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Business update
In the fourth quarter of 2023, Hilton Grand Vacations Inc. (NYSE:HGV) demonstrated strong financial performance despite facing challenges. There aren’t big surprises from the numbers in my opinion after my last article. Total contract sales reached $572 million, although they were impacted by approximately $40 million due to the ongoing effects of the Maui wildfires and a temporary outage in the sales system early in the quarter. The member count stood at 529,000, with a Consolidated Net Owner Growth (NOG) of 2.0% for the year. Total revenues increased to $1,019 million, up from $992 million in the same period of 2022. Adjusted EBITDA saw an increase to $270 million from $252 million in the fourth quarter of 2022, despite a $12 million net deferral and a $21 million impact from the Maui wildfires and sales system outage.
HGV has to navigate the timeshare industry that is not in fast growth mode
In 2023, the influx of new tours and customers hasn’t seen significant growth following the post-COVID wave of 2022. The volume per guest (VPGs) saw a 14% decline in the quarter, continuing the trend of mid-term decreases, which reflects challenging comparisons to 2022’s performance. Management believes that the tour flow remained strong, exceeding 2019’s figures. However, it may not be entirely satisfactory to benchmark against 2019 levels, considering that it was before Hilton Grand Vacations acquired Diamond. The integration of the two companies should ideally bring about improved scalability and accelerated customer acquisition channels.
The timeshare industry, a longstanding sector, doesn’t exhibit the rapid expansion seen in models like Airbnb. It requires patience, with growth being more gradual than explosive. As a niche in the tourism market, there’s a natural cautiousness among consumers, especially new buyers, towards timeshares.
The Bluegreen acquisition raised some questions
Regarding the $1.5 billion all-cash transaction for Bluegreen’s acquisition, it seems reasonable, especially considering the purchase price is an attractive 6x proforma LTM EBITDA, factoring in synergies. Notably, the deal does not involve any share dilution, and it comes at a time when, in my view, timeshare stocks are generally undervalued.
However, as with many acquisitions, this deal introduces some uncertainties. It could potentially distract management and slow the pace of returns to shareholders in the near term. Bluegreen’s portfolio predominantly consists of properties in locations accessible by car, appealing for weekend getaways. While some of Bluegreen’s locations, such as those in Texas, Georgia, and Wisconsin, fill gaps in HGV’s offerings, satisfying some HGV customers, Bluegreen’s roughly 200,000 members might not be as interested in HGV’s locations, which are typically more upscale and require air travel.
The collaboration with Bass Pro offers potential, but it’s important to recognize that the agreement could expire in 10 years. This partnership is very new for HGV members, who may not have a keen interest in outdoor adventures Bass Pro customers. Strategies that have worked for Bluegreen might not have the same impact for HGV.
The anticipated revenue synergies ranging from $75 million to $100 million, along with $100 million in expected cost savings, will require time to materialize, approximately 24 months. Given the distinct corporate cultures and sales teams of the two entities, integrating them may pose challenges. The management’s confidence in a seamless transition with Bluegreen, drawing from their recent experience with the Diamond acquisition, might be overly optimistic as each acquisition presents its own set of unique challenges.
Cashflow and Buybacks are the most attractive reasons to own
HGV’s appeal lies significantly in its robust profitability and the stability of its contractual agreements. When customers commit to timeshare intervals, they are obligated to continue payments for resort and club management fees, which contribute to HGV’s impressive profit margin of approximately 70% and yield around $400 million in profits. This forms a reliable stream of revenue. Furthermore, HGV exhibits commendable capital efficiency as a real estate developer, with a net property, plant, and equipment valuation of $819 million and depreciation & amortization expenses of only $213 million.
A critical aspect for HGV is maintaining the health of its loan portfolio. With a default rate of 8.56% and an average FICO score of 736 at loan origination, the company’s financial health in terms of cash generation from owners remains robust.
These factors enable HGV to deliver returns to its shareholders. In this quarter, HGV has repurchased 2.7 million shares for $99 million. As of February 23, 2024, it has acquired an additional 1.7 million shares for $71 million, leaving $289 million available under the 2023 Repurchase Plan. The company anticipates continuing with share buybacks at an estimated rate of $100 million per quarter throughout 2024.
The Bottom Line
HGV maintains its status as a high-quality stock underpinned by a resilient business framework. The innate human desire for travel and discovery ensures the inherent value of HGV’s extensive portfolio of properties is poised for growth. The company anticipates its full-year 2024 Adjusted EBITDA, excluding deferrals and recognitions, to fall between $1.2 billion and $1.26 billion. This projection includes the contributions from Bluegreen Vacations and anticipated synergies. With a market capitalization of $4.67 billion, the current price levels seem to carry minimal risk. Nevertheless, efficiency and operational controls can sometimes be overlooked in the process when management prioritizes growth. The acquisition of Bluegreen introduces a degree of uncertainty and could potentially delay HGV’s ability to fully demonstrate its earnings capacity, as the intricacies of business integration often extend beyond initial expectations.
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