Item 1. Financial Statements
Item 1. Financial Statements
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
June 30, 2023 December 31, 2022
(unaudited)
ASSETS
Cash and cash equivalents $ 252 $ 223
Restricted cash 336 332
Accounts receivable, net of allowance for doubtful accounts of $ 63 and $ 52
485 511
Timeshare financing receivables, net 1,778 1,767
Inventory 1,280 1,159
Property and equipment, net 807 798
Operating lease right-of-use assets, net 63 76
Investments in unconsolidated affiliates 72 72
Goodwill 1,416 1,416
Intangible assets, net 1,213 1,277
Other assets 449 373
TOTAL ASSETS (variable interest entities - $ 1,108 and $ 948 )
$ 8,151 $ 8,004
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other $ 1,043 $ 1,007
Advanced deposits 185 150
Debt, net 2,942 2,651
Non-recourse debt, net 882 1,102
Operating lease liabilities 83 94
Deferred revenues 253 190
Deferred income tax liabilities 658 659
Total liabilities (variable interest entities - $ 883 and $ 1,005 )
6,046 5,853
Commitments and contingencies - see Note 17
Stockholders' Equity:
Preferred stock, $ 0.01 par value; 300,000,000 authorized shares, none
issued or outstanding as of June 30, 2023 and December 31, 2022
— —
Common stock, $ 0.01 par value; 3,000,000,000 authorized shares,
109,929,447 shares issued and outstanding as of June 30, 2023 and
113,628,706 shares issued and outstanding as of December 31, 2022
1 1
Additional paid-in capital 1,541 1,582
Accumulated retained earnings 539 529
Accumulated other comprehensive income 24 39
Total stockholders' equity 2,105 2,151
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,151 $ 8,004
See notes to unaudited condensed consolidated financial statements.
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HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in millions, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Revenues
Sales of VOIs, net $ 355 $ 361 $ 673 $ 630
Sales, marketing, brand and other fees 173 161 331 280
Financing 76 64 150 128
Resort and club management 133 124 264 249
Rental and ancillary services 173 171 331 307
Cost reimbursements 97 67 192 133
Total revenues 1,007 948 1,941 1,727
Expenses
Cost of VOI sales 48 65 98 105
Sales and marketing 336 284 637 527
Financing 24 22 48 41
Resort and club management 44 37 86 73
Rental and ancillary services 154 150 306 282
General and administrative 48 66 90 108
Acquisition and integration-related expense 13 17 30 30
Depreciation and amortization 52 64 103 124
License fee expense 34 32 64 57
Impairment expense (reversal) 3 ( 3 ) 3 —
Cost reimbursements 97 67 192 133
Total operating expenses 853 801 1,657 1,480
Interest expense ( 44 ) ( 35 ) ( 88 ) ( 68 )
Equity in earnings from unconsolidated affiliates 2 4 5 7
Other gain (loss), net 3 ( 2 ) 4 ( 1 )
Income before income taxes 115 114 205 185
Income tax expense ( 35 ) ( 41 ) ( 52 ) ( 61 )
Net income $ 80 $ 73 $ 153 $ 124
Earnings per share:
Basic $ 0.72 $ 0.60 $ 1.37 $ 1.03
Diluted $ 0.71 $ 0.60 $ 1.35 $ 1.01
See notes to unaudited condensed consolidated financial statements.
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HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in millions)
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Net income $ 80 $ 73 $ 153 $ 124
Derivative instrument adjustments, net of tax 5 10 ( 5 ) 32
Foreign currency translation adjustments ( 10 ) ( 6 ) ( 10 ) ( 6 )
Other comprehensive (loss) income, net of tax ( 5 ) 4 ( 15 ) 26
Comprehensive income $ 75 $ 77 $ 138 $ 150
See notes to unaudited condensed consolidated financial statements.
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HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
Six Months Ended June 30,
2023 2022
Operating Activities
Net income $ 153 $ 124
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 103 124
Amortization of deferred financing costs, acquisition premiums and other 14 25
Provision for financing receivables losses 71 71
Impairment expense 3 —
Other (gain) loss, net ( 4 ) 2
Share-based compensation 26 26
Equity in earnings from unconsolidated affiliates ( 5 ) ( 7 )
Return on investments in unconsolidated affiliates 6 —
Net changes in assets and liabilities:
Accounts receivable, net 26 ( 73 )
Timeshare financing receivables, net ( 96 ) ( 52 )
Inventory ( 67 ) 20
Purchases and development of real estate for future conversion to inventory ( 6 ) ( 1 )
Other assets ( 134 ) ( 159 )
Accounts payable, accrued expenses and other 32 290
Advanced deposits 35 17
Deferred revenues 63 123
Net cash provided by operating activities 220 530
Investing Activities
Capital expenditures for property and equipment (excluding inventory) ( 9 ) ( 19 )
Software capitalization costs ( 16 ) ( 16 )
Net cash used in investing activities ( 25 ) ( 35 )
Financing Activities
Proceeds from debt 438 —
Proceeds from non-recourse debt 175 402
Repayment of debt ( 157 ) ( 132 )
Repayment of non-recourse debt ( 397 ) ( 697 )
Payment of debt issuance costs — ( 7 )
Repurchase and retirement of common stock ( 206 ) ( 78 )
Payment of withholding taxes on vesting of restricted stock units ( 14 ) ( 8 )
Proceeds from employee stock plan purchases 4 2
Proceeds from stock option exercises 7 1
Other ( 2 ) ( 1 )
Net cash used in financing activities ( 152 ) ( 518 )
Effect of changes in exchange rates on cash, cash equivalents & restricted cash ( 10 ) ( 6 )
Net increase (decrease) in cash, cash equivalents and restricted cash 33 ( 29 )
Cash, cash equivalents and restricted cash, beginning of period 555 695
Cash, cash equivalents and restricted cash, end of period 588 666
Less: Restricted cash 336 292
Cash and cash equivalents $ 252 $ 374
See notes to unaudited condensed consolidated financial statements.
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HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in millions)
Common Stock Additional
Paid-in
Capital Accumulated
Retained
Earnings Accumulated
Other
Comprehensive
Income Total
Stockholders'
Equity
Shares Amount
Balance as of December 31, 2022
113 $ 1 $ 1,582 $ 529 $ 39 $ 2,151
Net income — — — 73 — 73
Activity related to share-based compensation 1 — 3 — — 3
Derivative instrument adjustments, net of tax — — — — ( 10 ) ( 10 )
Repurchase and retirement of common stock, net of tax ( 2 ) — ( 26 ) ( 59 ) — ( 85 )
Balance as of March 31, 2023 112 $ 1 $ 1,559 $ 543 $ 29 $ 2,132
Net income — — — 80 — 80
Activity related to share-based compensation — — 16 — — 16
Employee stock plan issuance — — 4 — — 4
Foreign currency translation adjustments — — — — ( 10 ) ( 10 )
Derivative instrument adjustments, net of tax — — — — 5 5
Repurchase and retirement of common stock, net of tax ( 3 ) — ( 38 ) ( 84 ) — ( 122 )
Balance as of June 30, 2023
109 $ 1 $ 1,541 $ 539 $ 24 $ 2,105
Common Stock Additional
Paid-in
Capital Accumulated
Retained
Earnings Accumulated
Other
Comprehensive
Income Total
Stockholders'
Equity
Shares Amount
Balance as of December 31, 2021
120 $ 1 $ 1,630 $ 357 $ — $ 1,988
Net income — — — 51 — 51
Activity related to share-based compensation — — 4 — — 4
Derivative instrument adjustments, net of tax — — — — 22 22
Balance as of March 31, 2022 120 $ 1 $ 1,634 $ 408 $ 22 $ 2,065
Net income — — — 73 — 73
Activity related to share-based compensation — — 16 — — 16
Employee stock plan issuance — — 2 — — 2
Foreign currency translation adjustments — — — — ( 6 ) ( 6 )
Derivative instrument adjustments, net of tax — — — — 10 10
Repurchase and retirement of common stock ( 2 ) — ( 26 ) ( 57 ) — ( 83 )
Balance as of June 30, 2022
118 $ 1 $ 1,626 $ 424 $ 26 $ 2,077
See notes to unaudited condensed consolidated financial statements.
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HILTON GRAND VACATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
Our Business
Hilton Grand Vacations Inc. (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”) is a global timeshare company engaged in developing, marketing, selling, managing and operating timeshare resorts, timeshare plans and ancillary reservation services, primarily under the Hilton Grand Vacations brand. Our operations primarily consist of selling vacation ownership intervals and vacation ownership interests (collectively, “VOIs” or “VOI”) for ourselves and third parties; financing and servicing loans provided to consumers for their VOI purchases; operating resorts and timeshare plans; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange programs and Diamond points-based multi-resort timeshare clubs and exchange programs. During 2022, we began offering a new club membership called HGV Max across certain of our sales centers. For any customer who purchases a VOI, this membership provides the ability to use points across all properties within our network. The membership provides new destinations for existing club owners and broader vacation opportunities for new buyers. Our club offerings, including HGV Max, are collectively referred to as “Clubs”.
As of June 30, 2023, we had over 150 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.
Basis of Presentation
The unaudited condensed consolidated financial statements presented herein include 100% of our assets, liabilities, revenues, expenses and cash flows as well as all entities in which we have a controlling financial interest. 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 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% of the voting shares of a company or otherwise have a controlling financial interest. Our accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All material intercompany transactions and balances have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Our accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2022, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2023.
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. Interim results are not necessarily indicative of full year performance.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently Adopted Accounting Pronouncements
On January 1, 2023, we adopted Accounting Standards Update 2022-02 (“ASU 2022-02”), Financial Instruments— Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 provides, under Issue 2 - Vintage Disclosures, that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. For financing receivables, the vintage disclosure is to present the amortized cost basis by credit quality indicator and class of financing receivable for the year of origination. The vintage disclosures are to be applied prospectively. The impact of adoption of ASU 2022-02 was in disclosure only and did not have an impact on our condensed consolidated financial statements. See Note 5: Timeshare Financing Receivables for additional information.
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NOTE 3: 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 . See Note 16: Business Segments for more information related to our segments.
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
Real Estate Sales and Financing Segment 2023 2022 2023 2022
Sales of VOIs, net $ 355 $ 361 $ 673 $ 630
Sales, marketing, brand and other fees 173 161 331 280
Interest income 65 54 131 109
Other financing revenue 11 10 19 19
Real estate sales and financing segment revenues $ 604 $ 586 $ 1,154 $ 1,038
($ in millions) Three Months Ended June 30, Six Months Ended June 30,
Resort Operations and Club Management Segment 2023 2022 2023 2022
Club management $ 53 $ 51 $ 104 $ 102
Resort management 80 73 160 147
Rental (1)
162 155 309 279
Ancillary services 11 16 22 28
Resort operations and club management segment revenues $ 306 $ 295 $ 595 $ 556
(1) Excludes intersegment transactions. See Note 16: Business Segments for additional information.
Contract Balances
Our accounts receivable that relate to our contracts with customers includes amounts associated with our contractual right to consideration for completed performance obligations 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.
The following table provides information on our accounts receivable from contracts with customers which are included in Accounts receivable, net on our condensed consolidated balance sheets:
($ in millions) June 30, 2023 December 31, 2022
Receivables $ 324 $ 322
Contract liabilities include payments received or due in advance of satisfying our performance obligations. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues related to sales of VOIs of projects under construction, Club activation fees and annual dues, 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, deferred maintenance fees and other deferred revenue.
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The following table presents the composition of our contract liabilities:
($ in millions) June 30, 2023 December 31, 2022
Contract liabilities:
Advanced deposits $ 185 $ 150
Deferred sales of VOIs of projects under construction 6 3
Club dues and Club activation fees 142 76
Bonus point incentive liability (1)
101 106
Deferred maintenance fees 29 14
Other deferred revenue 31 42
(1) The balance includes $ 56 million and $ 51 million of bonus point incentive liabilities included in Accounts payable, accrued expenses and other on our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022, respectively. This liability is for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.
Revenue earned for the three and six months ended June 30, 2023, that was included in the contract liabilities balance at December 31, 2022, was approximately $ 43 million and $ 99 million, respectively.
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. Contract assets were $ 7 million as of June 30, 2023 and $ 9 million as of December 31, 2022.
Transaction Price Allocated to Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) bonus points that may be redeemed in the future.
The following table presents the deferred revenue, cost of VOI sales and direct selling costs from sales of VOIs related to projects under construction as of June 30, 2023 and December 31, 2022:
($ in millions) June 30, 2023 December 31, 2022
Sales of VOIs, net $ 6 $ 3
Cost of VOI sales 1 1
Sales and marketing expense 1 1
During the six months ended June 30, 2023, we recognized $ 4 million of sales of VOIs, net, offset by deferrals of $ 6 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 June 30, 2023 upon their completion in 2024.
The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Bonus points incentive liability as of June 30, 2023:
($ in millions) Remaining
Transaction Price Recognition Period Recognition Method
Advanced deposits $ 185 18 months Upon customer stays
Club activation fees 65 7 years Straight-line basis over average inventory holding period
Bonus point incentive liability 101 18 - 30 months
Upon redemption
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NOTE 4: ACCOUNTS RECEIVABLE
Accounts receivable within the scope of ASC 326 are measured at amortized cost. The following table represents our accounts receivable, net of allowance for credit losses:
($ in millions) June 30, 2023 December 31, 2022
Fee-for-service commissions $ 69 $ 91
Real estate and financing 44 59
Resort and club operations 211 179
Tax receivables 75 84
Insurance claims receivable 82 81
Other receivables 4 17
Total $ 485 $ 511
Our accounts receivable are generally due within one year of origination. We use delinquency status and economic factors such as credit quality indicators to monitor our receivables within the scope of ASC 326 and use these as a basis for how we develop our expected loss estimates. We have allowances for our accounts receivable to account for fee-for-service commissions, trade accounts receivable, marketing packages, club dues and activation fees.
NOTE 5: TIMESHARE FINANCING RECEIVABLES
We define our timeshare financing receivables portfolio segments as (i) originated and (ii) acquired. On August 2, 2021, (the “Acquisition Date”), we acquired Dakota Holdings, Inc., the parent of Diamond Resorts International (“Diamond” or “Legacy-Diamond”) (the “Diamond Acquisition”). Our originated portfolio represents timeshare financing receivables that existed both prior to and following the Acquisition Date, excluding Legacy-Diamond (“Legacy-HGV”) and timeshare financing receivables originated by Legacy-Diamond subsequent to the Acquisition Date. Our acquired portfolio includes all timeshare financing receivables acquired from Legacy-Diamond as of the Acquisition Date.
The following table presents the components of each portfolio segment by class of timeshare financing receivables:
Originated Acquired
($ in millions) June 30,
2023 December 31,
2022 June 30,
2023 December 31,
2022
Securitized $ 672 $ 788 $ 212 $ 262
Unsecuritized (1)
1,206 971 414 447
Timeshare financing receivables, gross $ 1,878 $ 1,759 $ 626 $ 709
Unamortized non-credit acquisition premium (2)
— — 34 41
Less: allowance for financing receivables losses ( 447 ) ( 404 ) ( 313 ) ( 338 )
Timeshare financing receivables, net $ 1,431 $ 1,355 $ 347 $ 412
(1) Includes amounts used as collateral to secure a non-recourse revolving timeshare receivable credit facility (“Timeshare Facility”) as well as amounts held as future collateral for securitization activities.
(2) Non-credit premium of $ 97 million was recognized at the Acquisition Date, of which $ 34 million and $ 41 million remains unamortized as of June 30, 2023 and December 31, 2022, respectively.
As of June 30, 2023 and December 31, 2022, we had timeshare financing receivables with a carrying value of $ 262 million and $ 105 million, respectively, securing the Timeshare Facility.
We record an estimate of variable consideration for defaults as a reduction of revenue from VOI sales at the time revenue is recognized. 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 both the six months ended June 30, 2023 and 2022, we recorded an adjustment to our estimate of variable consideration of $ 71 million.
We recognize interest income on our timeshare financing receivables as earned. As of both June 30, 2023 and December 31, 2022, we had interest receivable outstanding of $ 13 million on our originated timeshare financing receivables. As of June 30, 2023 and December 31, 2022, we had interest receivable outstanding of $ 3 million and $ 4 million, respectively, on our acquired timeshare financing receivables. Interest receivable is included in Other Assets within
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our condensed consolidated balance sheets. The interest rate charged on the notes correlates to the risk profile of the customer at the time of purchase and the percentage of the purchase that is financed, among other factors. As of June 30, 2023, our originated timeshare financing receivables had interest rates ranging from 1.5 % to 25.8 %, a weighted-average interest rate of 14.7 %, a weighted-average remaining term of 8.2 years and maturities through 2038. Our acquired timeshare financing receivables had interest rates ranging from 2.0 % to 25.0 %, a weighted-average interest rate of 15.7 %, a weighted-average remaining term of 7.2 years and maturities through 2033.
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.
Acquired Timeshare Financing Receivables with Credit Deterioration
Our acquired timeshare financing receivables were deemed to be purchased 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 financing receivable 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 risk-adjusted cash flows over the remaining term of the respective timeshare financing receivables. Consequently, the fair value of the acquired timeshare financing receivables recorded on our consolidated balance sheet as of the Acquisition Date included an estimate of expected financing receivable losses which became the historical cost basis for that portfolio going forward.
The allowance for financing receivable 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 financing receivable losses for our acquired timeshare financing receivables. Subsequent changes to the allowance for financing receivable losses are recorded as additions to or reversals to the provision.
Our gross acquired timeshare financing receivables as of June 30, 2023 mature as follows:
Acquired Timeshare Financing Receivables
($ in millions) Securitized Unsecuritized Total
Year
2023 (remaining six months) $ 20 $ 27 $ 47
2024 29 39 68
2025 31 44 75
2026 31 48 79
2027 32 51 83
Thereafter 69 205 274
Total $ 212 $ 414 $ 626
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Originated Timeshare Financing Receivables
Our originated timeshare financing receivables as of June 30, 2023 mature as follows:
Originated Timeshare Financing Receivables
($ in millions) Securitized Unsecuritized Total
Year
2023 (remaining six months) $ 44 $ 50 $ 94
2024 89 82 171
2025 90 93 183
2026 90 104 194
2027 86 115 201
Thereafter 273 762 1,035
Total $ 672 $ 1,206 $ 1,878
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, 2022 $ 404 $ 338
Provision for financing receivables losses (1)
71 —
Write-offs ( 33 ) ( 28 )
Inventory recoveries — 8
Upgrades (2)
5 ( 5 )
Balance as of June 30, 2023 $ 447 $ 313
($ in millions) Originated
Acquired
Balance as of December 31, 2021 $ 280 $ 482
Provision for financing receivables losses (1)
71 —
Write-offs ( 37 ) ( 60 )
Inventory recoveries — 17
Upgrades (2)
34 ( 34 )
Balance as of June 30, 2022 $ 348 $ 405
(1) Includes incremental provision for financing receivables losses, net of activity related to the repurchase of defaulted and upgraded securitized timeshare financing receivables.
(2) 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 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 the 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.
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Our gross balances by average FICO score of our Legacy-HGV timeshare financing receivables were as follows:
Legacy-HGV Timeshare Financing Receivables
($ in millions) June 30, 2023 December 31, 2022
FICO score
700+ $ 800 $ 763
600-699 288 270
<600 36 37
No score (1)
179 174
Total $ 1,303 $ 1,244
(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 June 30, 2023:
($ in millions) 2023 2022 2021 2020 2019 Prior Total
FICO score
700+ $ 194 $ 260 $ 115 $ 40 $ 73 $ 118 $ 800
600-699 60 96 43 15 27 47 288
<600 7 12 6 2 3 6 36
No score (1)
38 47 22 15 22 35 179
Total $ 299 $ 415 $ 186 $ 72 $ 125 $ 206 $ 1,303
Current period gross write-offs $ — $ 3 $ 6 $ 3 $ 6 $ 9 $ 27
(1) Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
As of June 30, 2023 and December 31, 2022, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $ 84 million and $ 76 million, respectively. The following tables detail an aged analysis of our gross timeshare receivables balance:
Legacy-HGV Timeshare Financing Receivables
June 30, 2023
($ in millions) Securitized Unsecuritized Total
Current $ 538 $ 659 $ 1,197
31 - 90 days past due 9 13 22
91 - 120 days past due 3 3 6
121 days and greater past due 4 74 78
Total $ 554 $ 749 $ 1,303
Legacy-HGV Timeshare Financing Receivables
December 31, 2022
($ in millions) Securitized Unsecuritized Total
Current $ 631 $ 520 $ 1,151
31 - 90 days past due 9 8 17
91 - 120 days past due 3 2 5
121 days and greater past due 4 67 71
Total $ 647 $ 597 $ 1,244
Legacy-Diamond Timeshare Financing Receivables
We evaluate these portfolios 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
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defaults and determining our allowance for financing receivables losses on our timeshare financing receivables. 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) June 30, 2023 December 31, 2022
FICO score
700+ $ 322 $ 373
600-699 238 265
<600 52 55
No score (1)
14 16
Total $ 626 $ 709
(1) Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
Legacy-Diamond Originated Timeshare Financing Receivables
($ in millions) June 30, 2023 December 31, 2022
FICO score
700+ $ 349 $ 321
600-699 191 163
<600 29 26
No score (1)
6 5
Total $ 575 $ 515
(1) Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
The following tables detail our gross Legacy-Diamond acquired and originated timeshare financing receivables by the origination year and average FICO score as of June 30, 2023:
Legacy-Diamond Acquired Timeshare Financing Receivables
($ in millions) 2023 2022 2021 2020 2019 Prior Total
FICO score
700+ $ — $ — $ 55 $ 69 $ 85 $ 113 $ 322
600-699 — — 40 45 60 93 238
<600 — — 10 12 10 20 52
No score (1)
— — 1 4 2 7 14
Total $ — $ — $ 106 $ 130 $ 157 $ 233 $ 626
Current period gross write-offs $ — $ — $ 4 $ 5 $ 8 $ 11 $ 28
(1) Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
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Legacy-Diamond Originated Timeshare Financing Receivables
($ in millions) 2023 2022 2021 2020 2019 Prior Total
FICO score
700+ $ 99 $ 188 $ 62 $ — $ — $ — $ 349
600-699 49 105 37 — — — 191
<600 6 15 8 — — — 29
No score (1)
2 3 1 — — — 6
Total $ 156 $ 311 $ 108 $ — $ — $ — $ 575
Current period gross write-offs $ — $ 3 $ 3 $ — $ — $ — $ 6
(1) Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
As of June 30, 2023 and December 31, 2022, we had ceased accruing interest on Legacy-Diamond timeshare financing receivables with an aggregate principal balance of $ 416 million and $ 377 million, respectively. The following tables detail an aged analysis of our gross timeshare receivables balance:
Legacy-Diamond Timeshare Financing Receivables
June 30, 2023
($ in millions) Securitized Unsecuritized Total
Current $ 304 $ 450 $ 754
31 - 90 days past due 11 20 31
91 - 120 days past due 4 9 13
121 days and greater past due 11 392 403
Total $ 330 $ 871 $ 1,201
Legacy-Diamond Timeshare Financing Receivables
December 31, 2022
($ in millions) Securitized Unsecuritized Total
Current $ 373 $ 442 $ 815
31 - 90 days past due 13 19 32
91 - 120 days past due 4 8 12
121 days and greater past due 13 352 365
Total $ 403 $ 821 $ 1,224
NOTE 6: INVENTORY
Inventory was comprised of the following:
($ in millions) June 30, 2023 December 31, 2022
Completed unsold VOIs $ 1,273 $ 1,096
Construction in process 6 62
Land, infrastructure and other 1 1
Total $ 1,280 $ 1,159
During the six months ended June 30, 2023, we acquired a property in New York for $ 136 million from a third-party developer for inventory. Under the purchase agreement, there are no further inventory commitments related to this property.
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The table below presents costs of sales true-ups relating to VOI products and the related impacts to the carrying value of inventory and cost of VOI sales.
Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2023 2022 2023 2022
Cost of sales true-up (1)
$ 13 $ 2 $ 29 $ 9
(1) For the three and six months ended June 30, 2023 and 2022, respectively, the costs of sales true-up decreased costs of VOI sales and increased inventory.
The table below presents expenses incurred, recorded in Cost of VOI sales, related to granting credit to customers for their existing ownership when upgrading into fee-for service projects.
Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2023 2022 2023 2022
Cost of VOI sales related to fee-for-service upgrades $ 3 $ 2 $ 6 $ 4
NOTE 7: CONSOLIDATED VARIABLE INTEREST ENTITIES
As of June 30, 2023, we consolidated 9 VIEs. 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 these VIEs as we have the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we often replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the right to receive benefits that could be significant to them. Only the assets of our VIEs are available to settle the obligations of the respective entities.
Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:
($ in millions) June 30, 2023 December 31, 2022
Restricted cash $ 48 $ 48
Timeshare financing receivables, net 1,048 883
Non-recourse debt, net 882 1,003
NOTE 8: INVESTMENTS IN UNCONSOLIDATED AFFILIATES
As of June 30, 2023, we have 25 % and 50 % ownership interests in BRE Ace LLC and 1776 Holding LLC, respectively, which are VIEs. We do not consolidate BRE Ace LLC and 1776 Holding LLC because we are not the primary beneficiary. For both VIEs, our investment interests are included in the condensed consolidated balance sheets as Investments in unconsolidated affiliates , and equity earned is included in the condensed consolidated statements of operations as Equity in earnings from unconsolidated affiliates .
During the three and six months ended June 30, 2023, we received a cash distribution of approximately $ 6 million from our investment in BRE Ace LLC.
Our two unconsolidated affiliates have aggregated debt balances of $ 410 million and $ 393 million as of June 30, 2023 and December 31, 2022, 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 totaled $ 72 million as of June 30, 2023 and December 31, 2022, respectively, and (ii) receivables for commission and other fees earned under fee-for-service arrangements. See Note 15: Related Party Transactions for additional information.
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NOTE 9: INTANGIBLE ASSETS
Intangible assets and related accumulated amortization were as follows:
June 30, 2023
($ in millions) Gross Carrying Amount Accumulated Amortization
Net Carrying Amount
Trade name $ 18 $ ( 18 ) $ —
Management contracts 1,340 ( 289 ) 1,051
Club member relationships 139 ( 47 ) 92
Capitalized software 180 ( 110 ) 70
Total $ 1,677 $ ( 464 ) $ 1,213
December 31, 2022
($ in millions) Gross Carrying Amount Accumulated Amortization
Net Carrying Amount
Trade name $ 18 $ ( 17 ) $ 1
Management contracts 1,340 ( 230 ) 1,110
Club member relationships 139 ( 37 ) 102
Capitalized software 163 ( 99 ) 64
Total $ 1,660 $ ( 383 ) $ 1,277
Amortization expense on intangible assets was $ 38 million and $ 49 million for the three months ended June 30, 2023 and 2022, respectively, and $ 78 million and $ 97 million for the six months ended June 30, 2023 and 2022, respectively.
NOTE 10: DEBT AND NON-RECOURSE DEBT
Debt
The following table details our outstanding debt balance and its associated interest rates:
($ in millions) June 30, 2023 December 31, 2022
Debt (1)
Senior secured credit facility
Term loan with a rate of 8.217 %, due 2028
$ 1,277 $ 1,284
Revolver with a rate of 7.108 %, due 2026
328 40
Senior notes with a rate of 5.000 %, due 2029
850 850
Senior notes with a rate of 4.875 %, due 2031
500 500
Other debt 35 29
Total debt, gross 2,990 2,703
Less: unamortized deferred financing costs and discounts (2)(3)
( 48 ) ( 52 )
Total debt, net $ 2,942 $ 2,651
(1) As of June 30, 2023 and December 31, 2022, weighted-average interest rates were 6.598 % and 6.143 %, respectively.
(2) Amount includes unamortized deferred financing costs related to our term loan and senior notes of $ 24 million and $ 18 million, respectively, as of June 30, 2023 and $ 26 million and $ 19 million, respectively, as of December 31, 2022. This amount also includes unamortized original issuance discounts of $ 6 million and $ 7 million as of June 30, 2023 and December 31, 2022, respectively.
(3) Amount does not include unamortized deferred financing costs of $ 4 million as of June 30, 2023 and December 31, 2022, respectively, related to our revolving facility which are included in Other assets in our condensed consolidated balance sheets.
Senior secured credit facility
As of June 30, 2023, we had $ 1 million of letters of credit outstanding under the revolving credit facility and $ 1 million outstanding backed by cash collateral. We were in compliance with all applicable maintenance and financial covenants and ratios as of June 30, 2023. As of June 30, 2023, we have $ 671 million remaining borrowing capacity under the revolver facility.
On May 31, 2023, we amended our Credit Facility Agreement to transition from London Interbank Offered Rate (“LIBOR”) reference rates to Secured Overnight Financing Rate (“SOFR”) reference rates. We applied the optional expedients in ASC 848, Reference Rate Reform (“ASC 848”), accounting for the modification as a continuation of the
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existing contract. Therefore, the transition did not require remeasurement at the modification date or a reassessment of previous accounting determinations, and the change in reference rates will be applied prospectively from the amendment date.
We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt. These interest rate swaps are associated with the remaining available SOFR based senior secured credit facility. During the second quarter of 2023, we amended certain interest rate swap contracts to transition from one-month LIBOR to one-month SOFR as the floating interest rate. The notional amount of the amended contracts was $ 550 million. The remaining $ 184 million interest rate swaps were not amended as of June 30, 2023. We did not de-designate the interest rate swaps with a floating interest rate to one-month LIBOR as we are permitted to maintain the designation as part of the transitional relief in accordance with ASC 848. Transaction costs incurred for the swap amendments were de minimis.
As of June 30, 2023, these interest rate swaps convert the SOFR based variable rate on our Term Loan to average fixed rates of 1.29 % per annum with maturities between 2023 and 2028, for the balance on this borrowing up to the notional values of our interest rate swaps. As of June 30, 2023, the total notional values of the interest rate swaps under our Term Loan was $ 703 million. Our interest rate swaps have been designated and qualify as cash flow hedges of interest rate risk and recorded at their estimated fair value as an asset in Other assets in our condensed consolidated balance sheets. As of June 30, 2023 and December 31, 2022, the estimated fair value of our cash flow hedges was $ 57 million and $ 63 million, respectively. 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.
The following table reflects the activity, net of tax, in Accumulated other comprehensive income related to our derivative instruments during the six months ended June 30, 2023.
Net unrealized gain on derivative instruments
Balance as of December 31, 2022
$ 48
Other comprehensive income before reclassifications, net 4
Reclassification to net income ( 9 )
Balance as of June 30, 2023
$ 43
Senior Notes due 2029 and 2031
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 June 30, 2023.
Non-recourse Debt
The following table details our outstanding non-recourse debt balance and associated interest rates:
($ in millions) June 30,
2023 December 31, 2022
Non-recourse debt (1)
Timeshare Facility with an average rate of 6.080 %, due 2025 (3)
$ 40 $ 98
HGV Securitized Debt with a weighted average rate of 2.711 %, due 2028
32 42
HGV Securitized Debt with a weighted average rate of 3.602 %, due 2032
80 98
HGV Securitized Debt with a weighted average rate of 2.431 %, due 2033
84 101
HGV Securitized Debt with a weighted average rate of 4.304 %, due 2034
139 168
HGV Securitized Debt with a weighted average rate of 4.826 %, due 2037
228 251
HGV Securitized Debt with a weighted average rate of 3.658 %, due 2039
112 134
Diamond Resorts Owner Trust 2019 with a weighted average rate of 3.255 %, due 2032
68 87
Diamond Resorts Owner Trust 2021 with a weighted average rate of 2.160 %, due 2033
108 134
Total non-recourse debt, gross 891 1,113
Less: unamortized deferred financing costs (2)
( 9 ) ( 11 )
Total non-recourse debt, net $ 882 $ 1,102
(1) As of June 30, 2023 and December 31, 2022, weighted-average interest rates were 3.799 % and 3.539 %, respectively.
(2) Amount relates to securitized debt only and does not include unamortized deferred financing costs of $ 3 million and $ 4 million as of June 30, 2023 and December 31, 2022, respectively, relating to our Timeshare Facility included in Other Assets in our condensed consolidated balance sheets.
(3) The revolving commitment period of the Timeshare Facility terminates in May 2024, however the repayment maturity date extends 12 months beyond the commitment termination date to May 2025.
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The Timeshare Facility is a non-recourse obligation payable solely from the pool of timeshare financing receivables pledged as collateral and related assets. As of June 30, 2023, our Timeshare Facility has a remaining borrowing capacity of $ 710 million.
We are required to deposit payments received from customers on the timeshare financing receivables securing the Timeshare Facility and Securitized Debt into depository accounts maintained by third parties. On a monthly basis, the depository accounts are utilized to make required principal, interest and other payments due under the respective loan agreements. The balances in the depository accounts were $ 48 million and $ 50 million as of June 30, 2023 and December 31, 2022, respectively, and were included in Restricted cash in our condensed consolidated balance sheets.
Debt Maturities
The contractual maturities of our debt and non-recourse debt as of June 30, 2023 were as follows:
($ in millions) Debt Non-recourse Debt Total
Year
2023 (remaining six months) $ 9 $ 128 $ 137
2024 17 215 232
2025 16 197 213
2026 344 124 468
2027 13 89 102
Thereafter 2,591 138 2,729
Total $ 2,990 $ 891 $ 3,881
NOTE 11: FAIR VALUE MEASUREMENTS
The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:
June 30, 2023
Hierarchy Level
($ in millions) Carrying
Amount Level 1 Level 3
Assets:
Timeshare financing receivables, net (1)
$ 1,778 $ — $ 1,900
Liabilities:
Debt, net (2)
2,942 2,442 371
Non-recourse debt, net (2)
882 795 40
December 31, 2022
Hierarchy Level
($ in millions) Carrying
Amount Level 1 Level 3
Assets:
Timeshare financing receivables, net (1)
$ 1,767 $ — $ 1,910
Liabilities:
Debt, net (2)
2,651 2,413 76
Non-recourse debt, net (2)
1,102 957 97
(1) Carrying amount net of allowance for financing receivables losses.
(2) Carrying amount net of unamortized deferred financing costs and discounts.
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 interest rate swaps discussed below and cash and cash equivalents, restricted cash, accounts receivable and advance deposits, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
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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 value of our Level 2 derivative financial instruments was determined utilizing projected future cash flows discounted based on an expectation of future interest rates derived from observable market interest rate curves and market volatility. Refer to Note 10: Debt and Non-recourse Debt above.
The estimated fair value 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.
NOTE 12: INCOME TAXES
The effective tax rate for the three months ended June 30, 2023 and 2022 was approximately 30 % and 36 %, respectively. The effective tax rate for the six months ended June 30, 2023 and 2022 was approximately 25 % and 33 %, respectively. The effective tax rate decrease year over year is due to the change in earnings mix of our worldwide income and discrete items, primarily unrecognized tax benefits. The difference between our effective tax rate as compared to the U.S. statutory federal tax rate of 21% is primarily due to the impact of state and foreign income taxes, offset by the benefit of discrete items including share-based compensation and unrecognized tax benefits.
NOTE 13: SHARE-BASED COMPENSATION
Stock Plan
On May 3, 2023, the 2023 Omnibus Incentive Plan (“2023 Plan”) was approved by our shareholders to replace the 2017 Omnibus Incentive Plan and the 2017 Plan for Non-Employee Directors (the “2017 Plans”). The 2023 Plan authorizes the issuance of restricted stock units (“Service RSUs”), nonqualified stock options (“Options”), time and performance-vesting restricted stock units (“Performance RSUs”), and stock appreciation rights (“SARs”) to certain employees and directors. Pursuant to the 2023 Plan, 5,240,000 shares of our common stock are reserved for issuance. The 2017 Plans remain in place until all of the awards previously granted thereunder have been paid, forfeited or expired. Shares underlying awards that are canceled or forfeited under the 2017 Plans without the issuance of any shares are added to the 2023 Plan share pool. However, the shares which remained available for issuance under the 2017 Plans are no longer available for issuance, and all future awards will be granted pursuant to the 2023 Plan. As of June 30, 2023, there were 5,266,105 shares of common stock available for future issuance under the 2023 plan. We recognized share-based compensation expense of $ 15 million for the three months ended June 30, 2023 and 2022, respectively, and $ 25 million and $ 26 million for the six months ended June 30, 2023 and 2022, respectively.
As of June 30, 2023, unrecognized compensation costs for unvested awards was approximately $ 53 million, which is expected to be recognized over a weighted average period of 1.8 years.
Service RSUs
During the six months ended June 30, 2023, we issued 517,478 Service RSUs with a grant date fair value of $ 48.81 , which generally vest in equal annual installments over three years from the date of grant.
Options
During the six months ended June 30, 2023 , we granted 301,215 Options with an exercise price of $ 49.14 , which generally vest over three years from the date of the grant.
The weighted-average grant date fair value of these Options was $ 24.78 , which was determined using the Black-Scholes-Merton option-pricing model with the assumptions included in the table below. Expected volatility is calculated using the historical volatility of our share price. Risk-free rate is based on the Treasury Constant Maturity Rate closest to the expected life as of the grant date. Expected term is estimated using the vesting period and contractual term of the Options.
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Expected volatility 46.8 %
Dividend yield (1)
— %
Risk-free rate 4.2 %
Expected term (in years) 6.0
(1) At the date of grant we had no plans to pay dividends during the expected term of these options.
As of June 30, 2023, we had 1,726,413 Options outstanding that were exercisable.
Performance RSUs
During the six months ended June 30, 2023, we issued 119,887 Performance RSUs with a grant date fair value of $ 49.14 . The Performance RSUs are settled at the end of a 3-year performance period, with 50 % 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 % of the Performance RSUs are subject to the achievement of certain contract sales targets. We determined that the performance conditions for our Performance RSUs are probable of achievement and, for the three and six months ended June 30, 2023, we recognized compensation expense based on the number of Performance RSUs we expect to vest.
Employee Stock Purchase Plan
In March 2017, the Board of Directors adopted the Hilton Grand Vacations Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective during 2017. In connection with the ESPP, 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 % of the fair market value per share of common stock on the purchase date, up to a maximum threshold established by the plan administrator for the offering period. During the three and six months ended June 30, 2022, we recognized less than $ 1 million of compensation expense related to this plan, respectively.
During fourth quarter of 2022, the Board of Directors amended the ESPP plan to allow eligible employees to purchase shares of our common stock at a price per share not less than 85 % of the fair market value per share of common stock on the first day of the Purchase Period or the last day of the Purchase Period, whichever is lower, up to a maximum threshold established by the plan administrator for the offering period. The amendment became effective in 2023. During the three and six months ended June 30, 2023, we recognized less than $ 1 million of compensation expense related to this plan.
NOTE 14: EARNINGS PER SHARE
The following tables present the calculation of our basic and diluted earnings per share (“EPS”) and the corresponding weighted average shares outstanding referenced in these calculations for the three and six months ended June 30, 2023 and 2022, respectively.
Three Months Ended June 30, Six Months Ended June 30,
($ and shares outstanding in millions, except per share amounts) 2023 2022 2023 2022
Basic EPS:
Numerator:
Net income $ 80 $ 73 $ 153 $ 124
Denominator:
Weighted average shares outstanding 111 121 112 120
Basic EPS (1)
$ 0.72 $ 0.60 $ 1.37 $ 1.03
Diluted EPS:
Numerator:
Net income $ 80 $ 73 $ 153 $ 124
Denominator:
Weighted average shares outstanding 112 122 113 122
Diluted EPS (1)
$ 0.71 $ 0.60 $ 1.35 $ 1.01
(1) Earnings per share amounts are calculated using whole numbers.
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The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period. For the three and six months ended June 30, 2023, we excluded 1,111,202 and 880,806 , res pe ctively, and 839,347 and 485,808 for the three and six months ended June 30, 2022, respectively, of share-based compensation awards, because their effect would have been anti-dilutive under the treasury stock method.
Share Repurchases
On May 4, 2022, our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to an aggregate of $ 500 million of its outstanding shares of common stock over a two-year period (the "2022 Repurchase Plan"). On May 3, 2023, our Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to an aggregate of $ 500 million of its outstanding shares of common stock over a two-year period (the "2023 Repurchase Plan") which is in addition to the 2022 Repurchase Plan. The following table summarizes stock repurchase activity under the share repurchase program as of June 30, 2023:
(in millions) Shares Cost
As of December 31, 2022
7 $ 272
Repurchases 5 206
As of June 30, 2023
12 $ 478
As of June 30, 2023, we had $ 522 million of remaining availability under the share repurchase programs, of which $ 22 million was under the 2022 Repurchase Plan and $ 500 million was under the 2023 Repurchase Plan.
NOTE 15: RELATED PARTY TRANSACTIONS
BRE Ace LLC and 1776 Holding, LLC
We hold a 25 % 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 % ownership interest in 1776 Holding, 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 condensed consolidated statements of operations. See Note 8: 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 Sales, marketing, brand, and other fees on our condensed consolidated statements of operations as of the date they became related parties.
Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2023 2022 2023 2022
Equity in earnings from unconsolidated affiliates $ 2 $ 4 $ 5 $ 7
Commissions and other fees 56 47 108 81
We also had $ 17 million and $ 23 million of outstanding receivables related to the fee-for-service agreements included in Accounts receivable, net on our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022, respectively.
NOTE 16: 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 Clubs and earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We also earn fees for
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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 programs. We also earn revenue from food and beverage, retail and spa outlets at our timeshare properties.
The performance of our operating segments, which are also our reportable 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 transactions; (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.
We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment operating performance.
The following table presents revenues for our reportable segments reconciled to consolidated amounts:
Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2023 2022 2023 2022
Revenues:
Real estate sales and financing $ 604 $ 586 $ 1,154 $ 1,038
Resort operations and club management (1)
320 303 622 571
Total segment revenues 924 889 1,776 1,609
Cost reimbursements 97 67 192 133
Intersegment eliminations (1)
( 14 ) ( 8 ) ( 27 ) ( 15 )
Total revenues $ 1,007 $ 948 $ 1,941 $ 1,727
(1) Includes charges to the Real estate sales and financing segment from the Resort operations and club management segment for fulfillment of discounted marking package stays at resorts. These charges totaled $ 14 million and $ 8 million, respectively, for the three months ended June 30, 2023 and 2022, and $ 27 million and $ 15 million, respectively, for the six months ended June 30, 2023 and 2022.
The following table presents Adjusted EBITDA for our reportable segments reconciled to net income:
Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2023 2022 2023 2022
Adjusted EBITDA:
Real estate sales and financing (1)
$ 189 $ 218 $ 358 $ 371
Resort operations and club management (1)
123 119 232 220
Segment Adjusted EBITDA 312 337 590 591
Acquisition and integration-related expense ( 13 ) ( 17 ) ( 30 ) ( 30 )
General and administrative ( 48 ) ( 66 ) ( 90 ) ( 108 )
Depreciation and amortization ( 52 ) ( 64 ) ( 103 ) ( 124 )
License fee expense ( 34 ) ( 32 ) ( 64 ) ( 57 )
Other gain (loss), net 3 ( 2 ) 4 ( 1 )
Interest expense ( 44 ) ( 35 ) ( 88 ) ( 68 )
Income tax expense ( 35 ) ( 41 ) ( 52 ) ( 61 )
Equity in earnings from unconsolidated affiliates 2 4 5 7
Impairment (expense) reversal ( 3 ) 3 ( 3 ) —
Other adjustment items (2)
( 8 ) ( 14 ) ( 16 ) ( 25 )
Net income $ 80 $ 73 $ 153 $ 124
(1) Includes intersegment transactions. Refer to our table presenting revenues by reportable segment above for additional discussion.
(2) For the three and six months ended June 30, 2023 and 2022, these amounts include costs associated with stock-based compensation, restructuring, one-time charges and other non-cash items included within our reportable segments.
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NOTE 17: COMMITMENTS AND CONTINGENCIES
Commitments
We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units or other real estate at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of June 30, 2023, we were committed to purchase approximately $ 57 million of inventory over a period of two years and $ 36 million of other commitments in the normal course of business. 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.
During the six months ended June 30, 2023, we fulfilled $ 136 million of purchases required under our inventory commitments. As of June 30, 2023, our remaining obligations pursuant to these arrangements were expected to be incurred as follows:
($ in millions) 2023 2024 2025 2026 2027 Thereafter Total
Inventory purchase obligations (1)
$ — $ 57 $ — $ — $ — $ — $ 57
Other commitments (2)
26 7 3 — — — 36
Total $ 26 $ 64 $ 3 $ — $ — $ — $ 93
(1) Includes commitments for properties in South Carolina and Japan.
(2) Primarily relates to commitments related to information technology and sponsorships.
Litigation Contingencies
We are involved in litigation arising from the normal course of business, some of which include 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 June 30, 2023, we accrued liabilities of approximately $ 119 million for all legal matters. Approximately $ 99 million of these accrued liabilities relate to a judgment entered against Diamond in March 2022 in connection with a case filed in 2015 that was not deemed probable and estimable as of the Acquisition Date. This matter is subject to insurance coverage, and as a result, we recorded an insurance claim receivable of $ 82 million within Accounts receivable, net in our condensed consolidated balance sheet as of June 30, 2023.
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.
Surety Bonds
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 $ 356 million as of June 30, 2023, which primarily consist of escrow and subsidy related bonds.
NOTE 18: SUBSEQUENT EVENTS
Management has evaluated all subsequent events through August 3, 2023, the date the condensed consolidated financial statements were available to be issued. The results of management’s analysis indicated no significant subsequent events have occurred that required consideration or adjustments to our disclosures in the unaudited financial statements.
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