 2018
results to ASC 605. Beginning in 2019, HGV will no longer present this
reconciliation.

Under ASC 606, recognitions of previously deferred revenues and expenses
increased reported revenue, net income and Adjusted EBITDA for the year
and quarter ended Dec. 31, 2018, compared to ASC 605. Under 605, total
revenues, net income and Adjusted EBITDA were $1.9 billion, $247 million
and $435 million, respectively, for the year ended Dec. 31, 2018, and
$513 million, $66 million and $114 million, respectively, for the
quarter ended Dec. 31, 2018.

Table T-2 shows that construction-related recognitions increased HGV’s
2018 reported financial results under ASC 606 by $67 million compared to
ASC 605. This reflects the recognition of revenues and expenses related
to sales made and deferred at The Residences prior
to 2018 that deferred through a cumulative adjustment to retained
earnings on Jan. 1, 2018, and subsequently recognized in the second
quarter of 2018 when construction was completed on this project. Table
T-2 also reflects offsetting deferrals and recognitions related to sales
made during 2018 at The Residences and
Ocean Tower that have no full-year financial impact.

The $12 million variance between the $79 million full-year recognitions
shown in Table T-1 and the $67 million full-year recognitions shown in
Table T-2 relates to timing differences in how recognitions are treated
between ASC 606 and ASC 605. The $67 million represents deferrals that would
have been recognized prior to 2018 under
ASC 605 based on the percentage of completion approach. As such, they
are removed from the 2018 results as part of the reconciliation to ASC
605. The remaining $12 million of deferrals is not removed from the
reconciliation because it would have been recognized in 2018 under both
ASC 606 and ASC 605 based on percentage of completion.

 
T-2
Construction-Related Recognitions (Deferrals) Included in Bridge
by Quarter
Between “As Reported” Results under ASC 606 and Previous
Accounting Guidance
 
  2018

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Full
Year

Sales of VOIs, net (1) $ (59 ) $ 87 $ (58 ) $ 142 $ 112
Cost of VOI sales(1) (18 ) 20 (18 ) 46 30
Sales, marketing, general and administrative expense(1)   (8 )   11   (8 )   20   15
Net construction recognitions (deferrals) $ (33 ) $ 56 $ (32 ) $ 76 $ 67
 
Number of projects in sales and under construction 2 1 1 N/A
 

____________________

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

In addition to construction deferral recognitions, other minor
accounting provisions of ASC 606 had a small impact on HGV’s 2018
results. Table T-3 details the construction deferral recognitions and
other minor accounting provisions contained in the reconciliation in
Table T-19 between the $503 million of 2018 Adjusted EBITDA as reported
under ASC 606 and the $435 million as reported under ASC 605.

 
T-3
Construction Deferrals and Other Items Detail in Bridge
Between “As Reported” Results under ASC 606 and Previous
Accounting Guidance
 
  Year Ended December 31, 2018
($ in millions)

Construction
Deferrals(1)

  Other(2)  

Total Effect of
ASC 606

Sales of VOIs, net $ (112 ) $ $ (112 )
Sales, marketing, brand and other fees 16 16
Resort and club management     1   1
Total revenues (112 ) 17 (95 )
 
Cost of VOI sales (30 ) (30 )
Sales and marketing (15 ) 16 1
Depreciation and amortization     2   2
Income before income taxes (67 ) (1 ) (68 )
Income tax benefit   17     17
Net income $ (50 ) $ (1 ) $ (51 )
 
Net income $ (50 ) $ (1 ) $ (51 )
Add back:
Depreciation and amortization 2 2
Income tax benefit   (17 )     (17 )
EBITDA (67 ) 1 (66 )
Other adjustment items     (2 )   (2 )
Adjusted EBITDA $ (67 ) $ (1 ) $ (68 )
 

____________________

(1)   During periods of construction, we defer revenues and certain
related direct expenses from the sales of VOIs until construction is
completed.
(2) Includes the following changes under ASC 606 compared to the
previous accounting guidance: (i) revenue for certain sales
incentives is now presented on a net basis as a decrease to both
sales, marketing, brand and other fees and sales and marketing
expense rather than on a gross basis; (ii) expected breakage revenue
from advanced deposits on prepaid vacation packages is recognized
ratably as packages are redeemed rather than upon expiration; and
(iii) key money amortization is presented as a reduction to sales,
marketing, brand and other fees rather than as amortization expense.
 

Conference Call

Hilton Grand Vacations will host a conference call on Feb. 28, 2019, at
11 a.m. (EST) to discuss fourth-quarter results. Participants may listen
to the live webcast by logging onto the Hilton Grand Vacations’ Investor
Relations website at http://investors.hgv.com/events-and-presentations.
A replay and transcript of the webcast will be available on HGV’s
Investor Relations website within 24 hours after the live event.

Alternatively, participants may listen to the live call by dialing
1-888-312-3049 in the U.S. or +1-323-794-2112 internationally. Please
use conference ID# 7540297. Participants are encouraged to dial into the
call or link to the webcast at least 20 minutes prior to the scheduled
start time. In the event of audio difficulties during the call on the
toll-free number, participants are advised that accessing the call using
the +1-323-794-2112 dial-in number may bypass the source of the audio
difficulties.

A telephone replay will be available for seven days following the call.
To access the telephone replay, dial 1-888-203-1112 in the U.S. or
+1-719-457-0820 internationally and use conference ID# 7540297.

Forward-Looking Statements

This press release contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements convey management’s expectations as to the
future of HGV, and are based on management’s beliefs, expectations,
assumptions and such plans, estimates, projections and other information
available to management at the time HGV makes such statements.
Forward-looking statements include all statements that are not
historical facts and may be identified by terminology such as the words
“outlook,” “believe,” “expect,” “potential,” “goal,” “continues,” “may,”
“will,” “should,” “could,” “seeks,” “approximately,” “projects,”
predicts,” “intends,” “plans,” “estimates,” “anticipates” “future,”
“guidance,” “target,” or the negative version of these words or other
comparable words. The forward-looking statements contained in this press
release include statements related to HGV’s revenues, earnings, taxes,
cash flow and related financial and operating measures, and expectations
with respect to future operating, financial and business performance,
and other anticipated future events and expectations that are not
historical facts.

HGV cautions you that its forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the
actual results, performance or achievements of HGV to be materially
different from the future results, business performance or achievements
expressed or implied by its forward-looking statements. HGV’s
forward-looking statements are not guarantees of future performance, and
you should not place undue reliance on such statements in this press
release. Factors that could cause HGV’s actual results to differ
materially from those contemplated by its forward-looking statements
include risks associated with: the inherent business, financial and
operating risks of the timeshare industry, including limited
underwriting standards due to the real-time nature of industry sales
practices, and the intense competition associated with the industry;
HGV’s ability successfully market and sell VOIs; HGV’s development and
other activities to source inventory for VOI sales; significant
increases in defaults on HGV’s vacation ownership mortgage receivables;
the ability of managed homeowner associations to collect sufficient
maintenance fees; general volatility in the economy and/or the financial
and credit markets; adverse economic or market conditions and trends in
the tourism and hospitality industry, which may impact the purchasing
and vacationing decisions of consumers; actions of HGV or the occurrence
of other events that could cause a breach under or termination of the
HGV’s license agreement with Hilton that could affect or terminate our
access to the Hilton brands and programs, or actions of Hilton that
affect the reputation of the licensed marks or Hilton’s programs;
economic and operational uncertainties related to HGV’s expanding global
operations, including our ability to manage the outcome and timing of
such operations and compliance with anti-corruption, data privacy and
other applicable laws and regulations affecting our international
operations; the effects of foreign currency exchange; changes in tax
rates and exposure to additional tax liabilities; the impact of future
changes in legislation, regulations or accounting pronouncements; HGV’s
acquisitions, joint ventures, and strategic alliances that may not
result in expected benefits, including the termination of material
fee-for-service agreements; our dependence on third-party development
activities to secure just-in-time inventory; HGV’s use of social media
platforms; cyber-attacks, security vulnerabilities, and information
technology system failures resulting in disclosure of personal data,
company data loss, system outages or disruptions of online services,
which could lead to reduced revenue, increased costs, liability claims,
harm to user engagement, and harm to HGV’s reputation or competitive
position; the impact of claims against HGV that may result in adverse
outcomes, including regulatory proceedings or litigation; HGV’s credit
facilities, indenture and other debt agreements and instruments,
including variable interest rates, operating and financial restrictions,
our ability to make scheduled payments, and our ability to refinance our
debt on acceptable terms; the continued service and availability of key
executives and employees; and catastrophic events or geo-political
conditions including war, terrorist activity, political strife or
natural disasters that may disrupt HGV’s operations in key vacation
destinations.

Contacts

Investor Contact:
Robert LaFleur
407-613-3327
[email protected]

Media Contact:
Lauren George
407-613-8431
[email protected]

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