Hilton Grand Vacations (HGV): A Fast Growing, Capital Efficient Timeshare Business
HGV is a rapidly growing timeshare company that markets and sells vacation ownership intervals (“VOIs”), manages resorts in top leisure and urban destinations, and operates a point-based vacation club. Its 46 resorts, representing 7,402 units, are located in iconic leisure and urban vacation destinations such as the Hawaiian Islands, New York City, Orlando and Las Vegas, and feature spacious, condominium-style accommodations with superior amenities and high quality service. Through Hilton Grand Vacations Club, HGV’s approximately 255,000 members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of industry-leading brands across more than 4,600 hotels, as well as numerous experiential vacation options, such as cruises and guided tours.
HGV has successfully transformed from a highly capital-intensive business to a capital efficient model by pursuing an inventory strategy focused on fee-for-service and just-in-time inventory acquisition. Over time, HGV will target a 50/50 sales mix of owned and fee-for-service inventory in an effort to optimize earnings growth, free cash flow production and returns on invested capital.
As previously announced, HGV’s experienced management team will be led by Mark Wang, who has led Hilton’s global timeshare operations since 2008, as Chief Executive Officer. The external search and appointment of a Chief Financial Officer is expected to conclude prior to the spin.
For the year ended December 31, 2015, HGV generated total revenues of $1.5 billion, net income of $174 million, Adjusted EBITDA of $373 million, and return on invested capital of 41.3 percent.
HGV’s Pro Forma Adjusted EBITDA for full year 2016 is projected to be between $370 million and $390 million, inclusive of Pro Forma Corporate & Other for full year 2016 of approximately $75 million, of which approximately $25 to $30 million is incremental. Furthermore, HGV will recognize approximately $25 to $30 million of Pro Forma full year 2016 management fee revenue earned from timeshare homeowners associations that are currently included in the results of Hilton’s management and franchise segment. As of year-end, HGV’s Pro Forma net leverage is projected to be approximately 1.0x Adjusted EBITDA, excluding receivables financings and securitizations.
Transaction Overview
Under the plan announced in February 2016, Hilton will execute tax-free spin-offs to shareholders of its timeshare business, Hilton Grand Vacations, and the bulk of its real estate business, with the intention of electing real estate investment trust (REIT) status for Park concurrently with completion of the spin. Hilton’s core Management & Franchise business will continue operating under the Hilton name.
Hilton has received a private letter ruling from the Internal Revenue Service on certain issues relevant to the qualification of the spin-offs as tax-free. These transactions will be effected through a distribution of the new entities’ stock to existing Hilton shareholders. Hilton shareholders will own shares in all three companies following the completion of the transaction.
One-time cash uses related to the transactions are expected to include approximately $200 million for the cash portion of a special dividend to be paid by Park following the spin-offs in connection with its election of REIT status, approximately $200 million for the acceleration of taxes associated with the cancellation of debt income, and approximately $250 million of estimated transaction costs.
Completion of the separations is subject to a number of conditions, including, among others, declaration of effectiveness of the Form 10 Registration Statements filed with the SEC, and other customary matters. Approval by Hilton’s shareholders is not required for completion of the separation.
