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 and managing timeshare resorts, primarily under the Hilton Grand Vacations brand. During 2021, we acquired Dakota Holdings, Inc., the parent of Diamond Resorts International (“Diamond”)(the “Diamond Acquisition”), and are in the process of rebranding Diamond properties and sales centers to brands that meet Hilton standards. 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 multi-resort trusts; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange program (collectively the “Legacy-HGV Club”) in addition to our Diamond points-based clubs (the Legacy-HGV Club and Diamond Clubs (as defined below) are collectively referred to as “Clubs”).
As of September 30, 2022, 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, Nevada, Hawaii, Europe, California, Virginia and Arizona.
Diamond Acquisition
On August 2, 2021, we completed the Diamond 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 that we manage, are included in one of Diamond’s single- and multi-use trusts (collectively, the “Diamond Collections” or “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.
The unaudited condensed consolidated financial statements in this report include 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.
Basis of Presentation
The unaudited condensed consolidated financial statements presented herein include 100 percent of our assets, liabilities, revenues, expenses and cash flows as well as all entities in which we have a controlling financial interest. 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”). 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, 2021, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2022.
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.
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 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.
Note 2: Summary of Significant Accounting Policies
Reclassifications
Certain prior period amounts in the unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation with no effect on previously reported total assets and total liabilities, net income or stockholders’ equity.
Recently Issued Accounting Pronouncements
Accounting Standards Not Yet Adopted
In March 2022, the FASB issued 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 guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and is to be applied prospectively. We are currently evaluating the effects of this ASU to our disclosures.
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.
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.
Fair Values of Assets Acquired and Liabilities Assumed
We accounted for the Diamond Acquisition as a business combination, which required us to record the assets acquired and liabilities assumed at fair value as of the Acquisition Date. The following table presents the fair values of the assets that we acquired and the liabilities that we assumed on the Acquisition Date in connection with the business combination as finalized at September 30, 2022.
| | | | | |
| ($ in millions) | 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 | 90 | |
| Timeshare financing receivables, net | 825 | |
| Inventory | 488 | |
| Property and equipment, net | 273 | |
| Operating lease right-of-use assets, net | 33 | |
| Intangible assets, net | 1,429 | |
| Other assets | 261 | |
| Total assets acquired | $ | 3,836 | |
| |
| Liabilities assumed | |
| Accounts payable, accrued expenses and other | $ | 520 | |
| Non-recourse debt, net | 660 | |
| Operating lease liabilities | 33 | |
| Advanced deposits | 4 | |
| Deferred revenues | 140 | |
| Deferred income tax liabilities | 485 | |
| Total liabilities assumed | $ | 1,842 | |
| |
| Net assets acquired | $ | 1,994 | |
| Total consideration transferred | $ | 3,410 | |
Goodwill(1) | $ | 1,416 | |
(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 deductible for tax purposes.
The measurement period adjustments recorded during the quarter ended September 30, 2022 resulted from changes to our estimates of the fair value of the acquired assets and assumed liabilities based on finalizing the valuations of acquired property and equipment and accounts receivable. In addition, we have established an initial reserve in connection
with certain pre-acquisition expenses which we have determined are not deductible for tax purposes. These resulted in a net increase to goodwill for the period of $59 million, net of tax impacts of adjustments.
The measurement period adjustments recorded during the quarter ended June 30, 2022 resulted from changes to our estimates of the fair value of the acquired assets and assumed liabilities based on finalizing the valuations of operating lease right-of-use asset and related lease liabilities valuation and capitalized software. These resulted in a net adjustment to goodwill for the period of $6 million, net of tax impacts of adjustments.
The measurement period adjustments recorded during the quarter ended March 31, 2022 resulted from changes to our estimates of the fair value of the acquired assets and assumed liabilities based on a revision to our valuation of insurance receivables given the ultimate determination of proceeds related to preacquisition business interruption insurance claims. The measurement period adjustments recognized include an adjustment to increase accounts receivable, net of allowance for doubtful accounts, for pre-acquisition contingencies, and the related tax impacts increasing deferred income tax liabilities. These resulted in a net adjustment to goodwill for the period of $26 million.
The prior period net income effect associated with the measurement period adjustments recorded during the nine months ended September 30, 2022 is immaterial.
Timeshare Financing Receivables
We acquired timeshare financing receivables which consist of loans to customers who purchased vacation ownership products and chose to finance their purchases. These timeshare financing receivables are collateralized by the underlying VOIs and generally have 10-year amortizing repayment terms. We estimated the fair value of the timeshare financing receivables using a discounted cash flow model, which calculated a present value of expected future risk-adjusted cash flows over the remaining term of the respective timeshare financing receivables. For purposes of our allocation, we have considered all acquired receivables to be purchase credit deteriorated assets. See Note 7: Timeshare Financing Receivables for additional information.
Acquired timeshare financing receivables with credit deterioration as of the Acquisition Date were as follows:
| | | | | |
| ($ 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 and undeveloped land. We valued 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.
Property and Equipment
We acquired property and equipment, which includes land, building and leasehold improvements, furniture and fixtures and construction in progress. We valued the majority of acquired 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.
Intangible Assets
The following table presents our estimates of the fair values of the acquired Diamond’s identified intangible assets and their related estimated remaining useful lives:
| | | | | | | | | | | |
| Estimated Fair Value
($ in millions) | | Estimated
Useful Life
(in years) |
| Trade name | $ | 18 | | | 1.5 |
| Management contracts | 1,251 | | | 35.4 |
| Club member relationships | 139 | | | 14.4 |
| Computer software | 21 | | | 1.5 |
| Total intangible assets | $ | 1,429 | | | |
We valued the acquired trade name intangible using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. We valued the acquired management contracts intangible and member relationships intangible 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.
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 valued deferred revenue at its carrying value.
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 calculated deferred income taxes based on statutory rates in the jurisdictions of the legal entities where the acquired assets and liabilities are recorded.
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.
Non-Recourse Debt
We valued 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.
Operating Lease Right-of-Use-Assets and Lease Liabilities
We have recorded liabilities for those operating leases assumed in connection with the Diamond Acquisition with a remaining term in excess of a year. We valued lease liabilities 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 measured at an amount equal to the lease liabilities, adjusted for favorable or unfavorable terms of the lease when compared with market terms.
Goodwill
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.
| | | | | | | | | | | | | | | | | |
| Real Estate Sales and Financing Segment | | Resort Operations and Club Management Segment | | Total Consolidated |
| Goodwill | $ | 1,048 | | | $ | 368 | | | $ | 1,416 | |
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, 2021, the first day of our prior fiscal year, but using our 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.
| | | | | |
| ($ in millions, except per share data) | Nine Months Ended
September 30, 2021 |
| Revenue | $ | 2,226 | |
| Net income | 58 | |
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 20: Business Segments below for more details related to our segments.
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Real Estate Sales and Financing Segment | 2022 | | 2021 | | 2022 | | 2021 |
| Sales of VOIs, net | $ | 500 | | | $ | 488 | | | $ | 1,130 | | | $ | 597 | |
| Sales, marketing, brand and other fees | 177 | | | 118 | | | 457 | | | 252 | |
| Interest income | 61 | | | 46 | | | 170 | | | 108 | |
| Other financing revenue | 7 | | | 7 | | | 26 | | | 19 | |
| Real estate sales and financing segment revenues | $ | 745 | | | $ | 659 | | | $ | 1,783 | | | $ | 976 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Resort Operations and Club Management Segment | 2022 | | 2021 | | 2022 | | 2021 |
| Club management | $ | 48 | | | $ | 42 | | | $ | 150 | | | $ | 98 | |
| Resort management | 82 | | | 57 | | | 229 | | | 94 | |
Rental(1) | 157 | | | 104 | | | 436 | | | 184 | |
| Ancillary services | 2 | | | 8 | | | 30 | | | 14 | |
| Resort operations and club management segment revenues | $ | 289 | | | $ | 211 | | | $ | 845 | | | $ | 390 | |
(1)Excludes intersegment eliminations. See Note 20: Business Segments for additional information.
Contract Balances
The following table provides information on our accounts receivable from contracts with customers which are included in Accounts receivable, net on our unaudited condensed consolidated balance sheets:
| | | | | | | | | | | |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
| Receivables | $ | 273 | | | $ | 202 | |
The following table presents the composition of our contract liabilities:
| | | | | | | | | | | |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
| Contract liabilities: | | | |
| Advanced deposits | $ | 138 | | | $ | 112 | |
| Deferred sales of VOIs of projects under construction | 1 | | | 34 | |
| Club dues and Legacy-HGV Club activation fees | 105 | | | 91 | |
Bonus Point incentive liability(1) | 58 | | | 44 | |
(1)Amounts related to the Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our unaudited condensed consolidated balance sheets. This liability is comprised of unrecognized revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.
Revenue earned for the three and nine months ended September 30, 2022, that was included in the contract liabilities balance at December 31, 2021 was approximately $63 million and $161 million, respectively.
Our accounts receivable 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 $5 million contract assets as of September 30, 2022 and no contract assets as of December 31, 2021.
Contract liabilities include payments received or due in advance of satisfying our performance obligations. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues related to sales of VOIs of projects under construction, Club activation fees and annual dues and the liability for 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 $118 million and $112 million as of September 30, 2022 and December 31, 2021, respectively. This additional deferred revenue balance includes $50 million and $51 million for bonus points and vacation package deferred revenue, $22 million and $10 million in deferred property insurance, $17 million and $14 million in deferred maintenance fees and $28 million and $37 million in other deferred revenue as of September 30, 2022 and December 31, 2021, respectively.
Transaction Price Allocated to Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Legacy-HGV Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Bonus Points that may be redeemed in the future.
The following table represents the deferred revenue, cost of VOI sales and direct selling costs from sales of VOIs related to projects under construction as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
| Sales of VOIs, net | $ | 1 | | | $ | 34 | |
Cost of VOI sales(1) | — | | | 12 | |
| Sales and marketing expense | — | | | 5 | |
(1)Includes anticipated Cost of VOI sales related to inventory associated with Sales of VOIs under construction.
We recognized the revenue, costs of VOI sales and direct selling costs related to the project under construction upon completion during the third quarter of 2022.
The following table includes the remaining transaction price related to Advanced deposits, and Legacy-HGV Club activation fees and Bonus Points as of September 30, 2022:
| | | | | | | | | | | | | | | | | |
| ($ in millions) | Remaining
Transaction Price | | Recognition Period | | Recognition Method |
| Advanced deposits | $ | 138 | | | 18 months | | Upon customer stays |
| Legacy-HGV Club activation fees | 65 | | | 7 years | | Straight-line basis over average inventory holding period |
| Bonus Points | 58 | | | 18 - 30 months | | Upon redemption |
Note 5: Restricted Cash
Restricted cash was as follows:
| | | | | | | | | | | |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
| Escrow deposits on VOI sales | $ | 218 | | | $ | 152 | |
Reserves related to non-recourse debt(1) | 59 | | | 67 | |
Other(2) | 42 | | | 44 | |
| $ | 319 | | | $ | 263 | |
(1)See Note 13: 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
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) | September 30,
2022 | | December 31,
2021 |
Fee-for-service commissions(1) | $ | 89 | | | $ | 73 | |
| Real estate and financing | 52 | | | 51 | |
| Resort and club operations | 118 | | | 76 | |
| Tax receivables | 25 | | | 95 | |
| Insurance claims receivable | 81 | | | — | |
Other receivables(2) | 33 | | | 7 | |
| Total | $ | 398 | | | $ | 302 | |
(1)Net of allowance.
(2)Primarily includes individually insignificant allowances recognized in the ordinary course of business.
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 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.
The changes in our allowance for fee-for-service commissions were as follows during the period from December 31, 2021 to September 30, 2022:
| | | | | |
| ($ in millions) | |
| Balance as of December 31, 2021 | $ | 18 | |
| Current period provision for expected credit losses | 5 | |
| Write-offs charged against the allowance | (9) | |
| Balance at September 30, 2022 | $ | 14 | |
In addition to the fee-for-service commission allowance, we have various allowances for our accounts receivable to account for expected losses related to club dues, maintenance fees, trade accounts receivable, sales of VOIs, and marketing packages.
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) |
| ($ in millions) | September 30,
2022 | | December 31,
2021 | | September 30,
2022 | | December 31,
2021 |
| Securitized | $ | 856 | | | $ | 587 | | | $ | 363 | | | $ | 523 | |
Unsecuritized(1) | 799 | | | 810 | | | 440 | | | 515 | |
| Timeshare financing receivables, gross | $ | 1,655 | | | $ | 1,397 | | | $ | 803 | | | $ | 1,038 | |
Unamortized non-credit acquisition premium(3) | — | | | — | | | 47 | | | 74 | |
| Less: allowance for financing receivables losses | (374) | | | (280) | | | (388) | | | (482) | |
| Timeshare financing receivables, net | $ | 1,281 | | | $ | 1,117 | | | $ | 462 | | | $ | 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 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)Non-credit premium of $97 million was recognized at the Acquisition Date, of which $47 million remains unamortized as of September 30, 2022.
In August 2022, we completed a securitization of $269 million of gross timeshare financing receivables and issued approximately $153 million of 4.30 percent notes, $73 million of 4.74 percent notes, $26 million of 5.57 percent notes, and $17 million of 8.73 percent notes due January 2037. The securitization transaction did not qualify as a sale and, accordingly, no gain or loss was recognized. The transaction is considered a secured borrowing, and the proceeds from the transaction are presented as non-recourse debt. The proceeds were primarily used to pay down the remaining borrowings of our Timeshare Facility and general corporate operating expenses. See Note 13: Debt and Non-recourse Debt for additional information.
In April 2022, we completed a securitization of $246 million of gross timeshare financing receivables and issued approximately $107 million of 3.61 percent notes, $84 million of 4.10 percent notes, $22 million of 4.69 percent notes, and $33 million of 6.79 percent notes due June 2034. The securitization transaction did not qualify as a sale and, accordingly,
no gain or loss was recognized. The transaction is considered a secured borrowing, and the proceeds from the transaction are presented as non-recourse debt. The proceeds were primarily used to pay down the remaining borrowings of one of our conduit facilities and general corporate operating expenses. See Note 13: Debt and Non-recourse Debt for additional information.
As of September 30, 2022 and December 31, 2021, we had timeshare financing receivables with a carrying value of $9 million and $131 million, respectively, securing the Timeshare Facility. 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. For the nine months ended September 30, 2022, we recorded an adjustment to our estimate of variable consideration of $101 million.
We recognize interest income on our timeshare financing receivables as earned. As of September 30, 2022 and December 31, 2021, we had interest receivable outstanding of $12 million and $9 million, respectively, on our originated timeshare financing receivables, which represent all Legacy-HGV timeshare financing receivables and timeshare financing receivables originated by Legacy-Diamond subsequent to the Acquisition Date. As of September 30, 2022 and December 31, 2021, we had interest receivable outstanding of $4 million and $7 million on our acquired timeshare financing receivables, which represents all timeshare financing receivables of Legacy-Diamond as of 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 September 30, 2022, our originated timeshare financing receivables had interest rates ranging from 1.5 percent to 25.8 percent, a weighted-average interest rate of 14.2 percent, a weighted-average remaining term of 8.2 and maturities through 2037. Our acquired timeshare financing receivables had interest rates ranging from 2.0 percent to 25.0 percent, a weighted-average interest rate of 15.7 percent, a weighted-average remaining term of 7.6 years and maturities through 2032.
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 risk-adjusted cash flows over the remaining term of the respective timeshare financing receivables. 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. 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 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 September 30, 2022 mature as follows:
| | | | | | | | | | | | | | | | | |
| Acquired Timeshare Financing Receivables |
| ($ in millions) | Securitized | | Unsecuritized | | Total |
| Year | | | | | |
| 2022 (remaining) | $ | 10 | | | $ | 8 | | | $ | 18 | |
| 2023 | 41 | | | 34 | | | 75 | |
| 2024 | 45 | | | 38 | | | 83 | |
| 2025 | 48 | | | 42 | | | 90 | |
| 2026 | 51 | | | 47 | | | 98 | |
| Thereafter | 168 | | | 271 | | | 439 | |
| $ | 363 | | | $ | 440 | | | $ | 803 | |
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 September 30, 2022 mature as follows:
| | | | | | | | | | | | | | | | | | | | |
| Originated Timeshare Financing Receivables | |
| ($ in millions) | Securitized | | Unsecuritized | | Total | |
| Year | | | | | | |
| 2022 (remaining) | $ | 24 | | | $ | 19 | | | $ | 43 | | |
| 2023 | 100 | | | 52 | | | 152 | | |
| 2024 | 104 | | | 59 | | | 163 | | |
| 2025 | 105 | | | 66 | | | 171 | | |
| 2026 | 105 | | | 73 | | | 178 | | |
| Thereafter | 418 | | | 530 | | | 948 | | |
| $ | 856 | | | $ | 799 | | | $ | 1,655 | | |
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, 2021 | $ | 280 | | | $ | 482 | |
Provision for financing receivables losses(1) | 101 | | | — | |
| Write-offs | (52) | | | (63) | |
Upgrades(2) | 45 | | | (31) | |
| Balance at September 30, 2022 | $ | 374 | | | $ | 388 | |
| | | | | | | | | | | |
| |
| ($ in millions) | Originated | | Acquired |
| Balance as of December 31, 2020 | $ | 211 | | | $ | — | |
Provision for financing receivables losses(1) | 77 | | | — | |
| Initial allowance for PCD financing receivables acquired during the period | — | | | 469 | |
| Write-offs | (50) | | | (7) | |
| Balance at September 30, 2021 | $ | 238 | | | $ | 462 | |
(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 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 |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
| FICO score | | | |
| 700+ | $ | 734 | | | $ | 703 | |
| 600-699 | 264 | | | 248 | |
| <600 | 36 | | | 35 | |
No score(1) | 167 | | | 166 | |
| $ | 1,201 | | | $ | 1,152 | |
(1)Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
The following table details our Legacy-HGV timeshare financing receivables by the origination year and average FICO score as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
| FICO score | | | | | | | | | | | | | |
| 700+ | $ | 258 | | | $ | 157 | | | $ | 55 | | | $ | 98 | | | $ | 68 | | | $ | 98 | | | $ | 734 | |
| 600-699 | 87 | | | 58 | | | 20 | | | 35 | | | 25 | | | 39 | | | 264 | |
| <600 | 11 | | | 8 | | | 3 | | | 5 | | | 3 | | | 6 | | | 36 | |
No score(1) | 41 | | | 30 | | | 19 | | | 29 | | | 19 | | | 29 | | | 167 | |
| $ | 397 | | | $ | 253 | | | $ | 97 | | | $ | 167 | | | $ | 115 | | | $ | 172 | | | $ | 1,201 | |
(1)Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
We apply payments we receive for loans, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a loan is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for loans for which we had previously ceased accruing interest once the loan is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the loan is 121 days past due and, subsequently, we write off the uncollectible note against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.
As of September 30, 2022 and December 31, 2021, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $71 million and $83 million, respectively. The following tables detail an aged analysis of our gross timeshare receivables balance:
| | | | | | | | | | | | | | | | | |
| Legacy-HGV Timeshare Financing Receivables |
| September 30, 2022 |
| ($ in millions) | Securitized | | Unsecuritized | | Total |
| Current | $ | 687 | | | $ | 427 | | | $ | 1,114 | |
| 31 - 90 days past due | 8 | | | 8 | | | 16 | |
| 91 - 120 days past due | 2 | | | 3 | | | 5 | |
| 121 days and greater past due | 1 | | | 65 | | | 66 | |
| $ | 698 | | | $ | 503 | | | $ | 1,201 | |
| | | | | | | | | | | | | | | | | |
| 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-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) | September 30, 2022 | | December 31, 2021 |
| FICO score | | | |
| 700+ | $ | 423 | | | $ | 601 | |
| 600-699 | 300 | | | 356 | |
| <600 | 63 | | | 70 | |
No score(1) | 17 | | | 11 | |
| $ | 803 | | | $ | 1,038 | |
(1)Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
| | | | | | | | | | | |
| Legacy-Diamond
Originated Timeshare Financing Receivables |
| ($ in millions) | September 30, 2022 | | December 31, 2021 |
| FICO score | | | |
| 700+ | $ | 282 | | | $ | 172 | |
| 600-699 | 144 | | | 60 | |
| <600 | 24 | | | 11 | |
No score(1) | 4 | | | 2 | |
| $ | 454 | | | $ | 245 | |
(1)Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
The following tables detail our Legacy-Diamond acquired and originated timeshare financing receivables by the origination year and average FICO score as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Legacy-Diamond Acquired Timeshare Financing Receivables |
| ($ in millions) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
| FICO score | | | | | | | | | | | | | |
| 700+ | $ | — | | | $ | 75 | | | $ | 91 | | | $ | 109 | | | $ | 71 | | | $ | 77 | | | $ | 423 | |
| 600-699 | — | | | 50 | | | 55 | | | 78 | | | 46 | | | 71 | | | 300 | |
| <600 | — | | | 12 | | | 15 | | | 13 | | | 6 | | | 17 | | | 63 | |
No score(1) | — | | | 1 | | | 5 | | | 2 | | | 1 | | | 8 | | | 17 | |
| $ | — | | | $ | 138 | | | $ | 166 | | | $ | 202 | | | $ | 124 | | | $ | 173 | | | $ | 803 | |
(1)Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Legacy-Diamond Originated Timeshare Financing Receivables |
| ($ in millions) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
| FICO score | | | | | | | | | | | | | |
| 700+ | $ | 200 | | | $ | 82 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 282 | |
| 600-699 | 98 | | | 46 | | | — | | | — | | | — | | | — | | | 144 | |
| <600 | 14 | | | 10 | | | — | | | — | | | — | | | — | | | 24 | |
No score(1) | 3 | | | 1 | | | — | | | — | | | — | | | — | | | 4 | |
| $ | 315 | | | $ | 139 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 454 | |
(1)Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.
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 September 30, 2022 and December 31, 2021, we had ceased accruing interest on Legacy-Diamond timeshare financing receivables with an aggregate principal balance of $400 million and $369 million, respectively. The following tables detail an aged analysis of our gross timeshare receivables balance:
| | | | | | | | | | | | | | | | | |
| Legacy-Diamond Timeshare Financing Receivables |
| September 30, 2022 |
| ($ in millions) | Securitized | | Unsecuritized | | Total |
| Current | $ | 483 | | | $ | 341 | | | $ | 824 | |
| 31 - 90 days past due | 17 | | | 16 | | | 33 | |
| 91 - 120 days past due | 5 | | | 5 | | | 10 | |
| 121 days and greater past due | 16 | | | 374 | | | 390 | |
| $ | 521 | | | $ | 736 | | | $ | 1,257 | |
| | | | | |
| 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 | |
Note 8: Inventory
Inventory was comprised of the following:
| | | | | | | | | | | |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
| Completed unsold VOIs | $ | 1,092 | | | $ | 1,219 | |
| Construction in process | 52 | | | 20 | |
| Land, infrastructure and other | 1 | | | 1 | |
| $ | 1,145 | | | $ | 1,240 | |
The table below presents costs of sales true-ups relating to VOI products and the related impacts to the carrying value of inventory.
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| ($ in millions) | 2022 | | 2021 |
Cost of sales true-up(1) | $ | 17 | | | $ | (1) | |
(1)For the nine months ended September 30, 2022, the costs of sales true-up decreased costs of VOI sales and increased inventory. For the nine months ended September 30, 2021, the costs of sales true-up increased costs of VOI sales and decreased inventory.
Shown below are expenses incurred, recorded in Cost of VOI sales, related to granting credit to customers for their existing ownership when upgrading into fee-for service projects:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Cost of VOI sales related to fee-for-service upgrades | $ | 3 | | | $ | 1 | | | $ | 7 | | | $ | 4 | |
Note 9: Property and Equipment
Property and equipment were comprised of the following:
| | | | | | | | | | | |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
| Land | $ | 234 | | | $ | 193 | |
| Building and leasehold improvements | 400 | | | 405 | |
| Furniture and equipment | 80 | | | 82 | |
| Construction in progress | 249 | | | 231 | |
| 963 | | | 911 | |
| Accumulated depreciation | (187) | | | (155) | |
| $ | 776 | | | $ | 756 | |
Land increased by $48 million during the second quarter of 2022 from December 31, 2021. We concluded that certain parcels of land and infrastructure which were previously classified as held for sale, no longer met the held for sale criteria. Thus, these assets were reclassified to property and equipment as a non-cash transfer. The assets were measured at fair value as of June 30, 2022 as assets held for sale prior to reclassification, principally utilizing market approaches for the land parcels and the cost approach for infrastructure. During the second quarter of 2022, we recorded a reversal of impairment expense of $7 million corresponding with this reclassification.
Note 10: Consolidated Variable Interest Entities
As of September 30, 2022 and December 31, 2021, we consolidated 9 variable interest entities (“VIEs”) and 11 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 and conduit facilities. They have been aggregated for disclosure purposes as they are similar in nature to our previously established VIEs. As of September 30, 2022 and December 31, 2021, conduit facilities had outstanding balances of zero and $133 million, respectively. As of September 30, 2022, all conduit facilities were paid off and terminated.
Our unaudited condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:
| | | | | | | | | | | |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
| Restricted cash | $ | 58 | | | $ | 62 | |
| Timeshare financing receivables, net | 1,009 | | | 1,021 | |
Non-recourse debt(1) | 1,168 | | | 1,195 | |
(1)Net of deferred financing costs.
During the three and nine months ended September 30, 2022 and 2021, we did not provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.
Note 11: Investments in Unconsolidated Affiliates
As of September 30, 2022, we have 25 percent and 50 percent 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. Our investment interests in and equity earned from both VIEs are included in our consolidated balance sheets as Investments in unconsolidated affiliates and in our consolidated statements of operations as Equity in earnings from unconsolidated affiliates, respectively.
Our two unconsolidated affiliates have aggregated debt balances of $398 million and $463 million as of September 30, 2022 and December 31, 2021, 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 $69 million and $59 million as of September 30, 2022 and December 31, 2021, respectively, and (ii) receivables for commission and other fees earned under fee-for-service arrangements. See Note 19: Related Party Transactions for additional information.
Note 12: Intangible Assets
Intangible assets and related accumulated amortization were as follows:
| | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| ($ in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Trade name | $ | 18 | | | $ | (14) | | | $ | 4 | |
| Management contracts | 1,340 | | | (199) | | | 1,141 | |
| Club member relationships | 139 | | | (31) | | | 108 | |
| Capitalized software | 160 | | | (95) | | | 65 | |
| $ | 1,657 | | | $ | (339) | | | $ | 1,318 | |
| | | | | |
| 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 | |
We acquired definite-lived intangible assets as part of the Diamond Acquisition, which have been valued in the amount of $1,429 million as of the Acquisition Date. Refer to Note 3: Diamond Acquisition for further details. Amortization expense on intangible assets was $50 million and $38 million for the three months ended September 30, 2022 and 2021, respectively, and $147 million and $48 million for the nine months ended September 30, 2022 and 2021, respectively.
Note 13: Debt & Non-recourse Debt
Debt
The following table details our outstanding debt balance and its associated interest rates:
| | | | | | | | | | | |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
Debt(1) | | | |
| Senior secured credit facility | | | |
Term loan with a rate of 5.250%, due 2028 | $ | 1,287 | | | $ | 1,297 | |
Revolver with a rate of 4.424%, due 2026 | — | | | 300 | |
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 | 29 | | | 27 | |
| 2,666 | | | 2,974 | |
Less: unamortized deferred financing costs and discounts(2)(3) | (54) | | | (61) | |
| $ | 2,612 | | | $ | 2,913 | |
(1)As of September 30, 2022 and December 31, 2021, weighted-average interest rates were 5.248% and 4.052%, respectively.
(2)Amount includes unamortized deferred financing costs related to our term loan and senior notes of $27 million and $20 million, respectively, as of September 30, 2022 and $33 million and $22 million, respectively, as of December 31, 2021. This amount also includes unamortized original issuance discounts of $7 million and $6 million as of September 30, 2022 and December 31, 2021, respectively.
(3)Amount does not include unamortized deferred financing costs of $4 million and $5 million as of September 30, 2022 and December 31, 2021, respectively, related to our revolving facility which are included in Other assets in our unaudited condensed consolidated balance sheets.
Senior secured credit facilities
During the nine months ended September 30, 2022, we repaid $310 million under the senior secured credit facilities. As of September 30, 2022, 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 September 30, 2022.
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 LIBOR based senior secured credit facility. Therefore as of September 30, 2022, these interest rate swaps convert the LIBOR based variable rate on our Term Loan to average fixed rates of 1.32 percent 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 September 30, 2022, the notional values of the interest rate swaps under our Term Loan was $710 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 unaudited condensed consolidated balance sheets. As of September 30, 2022 and December 31, 2021, the estimated fair value of our cash flow hedges are $67 million and $2 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 in accumulated other comprehensive income related to our derivative instruments during the nine months ended September 30, 2022.
| | | | | |
| Net unrealized gain on derivative instruments |
| Balance as of December 31, 2021 | $ | 2 | |
| Other comprehensive income before reclassifications, net | 48 | |
| Reclassification to net income | 1 | |
| Balance as of September 30, 2022 | $ | 51 | |
Non-recourse Debt
The following table details our outstanding non-recourse debt balance and associated interest rates:
| | | | | | | | | | | |
| ($ in millions) | September 30,
2022 | | December 31,
2021 |
Non-recourse debt(1) | | | |
Timeshare Facility with an average rate of 2.35%, due 2025(3) | $ | — | | | $ | 131 | |
HGV Securitized Debt with a weighted average rate of 2.711%, due 2028 | 48 | | | 70 | |
HGV Securitized Debt with a weighted average rate of 3.602%, due 2032 | 108 | | | 143 | |
HGV Securitized Debt with a weighted average rate of 2.431%, due 2033 | 111 | | | 151 | |
HGV Securitized Debt with a weighted average rate of 4.304%, due 2034 | 147 | | | — | |
HGV Securitized Debt with a weighted average rate of 4.826%, due 2037 | 260 | | | — | |
HGV Securitized Debt with a weighted average rate of 3.658%, due 2039 | 192 | | | 193 | |
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 | 62 | | | 92 | |
Diamond Resorts Owner Trust 2019 with a weighted average rate of 3.255%, due 2032 | 98 | | | 148 | |
Diamond Resorts Owner Trust 2021 with a weighted average rate of 2.160%, due 2032 | 147 | | | 224 | |
| 1,173 | | | 1,334 | |
Less: unamortized deferred financing costs(2) | (12) | | | (6) | |
| $ | 1,161 | | | $ | 1,328 | |
(1)As of September 30, 2022 and December 31, 2021, weighted-average interest rates were 3.661% and 2.876%, respectively.
(2)Amount relates to securitized debt only and does not include unamortized deferred financing costs of $4 million and $2 million as of September 30, 2022 and December 31, 2021, respectively, relating to our Timeshare Facility included in Other Assets in our unaudited condensed consolidated balance sheets.
(3)In connection with the amended and restated Timeshare Facility executed in May 2022, the revolving commitment period of the Timeshare Facility terminates in August 2024, however the repayment maturity date extends 12 months beyond the commitment termination date to August 2025.
During the nine months ended September 30, 2022, we terminated our conduit facility due in 2023 and 2024.
In August 2022, we completed a securitization of $269 million of gross timeshare financing receivables and issued approximately $153 million of 4.30 percent notes, $73 million of 4.74 percent notes, $26 million of 5.57 percent notes, and $17 million of 8.73 percent notes due January 2037. The securitized debt is backed by pledged assets, consisting primarily of a pool of timeshare financing receivables secured by first mortgages or deeds of trust on timeshare interest. The proceeds were primarily used to pay down the remaining borrowings of our Timeshare Facility and general corporate operating expenses. In connection with the securitization, we incurred $5 million in debt issuance costs.
In April 2022, we completed a securitization of $246 million of gross timeshare financing receivables and issued approximately $107 million of 3.61 percent notes, $84 million of 4.10 percent notes, $22 million of 4.69 percent notes, and $33 million of 6.79 percent notes due June 2034. The securitized debt is backed by pledged assets, consisting primarily of a pool of timeshare financing receivables secured by first mortgages or deeds of trust on timeshare interest and temporarily by a $34 million cash deposit. The securitized debt is a non-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral to the debt. The proceeds were primarily used to pay down the remaining borrowings on one of our conduit facility and general corporate operating expenses. In connection with the securitization, we incurred $4 million in debt issuance costs.
The Timeshare Facility is a non-recourse obligation payable solely from the pool of timeshare financing receivables pledged as collateral and related assets. In May 2022, we Amended and Restated our Timeshare Facility agreement under new terms, which include increasing the borrowing capacity from $450 million to $750 million, allowing
us to borrow up to the maximum amount until May 2024 and requiring all amounts borrowed to be repaid in 2025. In connection with the amendment, we incurred $3 million in debt issuance costs.
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 $59 million and $67 million as of September 30, 2022 and December 31, 2021, respectively, and were included in Restricted cash in our unaudited condensed consolidated balance sheets.
Debt Maturities
The contractual maturities of our debt and non-recourse debt as of September 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
| ($ in millions) | Debt | | Non-recourse Debt | | Total |
| Year | | | | | |
| 2022 (remaining) | $ | 4 | | | $ | 188 | | | $ | 192 | |
| 2023 | 15 | | | 433 | | | 448 | |
| 2024 | 15 | | | 164 | | | 179 | |
| 2025 | 14 | | | 214 | | | 228 | |
| 2026 | 13 | | | 65 | | | 78 | |
| Thereafter | 2,605 | | | 109 | | | 2,714 | |
| $ | 2,666 | | | $ | 1,173 | | | $ | 3,839 | |
Note 14: Fair Value Measurements
The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:
| | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| | | Hierarchy Level |
| ($ in millions) | Carrying
Amount | | Level 1 | | Level 3 |
| Assets: | | | | | |
Timeshare financing receivables, net(1) | $ | 1,743 | | | $ | — | | | $ | 1,860 | |
| Liabilities: | | | | | |
Debt, net(2) | 2,612 | | | 2,370 | | | 36 | |
Non-recourse debt, net(2) | 1,161 | | | 1,115 | | | — | |
| | | | | | | | | | | | | | | | | |
| 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.
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. Our estimated fair value of derivative financial instruments is considered a level 2 measurement and is included in Note 13: Debt and Non-recourse Debt above. Our valuation methodology is categorized based on each asset or liability’s respective measurement inputs and their correlation to information available in active markets as follows:
•Level 1 - Measurements based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
•Level 2 - Measurements based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or market data other than quoted prices that are observable.
•Level 3 - Measurements based on unobservable data that are supported by little or no market activity and are significant to the valuation methodology.
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.
The estimated fair value of our level 3 debt was determined utilizing indicative quotes obtained for similar issuances and projected future cash flows discounted at risk-adjusted rates.
The estimated fair value of our level 3 non-recourse debt was determined utilizing projected future cash flows discounted at risk-adjusted rates.
Note 15: 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.
As part of our integration of business operations from the Diamond Acquisition, we ceased utilizing one leased office space in the first quarter of 2022 and one additional office space in the second quarter of 2022 , both of which the Company considered to be a triggering event for impairment analysis. We recognized no impairment expenses on the related right-of-use assets during the three months ended September 30, 2022 and $6 million in the nine months ended September 30, 2022 respectively.
We recognize rent expense on leases with both contingent and non-contingent lease payment terms. Rent associated with non-contingent lease payments are recognized on a straight-line basis over the lease term. Rent expense for all operating leases for the three months ended September 30, 2022 and 2021, was $14 million and $6 million, and $29 million and $15 million, for the nine months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and 2021, these amounts included less than $1 million of short-term and variable lease costs, and for the nine months ended September 30, 2022 and 2021, $2 million and $1 million, respectively.
Supplemental cash flow information related to operating leases was as follows:
| | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| ($ in millions) | | | | | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash outflows from operating leases | | | | | $ | 20 | | | $ | 15 | |
| Right-of-use assets obtained in exchange for new lease liabilities: | | | | | | | |
| Operating leases | | | | | 2 | | | 35 | |
Supplemental consolidated balance sheet information related to operating leases was as follows:
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Weighted-average remaining lease term of operating leases (in years) | 4 | | 4 |
| Weighted-average discount rate of operating leases | 4.46 | % | | 4.35 | % |
The future minimum lease payments under non-cancelable operating leases, due in each of the next five years and thereafter as of September 30, 2022, are as follows:
| | | | | |
| ($ in millions) | Operating Leases |
| Year | |
| 2022 (remaining) | $ | 7 | |
| 2023 | 26 | |
| 2024 | 18 | |
| 2025 | 15 | |
| 2026 | 9 | |
| Thereafter | 6 | |
| Total future minimum lease payments | $ | 81 | |
| Less: imputed interest | (7) | |
| Present value of lease liabilities | $ | 74 | |
Note 16: Income Taxes
The effective tax rate for the nine months ended September 30, 2022 and 2021 was approximately 30 percent and 31 percent, respectively. The effective tax rate decrease year over year is primarily due to the change in earnings mix of our worldwide income and the impact of non-deductible costs related to the Diamond acquisition in the third quarter of 2021. The difference between our effective tax rate as compared to the U.S. statutory federal tax rate of 21 percent is primarily due to the impact of state and foreign income taxes, as well as discrete items including share-based compensation.
Note 17: Share-Based Compensation
Stock Plan
We issue service-based restricted stock units (“Service RSUs”), service and performance-based restricted stock units (“Performance RSUs”) and nonqualified stock options (“Options”) to certain employees and directors. We recognized share-based compensation expense of $14 million for the three months ended September 30, 2022 and 2021, and $40 million and $32 million for the nine months ended September 30, 2022 and 2021, respectively.
As of September 30, 2022, unrecognized compensation costs for unvested awards was approximately $43 million, which is expected to be recognized over a weighted average period of 1.9 years. As of September 30, 2022, there were 2,657,102 shares of common stock available for future issuance under this plan.
Service RSUs
During the nine months ended September 30, 2022, we issued 795,963 Service RSUs with a grant date fair value of $44.17, which generally vest in equal annual installments over three years from the date of grant.
Options
During the nine months ended September 30, 2022, we issued 389,536 Options with an exercise price of $44.09, which generally vest over three years from the date of the grant.
The weighted-average grant date fair value of these options was $20.08, which was determined using the Black-Scholes-Merton option-pricing model with the assumptions included in the table below. Expected volatility is calculated using our historical and implied volatility of our share price. Dividend yield is calculated based on our expected future payout at the time of issuance. Risk-free rate is based on the yields of U.S. Department of Treasury instruments with similar maturities. Expected term is estimated using the vesting period and contractual term of the Options.
| | | | | |
| Expected volatility | 45.8 | % |
| Dividend yield | — | % |
| Risk-free rate | 1.7 | % |
| Expected term (in years) | 6.0 |
As of September 30, 2022, we had 1,539,384 Options outstanding that were exercisable.
Performance RSUs
During the nine months ended months ended September 30, 2022, we issued 93,064 Performance RSUs with a grant date fair value of $44.09. 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 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 nine months ended September 30, 2022, 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 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. During the three and nine months ended September 30, 2022 and 2021, we recognized less than $1 million of compensation expense related to this plan.
Note 18: Earnings Per Share
The following tables present the calculation of our basic and diluted earnings per share (“EPS”) and the corresponding weighted average shares outstanding referenced in these calculations for the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ and shares outstanding in millions, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 |
| Basic EPS: | | | | | | | |
| Numerator: | | | | | | | |
Net income(1) | $ | 150 | | | $ | 99 | | | $ | 274 | | | $ | 101 | |
| Denominator: | | | | | | | |
| Weighted average shares outstanding | 120 | | | 108 | | | 121 | | | 93 | |
| Basic EPS | $ | 1.25 | | | $ | 0.92 | | | $ | 2.26 | | | $ | 1.08 | |
| Diluted EPS: | | | | | | | |
| Numerator: | | | | | | | |
Net income(1) | $ | 150 | | | $ | 99 | | | $ | 274 | | | $ | 101 | |
| Denominator: | | | | | | | |
| Weighted average shares outstanding | 121 | | | 109 | | | 123 | | | 94 | |
| Diluted EPS | $ | 1.24 | | | $ | 0.90 | | | $ | 2.23 | | | $ | 1.07 | |
(1)Net income for the three months ended September 30, 2022 and 2021 was $149,767,212 and $98,704,709, respectively, and $273,567,561 and $100,634,069 for the nine months ended September 30, 2022 and 2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Weighted average shares outstanding: | | | | | | | |
| Basic EPS | 119,564,760 | | | 107,688,389 | | | 121,308,912 | | | 92,944,812 | |
| Diluted EPS | 121,064,107 | | | 109,138,778 | | | 122,942,279 | | | 94,162,838 | |
The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period. For the three and nine months ended September 30, 2022, we excluded 846,369 and 736,581, respectively, and 512,371 and 631,738 for the three and nine months ended September 30, 2021, respectively, of share-based compensation awards, because their effect would have been anti-dilutive under the treasury stock method.
Note 19: 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 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 unaudited condensed consolidated statements of operations. 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 Sales, marketing, brand, and other fees on our unaudited condensed consolidated statements of operations as of the date they became related parties.
We also had $14 million and $20 million of outstanding receivables related to the fee-for-service agreements included in Accounts receivable, net on our unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Equity in earnings from unconsolidated affiliates | $ | 2 | | | $ | 1 | | | $ | 9 | | | $ | 7 | |
| Commissions and other fees | 52 | | | 33 | | | 133 | | | 70 | |
Note 20: 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 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 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 acquired Diamond operations within both segments since the Acquisition Date. The following table presents revenues for our reportable segments reconciled to consolidated amounts:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Revenues: | | | | | | | |
| Real estate sales and financing | $ | 745 | | | $ | 659 | | | $ | 1,783 | | | $ | 976 | |
Resort operations and club management(1) | 299 | | | 216 | | | 870 | | | 403 | |
| Total segment revenues | 1,044 | | | 875 | | | 2,653 | | | 1,379 | |
| Cost reimbursements | 82 | | | 58 | | | 215 | | | 131 | |
Intersegment eliminations(1)(2) | (10) | | | (5) | | | (25) | | | (13) | |
| Total revenues | $ | 1,116 | | | $ | 928 | | | $ | 2,843 | | | $ | 1,497 | |
(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 $10 million and $5 million for the three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, these charges totaled $25 million and $13 million, 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 and $2 million and less than $1 million for the three and nine months ended September 30, 2022 and 2021, respectively.
The following table presents Adjusted EBITDA for our reportable segments reconciled to net income:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Adjusted EBITDA: | | | | | | | |
Real estate sales and financing(1) | $ | 295 | | | $ | 280 | | | $ | 666 | | | $ | 352 | |
Resort operations and club management(1) | 112 | | | 109 | | | 332 | | | 212 | |
| Segment Adjusted EBITDA | 407 | | | 389 | | | 998 | | | 564 | |
| Acquisition and integration-related expense | (19) | | | (54) | | | (49) | | | (83) | |
| General and administrative | (50) | | | (41) | | | (158) | | | (92) | |
| Depreciation and amortization | (57) | | | (48) | | | (181) | | | (71) | |
| License fee expense | (33) | | | (24) | | | (90) | | | (57) | |
| Other loss, net | 2 | | | (20) | | | 1 | | | (22) | |
| Interest expense | (37) | | | (42) | | | (105) | | | (74) | |
| Income tax expense | (54) | | | (49) | | | (115) | | | (46) | |
| Equity in earnings from unconsolidated affiliates | 2 | | | 1 | | | 9 | | | 7 | |
| Impairment expense | — | | | (1) | | | — | | | (2) | |
Other adjustment items(2) | (11) | | | (12) | | | (36) | | | (23) | |
| Net income | $ | 150 | | | $ | 99 | | | $ | 274 | | | $ | 101 | |
(1)Includes intersegment transactions. Refer to our table presenting revenues by reportable segment above for additional discussion.
(2)For the three and nine months ended September 30, 2022 and 2021, this amount includes costs associated with restructuring, one-time charges and other non-cash items included within our reportable segments.
Note 21: 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 September 30, 2022, we were committed to purchase approximately $270 million of inventory and land over a period of 8 years and $12 million of other commitments in 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. During the nine months ended September 30, 2022, we fulfilled $50 million of purchases required under our inventory commitments. During the nine months ended September 30, 2021, we completed $132 million of purchases required under our inventory-related purchase commitments. As of September 30, 2022, our remaining obligations pursuant to these arrangements were expected to be incurred as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | 2022 (remaining) | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
| Inventory purchase obligations | $ | 56 | | | $ | 141 | | | $ | 59 | | | $ | 3 | | | $ | 3 | | | $ | 8 | | | $ | 270 | |
Other commitments(1) | 2 | | | 8 | | | 2 | | | — | | | — | | | — | | | 12 | |
| Total | $ | 58 | | | $ | 149 | | | $ | 61 | | | $ | 3 | | | $ | 3 | | | $ | 8 | | | $ | 282 | |
(1)Primarily relates to commitments related to information technology and sponsorships.
Rebranding Costs
As part of the Diamond Acquisition and per our licensing agreement with Hilton, we are committed to rebranding Diamond properties to brands that meet Hilton standards. We are currently rebranding our resorts and sales centers and expect rebranding to occur over a period of several years.
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 September 30, 2022, we accrued liabilities of approximately $121 million for all legal matters that were contingencies. Approximately $95 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 as of September 30, 2022, we recorded an insurance claim receivable of $80 million within Accounts receivable, net in our unaudited condensed consolidated balance sheet, During the three and nine months ended September 30, 2022, we recognized a charge of $1 million and $15 million, respectively, to our unaudited condensed consolidated statement of operations that represents the amount of the settlement liability not deemed probable of recovery from the insurance carriers.
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 22: Subsequent Events
Management has evaluated all subsequent events through November 9, 2022, the date the unaudited 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.