Item 5. Market for Registrant’s Common Equity
Item 5. Market For Registrant’s Common Equity, Related Stoc kholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “HGV.” Our common stock began trading on a “when-issued” basis on December 15, 2016 but did not commence regular-way trading on the NYSE until January 4, 2017, the day after the completion of our spin-off.
As previously disclosed in a Current Report on Form 8-K, in connection with the closing of the Diamond Acquisition, on August 2, 2021, HGV issued an aggregate of 33,925,901 shares of HGV's common stock as substantially all of the consideration to the former stockholders of Diamond. The shares were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended and/or Rule 506 under the Securities Act.
Performance Graph
The following graph compares the cumulative share price performance since December 15, 2016 with the Russell 2500 (R2500) Index and the Dow Jones US Travel & Leisure Index GICS Level 3 (DJUSTLE). The graph assumes that the value of the investment in our common stock and each index was $100 on December 15, 2016, which was the first day our common stock began trading on a “when-issued” basis.
Holders of Record
The number of stockholders of record of our common stock as of February 25, 2022 was 282 .
Dividends
Although we may return capital to stockholders through dividends or otherwise in the future, we have no current plans to pay dividends on our common stock. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, general and economic conditions, our results of operations, available cash, current and anticipated cash requirements, financial condition, contractual, legal, tax and regulatory restrictions on the payment of dividends by us to our stockholders or by our subsidiaries to us, and other factors that our board of directors may deem relevant. In addition, our senior secured credit facilities and certain of our non-recourse debt include provisions limiting our ability to make restricted payments, including dividends.
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Issuer Purchases of Equity Securities
On March 13, 2020, the Company announced that our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to an aggregate of $200 million of its outstanding shares of common stock. Since the launch of the 2020 share repurchase program, the company has repurchased less than one million shares for $10 million at an average price of $11.92. Due to the significant adverse impact on the global economy, capital markets, travel industry, and various government mandates regarding closures of businesses, all due to the COVID-19 pandemic and various uncertainties related to it, the Company announced on March 31, 2020 that it had suspended the 2020 share repurchase program. No shares have been repurchased under the plan since March 2020.
Item 6. [ Reserved ]
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Item 7. 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 consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K.
Forward-Looking Statements
This disclosure includes forward-looking statements; and actual results and events may differ substantially from those discussed or highlighted in these forward-looking statements. See “ Cautionary Note Regarding Forward-Looking Statements .”
Overview
Our Business
We are a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. During 2021, we acquired Diamond Resorts and are in the process of rebranding all Diamond properties and sales centers to the Hilton Grand Vacations brand and Hilton standards. O ur operations primarily consist of selling vacation ownership intervals and vacation ownership interests (collectively, “VOIs”, "VOI") for us and third parties; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts and multi-resort trusts; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange program (collectively the “Legacy-HGV Club”) and Diamond points-based clubs.
As of December 31, 2021, we have 154 properties located in the United States (“U.S.”), Europe, Mexico, the Caribbean, Canada and Japan. A significant number of our properties and VOIs are concentrated in Florida, Nevada, Hawaii, Europe, California, Virginia, and Arizona and feature spacious, condominium-style accommodations with superior amenities and quality service. As of December 31, 2021, we have approximately 333,000 Hilton Grand Vacations Club and Hilton Club members. Legacy-HGV 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 6,500 properties, as well as numerous experiential vacation options, such as cruises and guided tours. We also have 166,000 Diamond Club members who are able to utilize their points across the Diamond resorts, affiliated properties and alternative experiential options.
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 and its impact on consumer spending and demand for travel. Please see, “Impact of the COVID-19 Pandemic on Business and Results of Operations” and other discussions throughout this MD&A 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 Legacy-HGV 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.
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Our primary Collections product is the marketing and selling of VOIs sold to customers as beneficial interests in one of our Collections, which are represented by an annual or biennial allotment of points that can be utilized for vacations at any of the resorts in our network for varying lengths of stay. In general, purchasers of points do not acquire a direct ownership interest in the resort properties in our network generally, for each Collection, one or more trustees hold legal title to the deeded fee simple real estate interests or the functional equivalent, or, in some cases, leasehold real estate interests for the benefit of the respective Collection’s association members in accordance with the applicable agreements. We source some of our VOIs through just-in-time agreements with third-party developers and develop our own properties.
For the year ended December 31, 2021, sales from fee-for-service, just-in-time, developed and points-based inventory were 31 percent, 20 percent, 24 percent and 25 percent, respectively, of contract sales. See “Key Business and Financial Metrics and Terms Used by Management — Real Estate Sales Operating Metrics” for additional discussion of contract sales. The estimated contract sales value related to our inventory that is currently available for sale at open or soon-to-be open projects and inventory at new or existing projects that will become available for sale in the future upon registration, delivery or construction is approximately $13 billion at current pricing.
Capital efficient arrangements, comprised of our fee-for-service and just-in-time inventory, represented approximately 40 percent of that supply. We believe that the visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales, reduce capital investments, minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering into new markets.
We sell our vacation ownership products primarily through our distribution network of both-in-market and off-site sales centers. Our products are currently marketed for sale throughout the United States, Mexico, Canada, Europe, and Japan. 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 approximately 50 sales distribution centers in various domestic and international locations. We anticipate that those that were acquired as part of the Diamond Acquisition will undergo a phased rebranding starting in early 2022. 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 (Legacy-HGV only) 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 year ended December 31, 2021, 70 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 ranging from 2.5 percent to 25 percent per annum. Financing propensity was 74 percent and 66.5 percent for the year ended December 31, 2021 and 2020, respectively. We calculate financing propensity as contract sales volume of financed contracts originated in the period divided by contract sales volume of all contracts originated in the period.
The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the loan term. The weighted-average FICO score for loans to U.S. and Canadian borrowers at the time of origination were as follows:
Year Ended December 31,
2021
2020
2019
Weighted-average FICO score
734
734
736
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 Clubs. Historical default rates, which represent annual defaults as a percentage of each year’s beginning gross timeshare financing receivables balance, were as follows:
Year Ended December 31,
2021
2020
2019
Historical default rates (1)
8.93
%
6.34
%
5.14
%
(1) A loan is considered to be in default if it is equal to or greater than 121 days past due as of the prior month end.
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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 7: Timeshare Financing Receivables in our consolidated financial statements included in Item 8 of this Annual Report on form 10-K.
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 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 Clubs, including the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Legacy-HGV Club members, as well as the Diamond Clubs (the Legacy-HGV Club and Diamond Clubs are collectively referred to as “Clubs”). When owners purchase VOI, they are generally enrolled in a Club which allows the member to exchange their points for a number of vacation options. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system.
We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges through our club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.
Principal Components and Factors Affecting Our Results of Operations
Principal Components of Revenues
• Sales of VOIs, net represents revenue recognized from the sale of owned VOIs, net of amounts considered uncollectible and sales incentives.
• Sales, marketing, brand and other fees represents sales commissions, brand fees and other fees earned on the sales of VOIs through fee-for-service agreements with third-party developers. All sales commissions and brand fees are based on the total sales price of the VOIs. Also included in Sales, marketing, brand and other fees are revenues from marketing and incentive programs, including redemption of prepaid vacation packages and Club bonus points for stays at HGV properties, which are included in Rental and ancillary services .
• Financing represents revenue from the financing of sales of our owned intervals, which includes interest income and fees from servicing loans. We also earn fees from servicing the loans provided by third-party developers to purchasers of their VOIs.
• Resort and club management represents revenues from Club activation fees, annual dues and transaction fees from member exchanges. Resort and club management also includes recurring management fees under our agreements with HOAs for day-to-day-management services, including housekeeping services, maintenance, and certain accounting and administrative services for HOAs, generally based on a percentage of costs to operate the resorts.
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• Rental and ancillary services represents revenues from transient rentals of unoccupied vacation ownership units and revenues recognized from the utilization of Club points and vacation packages when points and packages are redeemed for rental stays at one of our resorts. We also earn fees from the rental of inventory owned by third parties. Ancillary revenues include food and beverage, retail, spa offerings and other guest services provided to resort guests.
• Cost reimbursements include costs that HOAs and developers reimburse to us. These costs primarily consist of payroll and payroll-related costs for management of the HOAs and other services we provide where we are the employer and insurance. The corresponding expenses are presented as Cost reimbursements expense in our consolidated statements of operations resulting in no effect on net income.
Factors Affecting Revenues
• Relationships with developers . In recent years, we have entered into fee-for-service and just-in-time agreements to sell VOIs on behalf of or acquired from third-party developers. The success and sustainability of our capital-efficient business model depends on our ability to maintain good relationships with third-party developers. Our relationships with these third parties also generate new relationships with developers and opportunities for property development that can support our growth. We believe that we have strong relationships with our third-party developers, and we are committed to the continued growth and development of these relationships. These relationships exist with a diverse group of developers and are not significantly concentrated with any particular third party.
• Construction activities . In recent years, we have entered into agreements with third parties to acquire both completed VOIs and property. At the same time, we have increased our own development activities to construct new properties that we will own and from which we are selling, and will continue to sell, units and VOIs. These activities, and in particular the development of real property into inventory, are subject to construction risks including, construction delays, zoning and other local, state or governmental approvals and failure by third-party contractors to perform. The realization of these factors could result in the inability to source inventory and ultimately lead to sales declines.
• Registration activities. The registration of VOIs for sale requires time and cost, and in many jurisdictions the exact date of registration approval cannot be predicted accurately. The inability to register our products in a timely, cost-effective fashion could result in the inability to sell our products and ultimately lead to sales declines.
• Relationship with Hilton. Following the spin-off, Hilton retained ownership of the Hilton-branded trademarks, tradenames and certain related intellectual property used in the operation of our business. We entered into a license agreement with Hilton, which was subsequently amended and restated in connection with the Diamond Acquisition, granting us the right to use the Hilton-branded trademarks, trade names and related intellectual property in our business for the term of the agreement. The termination of the license agreement or exercise of other remedies would materially harm our business and results of operations and impair our ability to market and sell our products and maintain our competitive position. For example, if we are not able to rely on the strength of the Hilton brands to attract prospective members and guest tours in the marketplace, our revenue would decline and our marketing and sales expenses would increase.
• Consumer demand and global economic conditions . Consumer demand for our products and services may be affected by the performance of the general economy, including the ability to generate high quality tours, and is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and adverse political conditions can subject and have subjected our revenues to significant volatility.
• Marketing . We rely on call transfers from Hilton, execution of a successful digital marketing strategy, vacation traffic at key locations, and other critical marketing elements to increase tour flow, VPG, and VOI sales, thereby increasing our revenue. Any significant changes to one or more factors that adversely affect our marketing activities, such as changes in consumer behavior and preference for vacations, decreases in call transfers from Hilton due to increasing consumer reliance on digital tools, and declining quality and/or volume of tour flow may adversely and materially impact our revenue.
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• Interest rates . We generate interest income from consumer loans we originate and declines in interest rates may cause us to lower our interest rates on our originated loans, which would adversely affect our income generated on future loans. Conversely, if interest rates increase significantly, it would increase the cost of purchasing VOIs for any purchaser who is financing their acquisition and may deter potential purchasers from buying a VOI, which could result in sales declines.
• Competition. We compete with other hotel and resort timeshare operators for sales of VOIs based principally on location, quality of accommodations, price, service levels and amenities, financing terms, quality of service, terms of property use, reservation systems and flexibility for VOI owners to exchange into time at other timeshare properties or other travel rewards. In addition, we compete based on brand name recognition and reputation. Our primary branded competitors in the timeshare space include Marriott Vacations Worldwide (which includes Marriott Vacations Worldwide, Interval Leisure Group, Vistana Signature Club and Hyatt Residence Club brands), Travel + Leisure Co., Disney Vacation Club, Holiday Inn Club Vacations, and Bluegreen Vacations.
Principal Components of Expenses
• Cost of VOI sales represents the costs attributable to the sales of owned VOIs recognized, as well as charges incurred related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects.
• Sales and marketing represents costs incurred to sell and market VOIs, including costs incurred relating to marketing and incentive programs, costs for tours, rental expense and wages and sales commissions.
• Financing represents consumer financing interest expense related to our debt securitized by gross timeshare financing receivables (‘‘Securitized Debt”) and Timeshare Facility, amortization of the related deferred loan costs and other expenses incurred in providing consumer financing and servicing loans.
• Resort and club management represents costs incurred to manage resorts and the Club, including payroll and related costs and other administrative costs.
• Rental and ancillary services include payroll and related costs, costs incurred from participating in the Hilton Honors loyalty program, retail, food and beverage costs and maintenance fees on unsold inventory.
• General and administrative consists primarily of compensation expense for our corporate staff and personnel supporting our business segments, professional fees (including consulting, audit and legal fees), administrative and related expenses. General and administrative also includes costs for services provided to us by Hilton.
• Depreciation and amortization are non-cash expenses that primarily consist of depreciation of fixed assets such as buildings and leasehold improvements and furniture and equipment at our sales centers, corporate offices, and assets purchased for future conversion to inventory, as well as amortization of our management agreement intangibles and capitalized software.
• License fee expense represents the royalty fee paid to Hilton under a license agreement for the exclusive right to use the Hilton Grand Vacations mark, which is generally based on a percentage of gross sales volume, of certain revenue streams.
• Cost reimbursements include costs that HOAs and developers reimburse to us. These costs primarily consist of payroll and payroll-related costs for management of the HOAs and other services we provide where we are the employer and insurance. The corresponding revenues are presented as Cost reimbursements revenue in our consolidated statements of operations resulting in no effect on net income.
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Factors Affecting Expenses
• Costs of VOI sales. In periods where there is increased demand for VOIs, we may incur increased costs to acquire inventory in the short-term, which can have an adverse effect on our cash flows, margins and profits. In addition, the registration of inventory for sale requires time and cost, and in many jurisdictions the exact date of registration approval cannot be predicted accurately. As we encourage owners to upgrade into other products, we incur expenses when owners upgrade from an interval in a project we developed into fee-for-service projects, on which we earn fees. In periods where more upgrades are occurring and we are not generating increased sales volume on unsold supply, we could see an adverse effect on our cash flows, margins and profits.
Furthermore, construction delays, zoning and other local, state or federal governmental approvals, particularly in new geographic areas with which we are unfamiliar, cost overruns, lender financial defaults, or natural or man-made disasters, as well as failure by third-party contractors to perform for any reason, could lead to an adverse effect on our cash flows, margins and profits.
• Sales and marketing expense . A significant portion of our costs relates to selling and marketing of our VOIs. In periods of decreased demand for VOIs, we may be unable to reduce our sales and marketing expenses quickly enough to prevent a deterioration of our profits and margins on our real estate operations.
• Rental and ancillary services expense . These expenses include personnel costs, rent, property taxes, insurance and utilities. We pay a portion of these costs through maintenance fees of unsold intervals and by subsidizing the costs of HOAs not covered by maintenance fees collected. If we are unable to decrease these costs significantly or rapidly when demand for our unit rentals decreases, the resulting decline in our revenues could have an adverse effect on our net cash flow, margins and profits.
• General and administrative. Increases in general and administrative expenses associated with operating as a publicly traded company in a competitive and dynamic timeshare industry, regulatory filings and professional fees may affect our net cash flows, margins and profits.
• Interest rates . Increases in interest rates would increase the consumer financing interest expense we pay on the Timeshare Facility and could adversely affect our financing operations in future securitization or other debt transactions, affecting net cash flow, margins and profits.
Other Items
• Seasonality. We experience modest seasonality in VOI sales at certain resorts, with increased revenue during traditional vacation periods for those locations.
• Regulation. Our business activities are highly regulated. We are subject to a wide variety of complex international, national, federal, state and local laws, regulations and policies in jurisdictions in which we operate. These laws, regulations and policies primarily affect four areas of our business: real estate development activities; marketing and sales activities; lending activities; and resort management activities. We seek to actively participate in the determination of new laws or other regulations affecting the timeshare industry. For further detail of these regulations see “ Risk Factors” and “Business–Government Regulation ” included elsewhere in this Annual Report on Form 10-K.
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, just-in-time, developed, and points-based) 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 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 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
55
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, developed and points-based) 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: Summary of Significant Accounting Policies in our consolidated financial statements included in Item 8 in this Annual Report on form 10-K, for additional information on Sales of VOIs, net.
• Sales revenue represents Sale of VOIs, net and commissions and brand fees earned from the sale of fee-for-service intervals.
• Real estate profit represents sales revenue less the cost of VOI sales and sales and marketing costs, net of marketing revenue. Real estate margin percentage is calculated by dividing real estate margin by sales revenue. We consider this to be an important operating measure because it measures the efficiency of our sales and marketing spending and management of inventory costs.
• Tour flow represents the number of sales presentations given at our sales centers during the period.
• Volume per guest (“VPG”) represents the sales attributable to tours at our sales locations and is calculated by dividing Contract sales, excluding telesales, by tour flow. We consider VPG to be an important operating measure because it measures the effectiveness of our sales process, combining the average transaction price with the closing rate.
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) other gains, including asset dispositions and foreign currency translations; (ii) debt restructurings/retirements; (iii) non-cash impairment losses; (iv) share-based and other compensation expenses; and (v) other items, including but not limited to costs associated with acquisitions, restructuring, amortization of premiums and discounts resulting from purchase accounting, and other non-cash and one-time charges.
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.
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EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under U.S. GAAP. Some of these limitations are:
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
• EBITDA and Adjusted EBITDA do not reflect our interest expense (excluding interest expense on non-recourse debt), or the cash requirements necessary to service interest or principal payments on our indebtedness;
• EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;
• EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
• EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;
• EBITDA and Adjusted EBITDA do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and
• EBITDA and Adjusted EBITDA may be calculated differently from other companies in our industry limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
Impact of the COVID-19 Pandemic on Business and Results of Operations
As of December 31, 2021, all of our resorts and nearly all sales centers which previously closed due to the COVID-19 pandemic for some period of time beginning in 2020 were open and operating, although some were still operating in markets with various capacity constraints, social distancing requirements and other safety measures, which are impacting consumer demand for resorts in those markets. We plan to continue our normal business as conditions permit, but increases of new infections or the emergence of new variants (such as the Delta and Omicron variants) may result in the reimposition of social distancing measures and/or restrictions in certain jurisdictions, travel restrictions and reduced consumer demand for travel that may impede or reverse our recovery. Please carefully review the risk factors contained in this Annual Report on Form 10-K and those described from time to time in other periodic reports that we file with the SEC for discussions of various factors and uncertainties related to the pandemic that may materially impact us.
Results of Operations
Year Ended December 31, 2021 Compared with Year Ended December 31, 2020
The following discussion and analysis of our financial condition and results of operations is for the year ended December 31, 2021 compared with the year ended December 31, 2020. Discussions of our financial condition and results of operations for the year ended December 31, 2020 compared to December 31, 2019 that have been omitted under this item can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and
57
Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission on March 1, 2021.
Segment Results
The following tables present our revenues by segment for the year ended December 31, 2021 compared to the years ended December 31, 2020 and 2019. We do not include equity in earnings from unconsolidated affiliates in our measures of segment revenues.
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2021
2020
$
$
$
Revenues:
Real estate sales and financing
$
1,451
$
494
$
957
$
322
$
635
Resort operations and club management
700
276
424
267
157
Total segment revenues
2,151
770
1,381
589
792
Cost reimbursements
202
137
65
44
21
Intersegment eliminations (1)
(18
)
(13
)
(5
)
—
(5
)
Total revenues
$
2,335
$
894
$
1,441
$
633
$
808
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2020
2019
$
$
$
Revenues:
Real estate sales and financing
$
494
$
1,252
$
(758
)
$
—
$
(758
)
Resort operations and club management
276
454
(178
)
—
(178
)
Total segment revenues
770
1,706
(936
)
—
(936
)
Cost reimbursements
137
168
(31
)
—
(31
)
Intersegment eliminations (1)
(13
)
(36
)
23
—
23
Total revenues
$
894
$
1,838
$
(944
)
$
—
$
(944
)
____________________
(1) Refer to Note 22: Business Segments in our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for details on the intersegment eliminations.
58
We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 22: Business Segments in our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. 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 table reconciles net income, our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2021
2020
$
$
$
Net income (loss)
$
176
$
(201
)
$
377
$
92
$
285
Interest expense
105
43
62
(1
)
63
Income tax expense (benefit)
93
(79
)
172
32
140
Depreciation and amortization
126
45
81
80
1
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates
1
2
(1
)
—
(1
)
EBITDA
501
(190
)
691
203
488
Other loss (gain), net
26
(3
)
29
1
28
Share-based compensation expense
48
15
33
—
33
Impairment expense (2)
2
209
(207
)
—
(207
)
Acquisition and integration-related expense
106
—
106
8
98
Other adjustment items (1)
33
26
7
18
(11
)
Adjusted EBITDA
$
716
$
57
$
659
$
230
$
429
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2020
2019
$
$
$
Net (loss) income
$
(201
)
$
216
$
(417
)
$
—
$
(417
)
Interest expense
43
43
—
—
—
Income tax (benefit) expense
(79
)
57
(136
)
—
(136
)
Depreciation and amortization
45
44
1
—
1
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates
2
3
(1
)
—
(1
)
EBITDA
(190
)
363
(553
)
—
(553
)
Other loss (gain), net
(3
)
3
(6
)
—
(6
)
Share-based compensation expense
15
22
(7
)
—
(7
)
Impairment expense (2)
209
—
209
—
209
Acquisition and integration-related expense
—
—
—
—
—
Other adjustment items (1)
26
20
6
—
6
Adjusted EBITDA
$
57
$
408
$
(351
)
$
—
$
(351
)
____________________
(1) For the year ended December 31, 2021, 2020 and 2019, this amount includes costs associated with restructuring, one-time charges and other non-cash items. Subsequent to the acquisition of Diamond in 2021, this also includes amortization of fair value premiums and discounts resulting from purchase accounting.
(2) In the fourth quarter 2020, we performed a review over certain of our long-lived assets and committed to a plan to monetize and dispose of certain assets via a sale. As a result, we recorded a non-cash impairment charge of $209 million in the fourth quarter of 2020 related to the identified assets. The non-cash impairment charge was comprised of a $201 million charge related to Land and infrastructure held for sale and an $8 million charge related to Property and equipment , respectively.
59
The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA.
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2021
2020
$
$
$
Adjusted EBITDA:
Real estate sales and financing (1)
$
537
$
33
$
504
$
154
$
350
Resort operations and club
management (1)
353
136
217
97
120
Adjustments:
Adjusted EBITDA from
unconsolidated affiliates
11
7
4
—
4
License fee expense
(80
)
(51
)
(29
)
—
(29
)
General and administrative (2)
(105
)
(68
)
(37
)
(21
)
(16
)
Adjusted EBITDA
$
716
$
57
$
659
$
230
$
429
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2020
2019
$
$
$
Adjusted EBITDA:
Real estate sales and financing (1)
$
33
$
325
$
(292
)
$
—
$
(292
)
Resort operations and club
management (1)
136
265
(129
)
—
(129
)
Adjustments:
Adjusted EBITDA from
unconsolidated affiliates
7
7
—
—
—
License fee expense
(51
)
(101
)
50
—
50
General and administrative (2)
(68
)
(88
)
20
—
20
Adjusted EBITDA
$
57
$
408
$
(351
)
$
—
$
(351
)
____________________
(1) Includes intersegment transactions, share-based compensation, depreciation and other adjustments attributable to the segments.
(2) Adjusts for 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.
60
The following table represents deferrals and recognitions of Sales of VOIs revenue and direct costs for properties under construction:
Year Ended December 31,
2021 vs
2020
Variance
2020 vs
2019
Variance
($ in millions)
2021
2020
2019
$
$
Sales of VOIs (deferrals)
$
(112
)
$
(85
)
$
(84
)
$
(27
)
$
(1
)
Sales of VOIs recognitions
245
—
—
245
—
Net Sales of VOIs recognitions (deferrals)
133
(85
)
(84
)
218
(1
)
Cost of VOI sales (deferrals) (1)
(36
)
(23
)
(27
)
(13
)
4
Cost of VOI sales recognitions
74
—
—
74
—
Net Cost of VOI sales recognitions (deferrals) (1)
38
(23
)
(27
)
61
4
Sales and marketing expense (deferrals)
(17
)
(13
)
(12
)
(4
)
(1
)
Sales and marketing expense recognitions
36
—
—
36
—
Net Sales and marketing expense
recognitions (deferrals)
19
(13
)
(12
)
32
(1
)
Net construction recognitions (deferrals)
$
76
$
(49
)
$
(45
)
$
125
$
(4
)
____________________
(1) Includes anticipated Cost of VOI Sales of VOIs under construction that will be acquired once construction is complete for the year ended December 31, 2020 and 2019.
Real estate sales and financing segment revenues increased by $957 million for the year ended December 31, 2021, compared to the same period in 2020, primarily due to the net recognition of $133 million of deferred sales of VOIs related to projects previously under construction that were completed during the year, compared to deferrals of $85 million of deferred sales of VOIs during the same period in 2020. Sales revenue also increased consistent with an increase in travel demand and the reopening of nearly all of our resorts and sales centers by the end of the second quarter of 2021 that were closed during the same period in 2020. Additionally, financing revenues increased by $18 million due to a greater balance of timeshare financing receivables and a corresponding increase in servicing fees. Diamond contributed $322 million to the total increase in real estate sales and financing revenues primarily driven by $251 million of sales of VOIs.
Real estate sales and financing Adjusted EBITDA increased by $504 million compared to the same period in 2020, due to the increases in revenues mentioned above, partially offset by corresponding increases in cost of VOI sales and real estate operating expenses associated with segment performance discussed herein. In addition, real estate sales and financing segment Adjusted EBITDA was impacted by $6 million of one-time payroll related expenses and $18 million of net amortization related to premiums and discounts resulting from purchase accounting. Diamond contributed $154 million to the total increase in real estate sales and financing Adjusted EBITDA.
61
Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.
Resort Operations and Club Management
Resort operations and club management segment revenues increased $424 million for the year ended December 31, 2021, compared to the same period in 2020, primarily due to increases in rental and ancillary revenues as a result of the reopening of nearly all of our resorts and sales centers by the end of the second quarter of 2021 that were closed during the same period in 2020. Diamond contributed $267 million to the total increase in resort operations and club management segment revenues for the year ended December 31, 2021, driven by $138 million of rental and ancillary revenue and $129 million of resort operations and club management revenue.
Resort operations and club management segment Adjusted EBITDA increased $217 million for the year ended December 31, 2021, compared to the same periods in 2020, primarily due to the increases in revenues described above partially offset by corresponding increases in segment operating expenses associated with segment performance discussed herein. Resort operations and club management segment Adjusted EBITDA was impacted by $6 million of proceeds from one-time insurance claim reimbursements related to hurricane damage suffered during 2021. Diamond contributed $97 million to the total increase in resort operations and club management Adjusted EBITDA for the year ended December 31, 2021.
Refer to “—Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.
Real Estate Sales and Financing Segment
Real Estate
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions, except Tour flow and VPG)
2021
2020
$
$
$
Contract sales
$
1,352
$
528
$
824
$
331
$
493
Adjustments:
Fee-for-service sales (1)
(424
)
(275
)
(149
)
—
(149
)
Provision for financing receivables losses
(121
)
(75
)
(46
)
(52
)
6
Reportability and other:
Net recognition (deferral) of sales of VOIs under construction (2)
133
(85
)
218
—
218
Fee-for-service sale upgrades, net
14
16
(2
)
—
(2
)
Other (3)
(71
)
(1
)
(70
)
(28
)
(42
)
Sales of VOIs, net
$
883
$
108
$
775
$
251
$
524
Tour flow
298,044
127,085
170,959
VPG
$
4,332
$
3,889
$
443
62
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions, except Tour flow and VPG)
2020
2019
$
$
$
Contract sales
$
528
$
1,410
$
(882
)
$
—
$
(882
)
Adjustments:
Fee-for-service sales (1)
(275
)
(760
)
485
—
485
Provision for financing receivables losses
(75
)
(74
)
(1
)
—
(1
)
Reportability and other:
Net (deferral) recognition of sales of VOIs under construction (2)
(85
)
(84
)
(1
)
—
(1
)
Fee-for-service sale upgrades, net
16
52
(36
)
—
(36
)
Other (3)
(1
)
(35
)
34
—
34
Sales of VOIs, net
$
108
$
509
$
(401
)
$
—
$
(401
)
Tour flow
127,085
383,108
(256,023
)
VPG
$
3,889
$
3,518
$
371
___________________ _
(1) Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.
(2) Represents the net impact of deferred revenues related to the Sales of VOIs under construction that are recognized when construction is complete.
(3) Includes adjustments for revenue recognition, including amounts in rescission and sales incentives.
Contract sales increased $824 million for the year ended December 31, 2021, compared to the same period in 2020, primarily due to an increase in tour flow and VPG corresponding with improvement in travel demand as a result of the reopening of nearly all of our resorts and sales centers during the second half of 2021 that were closed during the same period in 2020. Diamond contributed $331 million to the total increase in contract sales and $251 million to the total increase in sales of VOIs, net.
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2021
2020
$
$
$
Sales, marketing, brand and other fees
$
385
$
221
$
164
$
37
$
127
Less:
Marketing revenue and other fees
149
57
92
37
55
Commissions and brand fees
236
164
72
—
72
Sales of VOIs, net
883
108
775
251
524
Sales revenue
1,119
272
847
251
596
Less:
Cost of VOI sales
213
28
185
32
153
Sales and marketing expense, net (1)
479
313
166
104
62
Real estate profit (loss)
$
427
$
(69
)
$
496
$
115
$
381
Real estate profit margin
38.2
%
(25.4
)%
63
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2020
2019
$
$
$
Sales, marketing, brand and other fees
$
221
$
573
$
(352
)
$
—
$
(352
)
Less:
Marketing revenue and other fees
57
136
(79
)
—
(79
)
Commissions and brand fees
164
437
(273
)
—
(273
)
Sales of VOIs, net
108
509
(401
)
—
(401
)
Sales revenue
272
946
(674
)
—
(674
)
Less:
Cost of VOI sales
28
127
(99
)
—
(99
)
Sales and marketing expense, net (1)
313
549
(236
)
—
(236
)
Real estate (loss) profit
$
(69
)
$
270
$
(339
)
$
—
$
(339
)
Real estate profit margin
(25.4
)%
28.5
%
____________________
(1) 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.
Sales revenue increased by $847 million for the year ended December 31, 2021, compared to the same period in 2020, primarily due to the net recognition of sales of VOIs related to deferred revenues associated with properties that were under construction during the same period in 2020. Sales revenue also increased as a result of the reopening of nearly all of our resorts and sales centers by the end of the second quarter of 2021, combined with a higher mix of our sales for VOIs at new properties partially offset by increased breakage rates on marketing packages. Diamond contributed $251 million to sales revenue for the year ended December 31, 2021.
Financing
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2021
2020
$
$
$
Interest income
$
157
$
141
$
16
$
31
$
(15
)
Other financing revenue
26
24
2
3
(1
)
Financing revenue
183
165
18
34
(16
)
Consumer financing interest expense
30
31
(1
)
2
(3
)
Other financing expense
35
22
13
12
1
Financing expense
65
53
12
14
(2
)
Financing profit
$
118
$
112
$
6
$
20
$
(14
)
Financing profit margin
64.5
%
67.9
%
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2020
2019
$
$
$
Interest income
$
141
$
147
$
(6
)
$
—
$
(6
)
Other financing revenue
24
23
1
—
1
Financing revenue
165
170
(5
)
—
(5
)
Consumer financing interest expense
31
29
2
—
2
Other financing expense
22
24
(2
)
—
(2
)
Financing expense
53
53
—
—
—
Financing profit
$
112
$
117
$
(5
)
$
—
$
(5
)
Financing profit margin
67.9
%
68.8
%
Financing revenue increased $18 million for the year ended December 31, 2021, compared to the same period in 2020, primarily due to a $31 million increase related to interest income on both timeshare financing receivable portfolios acquired from Diamond and originated subsequent to the Acquisition Date, partially offset by a $15 million decrease in interest income on the Legacy-HGV originated timeshare financing receivables portfolio. The interest income generated from the originated loan portfolio decreased, compared to the same period in 2020, due to a decrease in the timeshare financing receivables balance, partially offset by an increase in weighted average interest rate for the portfolio from 12.6 percent to 14.3 percent as of December 31, 2021.
64
Financing expense increased by $12 million for the period ended December 31, 2021, compared to the same period in 2020, primarily related to Diamond's financing operations and interest expense on the acquired non-recourse debt.
Resort and Club Management
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2021
2020
$
$
$
Club management revenue
$
168
$
96
$
72
$
32
$
40
Resort management revenue
172
70
102
97
5
Resort and club management revenues
340
166
174
129
45
Club management expense
28
24
4
5
(1
)
Resort management expense
52
12
40
32
8
Resort and club management expenses
80
36
44
37
7
Resort and club management profit
$
260
$
130
$
130
$
92
$
38
Resort and club management profit margin
76.5
%
78.3
%
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2020
2019
$
$
$
Club management revenue
$
96
$
125
$
(29
)
$
—
$
(29
)
Resort management revenue
70
66
4
—
4
Resort and club management revenues
166
191
(25
)
—
(25
)
Club management expense
24
27
(3
)
—
(3
)
Resort management expense
12
19
(7
)
—
(7
)
Resort and club management expenses
36
46
(10
)
—
(10
)
Resort and club management profit
$
130
$
145
$
(15
)
$
—
$
(15
)
Resort and club management profit margin
78.3
%
75.9
%
Resort and club management revenues increased for the year ended December 31, 2021, compared to the same periods in 2020, primarily due to an increase in annual club dues and fees and number of transactions corresponding with more club members. Additionally, we restored our policy to charge club transaction fees during 2021 which further increased our revenue in comparison to the year ended December 31, 2020. Diamond contributed $129 million to the increase in resort and club management revenues for the year ended December 31, 2021 primarily related to resort management revenue.
Resort and club management profit increased for the year ended December 31, 2021, primarily due to the aforementioned increase in club management and resort management revenue, partially offset by an increase in resort management expenses driven by the opening of nearly all of our resorts and sales centers which had previously closed due to the COVID-19 pandemic by the end of the second quarter 2021. Diamond contributed $92 million to the increase in resort and club management profit for the year ended December 31, 2021.
65
Rental and Ancillary Services
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2021
2020
$
$
$
Rental revenues
$
315
$
90
$
225
$
126
$
99
Ancillary services revenues
27
7
20
12
8
Rental and ancillary services revenues
342
97
245
138
107
Rental expenses
242
98
144
118
26
Ancillary services expense
25
9
16
9
7
Rental and ancillary services expenses
267
107
160
127
33
Rental and ancillary services profit (loss)
$
75
$
(10
)
$
85
$
11
$
74
Rental and ancillary services profit margin
21.9
%
(10.3
)%
Year Ended December 31,
Change
Change due to
Legacy-Diamond
Change due to
Legacy-HGV
($ in millions)
2020
2019
$
$
$
Rental revenues
$
90
$
201
$
(111
)
$
—
$
(111
)
Ancillary services revenues
7
26
(19
)
—
(19
)
Rental and ancillary services revenues
97
227
(130
)
—
(130
)
Rental expenses
98
123
(25
)
—
(25
)
Ancillary services expense
9
24
(15
)
—
(15
)
Rental and ancillary services expenses
107
147
(40
)
—
(40
)
Rental and ancillary services (loss) profit
$
(10
)
$
80
$
(90
)
$
—
$
(90
)
Rental and ancillary services profit margin
(10.3
)%
35.2
%
Rental and ancillary services revenues, expenses, and profit margin increased for year ended December 31, 2021, compared to the same period in 2020, primarily due to an increase in transient revenue associated with the reopening of nearly all of our resorts in the second half of 2021 that were closed during the same period in 2020. Rental and ancillary services expenses increased corresponding with the aforementioned reopening of nearly all of our resorts. Diamond contributed $11 million to the increase in rental and ancillary profit for the year ended December 31, 2021.
Other Operating Expenses
Year Ended December 31,
2021 vs 2020
Variance
2020 vs 2019
Variance
($ in millions)
2021
2020
2019
$
%
$
%
General and administrative
$
151
$
92
$
118
59
64.1
%
$
(26
)
(22.0
)%
Depreciation
and amortization
126
45
44
81
NM (1)
1
2.3
%
License fee expense
80
51
101
29
56.9
%
(50
)
(49.5
)%
Impairment expense
2
209
—
(207
)
(99.0
)%
209
NM (1)
____________________
(1) Fluctuation in terms of percentage change is not meaningful.
The change in other operating expenses for the year ended December 31, 2021, compared to the same period in 2020, was driven by expenses related to the Diamond Acquisition and administrative expenses and depreciation and amortization. General and administrative expenses increased by $59 million, primarily related to increased salaries and legal and professional fees. The increase in general and administrative expenses was also related to an increase in expense related to share-based compensation. In the prior year, certain expenses related to Performance RSUs were reversed as the related RSUs were not expected to achieve certain performance targets, resulting in a credit to expense in the prior period. Depreciation and amortization increased primarily as a result of the amortization of intangible assets acquired as part of the Diamond Acquisition. License fee expense increase is related to the corresponding increase in Legacy-HGV revenue.
66
Acquisition and Integration-Related Expense
Year Ended December 31,
2021 vs 2020
Variance
2020 vs 2019
Variance
($ in millions)
2021
2020
2019
$
%
$
%
Acquisition and integration-related expense
$
106
$
—
$
—
106
NM (1)
$
—
NM (1)
____________________
(1) Fluctuation in terms of percentage change is not meaningful.
Acquisition and integration-related costs include direct expenses for the Diamond Acquisition including integration costs, legal and other professional fees. Integration costs include technology-related costs, fees paid to management consultants and employee-related costs such as severance and transition. We did not incur any acquisition and integration-related costs for the years ended December 31, 2020, and 2019.
Non-Operating Expenses
Year Ended December 31,
2021 vs 2020
Variance
2020 vs 2019
Variance
($ in millions)
2021
2020
2019
$
%
$
%
Interest expense
$
105
$
43
$
43
62
NM (1)
$
—
—
Equity in earnings from unconsolidated affiliates
(10
)
(5
)
(4
)
(5
)
100.0
%
(1
)
25.0
%
Other loss (gain), net
26
(3
)
3
29
NM (1)
(6
)
NM (1)
Income tax expense (benefit)
93
(79
)
57
172
NM (1)
(136
)
NM (1)
____________________
(1) Fluctuation in terms of percentage change is not meaningful.
The change in non-operating expenses for the year ended December 31, 2021, compared to the same period in 2020, was primarily due to a $62 million increase in interest expense and other loss, net driven by debt extinguished in connection to the Diamond Acquisition and other drawings to support operations. Income tax expense also increased for the year ended December 31, 2021 compared to the same period in 2020 consistent with increased pre-tax income.
Liquidity and Capital Resources
Overview
Our cash management objectives are to maintain the availability of liquidity, minimize operational costs, remit 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. Our primary source of funding to satisfy these requirements is derived from sales and financing of vacation ownership intervals, management of our resorts and Clubs, and rentals of available inventory. See Item 1. Business for more information on our reportable segments and sources of revenue.
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, our non-recourse revolving timeshare credit facility (“Timeshare Facility”) and two conduit facilities, and through periodic securitizations of our timeshare financing receivables.
• In March 2021, we amended our Credit Agreement to amend certain terms related to financial covenants to permit the Diamond Acquisition. The financial covenants were also amended to provide greater flexibility for the Company. The borrowing capacity under the Credit Agreement remained the same. In connection with the amendment, we incurred $1 million in debt issuance costs. We amended our Timeshare Facility to align with our amended Credit Agreement. In addition, we obtained a revolving
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credit facility commitment in connection with the Diamond Acquisition and incurred $2 million in debt issuance costs which were amortized over the term of the commitment in the first quarter of 2021. This was included in Interest expense in our consolidated statements of operations.
• In June 2021, we entered into indentures in connection with the issuance and sale of senior notes, $850 million aggregate principal amount of 5.00 percent senior notes due 2029 (" the 2029 Notes") and $500 million aggregate principal amount of 4.875 percent senior notes due 2031 ("the 2031 Notes"). The net proceeds from the 2029 Notes and the 2031 Notes were used to finance the repayment of certain indebtedness in connection with the Diamond Acquisition. The gross proceeds of the offerings were initially deposited and held in an escrow account until the closing of the Diamond Acquisition on August 2, 2021. In connection with the offerings, we incurred $24 million in debt issuance costs.
• In connection with the closing of the Diamond Acquisition, HGV also entered into a new $1.3 billion seven-year senior secured term loan facility ("Term Loan B"). The Term Loan B was issued at a $6 million discount and the cumulative proceeds received from the Term loan and related senior notes discussed below were used to repay certain existing indebtedness of both HGV and Diamond, including HGV's pre-existing term loan and senior notes, $260 million of the balance on the revolving credit facility, and approximately $2.03 billion of Diamond's corporate indebtedness. We incurred a $20 million of loss on debt extinguishment for the transactions described herein which is included in Other (loss) gain, net . As of December 31, 2021, we incurred approximately $32 million in debt issuance costs for Term Loan B.
• In December 2021, we amended and recast our existing revolving credit facility due in 2023 into our new senior secured credit facility due in 2028. As a part of the amendment, we also increased the capacity of the revolving credit facility from $800 million to $1 billion. Under the new credit facility, the revolver is subject to an interest rate of 2.00 plus one month LIBOR. Upon the execution of the recast, we refinanced the existing $300 million principal balance on the revolver due in 2023 into the new revolver due in 2028. As of December 31, 2021, we incurred approximately $5 million in debt issuance costs in connection with the recast of the revolver.
• As of December 31, 2021, we had total cash and cash equivalents of $695 million, including $263 million of restricted cash.
• As of December 31, 2021, we have $699 million remaining borrowing capacity under the revolver facility. In addition, we have $461 million remaining borrowing capacity in total under our Timeshare Facility, and conduit facilities due in 2023 and 2024. We have $74 million of mortgage notes that are available to be securitized, and another $219 million of mortgage notes that we expect will become eligible as soon as they meet typical milestones including receipt of first payment, deeding, or recording.
As of December 31, 2021, we have all of our resorts and nearly all sales centers open and currently operating. However, some of our resorts and sales centers are still operating in markets with capacity constraints and are subject to various safety measures, which are impacting consumer demand for resorts in those markets. While we plan to continue normal business as conditions permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity.
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 $293 million as of December 31, 2021 which primarily consist of escrow and construction related bonds.
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.
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We believe that our capital allocation strategy provides adequate funding for our operations, is flexible enough to fund our development pipeline, securitizes the optimal level of receivables, and provides the ability to be strategically opportunistic in the marketplace. 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 December 31, 2021, our inventory-related purchase commitments totaled $330 million over 9 years.
Sources and Uses of Our Cash
The following table summarizes our net cash flows and key metrics related to our liquidity:
2021 vs 2020
2020 vs 2019
Year Ended December 31,
Variance
Variance
($ in millions)
2021
2020
2019
$
$
Net cash provided by (used in):
Operating activities
$
168
$
79
$
143
$
89
$
(64
)
Investing activities
(1,631
)
(33
)
(63
)
(1,598
)
30
Financing activities
1,636
328
(108
)
1,308
436
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 and Diamond Club operations and providing related rental and 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 year ended December 31, 2021 compared to the same period in 2020 was primarily due to an increase in net income, offset by decreases in net working capital from operations.
The following table exhibits our VOI inventory spending for the years ended December 31, 2021, 2020 and 2019.
Year Ended December 31,
($ in millions)
2021
2020
2019
VOI spending - owned properties
$
200
$
106
$
83
VOI spending - fee-for-service upgrades (1)
10
13
47
Purchases and development of real estate for future conversion to inventory
33
36
168
Total VOI inventory spending
$
243
$
155
$
298
____________________
(1) Includes expense related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects of $7 million, $9 million and $31 million recorded in Costs of VOI sales for the years ended December 31, 2021, 2020 and 2019, respectively.
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Investing Activities
The following table summarizes our net cash used in investing activities:
2021 vs 2020
2020 vs 2019
Year Ended December 31,
Variance
Variance
($ in millions)
2021
2020
2019
$
$
Acquisition of Diamond, net of cash and restricted cash acquired
$
(1,592
)
$
—
$
—
$
(1,592
)
$
—
Capital expenditures for property and equipment
(18
)
(8
)
(37
)
(10
)
29
Software capitalization costs
(21
)
(23
)
(24
)
2
1
Investments in unconsolidated affiliates
—
(2
)
(2
)
2
—
Net cash used in investing activities
$
(1,631
)
$
(33
)
$
(63
)
$
(1,598
)
$
30
Our capital expenditures include spending related to technology and buildings and leasehold improvements used to support sales and marketing locations, resort operations and corporate activities. We believe the renovations of our existing assets are necessary to stay competitive in the markets in which we operate.
The change in net cash used in investing activities for the year ended December 31, 2021 compared to the same period in 2020 was primarily due to the Diamond Acquisition and related capitalized acquisition costs.
Financing Activities
The following table summarizes our net cash provided by (used in) financing activities:
Year Ended December 31,
2021 vs 2020
Variance
2020 vs 2019
Variance
($ in millions)
2021
2020
2019
$
$
Issuance of debt
$
2,950
$
495
$
485
$
2,455
$
10
Issuance of non-recourse debt
264
495
365
(231
)
130
Repayment of debt
(1,154
)
(165
)
(290
)
(989
)
125
Repayment of non-recourse debt
(359
)
(475
)
(376
)
116
(99
)
Debt issuance costs
(70
)
(9
)
(6
)
(61
)
(3
)
Repurchase and retirement of common stock
—
(10
)
(283
)
10
273
Payment of withholding taxes on vesting of restricted stock units
(6
)
(4
)
(4
)
(2
)
—
Proceeds from employee stock plan purchases
1
2
3
(1
)
(1
)
Proceeds from stock option exercises
13
1
—
12
1
Other financing activity
(3
)
(2
)
(2
)
(1
)
—
Net cash provided by financing activities
$
1,636
$
328
$
(108
)
$
1,308
$
436
The change in net cash flows provided by financing activity for the year ended December 31, 2021 compared to the same period in 2020 was primarily due to the increase in debt borrowings for the issuance of Term Loan B in August 2021 and senior notes in June 2021 offset by repayments of debt and non-recourse debt and $70 million of other debt issuance costs.
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Contractual Obligations
Our commitments primarily relate to agreements with developers to purchase or construct vacation ownership units, operating leases and obligations associated with our debt, non-recourse debt and the related interest. As of December 31, 2021, we were committed to $5,643 million in contractual obligations over 9 years, $775 million of which will be fulfilled in 2022. This amount includes $923 million of interest on our debt and non-recourse debt, $148 million of which will be incurred in 2022. The ultimate amount and timing of certain commitments is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 23: Commitments and Contingencies, Note 15: Debt and Non-recourse Debt and Note 17: Leases in our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information. We also intend to rebrand Diamond properties as Hilton Grand Vacations branded properties pursuant to the A&R Hilton License Agreement.
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 $293 million as of December 31, 2021 which primarily consist of escrow and construction related bonds.
Guarantor Financial Information
Certain subsidiaries, which are listed on Exhibit 22 of this Annual Report on Form 10-K, have guaranteed our obligations related to our senior unsecured 2029 Notes and 2031 Notes (together, "the Notes"). The 2029 Notes were issued in June 2021 with an aggregate principal balance of $850 million, an interest rate of 5.0 percent, and maturity in June 2029. The 2031 Notes were issued in June 2021 with an aggregate principal balance of $500 million, an interest rate of 4.875 percent, and maturity in July 2031.
The 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 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 the Issuers’ and each guarantor’s existing and future senior indebtedness, are subordinated to all of the Issuers’ and guarantors’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, including the Senior Secured Credit Facilities, rank senior in right of payment to all of the Issuers’ and guarantors’ future subordinated indebtedness and other obligations that expressly provide for their subordination to the notes and the related guarantees, and are structurally subordinated to all existing and future indebtedness claims of holders of preferred stock and other liabilities of the Issuer’s subsidiaries that do not guarantee the Notes.
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.
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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 and the subsidiary Guarantors and (ii) investments in and equity in the earnings of non-Guarantor subsidiaries and unconsolidated affiliates:
($ in millions)
December 31,
Assets
2021
Cash and cash equivalents
$
333
Restricted cash
165
Accounts receivable, net - due from non-guarantor subsidiaries
45
Accounts receivable, net - due from related parties
20
Accounts receivable, net - other
231
Timeshare financing receivables, net
678
Inventory
727
Property and equipment, net
693
Operating lease right-of-use assets, net
66
Investments in unconsolidated affiliates
59
Goodwill
1,377
Intangible assets, net
1,441
Land and Infrastructure held for sale
41
Other assets
263
Total assets
$
6,139
Liabilities
Accounts payable, accrued expenses and other - due from non-guarantor subsidiaries
$
45
Accounts payable, accrued expenses and other - other
592
Advanced deposits
111
Debt, net
2,912
Operating lease liabilities
83
Deferred revenues
150
Deferred income tax liabilities
326
Total liabilities
$
4,219
Year ended December 31,
($ in millions)
2021
Total revenues - transactions with non-guarantor subsidiaries
$
9
Total revenues - other
2,004
Operating income
241
Net income
116
Subsequent Events
Management has evaluated all subsequent events through March 1, 2022, the date the audited 2021 10-K was available to be issued and determined the following subsequent event occurred:
Subsequent to December 31, 2021, HGV repaid the full $133 million combined principal balance outstanding at December 31, 2021 of both conduit facilities, comprised of $125 million on the conduit facility due in 2023 and $8 million due on the conduit facility due in 2024.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. We believe that of our significant accounting policies, which are described in Note 2: Summary of Significant Accounting Policies in our consolidated
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financial statements included in Item 8 of this Annual Report on Form 10-K, the following accounting policies are critical because they involve a higher degree of judgment, and the estimates required to be made are based on assumptions that are inherently uncertain. As a result, these accounting policies could materially affect our financial position, results of operations and related disclosures. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that are believed to reflect the current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material effect on our financial position or results of operations.
Revenue Recognition
In accordance with ASC 606, revenue is recognized upon the transfer of control of promised goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve the core principle of the guidance, we take the following steps: (i) identify the contract with the customer; (ii) determine whether the promised goods or services are separate performance obligations in the contract; (iii) determine the transaction price, including considering the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract based on the standalone selling price or estimated standalone selling price of the good or service; and (v) recognize revenue when (or as) we satisfy each performance obligation.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. For arrangements that contain multiple goods or services, we determine whether such goods or services are distinct performance obligations that should be accounted for separately in the arrangement. When allocating the transaction price in the arrangement, we may not have observable standalone sales for all the performance obligations in these contracts; therefore, we exercise significant judgement when determining the standalone selling price of certain performance obligations. In order to estimate the standalone selling prices for products other than Collections contracts, we primarily rely on the expected cost plus margin and adjusted market assessment approaches. We estimate stand-alone selling price for Collections contracts based on historical information, including expected breakage in contracts with multiple performance obligations, and allocate the remainder of the transaction price to the sale of points-based VOIs due to the variability in observable historical prices for traditional VOI sales. We then recognize the revenue allocated to each performance obligation as the related performance obligation is satisfied. See Note 2: Summary of Significant Accounting Policies in our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion.
Inventory and Cost of Sales
We use the relative sales value method of costing our VOI sales and relieving inventory, which requires us to make estimates subject to significant uncertainty. The estimates include future sales prices, timing and volume, provisions for financing receivables losses on financed sales of VOIs, sales incentives, projected future cost and volume of recoveries, including inventory reacquired from our upgrade programs. We aggregate these factors to calculate total net cost of sales of VOIs as a percentage of net sales of VOIs and apply this ratio to allocate the cost of sales to recognized sales of VOIs. The effect of changes in these estimates over the life of a project are recognized on a retrospective basis through corresponding adjustments to inventory and cost of sales in the period in which the estimates are revised.
Due to the application of the retrospective adjustments, changes in any of our estimates, including changes in our development and sales strategies could have a material effect on the carrying value of certain projects and inventory. We monitor our projects and inventory on an ongoing basis and complete an evaluation each reporting period to ensure that the inventory is stated at the lower of cost or fair value less cost to sell. In addition, we continually assess our VOIs inventory and, if necessary, impose pricing adjustments to modify sales pace.
Long-lived Assets and Related Impairment
We evaluate the carrying value of our property and equipment if there are indicators of potential impairment. We perform an analysis to determine the recoverability of the asset’s carrying value by comparing the expected undiscounted future cash flows to the net book value of the asset. If it is determined that the expected undiscounted future cash flows are less than the net book value of the asset, we calculate the asset’s fair value. The impairment loss recognized is equal to the amount that the net book value is in excess of fair value. Fair value is generally estimated using valuation techniques that consider the discounted cash flows of the asset using discount and capitalization rates
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deemed reasonable for the type of asset, as well as prevailing market conditions, appraisals, recent similar transactions in the market and, if appropriate and available, current estimated net sales proceeds from pending offers. We review all finite life intangible assets for impairment when circumstances indicate that their carrying amounts may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of the carrying value over the fair value in our consolidated statements of operations.
We classify long-lived assets to be sold as held for sale in the period (i) we have approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. We initially measure a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. We assess the fair value of a long-lived asset less any costs to sell at each reporting period and until the asset is no longer classified as held for sale. The methodology utilized to determine fair value at the time of classification as held for sale is dependent on the type of long-lived asset reclassified. All methodologies utilized to determine fair value involve judgment.
Business Combinations
We account for our business combinations in accordance with the acquisition method of accounting. We allocate the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. For each acquisition, we recognize goodwill as the amount in which consideration transferred for the acquired entity exceeds the fair values of net assets. The fair value of net assets is the fair value assigned to the assets acquired reduced by the fair value assigned to liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, we use various recognized valuation methods including the income, cost and sales and market approaches, which also include certain valuation techniques such as discount rates, and the amount and timing of future cash flows. We utilize independent valuation specialists under our supervision for certain of our assignments of fair value. We record the net assets and results of operations of an acquired entity in our consolidated financial statements from the acquisition date through period-end. We expense acquisition-related expenses as incurred and include such expenses within Acquisition and integration-related expense on our consolidated statements of operations. See Note 2: Summary of Significant Accounting Policies and Note 3: Diamond Acquisition for further detail.
Goodwill
We do not amortize goodwill. We evaluate goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that it is more-likely-than-not that we may not be able to recover the carrying amount (book value) of the net assets of the related reporting unit. When evaluating goodwill for impairment, we may perform the optional qualitative assessment by considering factors including macroeconomic conditions, industry and market conditions and overall financial performance. If we bypass the qualitative assessment, or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. We only recognize an impairment on goodwill if the estimated fair value of a reporting unit is less than its carrying value, in an amount not to exceed the carrying value of the reporting unit's goodwill.
Allowance for Financing Receivables Losses
The allowance for financing receivables losses is related to the receivables generated by our financing of VOI sales, which are secured by the underlying timeshare properties. We determine our financing receivables to be past due based on the contractual terms of the individual mortgage loans. We use a technique referred to as static pool analysis as the basis for determining our general reserve requirements on our financing receivables. The adequacy of the related allowance is determined by management through analysis of several factors requiring judgment, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio, including historic and assumed default rates. Although the allowance includes several factors requiring judgment, the static pool model is not highly uncertain as it relies upon historical metrics.
Changes in the estimates used in developing our default rates could result in a material change to our allowance. A 0.5 percentage point increase to our projected default rates used in the allowance calculation would increase our allowance for financing receivables losses by approximately $15 million.
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Acquired Financial Assets with Credit Deterioration
When financial assets are acquired, whether in connection with a business combination or an asset acquisition, we evaluate whether those acquired financial assets have experienced a more-than-insignificant deterioration in credit quality since origination. Financial assets that were acquired with evidence of such credit deterioration are referred to as purchased credit deteriorated (“PCD”) assets and reflect the acquirer’s assessment at the acquisition date. The evaluation of PCD assets is a qualitative assessment requiring significant management judgment. We consider indicators such as delinquency, FICO score deterioration, purchased credit impaired status from prior acquisition, certain account status codes which we believe are indicative of credit deterioration, as well as certain loan activity such as modifications and downgrades. In addition, we consider the impact of current and forward-looking economic conditions relative to the conditions which would have existed at origination.
Acquired PCD assets are recorded at the purchase price, represented by the acquisition date fair value, and subsequently “grossed-up” by the acquirer’s acquisition date assessment of the allowance for credit losses. The purchase price and the initial allowance for credit losses collectively represent the PCD asset’s initial amortized cost basis. While the initial allowance for credit losses of PCD assets does not impact period earnings, the Company remeasures the allowance for credit losses for PCD assets during each subsequent reporting period; changes in the allowance are recognized as provision expense within period earnings. The difference over which par value of the acquired PCD assets exceeds the purchase price plus the initial allowance for credit losses is reflected as a non-credit discount (or premium) and is accreted into interest income (or as a reduction to interest income) under the effective interest method.
Acquired financial assets which are not PCD assets are also recorded at the purchase price but are not similarly “grossed-up”. The acquirer recognizes an allowance for credit losses as of the acquisition date, which is recognized with a corresponding provision expense impact within earnings. The allowance is remeasured within each subsequent reporting period in the same manner as for PCD assets, with any change in the allowance recognized as provision expense in period earnings. See Note 3: Diamond Acquisition and Note 7: Timeshare Financing Receivables for further information.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using currently enacted tax rates. We regularly review our deferred tax assets to assess their potential realization and establish a valuation allowance for portions of such assets that we believe will not be ultimately realized. In performing this review, we make estimates and assumptions regarding projected future taxable income, the expected timing of reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions may increase or decrease our valuation allowance resulting in an increase or decrease in our effective tax rate, which could materially affect our consolidated financial statements.
We use a prescribed more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return if there is uncertainty in income taxes recognized in the financial statements. Assumptions and estimates are used to determine the more-likely-than-not designation. Changes to these assumptions and estimates can lead to an additional income tax (expense) benefit, which can materially change our consolidated financial statements.
Legal Contingencies
We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. An estimated loss from a loss contingency should be accrued by a charge to income if it is probable and the amount of the loss can be reasonably estimated. Significant judgment is required when we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially affect our consolidated financial statements.
ITEM 7A. Quantitative and Qualitat ive 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. We do not foresee any significant changes in either our exposure to fluctuations in interest rates or how we manage interest rates or currency rates or how we manage such exposure in the future.
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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 (loss), 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 December 31, 2021, for our financial instruments that are materially affected by interest rate risk:
Maturities by Period
($ in millions)
Weighted
Average
Interest
Rate (1)
2022
2023
2024
2025
2026
There-
after
Total (2)
Fair
Value
Assets:
Fixed-rate securitized
timeshare financing
receivables
13.792%
$
133
$
141
$
147
$
150
$
148
$
391
1,110
$
1,011
Fixed-rate unsecuritized
timeshare financing
receivables
14.730%
103
100
112
123
136
751
1,325
894
Liabilities: (3)
Fixed-rate debt
4.160%
495
272
88
165
13
1,402
2,435
2,481
Variable-rate debt (4)
3.073%
23
570
22
13
13
1,232
1,873
1,872
(1) Weighted-average interest rate as of December 31, 2021.
(2) Amount excludes unamortized deferred financing costs.
(3) Includes debt and non-recourse debt.
(4) Variable-rate debt includes principal outstanding debt of $1,873 million as of December 31, 2021. See Note 15: Debt & Non-recourse Debt in our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K 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 and Canadian dollars, the value of which could change materially in reference to our reporting currency, the U.S. dollar. A 10 percent change in the foreign exchange rate of Japanese yen to U.S. dollar would change our gross timeshare financing receivables by approximately $3 million. A 10 percent change in the foreign exchange rate of the Canadian dollar to U.S. dollar would change our gross timeshare financing receivables by less than $1 million.
76
Item 8. Financial Stateme nts and Supplementary Data
HILTON GRAND VACATIONS INC.
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements of Hilton Grand Vacations Inc.
Management’s Report on Internal Control Over Financial Reporting
78
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
79
Report of Independent Registered Public Accounting Firm
82
Consolidated Balance Sheets as of December 31, 2021 and 2020
84
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019
85
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019
86
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
87
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019
88
Notes to Consolidated Financial Statements
89
77
Management's Report on Internal Control Over Financial Reporting
Management of Hilton Grand Vacations Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). The scope of our efforts to comply with Section 404 of the Sarbanes-Oxley Act with respect to 2021 included all of our operations other than those of Diamond which we acquired in 2021 as described in Note 3 to the consolidated financial statements. In accordance with the SEC’s published guidance, because we acquired these operations during the year, we excluded these operations from our efforts to comply with Section 404 with respect to 2021. The acquired operations of Diamond constituted approximately 64% of total assets as of December 31, 2021 and 27% and 46% of revenue and income before income taxes, respectively, for the year then ended. The SEC’s published guidance specifies that the period in which management may omit an assessment of an acquired business’s internal control over financial reporting from its assessment of the Company’s internal control may not extend beyond one year from the date of acquisition. Based on our assessment, which as discussed herein excluded the operations of Diamond, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2021.
Ernst & Young LLP, the independent registered public accounting firm that has audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2021. The report is included herein.
78
Report of Independent Regis tered Public Accounting Firm
To the Shareholders and the Board of Directors of Hilton Grand Vacations Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hilton Grand Vacations Inc. (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
79
Legacy-HGV Cost of Vacation Ownership Intervals Sales
Description of the Matter
For the year ended December 31, 2021, the Company’s cost of vacation ownership intervals (“VOI”) sales was $213 million, which includes amounts recognized by the Legacy-HGV operations. As discussed in Note 2 to the consolidated financial statements, the Company accounts for cost of VOI sales using the relative sales value method. Changes in estimates within the relative sales value calculations are accounted for as cost of sales true-ups and are included in cost of VOI sales in the consolidated statements of operations to retrospectively adjust the margin previously recognized subject to those estimates.
Auditing management’s application of the relative sales value method for Legacy-HGV sales was complex and highly judgmental due to the significant estimation uncertainty in determining the significant assumptions required to apply the method, including future VOI sales prices and sales incentives, timing and volume of VOI sales, provisions for financing receivables losses on financed sales of VOIs, and projected future costs.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Legacy-HGV cost of VOI sales process. For example, we tested controls over management’s review of the Legacy-HGV cost of VOI sales calculations used as part of the relative sales value method, including the significant assumptions described above.
To test the Legacy-HGV cost of VOI sales, we performed audit procedures that included, among others, assessing the methodologies used by management, evaluating the significant assumptions discussed above and testing the underlying data used by the Company within its analysis. We compared the significant assumptions used by management to historical trends and/or the Company’s future development plans, as appropriate. We assessed the historical accuracy of management’s estimates based on previous assumptions and performed analytical procedures to evaluate the significant assumptions. In addition, we performed analytical procedures to evaluate individual timeshare project Legacy-HGV cost of VOI sales rates. Given the uniqueness of the cost of VOI sales analysis to the real estate timeshare industry, we involved real estate subject matter resources on our team.
Legacy-HGV Allowance for Financing Receivables
Description of the Matter
At December 31, 2021, the Company’s allowance for financing receivables generated by the financing of VOI sales was $762 million, which includes amounts related to the Legacy-HGV operations. As discussed in Note 2 to the consolidated financial statements, the Company records an estimate of variable consideration due to uncollectibles as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale. The Company uses a technique referred to as static pool analysis as the basis for determining the default rates that are used to estimate variable consideration and allowance for financing receivables. The estimates of the variable consideration are based on default rates that are an output of the Legacy-HGV static pool and considers current and future economic and market conditions.
Auditing the Legacy-HGV allowance for financing receivables was challenging and required additional audit effort due to the complex nature of the static pool analysis and the high volume of data which is utilized in applying the static pool analysis. The estimate also required judgment in evaluating management’s conclusions regarding which historical default rates most appropriately reflect the current and future market conditions.
80
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Legacy-HGV allowance for financing receivables process, including controls over management’s review of the static pool analysis and data utilized in the static pool analysis.
To test the estimated Legacy-HGV allowance for financing receivables, we performed audit procedures that included, among others, assessing the methodology discussed above, and testing the completeness and accuracy of the underlying data used by the Company in its analysis. We also compared data used in the Legacy-HGV static pool analysis to historical data from prior periods. We compared current year default rates to prior year default rates. In addition, we recalculated the Legacy-HGV allowance for financing receivables for certain pools of loans. We evaluated management’s assessment that historical data reflects current and future market conditions in estimating the allowance. Given the uniqueness of the static pool analysis to the real estate timeshare industry, we involved real estate subject matter resources on our team.
Accounting for the Acquisition of Diamond
Description of the Matter
As more fully described in Note 3 to the consolidated financial statements, the Company acquired Dakota Holdings, Inc., the parent of Diamond Resorts International, Inc. (“Diamond”), on August 2, 2021 for aggregate cash and stock consideration of approximately $3.41 billion. The acquisition was accounted for as a business combination and, as such, the Company preliminarily measured the assets acquired and liabilities assumed at their acquisition-date fair values, including preliminary fair values of the acquired inventory and the management contracts intangible asset of $497 million and $1.25 billion, respectively.
Auditing management’s acquisition of Diamond involved especially subjective judgments and complex analyses related to the preliminary fair value estimates of the acquired inventory and management contracts intangible asset due to the significant estimation required in determining fair value. The estimates of fair value of the acquired inventory and management contracts intangible asset are sensitive to changes in assumptions impacting the net present value of future cash flows expected from the future performance of the acquired business. The significant assumptions impacting the estimates of the preliminary fair value of the acquired inventory and management contracts intangible asset included anticipated operating costs and margins, and the discount rates, which are affected by expectations about future market and economic conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Diamond business combination accounting process. For example, we tested controls over the valuation of the acquired inventory and management contracts intangible asset, including the Company’s controls over the valuation approaches and methods selected, and the significant assumptions used in the fair value measurements described above.
To test the fair values of the acquired inventory and the management contracts intangible asset, our audit procedures, among others, included evaluating the Company's valuation methods and significant assumptions used and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We compared the significant assumptions used by management to current economic trends, where applicable, the historical results of the acquired business, and other relevant factors. We involved our valuation specialists to assist with our evaluation of the valuation methods and certain significant assumptions, including the discount rates used in determining the fair values of the acquired inventory and the management contracts intangible asset.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Orlando, Florida
March 1, 2022
81
Report of Independent Regist ered Public Accounting Firm
To the Shareholders and the Board of Directors of Hilton Grand Vacations Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Hilton Grand Vacations Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hilton Grand Vacations Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Dakota Holdings, Inc., which is included in the 2021 consolidated financial statements of the Company and constituted approximately 64% of total assets as of December 31, 2021 and 27% and 46% of revenues and income before income taxes, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Dakota Holdings, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated March 1, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
82
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Orlando, Florida
March 1, 2022
83
HILTON GRAND VACATIONS INC.
CONSOLIDATED BA LANCE SHEETS
(in millions, except share data)
December 31,
2021
2020
ASSETS
Cash and cash equivalents
$
432
$
428
Restricted cash
263
98
Accounts receivable, net of allowance for doubtful accounts of $ 39 and $ 20
302
119
Timeshare financing receivables, net
1,747
974
Inventory
1,240
702
Property and equipment, net
756
501
Operating lease right-of-use assets, net
70
52
Investments in unconsolidated affiliates
59
51
Goodwill
1,377
—
Intangible assets, net
1,441
81
Land and infrastructure held for sale
41
41
Other assets
280
87
TOTAL ASSETS (variable interest entities - $ 1,100 and $ 800 )
$
8,008
$
3,134
LIABILITIES AND EQUITY
Accounts payable, accrued expenses and other
$
673
$
252
Advanced deposits
112
117
Debt, net
2,913
1,159
Non-recourse debt, net
1,328
766
Operating lease liabilities
87
67
Deferred revenues
237
262
Deferred income tax liabilities
670
137
Total liabilities (variable interest entities - $ 1,199 and $ 771 )
6,020
2,760
Commitments and contingencies - see Note 23
Equity:
Preferred stock, $ 0.01 par value; 300,000,000 authorized shares, none
issued or outstanding as of December 31, 2021 and 2020
—
—
Common stock, $ 0.01 par value; 3,000,000,000 authorized shares,
119,904,001 shares issued and outstanding as of December 31, 2021 and
85,205,012 shares issued and outstanding as of December 31, 2020
1
1
Additional paid-in capital
1,630
192
Accumulated retained earnings
357
181
Accumulated other comprehensive income
—
—
Total equity
1,988
374
TOTAL LIABILITIES AND EQUITY
$
8,008
$
3,134
See notes to consolidated financial statements.
84
HILTON GRAND VACATIONS INC.
CONSOLIDATED STATEME NTS OF OPERATIONS
(in millions, except per share amounts)
Year Ended December 31,
2021
2020
2019
Revenues
Sales of VOIs, net
$
883
$
108
$
509
Sales, marketing, brand and other fees
385
221
573
Financing
183
165
170
Resort and club management
340
166
191
Rental and ancillary services
342
97
227
Cost reimbursements
202
137
168
Total revenues
2,335
894
1,838
Expenses
Cost of VOI sales
213
28
127
Sales and marketing
653
381
719
Financing
65
53
53
Resort and club management
80
36
46
Rental and ancillary services
267
107
147
General and administrative
151
92
118
Acquisition and integration-related expense
106
—
—
Depreciation and amortization
126
45
44
License fee expense
80
51
101
Impairment expense
2
209
—
Cost reimbursements
202
137
168
Total operating expenses
1,945
1,139
1,523
Interest expense
( 105
)
( 43
)
( 43
)
Equity in earnings from unconsolidated affiliates
10
5
4
Other (loss) gain, net
( 26
)
3
( 3
)
Income (loss) before income taxes
269
( 280
)
273
Income tax (expense) benefit
( 93
)
79
( 57
)
Net income (loss)
$
176
$
( 201
)
$
216
Earnings (loss) per share:
Basic
$
1.77
$
( 2.36
)
$
2.43
Diluted
$
1.75
$
( 2.36
)
$
2.42
See notes to consolidated financial statements.
85
HILTON GRAND VACATIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Year Ended December 31,
2021
2020
2019
Net income (loss)
$
176
$
( 201
)
$
216
Foreign currency translation adjustments
( 2
)
—
—
Derivative instrument adjustments, net of tax
2
—
—
Other comprehensive income, net of tax
—
—
—
Comprehensive income (loss)
$
176
$
( 201
)
$
216
See notes to consolidated financial statements.
86
HILTON GRAND VACATIONS INC.
CONSOLIDATED STATEM ENTS OF CASH FLOWS
(in millions)
Year Ended December 31,
2021
2020
2019
Operating Activities
Net income (loss)
$
176
$
( 201
)
$
216
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
126
45
44
Amortization of deferred financing costs, acquisition premiums and other
39
18
17
Provision for financing receivables losses
121
75
74
Impairment expense
2
209
—
Other loss (gain), net
14
( 1
)
3
Share-based compensation
48
15
22
Deferred income tax expense (benefit)
58
( 123
)
3
Equity in earnings from unconsolidated affiliates
( 10
)
( 5
)
( 4
)
Return on investment in unconsolidated affiliates
2
—
—
Net changes in assets and liabilities, net of effects of acquisition:
Accounts receivable, net
( 124
)
56
( 20
)
Timeshare financing receivables, net
( 92
)
107
( 111
)
Inventory
15
( 91
)
( 4
)
Purchases and development of real estate for future conversion to inventory
( 33
)
( 36
)
( 168
)
Other assets
48
( 11
)
( 18
)
Accounts payable, accrued expenses and other
( 48
)
( 56
)
( 17
)
Advanced deposits
( 8
)
2
14
Deferred revenues
( 166
)
76
91
Other
—
—
1
Net cash provided by operating activities
168
79
143
Investing Activities
Acquisition of Diamond, net of cash and restricted cash acquired
( 1,592
)
—
—
Capital expenditures for property and equipment
( 18
)
( 8
)
( 37
)
Software capitalization costs
( 21
)
( 23
)
( 24
)
Investments in unconsolidated affiliates
—
( 2
)
( 2
)
Net cash used in investing activities
( 1,631
)
( 33
)
( 63
)
Financing Activities
Issuance of debt
2,950
495
485
Issuance of non-recourse debt
264
495
365
Repayment of debt
( 1,154
)
( 165
)
( 290
)
Repayment of non-recourse debt
( 359
)
( 475
)
( 376
)
Debt issuance costs and discounts
( 70
)
( 9
)
( 6
)
Repurchase and retirement of common stock
—
( 10
)
( 283
)
Payment of withholding taxes on vesting of restricted stock units
( 6
)
( 4
)
( 4
)
Proceeds from employee stock plan purchases
1
2
3
Proceeds from stock option exercises
13
1
—
Other financing activity
( 3
)
( 2
)
( 2
)
Net cash provided by (used in) financing activities
1,636
328
( 108
)
Effect of changes in exchange rates on cash, cash equivalents & restricted cash
( 4
)
—
—
Net increase (decrease) in cash, cash equivalents and restricted cash
169
374
( 28
)
Cash, cash equivalents and restricted cash, beginning of period
526
152
180
Cash, cash equivalents and restricted cash, end of period
$
695
$
526
$
152
See notes to consolidated financial statements.
87
HILTON GRAND VACATIONS INC.
CONSOLIDATED STATEMENTS OF ST OCKHOLDERS ’ EQUITY
(in millions)
Accumulated
Additional
Accumulated
Other
Common Stock
Paid-in
Retained
Comprehensive
Total
Shares
Amount
Capital
Earnings
Income
Equity
Balance as of December 31, 2019
85
$
1
$
179
$
390
$
—
$
570
Net loss
—
—
—
( 201
)
—
( 201
)
Activity related to share-based compensation
—
—
15
—
—
15
Repurchase and retirement of common stock
( 1
)
—
( 2
)
( 8
)
—
( 10
)
Balance as of December 31, 2020
84
$
1
$
192
$
181
$
—
$
374
Net income
—
—
—
176
—
176
Activity related to share-based compensation
2
—
56
—
—
56
Shares issued for Diamond acquisition
34
—
1,381
—
—
1,381
Employee stock plan issuance
—
—
1
—
—
1
Foreign currency translation adjustments
—
—
—
—
( 2
)
( 2
)
Derivative instrument adjustments
—
—
—
—
2
2
Balance as of December 31, 2021
120
$
1
$
1,630
$
357
$
—
$
1,988
See notes to consolidated financial statements.
88
HILTON GRAND VACATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization and Basis of Presentation
Our Business
We are a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. During 2021, we also acquired Diamond Resorts and are in the process of rebranding Diamond properties and sales centers to the Hilton Grand Vacations brand and Hilton standards. Our operations, which primarily consist of selling vacation ownership intervals and vacation ownership interests (collectively, “VOIs”, “VOI”) for us and third parties; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts and multi-resort trusts; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange program (collectively the “Legacy-HGV Club”) and Diamond points-based clubs.
As of December 31, 2021 , we had 154 properties located in the United States (“U.S.”), Europe, Mexico, the Caribbean, Canada and Japan. A significant number of our properties and VOIs are concentrated in Florida, Europe, Hawaii, California, Arizona, Nevada, and Virginia.
Diamond Acquisition
On August 2, 2021, we completed the acquisition of Dakota Holdings, Inc., the parent of Diamond Resorts International (the “Diamond Acquisition”). We completed the acquisition by exchanging 100 percent of the outstanding equity interests of Diamond for shares of HGV common stock. Pre-existing HGV shareholders owned approximately 72 percent of the combined company immediately after giving effect of the Diamond Acquisition, with certain funds controlled by Apollo Global Management Inc. (the "Apollo Funds" or, "Apollo") and other minority shareholders, who previously owned 100 percent of Diamond, holding the remaining approximately 28 percent at the time the Diamond Acquisition was completed .
Diamond also operates in the hospitality and VOI industry, with a worldwide resort network of global vacation destinations. Diamond’s portfolio consists of resort properties (the “Portfolio Properties”) that we manage, are included in one of Diamond's single- and multi-use trusts (collectively, the "Diamond Collections"), or are Diamond branded resorts in which we own inventory, as well as affiliated resorts and hotels, which we do not manage, and which do not carry the Diamond brand but are a part of Diamond's network and, through THE Club® and other Club offerings (the “Diamond Clubs”), are available for its members to use as vacation destinations.
Diamond’s operations primarily consist of: VOI sales and financing which includes marketing and sales of VOIs and consumer financing for purchasers of the Company's VOIs; operations related to the management of the homeowners associations (the “HOAs”) for resort properties and the Diamond Collections, operating and managing points-based vacation clubs, and operation of certain resort amenities and management services.
This Annual Report on Form 10-K includes Diamond’s results of operations beginning on August 2, 2021. We refer to Diamond's business and operations that we acquired as "Legacy-Diamond", and our business and operations that existed both prior to and following the Diamond Acquisition as "Legacy-HGV." See Note 3: Diamond Acquisition for more information.
Of our 154 properties, 92 are Legacy-Diamond properties as of December 31, 2021.
Basis of Presentation
The 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. Our accompanying 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 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”).
The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of rights held by other interests. If the entity is considered to be a variable interest entity (“VIE”), we determine whether we are the primary beneficiary, and then consolidate those VIEs for
89
which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interests in the entity. We consolidate entities when we own more than 50 percent of the voting shares of a company or otherwise have a controlling financial interest. The consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. GAAP.
Use of Estimates
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.
Impact of the COVID-19 Pandemic
As of December 31, 2021, all of our resorts and nearly all sales centers which had previously closed due to the COVID-19 pandemic were open and operating, although some are still operating in markets with various capacity constraints, social distancing requirements and other safety measures, which are impacting consumer demand for resorts in those markets. We plan to continue our normal business as conditions permit, but there can be no assurance that such positive trends will continue or that there will not be any increases of new infections and/or new variants (such as Delta and Omicron variant) that may result in the reimposition of social distancing measures and/or restrictions in certain jurisdictions, as well as travel restrictions that may impede or reverse our recovery.
Note 2: Summa ry of Significant Accounting Policies
Revenue Recognition
We account for revenue in accordance with Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (commonly referred to as Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”). Revenue is recognized upon the transfer of control of promised goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve the core principle of the guidance, we take the following steps: (i) identify the contract with the customer; (ii) determine whether the promised goods or services are separate performance obligations in the contract; (iii) determine the transaction price, including considering the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract based on the standalone selling price or estimated standalone selling price of the good or service; and (v) recognize revenue when (or as) we satisfy each performance obligation.
Contracts with Multiple Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. For arrangements that contain multiple goods or services, we determine whether such goods or services are distinct performance obligations that should be accounted for separately in the arrangement. When allocating the transaction price in the arrangement, we may not have observable standalone sales for all of the performance obligations in these contracts; therefore, we exercise significant judgement when determining the standalone selling price of certain performance obligations. In order to estimate the standalone selling prices for products, we primarily rely on the expected cost plus margin and adjusted market assessment approaches. We then recognize the revenue allocated to each performance obligation as the related performance obligation is satisfied as discussed below.
• Sales of VOIs, net — Customers who purchase all vacation ownership products, whether paid in cash or financed, enter into multiple contracts, which we combine and account for as a single contract. Revenue from VOI sales is recognized at the point in time when control of the VOI is transferred to the customer which is when the customer has executed a binding sales contract, collectability is reasonably assured, the purchaser’s period to cancel for a refund has expired and the customer has the right to use the VOI. Revenue from sales of VOIs under construction is deferred until the point in time when construction activities are deemed to be completed, occupancy of the development is permissible, and the above criteria has been met. For financed sales, we estimate the variable consideration to be received under such contracts and recognize revenue net of amounts deemed uncollectible as the VOI is returned to inventory upon customer default. Variable consideration which has not been included within the transaction price is presented as a reserve on the financing receivable. See Note 7: Timeshare Financing Receivables for more information regarding our estimate of variable consideration.
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Vacation ownership product sales include revenue from the sale of VOIs, which in the case of the Diamond Collections are represented by an annual or biennial allotment of points that can be utilized for vacations at Diamond resorts in our network for varying lengths of stay. Typical contracts include the sale of VOIs, certain sales incentives primarily in the form of additional points for use over a specified period of time (“Bonus Points”), and generally membership in the Legacy-HGV Club or Diamond Clubs, each of which represent a separate and distinct performance obligation for which consideration is allocated based on the estimated stand-alone selling price of the sales incentives and membership dues. We recognize revenue related to our VOIs when control of the points passes to the customer, which generally occurs after the expiration of the applicable statutory rescission period and after collectability is reasonably assured and the customer has the right to use the VOI.
Bonus Points are valid for a specified period of time (generally for a period between 18 and 30 months) and may be used for stays at properties within our resort network, and in the case of HGV, hotel reservations within Hilton’s system and VOI interval exchanges with other third-party vacation ownership exchanges. At the time of the VOI sale, we estimate the fair value of sales incentives to be redeemed, including an adjustment for estimated breakage, to determine the standalone selling price of these incentives (“FDI”). We defer a portion of the total transaction price for the combined VOI contract as a liability for the FDI and recognize the corresponding revenue at the point in time when the customer receives the benefits of the FDI, which is upon the customer’s redemption of the Bonus Points. At that time, we also determine whether we are principal or agent for the redeemed good or service and recognize revenue on a gross or net basis accordingly.
Contracts’ financed amount represents variable consideration which is estimated based on the expected value method to the extent that it is probable a significant reversal is not expected to occur. We estimate the expected value to be collected based on historical default rates and recognize revenue net of amounts deemed to be uncollectible. Variable consideration that has not been included in the transaction price is presented as a reserve on the financing receivable. See Note 7: Timeshare Financing Receivables for more information regarding our estimate of variable consideration.
• Sales, marketing, brand and other fees — We enter into contracts with third-party developers to sell VOIs on their behalf through fee-for-service agreements for which we earn sales commissions and other fees. These commissions are variable as they are based on the sales and marketing results, which are subject to the constraint on variable consideration and resolved on a monthly basis over the contract term. We estimate such commissions to the extent that it is probable that a significant reversal of such revenue will not occur and recognize the commissions as the developer receives and consumes the benefits of the services. Any changes in these estimates would affect revenue and earnings in the period such variances are realized.
Additionally, we enter into contracts to sell prepaid vacation packages. Our obligation in such contracts is satisfied when customers stay at our property; therefore, we recognize revenue for these packages when they are redeemed. On a portfolio basis, we exercise judgement to estimate the amount of expected breakage related to unused prepaid vacation packages and recognize such breakage in proportion to the pattern of packages utilized by our portfolio of customers.
• Financing — We offer financing to qualifying customers purchasing our VOIs. Revenue from the financing of timeshare sales is recognized on the accrual method as earned based on the outstanding principal, interest rate and terms stated in each individual financing agreement. We also recognize revenue from servicing the loans provided by third-party developers to purchasers of their VOIs over the period services are rendered.
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• Resort and club management — As part of our VOI sales, a majority of our customers enter into a Legacy-HGV Club or Diamond Club arrangement (referred to collectively as “Clubs”) which allows the member to exchange points for a number of vacation options. We manage the Clubs, receiving annual dues, transaction fees from member exchanges, and, in the case of the Legacy-HGV Club, activation fees. The member's first year of annual dues and, in the case of the Legacy-HGV Club, the activation fee, are payable at the time of the VOI sale.
The Legacy-HGV Club activation fee relates to activities we are required to undertake at or near contract inception to fulfill the contract and does not result in the transfer of a promised good or service. Since our customers are granted the opportunity to renew their membership on an annual basis for no additional activation fee, we defer and amortize the activation fee on a straight-line basis over the seven-year average inventory holding period.
Annual dues for membership renewals are billed each year, and we recognize revenue from these annual dues over the period services are rendered. A member may elect to enter into an optional exchange transaction at which point the member pays their required transaction fee. This option does not represent a material right as the transactions are priced at their standalone selling price. Revenue related to the transaction is recognized when the services are rendered.
As part of our resort operations, we contract with HOAs to provide day-to-day-management services, including housekeeping services, operation of a reservation system, maintenance, and certain accounting and administrative services. We receive compensation for such management services, which is generally based on a percentage of costs to operate the resorts, on a monthly basis. These fees represent a form of variable consideration and are estimated and recognized over time as the HOAs receive and consume the benefits of the management services. Management fees earned related to the portion of unsold VOIs at each resort which we own are recognized on a net basis given we retain these VOIs in our inventory.
• Rental and ancillary services — Our rental and ancillary services consist primarily of rental revenues on unoccupied vacation ownership units, inventory made available due to ownership exchanges through our club program and ancillary revenues. Rental revenue is recognized when occupancy has occurred. Advance deposits on the rental unit and the corresponding revenue is deferred and recognized upon the customer’s vacation stay. Ancillary revenues consist of food and beverage, retail, spa offerings and other items. We recognize ancillary revenue when goods have been provided and/or services have been rendered.
We account for rental operations of unsold VOIs, including accommodations provided through the use of our vacation sampler programs, as incidental operations. Incremental carrying costs in excess of incremental revenues are recognized in the period incurred. In all periods presented, incremental carrying costs exceeded incremental revenues, and all revenues and expenses are recognized in the period earned or incurred.
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• Cost reimbursements — As part of our management agreements with HOAs and fee-for-service developers, we receive cost reimbursements for performing the day-to-day management services, including direct and indirect costs that HOAs and developers reimburse to us. These costs primarily consist of insurance, payroll and payroll related costs for management of the HOAs and other services we provide where we are the employer and provide insurance. Cost reimbursements are based upon actual expenses with no added margin, and are billed to the HOA on a monthly basis. We recognize cost reimbursements when we incur the related reimbursable costs as the HOA receives and consumes the benefits of the management services.
We capitalize all incremental costs incurred to obtain a contract when such costs would not have been incurred if the contract had not been obtained. We elect to expense costs incurred to obtain a contract when the deferral period would be one year or less. Commissions for VOI sales for resorts under construction are expensed when the associated VOI revenue is recognized which is upon completion of the resort. These commissions are classified as Sales and marketing expense in our consolidated statements of operations. These contract costs are recognized at the point in time that the revenue related to the incentive is recognized and included within Sales of VOIs, net on the consolidated statements of operations.
As of December 31, 2021 , the ending asset balance for costs to obtain a contract was $ 13 million relating to deferred commission costs for certain vacation package sales and VOI sales of resorts under construction. For the year ended December 31, 2021, we recognized $ 33 million of expense related to this asset balance.
Other than the United States, there were no countries that individually represented more than 10 percent of total revenues for the years ended December 31, 2021, 2020 and 2019.
We earn commission and other fees related to fee-for-service agreements to sell VOIs. For the years ended December 31, 2021, 2020 and 2019 , we did not earn more than 10 percent of our total revenue from one customer.
We are required to collect certain taxes and fees from customers on behalf of government agencies and remit these back to the applicable governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent with respect to these taxes and fees. We do not retain these taxes and fees and, therefore, they are not included in revenues. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable taxing authority or other appropriate governmental agency.
Business Combinations
We account for our business combinations in accordance with the acquisition method of accounting. We allocate the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. For each acquisition, we recognize goodwill as the amount in which consideration transferred for the acquired entity exceeds the fair values of net assets. The fair value of net assets is the fair value assigned to the assets acquired reduced by the fair value assigned to liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, we use various recognized valuation methods including the income, cost and sales and market approaches, which also include certain valuation techniques such as discount rates, and the amount and timing of future cash flows. We utilize independent valuation specialists under our supervision for certain of our assignments of fair value. We record the net assets and results of operations of an acquired entity in our consolidated financial statements from the acquisition date through period-end. We expense acquisition-related expenses as incurred and include such expenses within Acquisition and integration-related expense on our consolidated statements of operations. See Note 3: Diamond Acquisition for further information.
Acquired Financial Assets with Credit Deterioration
When financial assets are acquired, whether in connection with a business combination or an asset acquisition, we evaluate whether those acquired financial assets have experienced a more-than-insignificant deterioration in credit quality since origination. Financial assets that were acquired with evidence of such credit deterioration are referred to as purchased credit deteriorated ("PCD") assets and reflect the acquirer’s assessment at the acquisition date. The evaluation of PCD assets is a qualitative assessment requiring management judgment. We consider indicators such as delinquency, FICO score deterioration, purchased credit impaired status from prior acquisition, certain account status codes which we believe are indicative of credit deterioration, as well as certain loan activity such as modifications and
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downgrades. In addition, we consider the impact of current and forward-looking economic conditions relative to the conditions which would have existed at origination.
Acquired PCD assets are recorded at the purchase price, represented by the acquisition date fair value, and subsequently “grossed-up” by the acquirer’s acquisition date assessment of the allowance for credit losses. The purchase price and the initial allowance for credit losses collectively represent the PCD asset’s initial amortized cost basis. While the initial allowance for credit losses of PCD assets does not impact period earnings, the Company remeasures the allowance for credit losses for PCD assets during each subsequent reporting period; changes in the allowance are recognized as provision expense within period earnings. The difference over which par value of the acquired PCD assets exceeds the purchase price plus the initial allowance for credit losses is reflected as a non-credit discount (or premium) and is accreted into interest income (or as a reduction to interest income) under the effective interest method.
Acquired financial assets which are not PCD assets are also recorded at the purchase price but are not similarly “grossed-up”. The acquirer recognizes an allowance for credit losses as of the acquisition date, which is recognized with a corresponding provision expense impact within earnings. The allowance is remeasured within each subsequent reporting period in the same manner as for PCD assets, with any change in the allowance recognized as provision expense in period earnings. See Note 3: Diamond Acquisition and Note 7: Timeshare Financing Receivables for further information.
Investments in Unconsolidated Affiliates
We account for investments in unconsolidated affiliates under the equity method of accounting when we exercise significant influence, but do not maintain a controlling financial interest over the affiliates. We evaluate our investments in affiliates for impairment when there are indicators that the fair value of our investment may be less than our carrying value.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of three months or less.
Restricted Cash
Restricted cash includes deposits received on VOI sales that are held in escrow until legal requirements of the local jurisdictions are met with regards to project construction or contract status and cash reserves required by our non-recourse debt agreements. Restricted cash also includes certain amounts collected on behalf of HOAs.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable primarily consists of trade receivables and is reported as 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 consolidated balance sheets and are expensed in the same line as the hosting arrangement in our consolidated statements of operations using the straight-line method over the assets’ estimated useful lives, which is generally three to five years . We review the CCAs for impairment when circumstances indicate that their carrying amounts may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the fair value in our consolidated statements of operations.
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 (loss) for the effective portion of the hedge and record the ineffectiveness of a hedge immediately in earnings in our consolidated
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statement of operations. We release the derivative’s gain or loss from AOCI to match the timing of the underlying hedged items’ effect on earnings.
Timeshare Financing Receivables and Allowance for Financing Receivables Losses
Our timeshare financing receivables consist of loans related to our financing of VOI sales that are secured by the underlying timeshare properties. We determine our timeshare financing receivables to be past due based on the contractual terms of the individual mortgage loans. We recognize interest income on our timeshare financing receivables as earned. The interest rate charged on the notes correlates to the risk profile of the borrower at the time of purchase and the percentage of the purchase that is financed, among other factors. We record an estimate of variable consideration as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale.
We have two timeshare financing receivables portfolio segments: (i) originated and (ii) acquired. Our originated portfolio segment includes Legacy-HGV and Legacy-Diamond timeshare financing receivables originated after the August 2, 2021 acquisition date, while our acquired portfolio segments includes all Legacy-Diamond timeshare financing receivables as of that date. We evaluate the portfolio segments collectively, since we hold a large group of homogeneous timeshare financing receivables, which are individually immaterial. We monitor the credit quality of our receivables on an ongoing basis. There are no significant concentrations of collection risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for determining our financing receivables losses reserve requirements on our timeshare financing receivables. The static pool analysis includes several years of default data through which we stratify our portfolio using certain key dimensions including, for Legacy-HGV timeshare financing receivables, FICO scores and equity percentage at the time of sale. The adequacy of the related allowance is determined by management through analysis of several factors, such as current and forward-looking 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. In addition, for our acquired portfolio segment we also develop an inventory recovery assumption to reflect the recovery value of VOIs from future potential defaults. Our estimate of inventory recovery is principally based upon the fair value of underlying VOIs and assumed default rates and is reflected as a reduction to the estimated gross allowance. Once a timeshare financing receivable within the acquired portfolio segment is charged-off, the loan's corresponding inventory recovery amount is reclassified from the allowance into inventory. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio.
We apply payments we receive for loans, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a note is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for loans for which we had previously ceased accruing interest once the loan is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the loan is 121 days past due and, subsequently, we write off the uncollectible note against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.
Inventory and Cost of Sales
Inventory includes unsold, completed VOIs; VOIs under construction; and land and infrastructure held for future VOI product development at our current resorts. We carry our completed VOI inventory at the lower of cost or estimated fair value, less costs to sell, which can result in impairment losses and/or recoveries of previous impairments. Projects under development, along with land and infrastructure for future development are under a held and use impairment model and are reviewed for indicators of impairment quarterly.
We capitalize costs directly associated with the acquisition, development and construction of a real estate project when it is probable that the project will move forward. We capitalize salary and related costs only to the extent they directly relate to the project. We capitalize interest expense, taxes and insurance costs when activities that are necessary to get the property ready for its intended use are underway. We cease capitalization of costs during prolonged gaps in development when substantially all activities are suspended or when projects are considered substantially complete.
We account for our VOI inventory and cost of VOI sales using the relative sales value method. Also, we do not reduce inventory for the cost of VOI sales related to anticipated defaults, and accordingly, no adjustment is made when inventory is reacquired upon default of the related receivable. This results in changes in estimates within the relative sales value calculations to be accounted for as real estate inventory true-ups, which we refer to as cost of sales
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true-ups, and are included in Cost of VOI sales in our consolidated statements of operations to retrospectively adjust the margin previously recognized subject to those estimates.
Property and Equipment
Property and equipment includes land, buildings and leasehold improvement and furniture and equipment at our corporate offices, sales centers and management offices. Additionally, certain property and equipment is held for future conversion into inventory. Construction in progress primarily relates to development activities. Costs that are capitalized related to development activities are classified as property and equipment until they are registered for sale. Costs of improvements that extend the economic life or improve service potential are also capitalized. Capitalized costs are depreciated over their estimated useful lives. Costs for normal repairs and maintenance are expensed as incurred. Other than the United States, there were no countries that individually represented over 10 percent of total property and equipment, net as of December 31, 2021 and 2020.
Depreciation is recorded using the straight-line method over the assets’ estimated useful lives, which are generally as follows: buildings and improvements ( eight to 40 years ); furniture and equipment ( three to eight years ); and computer equipment and acquired software ( three years ). Leasehold improvements are depreciated over the shorter of the estimated useful life, based on the estimates above, or the lease term.
We evaluate the carrying value of our property and equipment if there are indicators of potential impairment. We perform an analysis to determine the recoverability of the asset’s carrying value by comparing the expected undiscounted future cash flows to the net book value of the asset. If it is determined that the expected undiscounted future cash flows are less than the net book value of the asset, we calculate the asset’s fair value. The impairment loss recognized is equal to the amount that the net book value is in excess of fair value. Fair value is generally estimated using valuation techniques that consider the discounted cash flows of the asset using discount and capitalization rates deemed reasonable for the type of asset, as well as prevailing market conditions, appraisals, recent similar transactions in the market and, if appropriate and available, current estimated net sales proceeds from pending offers.
If sufficient information exists to reasonably estimate the fair value of a conditional asset retirement obligation, including environmental remediation liabilities, we recognize the fair value of the obligation when the obligation is incurred.
Assets Held for Sale
We classify long-lived assets to be sold as held for sale in the period (i) we have approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. We initially measure a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, we stop recording depreciation expense on the asset. We assess the fair value of a long-lived asset less any costs to sell at each reporting period and until the asset is no longer classified as held for sale. The methodology utilized to determine fair value at the time of classification as held for sale is dependent on the type of long-lived asset reclassified. All methodologies utilized to determine fair value involve judgment.
In the fourth quarter of 2020, we performed a review over certain of our long-lived assets, including undeveloped parcels of land and certain unallocated infrastructure costs related to future phases of existing resorts. During the review, we concluded that based on our current inventory pipeline, we will have sufficient inventory in Hawaii, Orlando and Las Vegas to support future business operations without the need to utilize the undeveloped land and unallocated infrastructure. As a result, we committed to a plan to monetize and dispose of these assets via a sale, which was approved by the Board of Directors. Certain identified undeveloped land and unallocated infrastructure assets in Orlando were part of the planned sale and are therefore held in Property and equipment as of December 31, 2020. The remaining identified assets are included in Land and infrastructure held for sale as of December 31, 2020. As a result of the plan to dispose of these assets via sale, we recorded a non-cash impairment charge of $ 209 million in the fourth quarter of 2020 related to the identified assets. The non-cash impairment charge was comprised of a $ 201 million charge related to Land and infrastructure held for sale and an $ 8 million charge related to Property and equipment , respectively.
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As of December 31, 2021, we have not sold the parcels or infrastructure that are held for sale; however, we have continued to actively market the assets and believe a sale is probable within the next year. We have assessed the fair value of the long-lived assets held for sale less costs to sell as of December 31, 2021. Refer to Note 16: Fair value measurements for further detail .
Leases
We lease sales centers, office space and equipment under lease agreements. We determine if an arrangement is a lease at inception. Amounts related to operating leases are included in Operating lease right-of-use (“ROU”) assets, net and Operating lease liabilities in our consolidated balance sheets. Operating lease ROU assets are adjusted for lease incentives received.
ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term as of the commencement date. Because most of our leases do not provide an explicit or implicit rate of return, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments on an individual lease basis. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments for the asset under similar terms.
We have lease agreements with lease and non-lease components. Our operating leases may require minimum rent payments, contingent rent payments based on a percentage of revenue or income, or rental payments adjusted periodically for inflation or rent payments equal to the greater of a minimum rent or contingent rent. Our leases do not contain any residual value guarantees or material restrictive covenants. Leases with a lease term of 12 months or less are not recorded on the consolidated balance sheets and lease expense is recognized on a straight-line basis over the lease term.
We monitor events or changes in circumstances that change the timing or amount of future lease payments which results in the remeasurement of a lease liability, with a corresponding adjustment to the ROU asset. ROU assets for operating and financing leases are periodically reviewed for impairment losses under ASC 360-10, Property, Plant, and Equipment , to determine whether a ROU asset is impaired, and if so, the amount of the impairment loss to recognize.
Goodwill
Goodwill acquired in business combinations is assigned to the reporting units expected to benefit from the combination as of the acquisition date. We review the carrying value of goodwill of each of our reporting units annually on October 1, or more frequently upon the occurrence of certain events or substantive changes in circumstances, based on either a qualitative assessment or a two-step impairment test.
We do not amortize goodwill. We evaluate goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that it is more-likely-than-not that we may not be able to recover the carrying amount (book value) of the net assets of the related reporting unit. When evaluating goodwill for impairment, we may perform the optional qualitative assessment by considering factors including macroeconomic conditions, industry and market conditions and overall financial performance. If we bypass the qualitative assessment, or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. We only recognize an impairment on goodwill if the estimated fair value of a reporting unit is less than its carrying value, in an amount not to exceed the carrying value of the reporting unit's goodwill.
In evaluating goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors that we consider include, for example, macroeconomic and industry conditions, overall financial performance of our reporting units, and other relevant entity-specific events. If we bypass the qualitative assessment, or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment we will recognize, if any.
No goodwill impairment charges were recognized during the year ended December 31, 2021.
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Intangible Assets
Our intangible assets consist of management agreements, trade name, club member relationships and certain proprietary software technologies with finite lives. We have management agreements, trade name, club member relationships, and software intangibles that were recorded at their fair value as part of the Diamond Acquisition. We also have management agreements that were recorded at their fair value at the time of the completion of a merger on October 24, 2007 , where Hilton became a wholly-owned subsidiary of an affiliate of The Blackstone Group L.P. (“Blackstone”). Additionally, we capitalize costs incurred to develop internal-use computer software, including costs incurred in connection with development of upgrades or enhancements that result in additional functionality. These capitalized costs are included in Intangible assets, net in our consolidated balance sheets. Intangible assets with finite useful lives are amortized using the straight-line method over their respective useful lives, which varies for each type of intangible, unless another amortization method is deemed to be more appropriate. In our consolidated statements of operations, the amortization of these intangible assets is included in depreciation and amortization expense and the amortization of costs to obtain a contract is recognized as a reduction to the related revenues.
In estimating the useful life of acquired assets, we reviewed the expected use of the assets acquired, factors that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset.
We review all finite life intangible assets for impairment when circumstances indicate that their carrying amounts may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of the carrying value over the fair value in our consolidated statements of operations. No intangible impairment charges were recognized during the years ended December 31, 2021, 2020, and 2019.
Deferred Financing Costs
Deferred financing costs, including legal fees and upfront lenders fees, related to the Company’s debt and non-recourse debt are deferred and amortized over the life of the respective debt using the effective interest method. These capitalized costs are included in Other assets, deferred financing costs related to the revolving facility only , or Debt, net in our consolidated balance sheets (see Note 15: Debt & Non-recourse debt for additional information). The amortization of deferred financing costs is included in interest expense in our consolidated statements of operations.
Costs Incurred to Sell VOIs and Vacation Packages
We expense indirect sales and marketing costs we incur to sell VOIs and vacation packages when incurred. Deferred selling expenses, which are direct selling costs related either to a contract for which revenue has not yet been recognized, were $ 25 million and $ 29 million as of December 31, 2021 and 2020, respectively, and were included in Other assets on our consolidated balance sheets.
Fair Value Measurements—Valuation Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (an exit price). We use the three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the data market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-level hierarchy of inputs is summarized below:
• Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets;
• Level 2—Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and
• Level 3—Valuation is based upon unobservable inputs that are significant to the fair value measurement.
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The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.
Currency Translation and Remeasurement
The United States dollar (“USD”) is our reporting currency and is the functional currency of the majority of our operations. For operations whose functional currency is not the USD, assets and liabilities measured in foreign currencies are translated into USD at the prevailing exchange rates in effect as of the financial statement date and the related gains and losses are reflected within Accumulated other Comprehensive Income in our consolidated balance sheets. Related income and expense accounts are translated at the average exchange rate for the period. Gains and losses from foreign exchange rate changes related to other transactions denominated in a currency other than an entity’s functional currency or intercompany receivables and payables denominated in a currency other than an entity’s functional currency that are not of a long-term investment nature are recognized as gain or loss on foreign currency transactions included in Other gain (loss), net in our consolidated statements of operations.
Share-Based Compensation Costs
Certain of our employees participate in our 2017 Omnibus Incentive Plan (the “Stock Plan”) which compensates eligible employees and directors with restricted stock units (“RSUs”), time and performance-vesting restricted stock units (“Performance RSUs” or "PSUs") and nonqualified stock options (“options”). We record compensation expense based on the share-based awards granted to our employees.
Share-based compensation awards issued prior to the spin-off have been converted to reflect the separation from Hilton. Upon the separation on January 3, 2017, holders of Hilton share-based awards received an adjusted award based on our shares. The adjustments were designed to generally preserve the fair value of each award before and after the separation.
• RSUs vest in annual installments over three years from the date of grant, subject to the individual’s continued employment through the applicable vesting date. Vested RSUs generally will be settled for Hilton Grand Vacation’s common stock. The grant date fair value is equal to Hilton Grand Vacation’s closing stock price on the date of grant.
• PSUs issued prior to 2021 are settled at the end of a three-year performance period, with 70 percent of the PSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization. This metric is further adjusted by sales of VOIs under construction. The remaining 30 percent of the PSUs are subject to the achievement of certain VOI sales targets.
• PSUs issued in March 2021 are settled at the end of a two-year performance period with 50 percent of the Performance RSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization further adjusted for net deferral and recognition of revenues and related direct expenses related to sales of VOIs of projects under construction. The remaining 50 percent of the Performance RSUs issued are subject to the achievement of certain contract sales targets.
• PSUs issued in August 2021, in conjunction with the Diamond Acquisition, are settled at the end of the performance period, which is from the Acquisition Date through December 31, 2023, with 67 percent of the Performance RSUs subject to achievement based on certain run rate cost savings. The remaining 33 percent of the Performance RSUs issued are subject to the achievement of the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization further adjusted for net deferral and recognition of revenues and related direct expenses related to sales of VOIs of projects under construction.
• Options vest over three years in annual installments from the date of grant, subject to the individual’s continued employment through the applicable vesting date and will terminate 10 years from the date of grant or earlier on the unvested portion of an individual whose service was terminated. The exercise price is equal to the closing price of the Hilton Grand Vacation’s common stock on the date of grant. The grant date fair value is estimated using the Black-Scholes-Merton Model.
We recognize the cost of services received in share-based payment transactions with employees as services are received and recognize a corresponding change in Additional Paid-in Capital in our consolidated balance sheets. The
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measurement objective for these equity awards is the estimated fair value at the grant date of the equity instruments that we are obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. Compensation expense is recognized ratably over the requisite service period. The requisite service period is the period during which an employee is required to provide service in exchange for an award. We recognize forfeitures of awards as they occur.
Income Taxes
We account for income taxes using the asset and liability method. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year, to recognize the deferred tax assets and liabilities that relate to tax consequences in future years, which result from differences between the respective tax basis of assets and liabilities and their financial reporting amounts, and tax loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the respective temporary differences or operating loss or tax credit carryforwards are expected to be recovered or settled. The realization of deferred tax assets and tax loss and tax credit carryforwards is contingent upon the generation of future taxable income and other restrictions that may exist under the tax laws of the jurisdiction in which a deferred tax asset exists. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.
We use a prescribed recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. For all income tax positions, we first determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If it is determined that a position meets the more-likely-than-not recognition threshold, the benefit recognized in the financial statements is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense in the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.
Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing the earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. When there is a year-to-date loss, potential common shares should not be included in the computation of diluted EPS; hence, diluted EPS would equal basic EPS in a period of loss.
Defined Contribution Plan
We administer and maintain a defined contribution plan for the benefit of all employees meeting certain eligibility requirements who elect to participate in the plan. Contributions are determined based on a specified percentage of salary deferrals by participating employees. We recognized compensation expense for our participating employees totaling $ 5 million, $ 5 million and $ 13 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Recently Issued Accounting Pronouncements
Adopted Accounting Standards
On January 1, 2021 we adopted Accounting Standards Update 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU 2019-12 simplifies various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements and related disclosures.
Accounting Standards Not Yet Adopted
In March 2020, the FASB issued Accounting Standards Update 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
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transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The guidance was effective as of March 12, 2020 and will apply through December 31, 2022. We are evaluating the effect of this ASU, but we do not expect it to have a material impact on our consolidated financial statements.
In October 2021, the FASB issued Accounting Standards Update 2021-08 (“ASU 2021-08”), Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers . ASU 2021-08 provides that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, the entity should account for the related revenue contracts in accordance with Topic 606 as if the entity had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2022. We currently plan to implement and evaluate the impacts of this new standard with future acquisitions, if any.
In November 2021, the FASB issued Accounting Standards Update 2021-10 (“ASU 2021-10”), Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance . ASU 2021-10 provides that annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy include Information about the nature of the transactions, line items on the balance sheet and income statement that are affected by the transactions, and significant terms and conditions of the transactions. The guidance is effective for all entities for financial statements issued for annual periods beginning after December 15, 2021. We are currently evaluating the effect of this ASU, but we do not expect it will have a material impact on our consolidated financial statements.
Note 3: Diamond Acquisition
On August 2, 2021, (the “Acquisition Date”), we completed the Diamond Acquisition by exchanging 100 percent of the outstanding equity interests of Diamond to HGV common shares. Following the closing of the Diamond Acquisition, pre-existing HGV shareholders owned approximately 72 percent of the combined company after giving effect to the Diamond Acquisition, with Apollo Funds and other minority shareholders holding the remaining approximately 28 percent at the time the Diamond Acquisition was completed. Diamond is a leader in the vacation ownership industry focused on the infusion of hospitality and experiences through the full life cycle of an owner or members' life cycle relationship with Diamond. This strategic combination creates a more expansive industry offering, leveraging HGV's strong brand and net owner growth along with Diamond's diverse network of locations and strength in experiential offerings. The acquisition also diversifies our product offerings and allows us to expand our customer demographic.
On the Acquisition Date, shareholders of Diamond received 0.32 shares of our common stock for each share of Diamond common stock, totaling approximately 28 percent of our total common shares outstanding. Additionally, in connection with the Diamond Acquisition, HGV repaid certain existing indebtedness of Diamond. Costs related to the acquisition for the year ended December 31, 2021 were $ 106 million, which were expensed as incurred, and reflected as Acquisition and integration-related expense in our consolidated statements of operations.
The following table presents the fair value of each class of consideration transferred in relation to the Diamond Acquisition at the Acquisition Date.
($ in millions, except stock price amounts)
HGV common stock shares issued for outstanding Diamond shares
33.93
HGV common stock price as of Acquisition Date (1)
40.71
Stock purchase price
$
1,381
Repayment of Legacy-Diamond debt
$
2,029
Total consideration transferred
$
3,410
____________________
(1) Represents the average of the opening and closing price of HGV stock on August 2, 2021.
Preliminary Fair Values of Assets Acquired and Liabilities Assumed
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We accounted for the Diamond Acquisition as a business combination, which requires us to record the assets acquired and liabilities assumed at fair value as of the Acquisition Date. The preliminary fair values of the assets acquired and liabilities assumed, which are presented in the table below, and the related preliminary acquisition accounting are based on management’s estimates and assumptions, as well as information compiled by management, including the books and records of Diamond. Our estimates and assumptions are subject to change during the measurement period, not to exceed one year from the Acquisition Date. The magnitude of the Diamond Acquisition could necessitate the need to use the full one-year measurement period to adequately analyze and assess a number of the factors used in establishing the asset and liability fair values as of the Acquisition Date. The final values may also result in changes to amortization expense related to intangible assets and depreciation expense related to property and equipment, among other changes. Any potential adjustments made could be material in relation to the values presented in the table below.
As discussed more fully below, the primary areas of the purchase price allocation that are not yet finalized include the following: (1) finalizing the review and valuation of acquired intangible assets and assigning the useful lives to such assets; (2) finalizing the review and valuation of acquired inventory, property and equipment (including key assumptions, inputs and estimates) and assigning the remaining useful lives to the depreciable assets; (3) finalizing the review and valuation of acquired timeshare financing receivables; (4) finalizing the review of accounts receivable, including the evaluation of which receivables are purchased credit deteriorated; (5) finalizing the valuation of certain in-place contracts or contractual relationships (including but not limited to leases), including determining the appropriate amortization period; (6) finalizing the review and valuation of other acquired assets and assumed liabilities; and (7) finalizing our estimate of the impact of purchase accounting on deferred income tax liabilities.
($ in millions)
Preliminary Amounts Recognized as of the Acquisition Date
Assets acquired
Cash and cash equivalents
$
310
Restricted cash
127
Accounts receivable, net of allowance for doubtful accounts
58
Timeshare financing receivables, net
825
Inventory
497
Property and equipment, net
298
Operating lease right-of-use assets, net
30
Intangible assets, net
1,431
Other assets
250
Total assets acquired
$
3,826
Liabilities assumed
Accounts payable, accrued expenses and other
$
470
Debt, net
14
Non-recourse debt, net
660
Operating lease liabilities
33
Advanced deposits
4
Deferred revenues
140
Deferred income tax liabilities
472
Total liabilities assumed
$
1,793
Net assets acquired
$
2,033
Total consideration transferred
$
3,410
Goodwill (1)
$
1,377
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________________
(1) Goodwill is calculated as total consideration transferred less net assets acquired and it primarily represents the value that we expect to obtain from synergies and growth opportunities from our combined Company post-acquisition. The majority of goodwill is not expected to be deductible for tax purposes.
The measurement period adjustments recorded during the quarter ended December 31, 2021 resulted from changes to our estimates of the fair value of the acquired assets and assumed liabilities based on management’s review of the historical accounting records of Diamond and third-party valuations. The measurement period adjustments recognized include an adjustment to reduce the initial vacation ownership customer relationship initially recognized, based on management’s determination that the intangible should no longer be separately recognized, an adjustment to reduce the initial estimate of the fair value of the acquired inventory based on management’s review of the key assumptions impacting fair value, other working capital adjustments, and the impact of the measurement period adjustments on deferred tax balances, which resulted in net adjustments to goodwill for the period of $ 557 million. The net income effect associated with the measurement period adjustments during the year ended December 31, 2021 were immaterial.
Timeshare Financing Receivables
We acquired timeshare financing receivables which consist of loans to customers who purchased vacation ownership products and chose to finance their purchases. These timeshare financing receivables are collateralized by the underlying VOIs and generally have 10-year amortizing repayment terms. We preliminarily estimated the fair value of the timeshare financing receivables using a discounted cash flow model, which calculated a present value of expected future risk-adjusted cash flows over the remaining term of the respective timeshare financing receivables. We are continuing to evaluate the significant assumptions underlying the discounted cash flow model including default and prepayment assumptions, which could result in changes to our preliminary estimate. For purposes of our initial allocation, we have considered all acquired receivables to be purchase credit deteriorated. See Note 7: Timeshare Financing Receivables for additional information.
Acquired timeshare financing receivables with credit deterioration as of the Acquisition Date were as follows:
($ in millions)
As of August 2, 2021
Purchase price
$
825
Allowance for credit losses
512
(Premium) attributable to other factors
( 97
)
Par value
$
1,240
Inventory
We acquired inventory which primarily consists of completed unsold VOIs. We preliminarily estimated the value of acquired inventory using a discounted cash flows method, which included an estimate of cash flows expected to be generated from the sale of VOIs. Significant estimates and assumptions impacting the fair value of the acquired inventory that are subjective and/or require complex judgments include our estimates of operating costs and margins, and the discount rate. Certain other estimates and assumptions impacting the fair value of the acquired inventory involving less subjective and/or less complex judgments include: short-term and long-term revenue growth rates, capital expenditures, tax rates and other factors impacting the discounted cash flows. We are continuing to assess the market assumptions and property conditions, which could result in changes to these preliminary values.
Property and Equipment
We acquired property and equipment, which includes land, building and leasehold improvements, furniture and fixtures and construction in progress. We preliminarily estimated the value of the majority of property and equipment using a mix of cost, market and discounted cash flow approaches, which included estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the resorts. Certain property and equipment assets were preliminarily valued at carrying value, which is our best estimate of fair value at this time given the information available to us. We are continuing to assess the market assumptions and property conditions, which could result in changes to these preliminary values.
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Goodwill
We recognized goodwill of approximately $1.4 billion in connection with the Diamond Acquisition. We have allocated the acquired goodwill to our segments, Real Estate Sales and Financing and Resort Operations and Club Management, as indicated in the table below. Our allocations may change throughout the measurement period as we continue to finalize the fair value of assets acquired and liabilities assumed in the Diamond Acquisition.
Real Estate Sales and Financing Segment
Resort Operations and Club Management Segment
Total Consolidated
Goodwill
$
1,011
366
$
1,377
Intangible Assets
The following table presents our preliminary estimates of the fair values of the acquired Diamond’s identified intangible assets and their related estimated remaining useful lives .
Estimated Fair
Estimated
Value
Useful Life
($ in millions)
(in years)
Trade name
$
18
1.5
Management contracts
1,251
35.4
Club member relationships
139
14.4
Computer software
23
1.5
Total intangible assets
$
1,431
We preliminarily estimated the fair value of Diamond’s trade name using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. We provisionally estimated the value of management contracts and member relationships using the multi-period excess earnings method, which is a variation of the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. Significant estimates and assumptions impacting the fair value of the acquired management contracts intangible that are subjective and/or require complex judgments include our estimates of operating costs and margins, and the discount rate. Certain other estimates and assumptions impacting the fair value of the acquired management contracts intangible involving less subjective and/or less complex judgments include: short-term and long-term revenue growth rates, attrition rates, capital expenditures, tax rates and other factors impacting the discounted cash flows. We continue to review Diamond’s contracts and historical performance in addition to evaluating the assumptions impacting the estimated values of such intangible assets and their respective useful lives, including the discount rate applied to the estimated cash flows and renewal and growth estimates and expected margins, which could result in changes to these preliminary values.
Deferred Revenue
Deferred revenue primarily relates to deferred sales incentives revenues, primarily related to Bonus Points, which are deferred and recognized upon redemption; and Club membership fees, which are deferred and recognized over the terms of the applicable contract term or membership on a straight-line basis. Additionally, deferred revenue includes maintenance fees collected from owners, in certain cases, which are earned by the relevant property owners’ association over the applicable period. We preliminarily estimated the fair value of the deferred revenue at the carrying value of such liabilities as of the Acquisition Date. We continue to review Diamond’s contracts, which could result in changes to the preliminary estimate.
Deferred Income Taxes
Deferred income taxes primarily relate to the fair value of assets and liabilities acquired from Diamond, including timeshare financing receivables, inventory, property and equipment, intangible assets, and debt. We preliminarily estimated deferred income taxes based on statutory rates in the jurisdictions of the legal entities where the acquired assets and liabilities are recorded. We are continuing to assess the tax rates used, and we will update our
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estimate of deferred income taxes based on changes to our preliminary valuations of the related assets and liabilities and refinement of the effective tax rates, which could result in changes to these preliminary values.
Debt
As part of the acquisition and consideration transferred, we paid off $ 2,029 million of Diamond’s existing corporate debt, accrued interest and early termination penalties. The nominal amount remaining represents various smaller notes. Please refer to Note 15: Debt & Non-recourse debt for more information.
Non-Recourse Debt
We preliminarily estimated the fair value of the securitized debt from VIEs and warehouse loan facilities, using a discounted cash flow model under the income approach. The significant assumptions in our analysis include default rates, prepayment rates, bond interest rates and other structural factors. We are continuing to evaluate the significant assumptions underlying the discounted cash flow model including default and prepayment assumptions, which could result in changes to our preliminary estimate.
Lease Obligations
We have recorded a preliminary estimate of the liability for those operating leases assumed in connection with the Diamond Acquisition with a remaining term in excess of a year. We measured the lease liabilities assumed at the present value of the remaining contractual lease payments based on the guidance in ASC 842 and using a discount rate determined as of the Acquisition Date. The right-of-use assets for such leases were initially measured at an amount equal to the lease liabilities, adjusted for favorable or unfavorable terms of the lease when compared with market terms. A small number of operating lease right of use assets and lease liabilities were preliminarily estimated at carrying value. We continue to assess the market assumptions, which could result in changes to our preliminary estimate.
Pro Forma Results of Operations
The following unaudited pro forma information presents the combined results of operations of HGV and Diamond as if we had completed the Diamond Acquisition on January 1, 2020, the first day of our 2020 fiscal year, but using our preliminary fair values of assets and liabilities as of the Acquisition Date. These unaudited pro forma results do not reflect any synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Diamond Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.
Year Ended December 31,
($ in millions, except per share data)
2021
2020
Revenue
$
3,146
$
1,896
Net income (loss)
374
( 561
)
Diamond Results of Operations
The following table presents the results of Diamond operations included in our statement of operations for the period from the Acquisition Date through the end of 2021.
($ in millions)
August 2, 2021 to
December 31, 2021
Revenue
$
633
Net income
92
105
Note 4: Revenue from Contracts with Customers
Disaggregation of Revenue
The following tables show our disaggregated revenues by product and segment from contracts with customers. We operate our business in the following two segments: (i) Real estate sales and financing and (ii) Resort operations and club management . Please refer to Note 22: Business Segments below for more details related to our segments.
($ in millions)
Year Ended December 31,
Real Estate Sales and Financing Segment
2021
2020
2019
Sales of VOIs, net
$
883
$
108
$
509
Sales, marketing, brand and other fees
385
221
573
Interest income
157
141
147
Other financing revenue
26
24
23
Real estate sales and financing segment revenues
$
1,451
$
494
$
1,252
($ in millions)
Year Ended December 31,
Resort Operations and Club Management Segment
2021
2020
2019
Club management
$
168
$
96
$
125
Resort management
172
70
66
Rental (1)
315
91
201
Ancillary services
27
7
26
Resort operations and club management segment revenues
$
682
$
264
$
418
____________________
(1) Excludes intersegment eliminations. See Note 22: Business Segments for additional information.
Contract Balances
The following table provides information on our accounts receivable with customers which are included in Accounts Receivable, net on our consolidated balance sheets:
Year Ended December 31,
($ in millions)
2021
2020
Receivables
$
202
$
64
The following table presents the composition of our contract liabilities.
Year Ended December 31,
($ in millions)
2021
2020
Contract liabilities:
Advanced deposits
$
112
$
117
Deferred sales of VOIs of projects under construction
34
169
Club dues and Legacy-HGV Club activation fees
91
77
Bonus Point incentive liability (1)
44
48
____________________
(1) Amounts related to the Bonus Point incentive liability are included in Accounts payable, Accrued Expenses and other on our consolidated balance sheets. This liability is comprised of unrecognized revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.
Revenue earned for the year ended December 31, 2021 that was included in the contract liabilities balance at December 31, 2020 was approximately $ 355 million. Revenue earned for the year ended December 31, 2020 that was included in the contract liabilities balance at December 31, 2019 was approximately $ 81 million.
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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 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 7: 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 targets 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. There were no contract assets as of December 31, 2021.
Contract liabilities include payments received or due in advance of satisfying our performance obligations, offset by revenues recognized. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues related to sales of VOIs of projects under construction, Club activation fees and annual dues and the liability for 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.
In addition to the contract liabilities included herein, we also have deferred revenue of $ 112 million and $ 16 million as of December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021 , this additional deferred revenue balance includes $ 51 million for bonus points and marketing package deferred revenue, $ 10 million in deferred property insurance, $ 14 million in deferred maintenance fees and $ 37 million in other deferred revenue.
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) Legacy-HGV Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Bonus Points that may be redeemed in the future.
Deferred VOI sales include the deferred revenues associated with: the sales associated with incomplete phases or buildings; the sales of unacquired inventory; and deferred sales associated with our long-term lease product with a reversionary interest. The following table represents the deferred revenue, cost of VOI sales and direct selling costs from sales of VOIs related to projects under construction as of December 31, 2021 and December 31, 2020.
Year Ended December 31,
($ in millions)
2021
2020
Sales of VOIs, net
$
34
$
169
Cost of VOI sales (1)
12
50
Sales and marketing expense
5
25
____________________
(1) Includes anticipated Cost of VOI sales related to inventory associated with Sales of VOIs under construction that will be acquired under a just-in-time arrangement once construction is complete.
During the year ended December 31, 2021, we recognized $ 245 million of sales of VOIs, net, offset by deferrals of $ 112 million, related to sales of projects under construction, some of which were completed during the year. We expect to recognize the revenue, costs of VOI sales and direct selling costs related to the projects under construction as of December 31, 2021 upon their completion in 2022.
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The following table includes the remaining transaction price related to Advanced deposits, Legacy-HGV Club activation fees and Bonus Points as of December 31, 2021:
($ in millions)
Remaining
Transaction Price
Recognition Period
Recognition Method
Advanced deposits
$
112
18 months
Upon customer stays
Legacy-HGV Club activation fees
63
7 years
Straight-line basis over average inventory holding period
Bonus Points
44
18 - 30 months
Upon redemption
Club activation fees are paid at closing of a VOI purchase, which grants access to our points-based Club. The revenue from these fees are deferred and amortized on a straight-line basis over the average inventory holding period. Deferred revenues do not include prepaid vacation packages or other prepayments for future stays at our resorts, which are included in Advanced deposits in our consolidated balance sheets.
Note 5: Restricted Cash
Restricted cash was as follows:
Year Ended December 31,
($ in millions)
2021
2020
Escrow deposits on VOI sales
$
152
$
69
Reserves related to non-recourse debt (1)
67
29
Other (2)
44
—
$
263
$
98
____________________
(1) See Note 15: Debt & Non-recourse Debt for further discussion.
(2) Other restricted cash primarily includes cash collected on behalf of HOAs, deposits related to servicer arrangements and other deposits.
Note 6: Accounts Receivable
The following table represents our accounts receivable, net of allowance for credit losses. Accounts receivable within the scope of ASC 326 are measured at amortized cost.
December 31,
December 31,
($ in millions)
2021
2020
Fee-for-service commissions (1)
$
73
$
22
Real estate and financing
51
11
Resort and club operations
76
23
Tax receivables
95
54
Other receivables (2)
7
9
Total
$
302
$
119
____________________
(1) Net of allowance.
(2) Primarily includes individually insignificant accounts receivable and related allowances recognized in the ordinary course of business.
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 of these arrangements include provisions requiring the reduction of fees earned for defaults and cancellations.
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The changes in our allowance for fee-for-service commissions were as follows during the year ended December 31, 2021:
($ in millions)
Balance as of December 31, 2020
$
18
Current period provision for expected credit losses
5
Write-offs charged against the allowance
( 5
)
Balance at December 31, 2021
$
18
Note 7: Timeshare Financing Receivables
We define our timeshare financing receivables portfolio segments as (i) originated and (ii) acquired. The following table presents the components of each portfolio segment by class of timeshare financing receivables.
Originated (2)
Acquired (2)
December 31,
December 31,
December 31,
December 31,
($ in millions)
2021
2020
2021
2020
Securitized
$
587
$
805
$
523
$
—
Unsecuritized (1)
810
380
515
—
Timeshare financing receivables, gross
$
1,397
$
1,185
$
1,038
$
—
Unamortized non-credit acquisition premium (3)
—
—
74
—
Less: allowance for financing
receivables losses
( 280
)
( 211
)
( 482
)
—
Timeshare financing receivables, net
$
1,117
$
974
$
630
$
—
____________________
(1) Includes amounts used as collateral to secure a non-recourse revolving timeshare receivable credit facility (“Timeshare Facility”) as well as amounts held as future collateral for upcoming securitization activities.
(2) Acquired timeshare financing receivables include all timeshare financing receivables of Legacy-Diamond as of the Acquisition Date. Originated timeshare financing receivables include all Legacy-HGV timeshare financing receivables and Legacy-Diamond timeshare financing receivables originated after the Acquisition Date.
(3) A non-credit premium of $ 97 million was recognized at the Acquisition Date. $ 74 million of this premium remains unamortized as of December 31, 2021 .
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As of December 31, 2021 and 2020, we had timeshare financing receivables with a carrying value of $ 131 million and $ 17 million, respectively, securing the Timeshare Facility. In connection with the acquisition of Diamond, we also gained access to two additional conduit facilities in anticipation of future financing activities. We record an estimate of variable consideration for estimated defaults as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale. We record the difference between the timeshare financing receivable and the variable consideration included in the transaction price for the sale of the related VOI as an allowance for financing receivables and record the receivable net of the allowance. During the year ended December 31, 2021 , we recorded an adjustment to our estimate of variable consideration of $ 121 million. During the year ended December 31, 2020 , we recorded an adjustment to our estimate of variable consideration of $ 75 million, which includes an incremental $ 23 million revenue reduction related to changes in estimates primarily driven by economic factors surrounding the COVID-19 pandemic.
We recognize interest income on our timeshare financing receivables as earned. As of December 31, 2021 and 2020, we had interest receivable outstanding of $ 9 million and $ 7 million, respectively, on our originated timeshare financing receivables, which represents all Legacy-HGV timeshare financing receivables and timeshare financing receivables originated by Legacy-Diamond subsequent to the Acquisition Date. As of December 31, 2021 , we had interest receivable outstanding of $ 7 million related to the Legacy-Diamond timeshare financing receivables that were acquired on the Acquisition Date. Interest receivable is included in Other Assets within our consolidated balance sheets. The interest rate charged on the notes correlates to the risk profile of the customer at the time of purchase and the percentage of the purchase that is financed, among other factors. As of December 31, 2021 , our originated timeshare financing receivables had interest rates ranging from 1.5 percent to 25 percent, an average interest rate of 13.3 percent, a weighted-average remaining term of 9.7 years and maturities through 2036 . Our acquired timeshare financing receivables had interest rates ranging from 3 percent to 25 percent, a weighted-average interest rate of 15.6 percent, a weighted-average remaining term of 7.9 years and maturities through 2031 .
Acquired Timeshare Financing Receivables with Credit Deterioration
As part of the Diamond Acquisition, we acquired existing portfolios of timeshare financing receivables. Acquired timeshare financing receivables include all timeshare financing receivables of Legacy-Diamond as of the Acquisition Date and were deemed to be purchase credit deteriorated financial assets. These notes receivable were initially recognized at their purchase price, represented by the acquisition date fair value, and subsequently “grossed- up” by our acquisition date assessment of the allowance for credit losses. The difference over which par value of the acquired purchased credit deteriorated assets exceeds the purchase price plus the initial allowance for credit losses is reflected as a non-credit premium and is amortized as a reduction to interest income under the effective interest method.
The fair value of our acquired timeshare financing receivables as of the Acquisition Date was determined using a discounted cash flow method, which calculated a present value of expected future cash flows based on scheduled principal and interest payments over the term of the respective timeshare financing receivables, while considering anticipated defaults and early repayments based on historical experience. Consequently, the fair value of the acquired timeshare financing receivables recorded on our balance sheet as of the Acquisition Date included an estimate of expected credit losses which became the historical cost basis for that portfolio going forward.
The allowance for credit losses for our acquired timeshare financing receivables is remeasured at each period end and takes into consideration an estimated measure of anticipated defaults and early repayments. We consider historical Legacy-Diamond timeshare financing receivables performance and the current economic environment in the re-measurement of the allowance for credit losses for our acquired timeshare financing receivables. Subsequent changes to the allowance for credit losses are recorded as additions to or reversals of credit losses in our consolidated statements of operations through provision for credit losses.
Our acquired timeshare financing receivables as of December 31, 2021 mature as follows:
110
Acquired Timeshare Financing Receivables
($ in millions)
Securitized
Unsecuritized
Total
Year
2022
$
51
$
36
$
87
2023
56
40
96
2024
61
45
106
2025
66
50
116
2026
70
55
125
Thereafter
219
289
508
$
523
$
515
$
1,038
Originated Timeshare Financing Receivables
Originated timeshare financing receivables represent all Legacy-HGV timeshare financing receivables and timeshare financing receivables originated by Legacy-Diamond subsequent to the Acquisition Date. Our originated timeshare financing receivables as of December 31, 2021 mature as follows:
Originated Timeshare Financing Receivables
($ in millions)
Securitized
Unsecuritized
Total
Year
2022
$
82
$
67
$
149
2023
85
60
145
2024
86
67
153
2025
84
73
157
2026
78
81
159
Thereafter
172
462
634
$
587
$
810
$
1,397
Allowance for Financing Receivables Losses
The changes in our allowance for financing receivables losses were as follows:
($ in millions)
Originated
Acquired
Balance as of December 31, 2018
$
172
$
—
Provisions for financing receivables losses (1)
74
—
Securitizations
—
—
Write-offs
( 62
)
—
Balance as of December 31, 2019
$
184
$
—
Provisions for financing receivables losses (1)
75
—
Securitizations
—
—
Write-offs
( 48
)
—
Balance as of December 31, 2020
$
211
$
—
Initial allowance for PCD financing receivables acquired during the period (2)
—
512
Provision for financing receivables losses (1)
121
—
Write-offs
( 79
)
( 11
)
Upgrades (3)
27
( 19
)
Balance as of December 31, 2021
$
280
$
482
(1) Includes incremental provision for financing receivables losses, net of activity related to the repurchase of defaulted and upgraded securitized timeshare financing receivables.
(2) The initial gross allowance determined for receivables with credit deterioration was $ 512 million as of the Acquisition Date. Of this amount, approximately $ 249 million relates to net uncollectible balances such as loans that were fully written-off prior to the Acquisition. Therefore, the net impact to the allowance related to acquired loans not previously written off was an increase of $ 263 million.
111
(3) Represents the initial change in allowance resulting from upgrades of Acquired loans. Upgraded Acquired loans and their related allowance are included in the Originated portfolio segment.
Credit Quality of Timeshare Financing Receivables
Legacy-HGV Timeshare Financing Receivables
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 collectability of our receivables on an ongoing basis. There are no significant concentrations of collection risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for determining our allowance for 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.
Our gross balances by average FICO score of our Legacy-HGV timeshare financing receivables were as follows:
Legacy-HGV Timeshare Financing Receivables
December 31,
December 31,
($ in millions)
2021
2020
FICO score
700+
$
703
$
711
600-699
248
266
<600
35
36
No score (1)
166
172
$
1,152
$
1,185
(1) Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
The following table details our gross Legacy-HGV timeshare financing receivables by the origination year and average FICO score as of December 31, 2021:
($ in millions)
2021
2020
2019
2018
2017
Prior
Total
FICO score
700+
$
249
$
81
$
138
$
93
$
63
$
79
$
703
600-699
80
31
49
33
21
34
248
<600
11
5
7
4
3
5
35
No score (1)
41
25
36
24
13
27
166
$
381
$
142
$
230
$
154
$
100
$
145
$
1,152
We apply payments we receive for loans, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a loan is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for loans for which we had previously ceased accruing interest once the loan is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the loan is 121 days past due and, subsequently, we write off the uncollectible note against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.
112
As of December 31, 2021 and 2020 , we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $ 83 and $ 117 million, respectively. The following tables detail an aged analysis of our gross timeshare financing receivables balance:
Legacy-HGV Timeshare Financing Receivables
December 31, 2021
($ in millions)
Securitized
Unsecuritized
Total
Current
$
569
$
488
$
1,057
31 - 90 days past due
6
6
12
91 - 120 days past due
2
2
4
121 days and greater past due
2
77
79
$
579
$
573
$
1,152
Legacy-HGV Timeshare Financing Receivables
December 31, 2020
($ in millions)
Securitized
Unsecuritized
Total
Current
$
783
$
265
$
1,048
31 - 90 days past due
11
9
20
91 - 120 days past due
5
3
8
121 days and greater past due
6
103
109
$
805
$
380
$
1,185
Legacy-Diamond Timeshare Financing Receivables
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 collectability 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.
Our gross balances by average FICO score of our Legacy-Diamond acquired and originated timeshare financing receivables were as follows:
Legacy-Diamond
Acquired Timeshare Financing Receivables
($ in millions)
December 31, 2021
FICO score
700+
$
601
600-699
356
<600
70
No score (1)
11
$
1,038
113
Legacy-Diamond
Originated Timeshare Financing Receivables
($ in millions)
December 31, 2021
FICO score
700+
$
172
600-699
60
<600
11
No score (1)
2
$
245
The following tables details our Legacy-Diamond acquired and originated timeshare financing receivables by the origination year and average FICO score as of December 31, 2021:
Legacy-Diamond Acquired Timeshare Financing Receivables
($ in millions)
2021
2020
2019
2018
2017
Prior
Total
FICO score
700+
$
125
$
128
$
146
$
94
$
58
$
50
$
601
600-699
64
70
89
50
34
49
356
<600
14
18
14
6
3
15
70
No score (1)
2
2
2
1
1
3
11
$
205
$
218
$
251
$
151
$
96
$
117
$
1,038
Legacy-Diamond Originated Timeshare Financing Receivables
($ in millions)
2021
2020
2019
2018
2017
Prior
Total
FICO score
700+
$
172
$
—
$
—
$
—
$
—
$
—
$
172
600-699
60
—
—
—
—
—
60
<600
11
—
—
—
—
—
11
No score (1)
2
—
—
—
—
—
2
$
245
$
—
$
—
$
—
$
—
$
—
$
245
The accrued interest on our Legacy-Diamond timeshare financing receivables is accrued based on the contractual provisions of the loan documents, which is suspended at the earlier of (i) the customer’s account becoming over 90 days delinquent, or (ii) the completion of cancellation or foreclosure proceedings. Once suspended, we reverse all prior recognized interest income as well. 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 become owner of the deed for the foreclosed unit.
As of December 31, 2021 we had ceased accruing interest on Legacy-Diamond timeshare financing receivables with an aggregate principal balance of $ 369 million. The following tables detail an aged analysis of our gross timeshare receivables balance:
Legacy-Diamond Timeshare Financing Receivables
December 31, 2021
($ in millions)
Securitized
Unsecuritized
Total
Current
$
496
$
385
$
881
31 - 90 days past due
15
18
33
91 - 120 days past due
6
5
11
121 days and greater past due
14
344
358
$
531
$
752
$
1,283
114
Note 8: Inventory
Inventory was comprised of the following:
December 31,
($ in millions)
2021
2020
Completed unsold VOIs
$
1,219
$
515
Construction in process
20
186
Land, infrastructure and other
1
1
$
1,240
$
702
Shown below are (i) costs of sales true-ups relating to VOI products and the related impacts to the carrying value of inventory and (ii) expenses incurred, recorded in Cost of VOI sales, related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects.
December 31,
($ in millions)
2021
2020
2019
Cost of sales true-up (1)
$
2
$
6
$
14
Cost of VOI sales related to fee-for-service upgrades
7
9
31
(1) Cost of sales true ups reduced costs of VOI sales and increased inventory in all periods presented.
See Note 24: Supplemental Disclosures of Cash Flow Information for information regarding non-cash transfers.
Note 9: Property and Equipment
Property and equipment were comprised of the following:
December 31,
($ in millions)
2021
2020
Land
$
193
$
109
Building and leasehold improvements
405
250
Furniture and equipment
82
65
Construction in progress
231
208
911
632
Accumulated depreciation
( 155
)
( 131
)
$
756
$
501
Depreciation expense on property and equipment was $ 36 million, $ 30 million, and $ 35 million for the years ended December 31, 2021, 2020 and 2019 respectively.
See Note 24: Supplemental Disclosures of Cash Flow Information for information regarding non-cash transfers.
Note 10: Consolidated Variable Interest Entities
As of December 31, 2021 and 2020, we consolidated 11 and 4 variable interest entities (“VIEs”), respectively. The activities of these entities are limited primarily to purchasing qualifying non-recourse timeshare financing receivables from us and issuing debt securities and/or borrowing under a debt facility to facilitate such purchases. The timeshare financing receivables held by these entities are not available to our creditors and are not our legal assets, nor is the debt that is securitized through these entities a legal liability to us.
We have determined that we are the primary beneficiaries of all VIEs as we have the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we often replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. Only the assets of our VIEs are available to settle the obligations of the respective entities.
As part of the Diamond Acquisition, we acquired the variable interests in the entities associated with Diamond’s outstanding timeshare financing receivables securitization transactions. They have been aggregated for disclosure
115
purposes as they are similar in nature to our previously established VIEs. We also acquired two conduit facilities which are VIEs and have an outstanding balance of $ 133 million as of December 31, 2021 (see Note 15: Debt and Non-recourse debt ).
Our consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:
December 31,
($ in millions)
2021
2020
Restricted cash
$
62
$
28
Timeshare financing receivables, net
1,021
742
Non-recourse debt (1)
1,195
766
(1) Net of deferred financing costs.
During the years ended December 31, 2021, 2020 and 2019 , we did no t provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.
Note 11: Investments in Unconsolidated Affiliates
As of December 31, 2021 , we have 25 percent and 50 percent ownership interests in BRE Ace LLC and 1776 Holdings LLC, respectively, which are VIEs. We do not consolidate BRE Ace LLC and 1776 Holdings LLC because we are not the primary beneficiary. Our investment interests in and equity earned from both VIEs are included in the consolidated balance sheets as Investments in unconsolidated affiliates and in the consolidated statements of operations as Equity in earnings from unconsolidated affiliates , respectively.
During the year ended December 31, 2021 , we received a cash distribution of approximately $ 2 million from our investment in BRE Ace LLC.
Our two unconsolidated affiliates have aggregated debt balances of $ 463 million and $ 454 million as of December 31, 2021 and 2020 , respectively. The debt is secured by their assets and is without recourse to us. Our maximum exposure to loss as a result of our investment interests in the two unconsolidated affiliates is primarily limited to (i) the carrying amount of the investments which totals $ 59 million and $ 51 million as of December 31, 2021 and December 31, 2020, respectively and (ii) receivables for commission and other fees earned under fee-for-service arrangements. See Note 21: Related Party Transactions for additional information.
Note 12: Intangible Assets
Intangible assets and related amortization expense were as follows:
December 31, 2021
($ in millions)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Trade name
$
18
$
( 5
)
$
13
Management contracts
1,340
( 106
)
1,234
Club member relationships
139
( 12
)
127
Capitalized software
138
( 71
)
67
$
1,635
$
( 194
)
$
1,441
December 31, 2020
($ in millions)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Trade name
$
—
$
—
$
—
Management contracts
89
( 51
)
38
Club member relationships
—
—
—
Capitalized software
94
( 51
)
43
$
183
$
( 102
)
$
81
116
We acquired definite-lived intangible assets as part of the Diamond Acquisition, which have been valued on a provisional basis, in the amount of $ 1,431 million as of the Acquisition Date. Refer to Note 3: Diamond Acquisition for further details. Prior to the Diamond Acquisition, intangible assets included computer software and management contracts. Amortization expense on intangible assets was $ 90 million, $ 15 million, and $ 9 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021 , the weighted average amortization period on trade name was 1.5 years, management agreements was 34.6 years, club member relationships was 14.4 years, and capitalized software was 2.5 years.
As of December 31, 2021, our future amortization expense for our amortizing intangible assets is estimated to be as follows:
($ in millions)
Future Amortization Expense
2022
$
196
2023
156
2024
137
2025
111
2026
99
Thereafter
742
$
1,441
Note 13: Other Assets
Other assets were as follows:
December 31,
($ in millions)
2021
2020
Inventory deposits
$
3
$
7
Deferred selling, marketing, general and administrative expenses
23
25
Prepaid expenses
123
12
Cloud computing arrangements
9
10
Interest receivable
16
7
Deferred income tax assets
7
4
Other
99
22
$
280
$
87
Note 14: Accounts Payable, Accrued Expenses and Other
Accounts payable, accrued expenses and other were as follows:
December 31,
($ in millions)
2021
2020
Accrued employee compensation and benefits
$
138
$
75
Accounts payable
63
20
Bonus point incentive liability
44
48
Due to Hilton
33
12
Income taxes payable
23
2
Sales & other taxes payable
100
7
Other accrued expenses (1)
272
88
$
673
$
252
(1) Other accrued expenses includes interest payables, accrued marketing expenses, and various accrued liabilities which are primarily driven by the Diamond Acquisition.
117
Note 15: Debt & Non-recourse Debt
Debt
The following table details our outstanding debt balance and its associated interest rates:
December 31,
($ in millions)
2021
2020
Debt (1)
Senior secured credit facility, due 2028 :
Term loan with a rate of 3.50 %
1,297
—
Revolver with a rate of 2.11 %
300
—
Senior secured credit facility, due 2023 :
Term loan with a rate of 2.25 %
—
177
Revolver with a rate of 2.25 %
—
660
Senior notes with a rate of 6.125 %, due 2024
—
300
Senior notes with a rate of 5.000 %, due 2029
850
—
Senior notes with a rate of 4.875 %, due 2031
500
—
Other debt
27
27
2,974
1,164
Less: unamortized deferred financing costs and discounts (2)(3)
( 61
)
( 5
)
$
2,913
$
1,159
(1) As of December 31, 2021 and 2020, weighted-average interest rates were 4.052 % and 3.357 % , respectively.
(2) Amount includes deferred financing costs related to our term loan and senior notes of $ 33 million and $ 22 million, respectively, as of December 31, 2021 and $ 1 million and $ 4 million, respectively, as of December 31, 2020 . This amount also includes original issuance discounts of $ 6 million as of December 31, 2021.
(3) Amount does not include deferred financing costs of $ 5 and $ 4 million as of December 31, 2021 and 2020, respectively, relating to our revolving facility included in Other Assets in our consolidated balance sheets.
Senior Secured Credit Facilities
In March 2021, we amended our Credit Agreement to amend certain terms related to financial covenants to permit the previously announced proposed acquisition of Diamond, pursuant to that certain Agreement and Plan of Merger dated March 10, 2021. Refer to Note 3: Diamond Acquisition for further information regarding the merger. The borrowing capacity under the Credit Agreement remained the same. In connection with the amendment, we incurred $ 1 million in debt issuance costs. In addition, we obtained a revolving credit facility commitment in connection with the Diamond Acquisition and incurred $ 2 million in debt issuance costs which were amortized over the term of the commitment in the first quarter of 2021. This was included in Interest expense in our consolidated statements of operations.
In connection with the closing of the Diamond Acquisition, HGV entered into a new $ 1.3 billion seven-year senior secured term loan facility ("Term Loan B"). The Term Loan B was issued at a $ 6 million discount and the cumulative proceeds received from the Term loan and related senior notes discussed below were used to repay certain existing indebtedness of both HGV and Diamond, including HGV's pre-existing term loan and senior notes due 2024, $ 260 million of the balance on the revolving credit facility, and a portion of $ 2.03 billion of Diamond's corporate indebtedness. We incurred a $ 20 million loss on debt extinguishment in relation to the transactions described herein which is included in Other (loss) gain, net. During the year ended December 31, 2021 , we incurred approximately $ 32 million in debt issuance costs for Term Loan B.
In December 2021, we amended and recast our existing revolving credit facility due in 2023 into our new senior secured credit facility due in 2028 . As a part of the amendment, we also increased the capacity of the revolving credit facility from $ 800 million to $ 1 billion. Under the new credit facility, the revolver is subject to an interest rate of 2.00 percent plus one month LIBOR. Upon the execution of the recast, we refinanced the existing $ 300 million principal balance on the revolver due in 2023 into the new revolver due in 2028. This transaction was treated as a $ 300 million drawing on the revolver due in 2028 and subsequent repayment on the revolver due in 2023. During the year ended December 31, 2021 , we incurred approximately $ 5 million in debt issuance costs in connection with the recast of the revolver.
During the year ended December 31, 2021 , we repaid $ 363 million under the senior secured credit facilities which included payments of $ 360 million toward the revolver balance in addition to paying off HGV's pre-existing term loan balance of $ 177 million and senior notes balance of $ 300 million mentioned above. We also paid off $ 14
118
million of the remaining Debt. As of December 31, 2021 , we had $ 1 million of letters of credit outstanding under the revolving credit facility and $ 2 million outstanding backed by cash collateral. We were in compliance with all applicable maintenance and financial covenants and ratios as of December 31, 2021.
We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt. Such interest rates swaps converted the LIBOR based variable rates on our Term Loan and Revolver to average fixed rates of 1.44 percent per annum through May 2028 and 0.53 percent per annum through November 2023, respectively, for the balance on these borrowings up to the notional values of our interest rate swaps. As of December 31, 2021 , the notional values of the interest rate swaps under our term loan and revolver were $ 350 million and $ 168 million, respectively. Our interest rate swaps have been designated and qualify as cash flow hedges of interest rate risk and recorded as a liability in Accounts Payable, Accrued Expenses and Other in our consolidated balance sheets as of December 31, 2021. We characterize payments we make in connection with these derivative instruments as interest expense and a reclassification of accumulated other comprehensive income for presentation purposes. For the year ended December 31, 2021 , we recorded $ 2 million in accumulated other comprehensive income related to the cash flow hedges.
Senior Notes due 2029 and 2031
In June 2021, we entered into indentures in connection with the issuance and sale of senior notes, $ 850 million aggregate principal amount of 5.00 percent senior notes due 2029 ("the 2029 Notes") and $ 500 million aggregate principal amount of 4.875 percent senior notes due 2031 ("the 2031 Notes"). The net proceeds from the 2029 Notes and the 2031 Notes were used to finance the repayment of certain indebtedness in connection with the Diamond Acquisition. In connection with the senior notes issuances, we incurred $ 24 million in debt issuance costs.
The Senior Unsecured Notes are guaranteed on a senior unsecured basis by certain of our subsidiaries. We are in compliance with all applicable financial covenants as of December 31, 2021.
Non-recourse Debt
The following table details our outstanding non-recourse debt balance and its associated interest rates:
December 31,
($ in millions)
2021
2020
Non-recourse debt (1)
Timeshare Facility with an average rate of 1.750 %, due 2023 (3)
$
131
$
—
HGV Securitized Debt with a weighted average rate of 2.711 %, due 2028
70
106
HGV Securitized Debt with a weighted average rate of 3.602 %, due 2032
143
202
HGV Securitized Debt with a weighted average rate of 2.431 %, due 2033
151
216
HGV Securitized Debt with a weighted average rate of 3.658 %, due 2039
193
251
Diamond Resorts Premium Yield Facility with an average rate of 4.766 %, due 2031
8
—
Diamond Resorts Conduit Facility with an average rate of 2.250 %, due 2023
125
—
Diamond Resorts Conduit Facility with an average rate of 3.000 %, due 2024
8
—
Diamond Resorts Owner Trust 2017 with a weighted average rate of 3.504 %, due 2029
41
—
Diamond Resorts Owner Trust 2018 with a weighted average rate of 4.061 %, due 2031
92
—
Diamond Resorts Owner Trust 2019 with a weighted average rate of 3.277 %, due 2032
148
—
Diamond Resorts Owner Trust 2021 with a weighted average rate of 2.160 %, due 2032
224
—
1,334
775
Less: unamortized deferred financing costs (2)
( 6
)
( 9
)
$
1,328
$
766
(1) As of December 31, 2021 and 2020 , weighted-average interest rates were 2.876 percent and 3.173 percent, respectively.
(2) Amount relates to Securitized Debt only and does not include deferred financing costs of $ 2 million and $ 3 million as of December 31, 2021 and 2020, respectively, relating to our Timeshare Facility included in Other Assets in our consolidated balance sheets.
The Timeshare Facility is a non-recourse obligation with a borrowing capacity of $ 450 million and is payable solely from the pool of timeshare financing receivables pledged as collateral and related assets. In March 2021, we amended our Timeshare Facility to align with our amended Credit Agreement, as described above. The Premium Yield Facility is a non-recourse amortizing obligation payable solely from the pool of timeshare financing receivables pledged as collateral and related assets. We assumed the Premium Yield Facility as part of the Diamond Acquisition. In addition to these two facilities, we gained access to two additional conduit facilities, due in 2023 and 2024 respectively, as a part of our acquisition of Diamond Resorts. These facilities were issued through variable interest entities (see Note 10: Consolidated Variable Interest Entities ) and have borrowing capacities of $ 125 million and
119
$ 150 million, respectively. Both of these facilities are non-recourse obligations with customary provisions similar to the Timeshare Facility, each of which bear a variable interest rate plus a margin and are subject to non-use fees. During the year ended December 31, 2021 , we drew $ 125 million on the conduit facility due in 2023 and $ 8 million on the conduit facility due in 2024.
We are required to deposit payments received from customers on the timeshare financing receivables securing the Timeshare Facility, Premium Yield 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 $ 67 million and $ 29 million as of December 31, 2021 and 2020, respectively, and were included in Restricted Cash in our consolidated balance sheets.
Debt Maturities
The contractual maturities of our debt and non-recourse debt as of December 31, 2021 were as follows:
($ in millions)
Debt
Non-recourse Debt
Total
Year
2022
$
15
$
503
$
518
2023
314
528
842
2024
14
96
110
2025
13
165
178
2026
13
13
26
Thereafter
2,605
29
2,634
$
2,974
$
1,334
$
4,308
Note 16: Fair Value Measurements
The carrying amounts and estimated fair values of our financial assets and liabilities, which are required for disclosure, were as follows:
December 31, 2021
Hierarchy Level
($ in millions)
Carrying
Amount
Level 1
Level 3
Assets:
Timeshare financing receivables, net (1)
$
1,747
$
—
$
1,905
Liabilities:
Debt, net (2)
2,913
2,663
340
Non-recourse debt, net (2)
1,328
1,080
270
(1) Carrying amount net of allowance for financing receivables losses.
(2) Carrying amount net of unamortized deferred financing costs and discount.
December 31, 2020
Hierarchy Level
($ in millions)
Carrying
Amount
Level 1
Level 3
Assets:
Timeshare financing receivables, net (1)
$
974
$
—
$
1,248
Liabilities:
Debt, net (2)
1,159
315
871
Non-recourse debt, net (2)
766
—
732
(1) Carrying amount net of allowance for financing receivables losses.
(2) Carrying amount net of unamortized deferred financing costs and discounts
120
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 originated and acquired timeshare financing receivables were determined using a discounted cash flow model. Our model incorporates default rates, coupon rates, credit quality and loan terms respective to the portfolio based on current market assumptions for similar types of arrangements.
The estimated fair values of our Level 1 debt and non-recourse debt were based on prices in active debt markets. The estimated fair value of our Level 3 debt and non-recourse debt were based on the following:
• Debt – based on indicative quotes obtained for similar issuances and projected future cash flows discounted at risk-adjusted rates
• Non-recourse debt – based on projected future cash flows discounted at risk-adjusted rates.
During the year ended December 31, 2021, we revised our valuation technique used to estimate the fair value of certain debt and non-recourse debt instruments. This revision in valuation technique was due to the availability of information in active debt markets which allowed us to utilize Level 1 inputs. The valuation of these instruments were previously measured using Level 3 inputs.
Non-recurring fair value measurements
We measure certain assets at fair value on a non-recurring basis, including land and infrastructure, as a result of their classification as held for sale. Refer to Note 2: Significant Accounting Policie s for further detail on the held for sale classification. We utilized the market approach for the land and cost approach for infrastructure to determine their respective fair values. The fair value calculations involve judgement and are sensitive to key assumptions utilized, including comparative sales for land (level 2) and replacement costs for infrastructure (level 3). The estimated fair value of land and infrastructure held for sale was $ 45 million as of December 31, 2021 and 2020, excluding costs to sell.
Note 17: Leases
We lease sales centers, office space and equipment under operating leases, some of which we acquired as part of the Diamond Acquisition. Our leases expire at various dates from 2022 through 2030 , with varying renewal and termination options. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
We recognize rent expense on leases with both contingent and non-contingent lease payment terms. Rent associated with non-contingent lease payments are recognized on a straight-line basis over the lease term. Rent expense for all operating leases for the year ended December 31, 2021, 2020 and 2019 was as follows:
Year Ended December 31,
($ in millions)
2021 (1)
2020 (1)
2019 (1)
Minimum rentals
$
20
$
19
$
19
Contingent rentals
2
1
2
$
22
$
20
$
21
(1) These amounts include short term and variable rent of $ 2 million, $ 5 million, and $ 3 million for the years December 31, 2021, 2020 and 2019, respectively.
121
Supplemental cash flow information related to operating leases was as follows:
Year Ended December 31,
($ in millions)
2021
2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases
$
21
$
18
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases
35
5
Supplemental balance sheet information related to operating leases was as follows:
December 31,
2021
2020
Weighted-average remaining lease term of operating leases (in years)
4
5.4
Weighted-average discount rate of operating leases
4.35
%
4.95
%
The future minimum rent payments under noncancelable operating leases, due in each of the next five years and thereafter as of December 31, 2021, are as follows:
($ in millions)
Operating Leases
Year
2022
25
2023
24
2024
17
2025
15
2026
9
Thereafter
6
Total future minimum lease payments
$
96
Less: imputed interest
( 9
)
Present value of lease liabilities
$
87
Note 18: Income Taxes
Our tax provision includes federal, state and foreign income taxes payable. The domestic and foreign components of our income (loss) before taxes were as follows:
Year Ended December 31,
($ in millions)
2021
2020
2019
U.S. income (loss) before tax
$
195
$
( 287
)
$
234
Foreign income before tax
74
7
39
Total income (loss) before taxes
$
269
$
( 280
)
$
273
122
The components of our provision for income taxes were as follows:
Year Ended December 31,
($ in millions)
2021
2020
2019
Current:
Federal
$
( 5
)
$
36
$
37
State
9
5
9
Foreign
31
3
8
Total current
35
44
54
Deferred:
Federal
61
( 98
)
3
State
( 1
)
( 23
)
1
Foreign
( 2
)
( 2
)
( 1
)
Total deferred
58
( 123
)
3
Total provision for income taxes
$
93
$
( 79
)
$
57
Reconciliations of our tax provision at the U.S. statutory rate to the provision for income taxes were as follows:
Year Ended December 31,
($ in millions)
2021
2020
2019
Statutory U.S. federal income tax provision
$
57
$
( 59
)
$
57
State and local income taxes, net of U.S. federal tax benefit
8
( 17
)
11
Impact of foreign operations
14
( 5
)
1
Interest on installment sales, net of U.S. federal tax benefit
3
1
4
Transaction costs
5
—
—
Share-based compensation, net of IRC § 162(m) limitation
5
1
1
Tax accounting method change
—
—
( 18
)
Other
1
—
1
Provision for income taxes
$
93
$
( 79
)
$
57
Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities plus carryforward items.
The compositions of net deferred tax balances were as follows:
December 31,
($ in millions)
2021
2020
Deferred income tax assets
$
7
$
4
Deferred income tax liabilities
( 670
)
( 137
)
Net deferred taxes
$
( 663
)
$
( 133
)
123
The tax effects of the temporary differences and carryforwards that give rise to our net deferred tax liability were as follows:
December 31,
($ in millions)
2021
2020
Deferred tax assets:
Compensation
$
22
$
16
Domestic tax loss and credit carryforwards
100
5
Foreign tax loss carryforwards
47
2
Other reserves
179
89
348
112
Valuation allowance
( 74
)
( 4
)
Deferred tax assets
274
108
Deferred tax liabilities:
Property and equipment
( 165
)
( 70
)
Amortizable intangible assets
( 309
)
( 7
)
Deferred income
( 463
)
( 164
)
Other liabilities
—
—
Deferred tax liabilities
( 937
)
( 241
)
Net deferred taxes
$
( 663
)
$
( 133
)
Our net deferred tax liability increased by $ 530 million as of December 31, 2021, as compared to the same period in 2020, primarily due to acquired deferred taxes resulting from the Diamond Acquisition.
We have $ 331 million federal, $ 179 million foreign, and $ 406 million state tax loss carryforwards with varying expiration dates. The majority of our federal and foreign tax losses can be carried forward indefinitely. The remaining tax losses have expiration periods generally between five and twenty years. We have foreign tax credit carryforwards of $ 4 million and state tax credit carryforwards of $ 3 million. The credit carryforwards have expiration dates between six and fifteen years .
We establish valuation allowances for financial reporting purposes to offset certain deferred tax assets due to uncertainty regarding our ability to realize them in the future. The valuation allowance increased from $ 4 million as of December 31, 2020, to $ 74 million as of December 31, 2021, primarily due to acquired deferred tax assets from the Diamond Acquisition for which no future tax benefit is expected.
Reconciliations of the amounts of unrecognized tax benefits were as follows:
December 31,
($ in millions)
2021
2020
2019
Unrecognized tax benefits at beginning of year
$
—
$
—
$
—
Current period tax position increases
1
—
—
Prior period tax position increases
18
—
—
Decreases due to lapse in applicable statute of limitations
( 7
)
—
—
Unrecognized tax benefits at end of year
$
12
$
—
$
—
We recorded $ 12 million as of December 31, 2021, excluding interest and penalties, as a liability for unrecognized tax benefits in Accounts payable, accrued expenses and other in the consolidated balance sheet. We have $ 12 million of unrecognized tax benefits that if recognized would affect the annual effective tax rate. The total liability accrued for interest and penalties was $ 12 million as of December 31, 2021. We do not anticipate any significant increases or decreases in our unrecognized tax benefits within the next twelve months.
We file federal, state and foreign income tax returns in jurisdictions with varying statute of limitations. We are currently under audit in several tax jurisdictions. The open tax years for major tax jurisdictions are 2006 through 2021. While there is no assurance as to the results, we believe we are adequately reserved for these audits.
124
Although the Tax Cuts and Jobs Act of 2017 generally eliminates U.S. federal income tax on dividends from foreign subsidiaries, foreign withholding taxes may be incurred if these profits are distributed. No income or deferred taxes have been accrued on foreign earnings or other outside basis differences, as we intend to indefinitely reinvest these amounts in our foreign operations. An estimate of these amounts is not practicable due to the inherent complexity of the multi-jurisdictional tax environment in which the Company operates.
Note 19: Share-Based Compensation
Stock Plan
We issue service-based restricted stock units (“Service RSUs”), service and performance-based restricted stock units and nonqualified stock options (“Options”) to certain employees and directors. We recognized share-based compensation expense of $48 million, $ 15 million and $ 22 million during the years ended December 31, 2021, 2020 and 2019, respectively. The total tax benefit recognized related to this compensation was $ 4 million for the years ended December 31, 2021, 2020 and 2019.
As of December 31, 2021, unrecognized compensation cost for unvested awards was approximately $ 27 million, which is expected to be recognized over a weighted average period of 1.7 years. As of December 31, 2021, there were 3,771,197 shares of common stock available for future issuance under this plan.
Service RSUs
The following table provides information about our RSU grants for the last three fiscal years:
Year Ended December 31,
2021
2020
2019
Number of shares granted
588,930
672,123
500,925
Weighted average grant date fair value per share
38.50
$
25.14
$
33.07
Fair value of shares vested (in millions)
19
$
10
$
10
The following table summarizes the activity of our RSUs during the year ended December 31, 2021:
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Outstanding, beginning of period
973,985
28.89
Granted
588,930
38.50
Vested
( 465,949
)
30.39
Forfeited
( 67,328
)
31.34
Outstanding, end of period
1,029,638
33.55
Options
The following table provides information about our option grants for the last three fiscal years:
Year Ended December 31,
2021
2020
2019
Number of options granted
542,793
566,401
544,209
Weighted average exercise price per share
$
38.22
$
25.80
$
33.32
Weighted average grant date fair value per share
$
18.41
$
9.14
$
12.29
125
The weighted-average grant date fair value of each of these options was $ 18.41 , which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Year Ended December 31,
2021
2020
2019
Expected volatility (1)
50.5
%
35.4
%
33.1
%
Dividend yield (2)
—
%
—
%
—
%
Risk-free rate (3)
1.1
%
1.0
%
2.6
%
Expected term (in years) (4)
6.0
6.0
6.0
(1) During the years ended December 31, 2020, and 2019 due to limited trading history for our common stock, we did not have sufficient information available on which to base a reasonable and supportable estimate of the expected volatility of its share price. As a result, we used an average historical volatility of our peer group over a time period consistent with its expected term assumption. Our peer group was determined based upon companies in our industry with similar business models and is consistent with those used to benchmark our executive compensation.
(2) At the date of grant we had no plans to pay dividends during the expected term of these options.
(3) Based on the yields of U.S. Department of Treasury instruments with similar expected lives.
(4) Estimated using the average of the vesting periods and the contractual term of the options.
The following table summarizes the activity of our options during the year ended December 31, 2021:
Number
of Shares
Weighted
Average
Exercise Price
Per Share
Outstanding, beginning of period
2,013,939
$
30.15
Granted
542,793
38.22
Exercised
( 419,122
)
29.17
Forfeited, canceled or expired
( 50,886
)
32.57
Outstanding, end of period
2,086,724
32.39
Exercisable, end of period
1,091,435
31.40
As of December 31, 2021, we had 1,091,435 Options outstanding that were exercisable with an aggregate intrinsic value of $23 million and weighted average remaining contractual term of approximately 7 years. The intrinsic value of all options exercised during the year was $7 million.
Performance RSUs
During the year ended December 31, 2021, we issued two separate tranches of Performance RSUs.
In March 2021, we issued 124,711 Performance RSUs with a grant date fair value of $ 38.22 . The Performance RSUs are settled at the end of a two-year performance period, with 50 percent of the Performance RSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization further adjusted for net deferral and recognition of revenues and related direct expenses related to sales of VOIs of projects under construction. The remaining 50 percent of the Performance RSUs issued are subject to the achievement of certain contract sales targets.
In August 2021, and in conjunction with the Diamond Acquisition, we issued 351,118 Performance RSUs with a grant date fair value of $ 40.27 . The Performance RSUs are settled at the end of the performance period which is from the Acquisition Date through December 31, 2023, with 67 percent of the Performance RSUs subject to achievement based on certain run rate cost savings. The remaining 33 percent of the Performance RSUs issued are subject to the achievement of the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization further adjusted for net deferral and recognition of revenues and related direct expenses related to sales of VOIs of projects under construction.
126
During the fourth quarter of 2021, the Compensation Committee approved the modification of the performance conditions for the Performance RSUs issued in 2019, 2020, and March 2021 to reflect results of HGV and Diamond operations subsequent to the Acquisition Date. We estimate that the performance conditions for the 2019 and 2020 Performance RSU awards remain improbable of achievement under the modified performance conditions. As such, HGV continues to not accrue expenses related to the Performance RSUs granted in 2019 and 2020. In regards to the Performance RSUs granted in March 2021, we determined that under the modified performance conditions the awards issued are probable of achievement. We did not incur incremental compensation expense resulting from the modification which was applied to the Performance RSUs of 28 grantees. We also determined that the performance conditions for the awards issued in August 2021 are probable of achievement and recognized compensation expense based on the number of Performance RSUs we expect to vest during the year ended December 31, 2021.
The following table provides information about our Performance RSU grants, which is based on our Adjusted EBITDA metric described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K, further adjusted by sales of VOIs under construction for the last three fiscal years:
Year Ended December 31,
2021
2020
2019
Number of shares granted
178,224
117,975
93,566
Weighted average grant date fair value per share
$
39.55
$
25.69
$
33.32
Fair value of shares vested (in millions)
—
2
—
The following table provides information about our Performance RSU grants, which is based on contract sales as defined in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for the last three fiscal years:
Year Ended December 31,
2021
2020
2019
Number of shares granted
62,356
50,554
40,094
Weighted average grant date fair value per share
$
38.22
$
25.69
$
33.32
Fair value of shares vested (in millions)
—
1
—
The following table provides information about our Performance RSU grants, which is based on achieving certain run rate cost savings initiatives for the last three fiscal years:
Year Ended December 31,
2021
2020
2019
Number of shares granted
475,829
50,554
40,094
Weighted average grant date fair value per share
$
39.73
$
25.69
$
33.32
Fair value of shares vested (in millions)
—
1
—
127
The following table summarizes the activity of our Performance RSUs during the year ended December 31, 2021:
Adjusted EBITDA (1)
Contract Sales
Run Rate Cost Savings
Number of
Shares
Weighted
Average
Grant
Date Fair
Value per
Share
Number of
Shares
Weighted
Average
Grant
Date Fair
Value per
Share
Number of
Shares
Weighted
Average
Grant
Date Fair
Value per
Share
Outstanding, beginning of period
214,406
$
29.08
91,874
$
29.08
—
$
—
Granted
178,224
39.55
62,356
38.22
235,249
40.27
Vested
—
—
—
—
—
—
Forfeited, canceled or expired
( 18,387
)
29.08
( 7,878
)
29.08
—
—
Outstanding, end of period
374,243
34.07
146,352
32.98
235,249
40.27
(1) Represents our Adjusted EBITDA metric described in Part 1 of this Form 10-K, further adjusted by net recognition and deferral activity from sales of VOIs under construction.
Employee Stock Purchase Plan
In March 2017, the Board of Directors adopted the Hilton Grand Vacations Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective during 2017. In connection with the Plan, we issued 2.5 million shares of common stock which may be purchased under the ESPP. The ESPP allows eligible employees to purchase shares of our common stock at a price per share not less than 95 percent of the fair market value per share of common stock on the purchase date, up to a maximum threshold established by the plan administrator for the offering period. For the year ended December 31, 2021 and 2020 , we issued 39,985 and 81,520 shares, respectively, and recognized less than $ 1 million of compensation expense in both periods related to this plan.
Note 20: Earnings (Loss) Per Share
The following tables below present the calculation of our basic and diluted earnings (loss) per share (“EPS”) and the corresponding weighted average shares outstanding referenced in these calculations for the years ended December 31, 2021, 2020, and 2019.
Year Ended December 31,
($ and shares outstanding in millions, except per share amounts)
2021
2020
2019
Basic EPS:
Numerator:
Net income (loss) (1)
$
176
$
( 201
)
$
216
Denominator:
Weighted average shares outstanding
100
85
89
Basic EPS
$
1.77
$
( 2.36
)
$
2.43
Diluted EPS:
Numerator:
Net income (loss) (1)
$
176
$
( 201
)
$
216
Denominator:
Weighted average shares outstanding
101
85
89
Diluted EPS
$
1.75
$
( 2.36
)
$
2.42
(1) Net income (loss) for years ended December 31, 2021, 2020, and 2019 were $ 176,426,924 , ($ 200,709,244 ), and $ 215,695,961 , respectively.
128
Years ended December 31,
2021
2020
2019
Weighted average shares outstanding:
Basic EPS
99,747,367
85,181,106
88,758,859
Diluted EPS
101,090,176
85,181,106
89,291,176
The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period.
For the years ended December 31, 2021, 2020 and 2019, we excluded 651,748 , 2,192,591 and 836,677 share-based compensation awards, respectively, because their effect would have been anti-dilutive under the treasury stock method.
Note 21: Related Party Transactions
BRE Ace LLC and 1776 Holding, LLC
We hold a 25 percent ownership interest in BRE Ace LLC, a VIE, which owns a timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations.”
We hold a 50 percent ownership interest in 1776 Holdings, LLC, a VIE, which owns a timeshare resort property and related operations, known as “Liberty Place Charleston, by Hilton Club.”
We record Equity in earnings from our unconsolidated affiliates in our consolidated statements of operations. For the year ended December 31, 2021 , we recorded a distribution of approximately $ 2 million from BRE Ace LLC within Equity in earnings from our unconsolidated affiliates. See Note 11: 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. These amounts are summarized in the following table and are included in General and administrative expenses on our consolidated statements of operations as of the date they became related parties.
We also have $ 20 million and $ 7 million of outstanding receivables related to the fee-for-service agreements included in Accounts receivable, net on our consolidated balance sheets as of December 31, 2021 and December 31, 2020, respectively.
December 31,
($ in millions)
2021
2020
2019
Equity in earnings from unconsolidated affiliates
$
10
$
5
$
4
Commissions and other fees
105
55
136
Apollo Global Management Inc.
As part of the Diamond Acquisition as described above in Note 3: Diamond Acquisition , Apollo obtained more than 20 percent of our common stock and has the right to designate two nominees to the Board of Directors of HGV pursuant to a Stockholders Agreement among HGV and Apollo. In addition to the right to designate nominees to the Board, the Stockholders Agreement gives Apollo certain other governance, consent and pre-emptive rights, all based on the number of certain shares of HGV common stock owned by Apollo. Outside of agreements related to the Diamond Acquisition, we did not have any transactions with Apollo during the year ended December 31, 2021 and do not have any outstanding balances or agreements with Apollo as of December 31, 2021. We made one payment to Apollo subsequent to the Diamond Acquisition, of approximately $2 million, for amounts that were accrued for periods prior to the completion of the Diamond Acquisition and were included in Accounts Payable, Accrued Expenses and Other as of the Acquisition Date.
129
Note 22: Business Segments
We operate our business through the following two segments:
• Real estate sales and financing – We market and sell VOIs that we own. We also source VOIs through fee-for-service agreements with third-party developers. Related to the sales of the VOIs that we own, we provide consumer financing, which includes interest income generated from the origination of consumer loans to customers to finance their purchase of VOIs and revenue from servicing the loans. We also generate fee revenue from servicing the loans provided by third-party developers to purchasers of their VOIs.
• Resort operations and club management – We manage the Club and Diamond Clubs and earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We also earn fees for managing the timeshare properties. We generate rental revenue from unit rentals of unsold inventory and inventory made available due to ownership exchanges under our Club and Diamond Clubs programs. 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, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) other gains, including asset dispositions and foreign currency translations; (ii) debt restructurings/retirements; (iii) non-cash impairment losses; (iv) share-based and other compensation expenses; and (v) other items, including but not limited to costs associated with acquisitions, restructuring, amortization of premiums resulting from purchase accounting, and other non-cash and one-time charges.
We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment operating performance.
Below is the presentation of our reportable segment results which include the newly acquired Diamond operations within both segments since the Acquisition Date. The following table presents revenues for our reportable segments reconciled to consolidated amounts:
Year Ended December 31,
($ in millions)
2021
2020
2019
Revenues:
Real estate sales and financing
$
1,451
$
494
$
1,252
Resort operations and club management (1)
700
276
454
Segment revenues
2,151
770
1,706
Cost reimbursements
202
137
168
Intersegment eliminations (1)(2)
( 18
)
( 13
)
( 36
)
Total revenues
$
2,335
$
894
$
1,838
(1) Includes charges to the real estate sales and financing segment from the resort operations and club management segment for fulfillment of discounted marketing package stays at resorts. These charges totaled $ 18 million, $ 13 million and $ 35 million for the years ended December 31, 2021, 2020, and 2019 , respectively.
(2) Includes charges to the real estate sales and financing segment from the resort operations and club management segment for the rental of model units to show prospective buyers. These charges totaled $ 1 million for the year ended December 31, 2021 , less than $ 1 million for the year ended December 31, 2020 and $ 1 million for the year ended December 31, 2019 .
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The following table presents Adjusted EBITDA for our reportable segments reconciled to net income (loss):
Year Ended December 31,
($ in millions)
2021
2020
2019
Adjusted EBITDA:
Real estate sales and financing (1)
$
537
$
33
$
325
Resort operations and club management (1)
353
136
265
Segment Adjusted EBITDA
890
169
590
Acquisition and integration-related expense
( 106
)
—
—
General and administrative
( 151
)
( 92
)
( 118
)
Depreciation and amortization
( 126
)
( 45
)
( 44
)
License fee expense
( 80
)
( 51
)
( 101
)
Other (loss) gain, net
( 26
)
3
( 3
)
Interest expense
( 105
)
( 43
)
( 43
)
Income tax (expense) benefit
( 93
)
79
( 57
)
Equity in earnings from unconsolidated affiliates
10
5
4
Impairment expense
( 2
)
( 209
)
—
Other adjustment items (2)
( 35
)
( 17
)
( 12
)
Net income (loss)
$
176
$
( 201
)
$
216
(1) Includes intersegment eliminations. Refer to our table presenting revenues by reportable segment above for additional discussion.
(2) This amount includes costs associated with restructuring, one-time charges and other non-cash items.
The following table presents total assets for our reportable segments, reconciled to consolidated amounts:
December 31,
($ in millions)
2021
2020
Real estate sales and financing
$
5,544
$
2,839
Resort operations and club management
2,145
79
Total segment assets
7,689
2,918
Corporate
278
175
Land and infrastructure held for sale
41
41
Total assets
$
8,008
$
3,134
The following table presents capital expenditures for property and equipment for our reportable segments, reconciled to consolidated amounts:
December 31,
($ in millions)
2021
2020
2019
Real estate sales and financing
$
60
$
18
$
19
Resort operations and club management
—
—
5
Total segment capital expenditures
60
18
24
Corporate
12
8
13
Total capital expenditures
$
72
$
26
$
37
Note 23: 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 December 31, 2021 , we were committed to purchase approximately $ 330 million of inventory and land over a period of 9 years and $ 7 million of other commitments under the normal course of business. Additionally, we have committed to develop additional vacation ownership units at an existing resort in Japan. We are also committed to an agreement to exchange parcels of land in Hawaii, subject to the successful completion of zoning, land use requirements and other applicable regulatory requirements. The actual amount and timing of the acquisitions are subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances.
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During the years ended December 31, 2021 and 2020 , we completed $ 132 million and $ 23 million, respectively, of purchases required under our inventory-related purchase commitments. As of December 31, 2021, our remaining obligations pursuant to these arrangements were expected to be incurred as follows:
($ in millions)
2022
2023
2024
2025
2026
Thereafter
Total
Inventory purchase obligations
$
80
$
196
$
3
$
40
$
3
$
8
$
330
Other commitments (1)
6
1
—
—
—
—
$
7
Total
$
86
$
197
$
3
$
40
$
3
$
8
$
337
(1) Primarily relates to commitments related to information technology and brand licensing under the normal course of business
Rebranding Costs
As part of the Diamond Acquisition and per our licensing agreement with Hilton, we are committed to rebranding Diamond properties to the Hilton Grand Vacations brand and Hilton standards. As of December 31, 2021 we have begun incurring rebranding costs during the fourth quarter of 2021 in respect to information technology and sales centers, and expect rebranding to continue over a period of several years.
Litigation Contingencies
We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. We evaluate these legal proceedings and claims at each balance sheet date to determine the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, our ability to reasonably estimate the amount of loss. We record a contingent litigation liability when it is determined that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of December 31, 2021 , we accrued liabilities of approximately $ 27 million for all legal matters that were contingencies. Substantially all of these accrued liabilities are related to matters that existed as of the Acquisition Date, which are subject to change during the measurement period of the Diamond Acquisition. See Note 3: Diamond Acquisition .
While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial condition, cash flows, or materially adversely affect overall trends in our results of operations, legal proceedings are inherently uncertain and unfavorable rulings could, individually or in aggregate, have a material adverse effect on the Company’s business, financial condition or results of operations.
Note 24: Supplemental Disclosures of Cash Flow Information
Cash paid for interest during the years ended December 31, 2021, 2020 and 2019 , was $ 66 million, $ 64 million and $ 63 million, respectively. Cash paid for income taxes, net of refunds during the years ended December 31, 2021, 2020 and 2019 was $ 54 million, $ 54 million and $ 74 million, respectively.
The following non-cash activities were excluded from the consolidated statements of cash flows:
• In 2021, we recorded non-cash issuance of stock of $ 1,381 million related to our acquisition of Diamond. See Note 3: Diamond Acquisition for additional information.
• In 2021, we recorded non-cash operating activity transfers of $ 55 million related to the registrations for timeshare units under construction from Property and equipment to Inventory .
• In 2020, we recorded non-cash operating activity transfers of $ 41 million related to the classification of certain undeveloped land and infrastructure as available for sale from Inventory to Land and infrastructure held for sale and $ 16 million related to the classification of certain undeveloped land and infrastructure from Inventory to Property and equipment .
• In 2020, we recorded non-cash operating activity transfers of $ 301 million related to the registrations for timeshare units under construction from Property and equipment to Inventory .
• In 2019, we recorded a $ 23 million non-cash issuance of other debt related to the acquisition of property for future conversion to inventory involving a note payable financed by the seller.
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• In 2019, we recorded net non-cash operating activity transfers of $ 25 million from Property and equipment to Inventory related to the registration of timeshare units under construction.
• In 2019, we recorded non-cash operating activity transfers of $ 40 million related to the reclassification of deposits on properties for future development into timeshare inventory from Other assets to Property and equipment.
Note 25: Subsequent Events
Management has evaluated all subsequent events through March 1, 2022, the date the audited 2021 10-K was available to be issued and determined the following subsequent event occurred:
Subsequent to December 31, 2021, HGV repaid the full $ 133 million combined principal balance outstanding at December 31, 2021 of both conduit facilities, comprised of $ 125 million on the conduit facility due in 2023 and $ 8 million due on the conduit facility due in 2024 .
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Item 9. Changes In and Disagreements with Accou ntants on Accounting and Financial Disclosure
There were no changes in or disagreements with our accountants on accounting and financial disclosure matters.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.