EX-99.1 2 d253212dex991.htm PRELIMINARY INFORMATION STATEMENT Preliminary Information Statement
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Exhibit 99.1

 

 

 

LOGO

                    , 2016

Dear Hilton Worldwide Holdings Inc. Stockholder:

I am pleased to inform you that the board of directors of Hilton Worldwide Holdings Inc. (“Hilton Parent” and, together with its consolidated subsidiaries, “Hilton”) approved a plan to enhance long-term stockholder value by separating Hilton into three independent, publicly traded companies. Under the plan, Hilton Parent will execute tax-free spin-offs of Park Hotels & Resorts Inc. (“Park Parent” and, together with its consolidated subsidiaries, “Park Hotels & Resorts”), which will hold a portfolio of Hilton’s owned and leased hotels and resorts, and Hilton Grand Vacations Inc. (“HGV Parent” and, together with its consolidated subsidiaries, “Hilton Grand Vacations”), which will own and operate Hilton’s timeshare business. Upon completion of the spin-offs, Hilton Parent stockholders will own 100% of the outstanding shares of common stock of each of Park Parent and HGV Parent, and will continue to own 100% of the outstanding shares of common stock of Hilton Parent. Park Parent will be a leading lodging real estate investment trust with a diverse portfolio of iconic and market-leading hotels and resorts with significant underlying real estate value, and Hilton Grand Vacations will be a rapidly growing timeshare company that markets and sells vacation ownership intervals and manages resorts in top destinations. Hilton Parent will retain its core management and franchise business and continue to trade on the New York Stock Exchange as a leading global hospitality company.

We believe that this separation is in the best interests of Hilton Parent, its stockholders and other constituents, as it will result in three pure-play companies, enabling dedicated management teams to fully activate their respective businesses, take advantage of both organic and inorganic growth opportunities, and align their structures and capital allocation strategies with a dedicated investor base.

The spin-offs will be completed by way of a pro rata distribution of Park Parent and HGV Parent common stock to our stockholders of record as of 5:00 p.m., Eastern time, on December 15, 2016, the spin-off record date. Each Hilton Parent stockholder will receive one share of Park Parent common stock for every five shares of Hilton Parent common stock and one share of HGV Parent common stock for every ten shares of Hilton Parent common stock, in each case, held by such stockholder on the record date. The distribution of these shares will be made in book-entry form, which means that no physical share certificates will be issued. The transaction is subject to certain customary conditions. Stockholder approval of the distributions is not required, and you are not required to take any action to receive your shares of Park Parent and HGV Parent common stock. Immediately following the spin-offs, you will own common stock in Hilton Parent, Park Parent and HGV Parent. The common stock of Hilton Parent will continue to trade on the New York Stock Exchange under the symbol “HLT.” Both Park Parent and HGV Parent intend to have their common stock listed on the New York Stock Exchange under the symbols “PK” and “HGV,” respectively. We expect the spin-offs to be tax-free to the stockholders of Hilton Parent, except to the extent of cash received in lieu of fractional shares. The spin-offs are conditioned on, among other things, the ruling received by Hilton Parent from the Internal Revenue Service regarding certain U.S. federal income tax aspects of the spin-offs remaining in effect as of the distribution date, and the receipt of an opinion of our tax counsel confirming that the spin-offs will qualify as tax-free distributions under Section 355 of the Internal Revenue Code of 1986, as amended.

We have prepared the enclosed information statements, which describe the spin-offs in detail and contain important information about each of Park Hotels & Resorts and Hilton Grand Vacations, including historical financial statements. We are mailing to all Hilton Parent stockholders a notice with instructions informing holders how to access the information statements online. We urge you to read the information statements carefully.

We want to thank you for your continued support of Hilton, and we look forward to your support of all three companies in the future.

Sincerely,

Christopher J. Nassetta

President and Chief Executive Officer

Hilton Worldwide Holdings Inc.


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LOGO

                    , 2016

Dear Hilton Grand Vacations Inc. Stockholder:

It is our pleasure to welcome you as a stockholder of our company, Hilton Grand Vacations Inc. (“HGV Parent” and, together with its consolidated subsidiaries, “Hilton Grand Vacations”). Following the distribution of all of the outstanding shares of HGV Parent common stock by Hilton Worldwide Holdings Inc. (“Hilton Parent”), Hilton Grand Vacations will be a rapidly growing timeshare company that markets and sells vacation ownership intervals and manages resorts in iconic leisure and urban destinations.

As an independent, publicly traded company, we will be better positioned to allocate capital and pursue a sales strategy that will maximize earnings growth, free cash flow production and returns on invested capital, all of which will drive overall value to our stockholders. In addition, we believe our management team will be able to respond more quickly and effectively to acquisition and market opportunities as well as execute our business and growth strategies.

We expect to have HGV Parent common stock listed on the New York Stock Exchange under the symbol “HGV” in connection with the distribution of HGV Parent common stock by Hilton Parent.

We invite you to learn more about HGV Parent by reviewing the enclosed information statement. We look forward to our future as an independent, publicly traded company and to your support as a holder of HGV Parent common stock.

Sincerely,

Mark D. Wang

President and Chief Executive Officer

Hilton Grand Vacations Inc.


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 30, 2016

INFORMATION STATEMENT

Hilton Grand Vacations Inc.

Common Stock

(par value $0.01 per share)

 

 

This information statement is being sent to you in connection with the separation of Hilton Grand Vacations Inc. (“HGV Parent” and, together with its consolidated subsidiaries, “Hilton Grand Vacations” or “HGV”) from Hilton Worldwide Holdings Inc. (“Hilton Parent” and, together with its consolidated subsidiaries, “Hilton”), following which HGV Parent will be an independent, publicly traded company. As part of the separation, Hilton will undergo an internal reorganization, after which it will complete the separation by distributing all of the outstanding shares of HGV Parent common stock on a pro rata basis to the holders of Hilton Parent common stock. We refer to this pro rata distribution as the “distribution” and we refer to the separation, including the internal reorganization and distribution, as the “spin-off.” We expect that the spin-off will be tax-free to Hilton Parent stockholders for U.S. federal income tax purposes, except to the extent of cash received in lieu of fractional shares. Each Hilton Parent stockholder will receive one share of HGV Parent common stock for every ten shares of Hilton Parent common stock held by such stockholder on December 15, 2016, the record date. The distribution of shares will be made in book-entry form only. Hilton Parent will not distribute any fractional shares of HGV Parent common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the spin-off. The distribution will be effective as of 5:00 p.m., Eastern time, on January 3, 2017. Immediately after the distribution becomes effective, we will be an independent, publicly traded company.

No vote or other action of Hilton Parent stockholders is required in connection with the spin-off. We are not asking you for a proxy and you should not send us a proxy. Hilton Parent stockholders will not be required to pay any consideration for the shares of HGV Parent common stock they receive in the spin-off, and they will not be required to surrender or exchange shares of their Hilton Parent common stock or take any other action in connection with the spin-off.

All of the outstanding shares of HGV Parent common stock are currently owned, directly or indirectly, by Hilton Parent. Accordingly, there is no current trading market for HGV Parent common stock. We expect, however, that a limited trading market for HGV Parent common stock, commonly known as a “when-issued” trading market, will develop at least two trading days prior to the record date for the distribution, and we expect “regular-way” trading of HGV Parent common stock will begin the first trading day after the distribution date. We intend to list HGV Parent common stock on the New York Stock Exchange (“NYSE”) under the ticker symbol “HGV.”

 

 

In reviewing this information statement, you should carefully consider the matters described in “Risk Factors” beginning on page 28 of this information statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

The date of this information statement is                     , 2016.

 

 

A Notice of Internet Availability of Information Statement Materials containing instructions describing how to access this Information Statement was first mailed to Hilton Parent stockholders on or about                     , 2016.


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TABLE OF CONTENTS

 

     Page  

Summary

     1   

Risk Factors

     28   

Special Note About Forward-Looking Statements

     54   

The Spin-Off

     55   

Trading Market

     67   

Dividend Policy

     69   

Capitalization

     70   

Selected Historical Consolidated Financial Data

     71   

Unaudited Pro Forma Consolidated Financial Statements

     72   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     79   

The Timeshare Industry

     104   

Business

     106   

Management

     123   

Executive and Director Compensation

     129   

Certain Relationships and Related Party Transactions

     159   

Description of Certain Indebtedness

     171   

Security Ownership of Certain Beneficial Owners and Management

     177   

Description of Capital Stock

     180   

Where You Can Find More Information

     187   

Index to Financial Statements

     F-1   

Unless otherwise indicated or the context otherwise requires, references herein to:

 

    “Hilton Grand Vacations,” “HGV,” “we,” “our,” “us,” “the Company” and “our company” refer (1) prior to the consummation of our internal reorganization described under “The Spin-Off—Manner of Effecting the Spin-Off—Internal Reorganization,” to Hilton Resorts Corporation and its consolidated subsidiaries and (2) after such internal reorganization to Hilton Grand Vacations Inc. and its consolidated subsidiaries, which shall include HRC;

 

    “HGV Parent” refer only to Hilton Grand Vacations Inc., exclusive of its subsidiaries;

 

    “HRC” refer to Hilton Resorts Corporation and its consolidated subsidiaries;

 

    “Hilton” refer to Hilton Worldwide Holdings Inc. and its consolidated subsidiaries, and references to “Hilton Parent” or “Parent” refer only to Hilton Worldwide Holdings Inc., exclusive of its subsidiaries; and

 

    “Park Hotels & Resorts” refer to Park Hotels & Resorts Inc. and its consolidated subsidiaries, and references to “Park Parent” refer only to Park Hotels & Resorts Inc., exclusive of its subsidiaries;

in each case giving effect to the spin-off, including the internal reorganization and distribution.

Additionally, unless otherwise indicated or the context otherwise requires, all information in this information statement gives effect to the effectiveness of our amended and restated certificate of incorporation and bylaws, the forms of which are filed as exhibits to the registration statement of which this information statement forms a part.


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FINANCIAL STATEMENT PRESENTATION

This information statement includes certain historical consolidated financial and other data for HRC. HRC will be considered our predecessor for financial reporting purposes. Hilton Grand Vacations Inc. is the registrant under the registration statement of which this information statement forms a part and will be the financial reporting entity following the consummation of the spin-off. The historical consolidated financial information of HRC as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 has been derived from the audited consolidated financial statements of HRC included elsewhere in this information statement. The historical consolidated financial information of HRC as of December 31, 2013, 2012 and 2011 and for the years ended December 31, 2012 and 2011 has been derived from the unaudited consolidated financial statements of HRC that are not included in this information statement. The historical consolidated financial information of HRC as of September 30, 2016 and for the nine months ended September 30, 2016 and 2015 has been derived from the unaudited condensed consolidated financial statements of HRC that are included in this information statement. The unaudited consolidated financial statements of HRC have been prepared on the same basis as the audited consolidated financial statements of HRC and, in our opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results for any interim period are not necessarily indicative of the results that may be expected for the full year. Our historical results are not necessarily indicative of the results expected for any future period.

This information statement also includes an unaudited pro forma consolidated balance sheet as of September 30, 2016 and unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2016 and year ended December 31, 2015, which present our combined financial position and results of operations to give pro forma effect to the spin-off, including the internal reorganization and distribution and the other transactions described under “Unaudited Pro Forma Consolidated Financial Statements.” The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have occurred if the relevant transactions had been consummated on the date indicated, nor is it indicative of future operating results.

You should read our selected historical consolidated financial information and unaudited pro forma consolidated financial statements and the accompanying notes in conjunction with, and each is qualified in their entirety by reference to, the consolidated historical financial statements and related notes included elsewhere in this information statement and the financial and other information appearing elsewhere in this information statement, including information contained in “Risk Factors,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Other than the inception balance sheet, the financial statements of Hilton Grand Vacations Inc. have not been included in this information statement as it is a newly incorporated entity and has no business transactions or activities to date. In connection with the internal reorganization, Hilton Grand Vacations Inc. will become the parent of HRC.

INDUSTRY AND MARKET DATA

Certain industry and market data included in this information statement have been obtained from third-party sources that we believe to be reliable, including the American Resort Development Association (“ARDA”). Market estimates are calculated by using independent industry publications and other publicly available information in conjunction with our assumptions about our markets. While we are not aware of any misstatements regarding any industry, market or similar data presented herein and we have not independently verified such information, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Special Note About Forward-Looking Statements” and “Risk Factors” in this information statement.

 

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CERTAIN DEFINED TERMS

Except where the context suggests otherwise, we define certain terms in this information statement as follows:

 

    “capital-efficient inventory” refers to our fee-for-service and just-in-time VOI inventory;

 

    “Club” refers to Hilton Grand Vacations Club, our points-based vacation exchange program;

 

    “contract sales” represents the total amount of VOI products under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales is not a recognized term under generally accepted accounting principles in the United States (“U.S. GAAP”), and should not be considered in isolation or as an alternative to timeshare sales, net, or any other comparable operating measure derived in accordance with U.S. GAAP. For a reconciliation of contract sales to sales of VOIs, net, which we believe is the most closely comparable U.S. GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Real Estate”;

 

    “developed inventory” refers to VOI inventory sourced from projects developed by HGV;

 

    “fee-for-service” refers to VOI inventory we sell and manage on behalf of third-party developers;

 

    “just-in-time” refers to VOI inventory sourced in transactions that are designed to closely correlate the timing of the acquisition with our sale of that inventory to purchasers;

 

    “owned inventory” refers to our developed and just-in-time VOI inventory; and

 

    “VOIs” refers to vacation ownership intervals.

 

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SUMMARY

This summary highlights information contained in this information statement and provides an overview of our company, our separation from Hilton and the distribution of HGV Parent common stock by Hilton Parent to its stockholders. For a more complete understanding of our business and the spin-off, you should read this entire information statement carefully, particularly the discussion set forth under “Risk Factors” and our audited historical consolidated financial statements, our unaudited pro forma consolidated financial statements and the respective notes to those statements included in this information statement.

Hilton Grand Vacations

Hilton Grand Vacations (“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 points-based vacation club. Our 46 resorts, representing 7,592 units, are located in iconic vacation destinations such as the Hawaiian Islands, New York City, Orlando and Las Vegas, and feature spacious, condominium-style accommodations with superior amenities and quality service. Through Hilton Grand Vacations Club (the “Club”), our approximately 265,000 members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 12 industry-leading brands across more than 4,700 hotels, as well as numerous experiential vacation options, such as cruises and guided tours.

Our compelling VOI product allows customers to advance purchase a lifetime of vacations. Because our VOI owners generally purchase only the vacation time they intend to use each year, they are able to efficiently split the full cost of owning and maintaining a vacation residence with other owners. Our customers also benefit from the high-quality amenities and service at our Hilton-branded resorts. Furthermore, our points-based platform offers members tremendous flexibility, enabling us to more effectively adapt to their changing vacation needs over time. Building on the strength of that platform, we continuously seek new ways to add value to our Club membership, including enhanced product offerings, greater geographic distribution, broader exchange networks and further technological innovation, all of which drive better, more personalized vacation experiences and guest satisfaction.

As innovators in the timeshare business, we have 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.

 



 

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Inventory Sources as a Percentage of 2015 Contract Sales

 

 

LOGO   

•    “Fee-for-service” refers to VOI inventory we sell and manage on behalf of third-party developers.

 

•    “Just-in-time” refers to VOI inventory primarily sourced in transactions that are designed to closely correlate the timing of the acquisition with our sale of that inventory to purchasers.

 

•    “Developed” refers to VOI inventory sourced from projects developed by HGV.

Fee-for-service sales require virtually no capital investment on our part and provide us the flexibility to invest capital selectively. In 2015, our fee-for-service transactions represented 58% of contract sales, up from 0% in 2009. Based on our 2015 sales pace, we have access to more than six years of future inventory, with capital efficient arrangements representing approximately 85% of that supply. This visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales, reduce capital investments, minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering new markets.

The strength of our platform, coupled with what we believe is the industry’s most capital-efficient inventory sourcing model, has led to:

 

    Robust sales growth over the course of the cycle with contract sales increasing at a compound annual growth rate (“CAGR”) of 7.9% from 2007 to 2015, outperforming the industry, which experienced a decline of 2.6% over the same period;

 

    Strong net owner growth with Club membership increasing at a 9% CAGR over the last four years to total approximately 265,000 members as of September 30, 2016;

 

    Approximately 60% of our contract sales in the last five years coming from new owners;

 

    Dramatically reduced capital requirements with inventory investment decreasing from an annual average of $405 million during 2007 and 2008 to $96 million during 2014 and 2015;

 

    Significant cash flow from operations of over $1 billion from 2011 to 2015;

 

    Strong segment Adjusted EBITDA margin of 35.5% in 2015, up 510 basis points since 2011;

 

    Meaningfully improved return on invested capital from 2011 to 2015 by 28.8 percentage points to 41.3% in 2015; and

 

    Total revenues of $1.5 billion, net income of $174 million and Adjusted EBITDA of $373 million for the year ended December 31, 2015, representing impressive growth of 46%, 139% and 75%, respectively since 2011.

 



 

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After the spin-off, we expect to further capitalize on our competitive advantages as we fully activate our business, benefiting from a dedicated management team and independent capital resources. Over time, we plan to target a 50/50 mix between fee-for-service and owned sales as we believe this mix will optimize earnings growth, free cash flow production and returns on invested capital. We also will maintain an exclusive, long-term relationship with Hilton, through which our Club members will continue to have access to Hilton’s award-winning guest loyalty program and global portfolio of hotels, and we will continue to benefit from the strength and scale of Hilton’s robust commercial services platform. We expect to collaborate with Hilton and other third-parties on timeshare development opportunities in new and existing locations and across chain scale segments.

See “Summary—Summary Historical and Unaudited Pro Forma Consolidated Financial Data” for our definitions of contract sales, Adjusted EBITDA and return on invested capital and for reconciliations to measures calculated in accordance with GAAP.

The Timeshare Industry

The timeshare industry, also known as the vacation ownership industry, is one of the fastest-growing segments of the global travel and tourism sector. Annual timeshare sales in the United States increased over 800% between 1984 and 2015 to $8.6 billion. This growth was driven primarily by increased interest from established developers, owners and managers, particularly globally recognized lodging and entertainment companies, product evolution and geographic expansion. At inception, timeshare products were largely limited to a fixed or floating week, whereby a customer would purchase rights to use the same property each year, typically at the same time each year. The industry has since evolved to better meet consumer demands, offering more flexible products, such as membership in multi-property vacation networks. Additionally, product locations have expanded beyond traditional resort markets to include urban and international destinations.

The timeshare industry remains well-positioned for continued growth given favorable macroeconomic and secular trends. Economists forecast healthy consumer spending trends, while data released by the Commerce Department suggests a shift in spending patterns as consumers spend more on experiences and less on retail. Furthermore, timeshare sales in 2015 remained approximately 19% below the industry peak of $10.6 billion in 2007, suggesting continued growth potential during this stage of the current lodging cycle. We expect new product supply to attract new customers and stimulate incremental purchases from existing customers. Additionally, we expect an expanding middle class and rising growth in global tourism to bode well for the long-term health of the timeshare industry, while industry fragmentation should support continued consolidation activity.

Our Competitive Strengths

We believe the following competitive strengths position us as a leader and innovator in the timeshare industry.

 

   

Exceptional Vacation Offerings. Our upscale resort collection features spacious, studio to three-bedroom condominium-style accommodations in high-demand destinations such as New York City, Orlando, the Hawaiian Islands and Las Vegas. We offer superior amenities such as full kitchens, in-unit washers and dryers, spas and kids’ clubs along with beach-front locations and the quality service that is synonymous with the Hilton name. We keep our properties modern through diligent use of reserves funded by homeowners’ associations (“HOAs”), which are deployed to update our properties on average every five years, resulting in consistent high property and service ratings. In addition, purchasers of our VOIs are enrolled in our flexible, points-based Hilton Grand Vacations Club exchange program, giving each member an annual allotment of Club points representing their owned interest and offering an attractive value proposition. Members have the ability to use their points for a

 



 

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variety of vacation options, including a priority reservation period at their home resort where their VOI is deeded, stays at any Hilton Grand Vacations resort, conversion to Hilton HHonors points, access to RCI’s vacation exchange network and exchanges for experiential travel alternatives.

 

    Large and Growing Loyal Member Base. We have a loyal base of approximately 265,000 members, which has more than doubled since 2007, growing at a CAGR of nearly 9%. Yet, we continue to see tremendous growth opportunities across regions and demographics. Approximately 75% of our members were located in the United States, 20% in Japan and 5% in other international locations as of September 30, 2016. Based on information available to us, Millennials and Generation Xers made up nearly half of our first time buyers in the U.S. in 2015 and represent a growing and attractive demographic. Approximately 60% of our contract sales in the last five years were to new members, which benefits future sales given that for every dollar of initial VOI purchases by new members, we expect those members will on average purchase approximately another dollar of additional VOI product over the lifetime of their membership. We continuously strive to enhance Club value and our approximately 7,800 employees are committed to providing our members with exceptional service and cultivating member loyalty.

 

    High-quality Customers. We consider our customer base to be among the highest quality in the industry, with our U.S. members having an average annual income level of greater than $100,000, meaningfully above the national average, a high percentage of home ownership and a frequent traveler profile. Additionally, our customers had a weighted average FICO score of 745 for new loan originations to U.S. and Canadian borrowers over the past three years, making them attractive purchasers. Our members’ creditworthiness is further demonstrated by low levels of HOA maintenance fee delinquencies, which averaged only 2.5% since 2011 compared to an annual range of 8% to 12% for the industry from 2011 to 2015. Additionally, our consumer loan portfolio has experienced low default rates of approximately 3% over the last several years.

 

    Long-term Recurring Revenue Streams. Our platform drives highly predictable, long-term recurring revenue streams through annual Club membership dues and exchange fees and from our management agreements with HOAs. Further, unlike traditional revenue-based hotel-management fees, our management fees are generally unaffected by changes in rental rate or occupancy, making them less susceptible to market downturns. Since our inception in 1992, no management agreement at any of our developed or fee-for-service properties has been terminated or lapsed. As a result of these recurring revenue streams, our resort operations and club management segment Adjusted EBITDA represented 43% of our total Adjusted EBITDA in 2015.

 

    Highly Effective Marketing and Sales Model. Our data-driven, affinity-based marketing approach combined with our scaled and disciplined sales process has delivered consistent sales and new member growth over the past five years. By conducting our marketing and sales activities in large markets with high levels of inbound tourism, we are able to generate year-round tour flow, making it more cost effective to reach potential new members and therefore increasing margins. The efficiency of our sales and marketing is demonstrated by our real estate margin percentage of 27.5% in 2015. In addition, our targeted direct marketing enables us to reach customers who already have an affinity with Hilton and meet our high financial standards. As a result of our marketing expertise and our relationship with Hilton, our tour flow increased at a CAGR of 10.4% between 2007 and 2015. Importantly, we have the ability to scale our model by cross-marketing and cross-selling our resorts as well as employing effective hiring practices, proprietary training and advanced technology platforms. In Japan, for example, we have successfully sold our products in Hawaii using our off-site sales model, resulting in a Japanese member base of approximately 53,500 as of September 30, 2016. Our track record of contract sales growth even during the 2008 to 2010 market downturn demonstrates the effectiveness of our distribution model and sales execution.

 



 

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    Capital-efficient Business Model. We are an industry leader in capital-efficient VOI sales, which represented 78% of our contract sales in 2015. Of these sales, fee-for-service represented 58% and just-in-time represented 20%. Since our first fee-for-service project in 2010, we have entered into 10 fee-for-service deals, which have contributed approximately 160,000 VOIs to our total supply. Our capital requirements have reduced dramatically as a result, producing strong cash flow and higher returns on invested capital. As we transitioned from capital-intensive real estate development to a more capital-efficient business model, our inventory investment decreased from an annual average of $405 million during 2007 and 2008 to $96 million during 2014 and 2015. In addition, we generated cash flow from operations of over $1 billion between 2011 and 2015. Further, our relationships with some of the largest and most sophisticated real estate investors in the world, including Blackstone, Goldman Sachs, Centerbridge and Strand Capital Group, have given us access to a wide range of capital partners and the credibility to execute deals in diverse markets. As a result of our efforts, all inventory sources are projected to supply us with access to more than six years of future inventory based on our 2015 sales pace, with capital efficient arrangements representing approximately 85% of that supply.

 

    Exclusive, Long-term Relationship with Hilton. Our relationship with Hilton connects us with a portfolio of globally recognized, market-leading hospitality brands and a superior exchange network and gives us exclusive access to a large and growing base of loyal customers and a powerful network of commercial services. With a nearly 100-year pedigree in the hospitality industry, Hilton is one of the largest and fastest growing hospitality companies in the world, with over 4,700 properties in 104 countries and territories as of September 30, 2016. Our long-term license agreement with Hilton will give us the exclusive right to market, sell and lease VOI inventory and manage resorts under the Hilton Grand Vacations brand. In 2015, 93% of Club points redeemed were used within the Hilton system by members to stay at the home resort where their VOI is deeded, exchange within our Club or convert their Club points to HHonors points for hotel stays. We believe this loyalty to the Hilton system demonstrates high member satisfaction, attracts new Club members and rental guests, and lowers our customer acquisition costs. Furthermore, our products should command a higher price point given the strength of Hilton’s brand portfolio and reputation for exceptional service and quality. We believe our relationship with Hilton and access to its formidable platform are significant competitive advantages that position us for strong future growth.

 

    Experienced and Execution-focused Management Team. Our experienced management team is headed by Mark D. Wang, our President and Chief Executive Officer, who has led Hilton’s global timeshare operations since 2008, including our successful transition to a capital-efficient business model. Mr. Wang has 35 years of experience in the timeshare industry, and our executive officers have an average of 29 years in the timeshare and hospitality industries. With this experience, our management team has created a lean and nimble organizational structure, which allows us to respond quickly and effectively to opportunities and dynamic market conditions. By fostering a culture with a strong focus on execution and operational effectiveness, management empowers our employees to respond to our members’ and guests’ needs and provide each of them with a unique and memorable experience.

Our Business and Growth Strategies

Our goal is to create long-term value by delivering a lifetime of exceptional vacation experiences to our loyal and growing membership base and leveraging our capital-efficient business model to drive strong returns on invested capital, free cash flow and bottom-line growth. The following are key elements of our strategy to accomplish this goal:

 

   

Grow Vacation Sales. We intend to continue growing contract sales by pursuing a balanced mix of sales to new and existing members. We expect to drive growth by enhancing the value of Club

 



 

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membership and expanding our highly effective sales distribution model within and outside of our existing markets. As part of this strategy, we will continue to pursue opportunities in large urban and resort markets with strong inherent demand such as Washington, D.C. and Maui, Hawaii. Over time, we intend to continue expanding our marketing and sales operations in Japan and explore opportunities for in-market product offerings to those customers. We already have experienced strong growth in Japan, with an increase of 130% in contract sales from 2007 to 2015, and believe we can leverage our success to further expand in Japan and across select Asian markets. We also will pursue growth opportunities by exploring additional development opportunities within the Hilton portfolio and expanding our marketing partnerships.

 

    Grow Our Member Base. We have experienced 23 consecutive years of net owner growth. As part of our strategy to grow our member base, we will continue to use our relationship with Hilton to target new, brand-loyal members. The Hilton HHonors loyalty program represents a cost-effective source of member growth. We also will leverage new and existing marketing relationships and continue our successful local marketing programs. Our focus on enhancing Club value also will enable us to acquire new members by expanding the demographics of our member base. Our increased marketing efforts have resulted in member demographics shifting to younger generations, with an increase in Millennial and Generation X first time buyers in the U.S. to nearly half of our first time buyers in 2015, both of which represent a large and attractive future member base. Net owner growth supports strong future sales growth, as a significant portion of our member base buys additional VOI products, which expands our predictable, recurring fee-based resort and Club management business.

 

    Continue to Enhance Member Experiences. We are continuously seeking new ways to add value to our Club membership, including expanding our vacation options and destinations, in-market and travel-related discounts, travel exchange partners and providing access to a growing network of new Hilton-branded hotels and resorts. We also intend to expand the technology options available to members, including our new website, mobile application and digital keys, which allow members and guests to skip the front desk and access their room via smartphone. Our employees also are an important part of the vacation experiences of our members and will continue to enhance these experiences by providing our signature high-quality customer service. We believe the dedicated service of our employees, vacation experiences and Club value we offer our members foster loyalty and generate significant repeat business through our most cost-effective marketing channel.

 

    Optimize Our Sales Mix of Capital-efficient Inventory. We believe that optimizing our mix of capital-efficient and owned inventory sales will drive premium top line growth, cash flow generation and returns on invested capital. Over time, we will target a 50/50 sales mix of owned and fee-for-service inventory. We also intend to take advantage of our robust deal pipeline fueled by existing and new relationships with third-party developers for a full range of fee-for-service and just-in-time projects. We will maintain a disciplined approach to capital allocation, while strategically pursuing acquisitions and development of owned inventory in key markets.

 

    Pursue Opportunistic Business Ventures. Despite recent consolidation, the timeshare industry remains fragmented. We will continue to evaluate market opportunities and consider strategic acquisitions that meet our high product and service standards. This could include corporate and property acquisitions to expand our inventory options and distribution capabilities. We also intend to use our relationship with Hilton and third-party developers as well as our innovative platform and industry experience to create new products and additional efficiencies. For example, we intend to continue collaborating with Hilton on timeshare development opportunities at new and existing hotel properties and explore growth opportunities along the Hilton brand spectrum.

 



 

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Capital Allocation and Financial Policy

We plan to: pursue a disciplined capital allocation policy; invest capital selectively to source high-quality inventory in key, strategic markets; and finance the development and purchase of new VOI inventory through modest leverage and securitization of our timeshare financing receivables. We expect to target an investment grade credit rating and return capital to stockholders through dividends and stock buybacks over time.

Our History

Our history dates to 1992 with Hilton’s joint venture with Grand Vacations. In 1996, Hilton Grand Vacations became a wholly owned subsidiary of Hilton Parent. During the ensuing years we expanded our operations and established a track record of innovation in our industry. Unlike the broader timeshare industry, which experienced a contraction in 2008 and 2009 as a result of the overall economic recession, we were able to grow contract sales during the industry downturn and have continued to deliver contract sales growth in each period since, driven by our continued focus on marketing and sales activities, our strong development margins, large-market distribution model, synergies with Hilton, commitment to new owner transactions and lean organizational structure. Key events in our history are illustrated in the following timeline:

 

 

LOGO

 



 

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HNA Group Strategic Investment and Secondary Offering

On October 24, 2016, Hilton Parent, The Blackstone Group L.P. and its affiliates (“Blackstone”) and HNA Tourism Group Co., Ltd. (“HNA”) announced that affiliates of Blackstone agreed to sell to HNA 247,500,000 shares of common stock of Hilton Parent, representing approximately 25% of the outstanding shares of common stock of Hilton Parent, pursuant to a stock purchase agreement between HNA and Blackstone (the “Sale”). The Sale is expected to close, subject to customary closing conditions (including receipt of regulatory approvals in the United States, China and certain other countries), in the first quarter of 2017. If the Sale closes after the spin-off record date, the Sale also will include the shares of common stock of HGV Parent and Park Parent received by Blackstone with respect to the shares of common stock of Hilton Parent being sold to HNA.

In connection with the Sale, HGV Parent entered into a stockholders agreement and a registration rights agreement with HNA, which will become effective upon the later to occur of (i) the closing of the Sale and (ii) the consummation of the spin-off. HGV Parent also entered into a registration rights agreement with Blackstone (which will become effective upon the consummation of the spin-off) and HGV Parent further intends to enter into a stockholders agreement with Blackstone at the consummation of the spin-off which will be substantially the same as Blackstone’s stockholders agreement with Hilton Parent. See “Certain Relationships and Related Party Transactions—Stockholders Agreements” and “Certain Relationships and Related Party Transactions—Registration Rights Agreements” for more detailed descriptions of these agreements.

On November 15, 2016, certain selling stockholders affiliated with Blackstone completed a secondary offering of 55,000,000 shares of common stock of Hilton Parent (the “Secondary Offering”). In this information statement, information with respect to the anticipated beneficial ownership of our common stock by Blackstone reflects the completion of the Secondary Offering.

Summary Risk Factors

There are a number of risks related to our business and the spin-off and related transactions, including:

 

    we are subject to the business, financial and operating risks inherent to the timeshare industry, any of which could reduce our revenues and limit opportunities for growth;

 

    macroeconomic and other factors beyond our control can adversely affect and reduce demand for our products and services;

 

    we do not own the Hilton brands and our business will be materially harmed if we breach our license agreement with Hilton or it is terminated;

 

    our business depends on the quality and reputation of the Hilton brands and affiliation with the Hilton HHonors loyalty program;

 

    our dependence on development activities exposes us to project cost and completion risks;

 

    a decline in developed or acquired VOI inventory or our failure to enter into and maintain fee-for-service agreements may have an adverse effect on our business or results of operations;

 

    we operate in a highly competitive industry;

 

    we manage a concentration of properties in particular geographic areas, which exposes our business to the effects of regional events and occurrences;

 

    if maintenance fees at our resorts are required to be increased, our product could become less attractive and our business could be harmed;

 



 

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    the expiration, termination or renegotiation of our management agreements could adversely affect our cash flows, revenues and profits;

 

    our indebtedness and other contractual obligations could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts and could divert our cash flow from operations for debt payments;

 

    we may be responsible for U.S. federal income tax liabilities that relate to the distribution;

 

    we do not have a recent operating history as an independent company and our historical financial information does not predict our future results;

 

    we may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off;

 

    we may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements related to the spin-off; and

 

    upon consummation of the spin-off, approximately 40% of the voting power in HGV Parent will be controlled by Blackstone and upon consummation of the Sale, 25% of the voting power in HGV Parent will be controlled by HNA and approximately 15% will be controlled by Blackstone, and their respective interests may conflict with ours or yours in the future.

These and other risks related to our business and the spin-off are discussed in greater detail under the heading “Risk Factors” in this information statement. You should read and consider all of these risks carefully.

 

 

Hilton Grand Vacations Inc. was incorporated in the State of Delaware on May 2, 2016. Our headquarters are located at 6355 MetroWest Boulevard, Suite 180, Orlando, Florida 32835. Our telephone number is (407) 722-3100.

 



 

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The Spin-Off

Overview

On February 26, 2016, Hilton Parent announced its intention to implement the spin-off of HGV and Park Hotels & Resorts from Hilton, following which HGV Parent and Park Parent will be independent, publicly traded companies.

Before our spin-off from Hilton, we will enter into a Distribution Agreement and several other agreements with Hilton Parent and Park Parent related to the spin-off. These agreements will govern the relationship among us, Hilton and Park Hotels & Resorts after completion of the spin-off and provide for the allocation among us, Hilton and Park Hotels & Resorts of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities). These agreements also will include arrangements with respect to transitional services to be provided by Hilton to HGV and Park Hotels & Resorts. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off.”

The distribution of HGV Parent common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. In addition, Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents, or that market conditions or other circumstances are such that it is not advisable at that time to separate HGV from Hilton. See “The Spin-Off—Conditions to the Spin-Off.”

 



 

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Organizational Structure

The simplified diagrams below (which omit certain wholly owned intermediate holding companies) depict the organizational structure of Hilton, Park Hotels & Resorts and Hilton Grand Vacations before and after giving effect to the spin-offs.

Current Hilton Organizational Structure

 

LOGO

Organizational Structure Following the Spin-Offs

 

LOGO

 



 

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Financing Transactions

Subject to market conditions, we expect to complete one or more financing transactions on or prior to the completion of the spin-off. As a result of these financing transactions, upon consummation of the spin-off we expect to have total recourse indebtedness of approximately $500 million, excluding $450 million expected to be outstanding under our non-recourse financing receivables credit facility (the “Timeshare Facility”) and between $250 million and $300 million of our non-recourse notes backed by timeshare financing receivables (the “Securitized Debt”) expected to be outstanding. Included in our expected outstanding non-recourse Timeshare Facility balance is an intended borrowing of an additional $300 million, which proceeds will be used to distribute cash to Hilton Parent. After giving effect to the foregoing financing transactions, upon consummation of the spin-off, we expect to have $1.22 billion of total recourse and non-recourse indebtedness outstanding. There can be no assurances that any such financing transactions will be completed in the timeframe or size indicated or at all. See “The Spin-Off—Financing Transactions” and “Description of Certain Indebtedness.”

Questions and Answers About the Spin-Off

The following provides only a summary of the terms of the spin-off. For a more detailed description of the matters described below, see “The Spin-Off.”

 

Q: What is the spin-off?

 

A: The spin-off is the series of transactions by which HGV will separate from Hilton. To complete the spin-off, Hilton Parent will distribute to its stockholders all of the outstanding shares of HGV Parent common stock. We refer to this as the distribution. Following the spin-off, HGV will be a separate company from Hilton, and Hilton will not retain any ownership interest in HGV.

 

Q: What will I receive in the spin-off?

 

A: As a holder of Hilton Parent common stock, you will retain your Hilton Parent shares and will receive one share of HGV Parent common stock for every ten shares of Hilton Parent common stock you own as of the record date. You also will receive one share of common stock of Park Parent for every five shares of Hilton Parent common stock you own as of the record date in connection with the spin-off of that company. The number of shares of Hilton Parent common stock you own and your proportionate interest in Hilton Parent will not change as a result of the spin-off. See “The Spin-Off.”

 

Q: What is HGV Parent?

 

A: HGV Parent is a rapidly growing timeshare company that markets and sells vacation ownership intervals and manages resorts in top destinations. HGV Parent is currently a subsidiary of Hilton Parent whose shares will be distributed to Hilton Parent stockholders when the spin-off is completed. After the spin-off is completed, HGV Parent will be an independent, publicly traded company.

 

Q: Why is the separation of HGV Parent structured as a spin-off?

 

A:

Hilton Parent intends to implement the spin-off of (i) its timeshare business, which we refer to as Hilton’s “Timeshare business,” and (ii) a portfolio of 69 owned and leased hotel and resort properties, with nearly 36,000 rooms, comprising a substantial portion of Hilton’s ownership business, and certain related assets and operations, which we refer to collectively as the “Separated Real Estate business.” Hilton determined, and continues to believe, that a spin-off is the most efficient way to accomplish a separation of the Timeshare business from Hilton for various reasons, including: (i) a spin-off would be a tax-free distribution of HGV Parent common stock to Hilton Parent stockholders; (ii) a spin-off offers a higher degree of

 



 

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  certainty of completion in a timely manner, lessening disruption to current business operations; and (iii) a spin-off provides greater assurance that decisions regarding HGV’s capital structure support future financial stability. After consideration of strategic alternatives, Hilton believes that a tax-free spin-off will enhance the long-term value of both Hilton and HGV. See “The Spin-Off—Reasons for the Spin-Off.”

 

Q: Can Hilton decide to cancel the distribution of the HGV Parent common stock even if all the conditions have been met?

 

A: Yes. The distribution of HGV Parent common stock is subject to the satisfaction or waiver of certain conditions. See “The Spin-Off—Conditions to the Spin-Off.” Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents, or that market conditions or other circumstances are such that it is not advisable at that time to separate HGV from Hilton.

 

Q: What is being distributed in the spin-off?

 

A: Approximately 99 million shares of HGV Parent common stock will be distributed in the spin-off, based on the number of shares of Hilton Parent common stock expected to be outstanding as of December 15, 2016 the record date, and assuming a distribution ratio of one-to-ten. The actual number of shares of HGV Parent common stock to be distributed will be calculated on the record date. The shares of HGV Parent common stock to be distributed by Hilton Parent will constitute all of the issued and outstanding shares of HGV Parent common stock immediately prior to the distribution. See “Description of Capital Stock—Common Stock.”

 

Q: When is the record date for the distribution?

 

A: The record date is December 15, 2016.

 

Q: When will the distribution occur?

 

A: The distribution date of the spin-off is January 3, 2017. We expect that it will take the distribution agent, acting on behalf of Hilton Parent, up to two weeks after the distribution date to fully distribute the shares of HGV Parent common stock to Hilton Parent stockholders.

 

Q: What do I have to do to participate in the spin-off?

 

A: Nothing. You are not required to take any action, although we urge you to read this entire document carefully. No stockholder approval of the distribution is required or sought. You are not being asked for a proxy. No action is required on your part to receive your shares of HGV Parent common stock. You will neither be required to pay anything for the new shares nor be required to surrender any shares of Hilton Parent common stock to participate in the spin-off.

 

Q: How will stock options, time-vesting restricted stock units, and performance-vesting restricted stock units and restricted shares held by Hilton Grand Vacation employees be affected as a result of the spin-off?

 

A:

At the time of the distribution, subject to approval of the board of directors of Hilton Parent, in general, it is expected that all outstanding Hilton Parent equity-based compensation awards, whether vested or unvested, and which are held by any individual who is employed by us as of the separation will convert into awards

 



 

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  that will settle in shares of Hilton Grand Vacations common stock following the spin-off, and performance-vesting awards will generally be converted into time-vesting awards based upon a performance level to be determined by the Hilton Parent Compensation Committee prior to the separation. For more information on the treatment of equity-based compensation awards in the spin-off, see “The Spin-Off—Treatment of Outstanding Equity Awards.”

 

Q: How will fractional shares be treated in the spin-off?

 

A: Fractional shares of HGV Parent common stock will not be distributed. Fractional shares of HGV Parent common stock to which Hilton Parent stockholders of record would otherwise be entitled will be aggregated and sold in the public market by the distribution agent at prevailing market prices. The distribution agent, in its sole discretion, will determine when, how and through which broker-dealers, provided that such broker-dealers are not affiliates of Hilton Parent or HGV Parent, and at what prices to sell these shares. The aggregate net cash proceeds of the sales will be distributed ratably to those stockholders who would otherwise have received fractional shares of HGV Parent common stock. See “The Spin-Off—Treatment of Fractional Shares” for a more detailed explanation. Receipt by a stockholder of proceeds from these sales in lieu of a fractional share generally will result in a taxable gain or loss to those stockholders for U.S. federal income tax purposes. Each stockholder entitled to receive cash proceeds from these shares should consult his, her or its own tax advisor as to such stockholder’s particular circumstances. We describe the material U.S. federal income tax consequences of the distribution in more detail under “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 

Q: Why has Hilton determined to undertake the spin-off?

 

A: Hilton Parent’s board of directors has determined that the spin-off is in the best interests of Hilton Parent, its stockholders and other constituents because the spin-off will provide the following key benefits:

 

    Direct and Differentiated Access to Capital Resources to Pursue Tailored Growth Strategies. Following the spin-off, HGV will be better positioned to target a 50/50 mix between fee-for-service and owned VOI inventory sales by opportunistically allocating capital toward owned inventory. We believe that optimizing our sales mix will enable us to maximize earnings growth, free cash flow production and returns on invested capital. As a company focused solely on the timeshare business with direct access to capital and independent financial resources, we believe we will be able to execute our business and growth strategies to drive overall value to our stockholders. Similarly, as a company focused on hotel management and franchising, Hilton Parent expects to benefit from alignment with a dedicated investor base, resulting in enhanced and more efficient access to capital to pursue a growth strategy best suited for its core, capital-light fee business.

 

    Enhanced Investor Choices by Offering Investment Opportunities in Separate Entities. Hilton’s management and franchising and timeshare businesses exhibit different financial and operating characteristics and appeal to different types of investors with different investment goals and risk profiles. Finding investors who want to invest in the businesses together is more challenging than finding investors for each business individually. After the spin-off, investors should be better able to evaluate the financial performance of each company, as well as its strategy within the context of its particular market, thereby enhancing the likelihood that each company will achieve an appropriate market valuation.

 

   

Dedicated Management Team with Enhanced Strategic Focus. Following the spin-off, Hilton’s management and franchising and timeshare businesses will no longer compete for the attention and resources of a single management team and will benefit from dedicated management teams focused on designing and implementing tailored strategies to achieve the distinct goals and opportunities of each business. Moreover, free from constraints that arise from being part of a larger hospitality company,

 



 

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HGV’s dedicated management team will be able to respond more quickly and effectively to acquisition and market opportunities as well as execute its business and growth strategies.

 

    Improved Management Incentive Tools. We expect to use equity-based and other incentive awards to compensate current and future employees. In multi-business companies such as Hilton, it is difficult to structure incentives that reward employees in a manner directly related to the performance of their respective business units. By granting awards linked to the performance of a pure-play business, the compensation arrangements of each company should provide enhanced incentives for employee performance and improve the ability of each company to attract, retain and motivate qualified personnel.

 

Q: What are the U.S. federal income tax consequences of the spin-off?

 

A: Hilton Parent has received a ruling (“IRS Ruling”) from the Internal Revenue Service (“IRS”) regarding certain U.S. federal income tax aspects of the spin-off. The spin-off is conditioned on the IRS Ruling remaining in effect as of the distribution date. In addition, the spin-off is conditioned on the receipt of an opinion of Simpson Thacher & Bartlett LLP, Hilton Parent’s tax counsel (“Spin-off Tax Counsel”), confirming tax-free treatment under Section 355 of the Code of the distributions. Although Hilton Parent has no current intention to do so, such conditions are solely for the benefit of Hilton Parent and its stockholders and may be waived by Hilton Parent in its sole discretion. The material U.S. federal income tax consequences of the distribution are described in more detail under “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 

Q: Will the HGV Parent common stock be listed on a stock exchange?

 

A: Yes. Although there is not currently a public market for HGV Parent common stock, before completion of the spin-off, HGV Parent will apply to list its common stock on the NYSE under the symbol “HGV.” It is anticipated that trading of HGV Parent common stock will commence on a “when-issued” basis at least two trading days prior to the record date. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. “When-issued” trades generally settle within four trading days after the distribution date. On the first trading day following the distribution date, any “when-issued” trading with respect to HGV Parent common stock will end, and “regular-way” trading will begin. “Regular-way” trading refers to trading after a security has been issued and typically involves a transaction that settles on the third full trading day following the date of the transaction. See “Trading Market.”

 

Q: Will my shares of Hilton Parent common stock continue to trade?

 

A: Yes. Hilton Parent common stock will continue to be listed and trade on the NYSE under the symbol “HLT.”

 

Q: If I sell, on or before the distribution date, shares of Hilton Parent common stock that I held on the record date, am I still entitled to receive shares of HGV Parent common stock distributable with respect to the shares of Hilton Parent common stock I sold?

 

A:

Beginning on or shortly before the record date and continuing through the distribution date for the spin-off, Hilton Parent common stock will begin to trade in two markets on the New York Stock Exchange: a “regular-way” market and an “ex-distribution” market. If you hold shares of Hilton Parent common stock as of the record date for the distribution and choose to sell those shares in the “regular-way” market after the record date for the distribution and on or before the distribution date, you also will be selling the right to receive the shares of HGV Parent common stock in connection with the spin-off. However, if you hold

 



 

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  shares of Hilton Parent common stock as of the record date for the distribution and choose to sell those shares in the “ex-distribution” market after the record date for the distribution and on or before the distribution date, you will still receive the shares of HGV Parent common stock in the spin-off.

 

Q: Will the spin-off affect the trading price of my Hilton Parent stock?

 

A: Yes. The trading price of shares of Hilton Parent common stock immediately following the distribution is expected to be lower than immediately prior to the distribution because its trading price will no longer reflect the value of the Timeshare business and Separated Real Estate business. However, we cannot predict the price at which the Hilton Parent shares will trade following the spin-off.

 

Q: What financing transactions will be undertaken in connection with the spin-off?

 

A: Subject to market conditions, we expect to complete one or more financing transactions on or prior to the completion of the spin-off. As a result of these financing transactions, upon consummation of the spin-off we expect to have total recourse indebtedness of approximately $500 million, excluding $450 million expected to be outstanding under the non-recourse Timeshare Facility and between $250 million and $300 million of non-recourse Securitized Debt expected to be outstanding. Included in our expected outstanding non-recourse Timeshare Facility balance is an intended borrowing of an additional $300 million, which proceeds will be used to distribute cash to Hilton Parent. After giving effect to the foregoing financing transactions, upon consummation of the spin-off, we expect to have $1.22 billion of total recourse and non-recourse indebtedness outstanding. We have not yet identified the specific sources of funds and there can be no assurances that any such financing transactions will be completed in the timeframe or size indicated or at all. The financing transactions will be described in greater detail in a subsequent amendment to the registration statement of which this information statement forms a part. See “The Spin-Off—Financing Transactions” and “Description of Certain Indebtedness.”

 

Q: What is the estimated cash amount that Hilton Grand Vacations will contribute to Hilton Parent?

 

A: Hilton Grand Vacations will contribute up to approximately $500 million in cash to Hilton Parent from proceeds of financing transactions expected to be completed on or prior to completion of the spin-off.

 

Q: Who will comprise the senior management team and board of directors of HGV Parent after the spin-off?

 

A: The executive officers following the spin-off will include Mark D. Wang, President and Chief Executive Officer, who will also serve as a director; James E. Mikolaichik, Chief Financial Officer; Michael D. Brown, Chief Operating Officer; Charles R. Corbin, Jr., General Counsel; and Stan R. Soroka, Chief Customer Officer. See “Management” for information on our executive officers and board of directors.

 

Q: What will the relationship be between Hilton and HGV after the spin-off?

 

A:

Following the spin-off, HGV Parent will be an independent, publicly traded company, and Hilton Parent will have no continuing stock ownership interest in HGV Parent. HGV Parent will have entered into a Distribution Agreement with Hilton Parent and Park Parent and will enter into several other agreements for the purpose of allocating among Hilton Parent, HGV Parent and Park Parent various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities). These agreements also will govern HGV’s relationship with Hilton and Park Hotels & Resorts

 



 

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  following the spin-off and will provide arrangements for employee matters, tax matters, intellectual property matters, insurance matters and other specified liabilities, rights and obligations attributable to periods before and, in some cases, after the spin-off. These agreements also will include arrangements with respect to transitional services to be provided by Hilton to HGV and Park Hotels & Resorts. The Distribution Agreement will provide, in general, that HGV will indemnify Hilton against any and all liabilities arising out of HGV’s business as constituted in connection with the spin-off and any other liabilities and obligations assumed by HGV, and that Hilton will indemnify HGV against any and all liabilities arising out of the businesses of Hilton as constituted in connection with the spin-off and any other liabilities and obligations assumed by Hilton. In addition, HGV Parent and Hilton will enter into a long-term license agreement with Hilton will give HGV the exclusive right to market, sell and rent VOI inventory and manage resorts under the Hilton Grand Vacations brand.

 

Q: What will HGV Parent’s dividend policy be after the spin-off?

 

A: Although we expect to return capital to stockholders through dividends or otherwise in the future, we have no current plans to pay dividends on our common stock. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Q: What are the anti-takeover effects of the spin-off?

 

A: Some provisions of the amended and restated certificate of incorporation and bylaws of HGV Parent, Delaware law and possibly the agreements governing HGV Parent’s new debt, as each will be in effect immediately following the spin-off, may have the effect of making more difficult an acquisition of control of HGV in a transaction not approved by HGV’s board of directors. See “Description of Capital Stock—Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws and Certain Provisions of Delaware Law.” In addition, under the Tax Matters Agreement, HGV Parent will agree, subject to certain terms, conditions and exceptions, not to enter into any transaction for a period of two years following the distribution involving an acquisition (including issuance) of HGV Parent common stock or certain other transactions that could cause the distribution to be taxable to Hilton Parent. The parties also will agree to indemnify each other for any tax resulting from any transaction to the extent a party’s actions caused such tax liability, whether or not the indemnified party consented to such transaction or the indemnifying party was otherwise permitted to enter into such transaction under the Tax Matters Agreement, and for all or a portion of any tax liabilities resulting from the distribution under certain other circumstances. Generally, Hilton Parent will recognize a taxable gain on the distribution if there are (or have been) one or more acquisitions (including issuances) of HGV Parent capital stock representing 50 percent or more of HGV Parent’s stock, measured by vote or value, and the acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Any such acquisition of HGV Parent common stock within two years before or after the distribution (with exceptions, including public trading by less-than-5% stockholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. Moreover, under the Stockholders Agreement, HGV Parent will agree to restrict certain issuances and repurchases of its stock to manage the aggregate shift in ownership of HGV Parent’s stock as a result of such acquisitions. As a result, HGV’s obligations may discourage, delay or prevent a change of control of HGV.

 

Q: What are the risks associated with the spin-off?

 

A: There are a number of risks associated with the spin-off and ownership of HGV Parent common stock. These risks are discussed under “Risk Factors.”

 



 

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Q: Where can I get more information?

 

A. If you have any questions relating to the mechanics of the distribution, you should contact the distribution agent at:

Wells Fargo Shareowner Services

P.O. Box 64874

St. Paul, MN 55164-0874

Toll Free Number: 800-468-9716

Before completion of the spin-off, if you have any questions relating to the spin-off, you should contact Hilton Parent at:

Hilton Worldwide Holdings Inc.

Investor Relations

Phone: 703-883-5476

Email: ir@hilton.com

www.hiltonworldwide.com

After completion of the spin-off, if you have any questions relating to HGV, you should contact HGV Parent at:

Hilton Grand Vacations Inc.

Investor Relations

Phone: 407-722-3327

Email: rlafleur@hgvc.com

www.hiltongrandvacations.com

 



 

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Summary of the Spin-Off

 

Distributing Company

Hilton Worldwide Holdings Inc., a Delaware corporation. After the distribution, Hilton Parent will not own any shares of HGV Parent common stock.

 

Distributed Company

Hilton Grand Vacations Inc., a Delaware corporation and a wholly owned subsidiary of Hilton Parent. After the spin-off, HGV Parent will be an independent, publicly traded company.

 

Distributed Securities

All of the outstanding shares of HGV Parent common stock owned by Hilton Parent, which will be 100 percent of the HGV Parent common stock issued and outstanding immediately prior to the distribution.

 

Record Date

The record date for the distribution is December 15, 2016.

 

Distribution Date

The distribution date is January 3, 2017.

 

Internal Reorganization

As part of the spin-off, Hilton will undergo an internal reorganization, which we refer to as the “internal reorganization,” pursuant to which, among other things and subject to limited exceptions:

 

    all of the assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) associated with the Timeshare business will be retained by or transferred to us or our subsidiaries;

 

    all of the assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) associated with the Separated Real Estate business will be retained by or transferred to Park Parent or its subsidiaries; and

 

    all other assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) of Hilton will be retained by or transferred to Hilton Parent or its subsidiaries (other than us, Park Parent or our respective subsidiaries).

 

  In particular, following the internal reorganization, Hilton Grand Vacations will own HRC, the legal entity that currently owns and operates the entirety of Hilton Parent’s Timeshare business, which has historically operated as a distinct operating segment. See the financial statements of HRC included in this information statement for additional details on the historical assets, liabilities and obligations of the Timeshare business.

 

  After completion of the spin-off:

 

    we will be an independent, publicly traded company (NYSE : HGV), and will own and operate Hilton’s timeshare business;

 



 

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    Park Parent will be an independent, self-administered, publicly traded company (NYSE : PK), and will hold a portfolio of Hilton’s real estate assets and certain other assets and operations as described herein; and

 

    Hilton will continue to be an independent, publicly traded company (NYSE: HLT) and continue to own and operate its management and franchising business and will continue to hold certain real estate assets not transferred to Park Hotels & Resorts as part of the spin-off.

 

  See “The Spin-Off—Manner of Effecting the Spin-Off—Internal Reorganization.”

 

Distribution Ratio

Each holder of Hilton Parent common stock will receive one share of HGV Parent common stock for every ten shares of Hilton Parent common stock held at 5:00 p.m., Eastern time, on December 15, 2016.

 

  Immediately following the spin-off, HGV Parent expects to have 27 record holders of shares of common stock and approximately 99 million shares of common stock outstanding, based on the number of stockholders and outstanding shares of Hilton Parent common stock on November 8, 2016 and the distribution ratio. The figures exclude shares of Hilton Parent common stock held directly or indirectly by Hilton Parent, if any. The actual number of shares to be distributed will be determined on the record date and will reflect any repurchases of shares of Hilton Parent common stock and issuances of shares of Hilton Parent common stock in respect of awards under Hilton Parent equity-based incentive plans between the date the Hilton Parent board of directors declares the dividend for the distribution and the record date for the distribution.

 

The Distribution

On the distribution date, Hilton Parent will release the shares of HGV Parent common stock to the distribution agent to distribute to Hilton Parent stockholders. The distribution of shares will be made in book-entry form only, which means that no physical share certificates will be issued. It is expected that it will take the distribution agent up to two weeks to issue shares of HGV Parent common stock to you or to your bank or brokerage firm electronically on your behalf by way of direct registration in book-entry form. Trading of our shares will not be affected during that time. You will not be required to make any payment, surrender or exchange your shares of Hilton Parent common stock or take any other action to receive your shares of HGV Parent common stock.

 

Fractional Shares

The distribution agent will not distribute any fractional shares of HGV Parent common stock to Hilton Parent stockholders. Fractional shares of HGV Parent common stock to which Hilton Parent stockholders of record would otherwise be entitled will be aggregated and sold in the public market by the distribution agent. The aggregate

 



 

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net cash proceeds of the sales will be distributed ratably to those stockholders who would otherwise have received fractional shares of HGV Parent common stock. Receipt of the proceeds from these sales generally will result in a taxable gain or loss to those stockholders for U.S. federal income tax purposes. Each stockholder entitled to receive cash proceeds from these shares should consult his, her or its own tax advisor as to such stockholder’s particular circumstances. The material U.S. federal income tax consequences of the distribution are described in more detail under “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 

Conditions to the Spin-Off

Completion of the spin-off is subject to the satisfaction or waiver by Hilton Parent of the following conditions:

 

    the final approval by the board of directors of Hilton Parent of the spin-off and all related transactions and the determination of the record date, which approval may be given or withheld at its absolute and sole discretion;

 

    our Registration Statement on Form 10, of which this information statement forms a part, shall have been declared effective by the Securities and Exchange Commission (the “SEC”), no stop order suspending the effectiveness thereof shall be in effect, no proceedings for such purpose shall be pending before or threatened by the SEC, and this information statement, or a notice of internet availability thereof, shall have been mailed to the Hilton Parent stockholders;

 

    HGV Parent common stock shall have been approved for listing on the NYSE, subject to official notice of distribution;

 

    Hilton Parent shall have obtained an opinion from Spin-off Tax Counsel, in form and substance satisfactory to Hilton Parent, to the effect that the spin-off will qualify as a tax-free distribution under Section 355 of the Code;

 

    the IRS Ruling shall not have been revoked or modified in any material respect;

 

    prior to the distribution date, the Hilton Parent board of directors shall have obtained opinions from a nationally recognized valuation firm, in form and substance satisfactory to Hilton, with respect to the capital adequacy and solvency of each of Hilton, HGV and Park Hotels & Resorts after giving effect to the spin-off;

 

    any material governmental approvals and other consents necessary to consummate the spin-off shall have been received;

 

    no order, injunction or decree issued by any governmental entity of competent jurisdiction or other legal restraint or prohibition preventing the consummation of all or any portion of the spin-off shall be pending, threatened, issued or in effect, and no other event shall have occurred or failed to occur that prevents the consummation of all or any portion of the spin-off;

 



 

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    no other events or developments shall have occurred or failed to occur that, in the judgment of the board of directors of Hilton Parent, would result in the distribution having a material adverse effect on Hilton or its stockholders;

 

    the internal reorganization shall have been completed, except for such steps as Hilton Parent in its sole discretion shall have determined may be completed after the distribution date;

 

    all necessary actions shall have been taken to cause the board of directors of HGV Parent to consist of the individuals identified in this information statement as directors of HGV Parent;

 

    all necessary actions shall have been taken to cause the officers of HGV to be the individuals identified as such in this information statement;

 

    all necessary actions shall have been taken to adopt the forms of amended and restated certificate of incorporation and bylaws filed by HGV Parent with the SEC as exhibits to the Registration Statement on Form 10, of which this information statement forms a part; and

 

    each of the Distribution Agreement, the Tax Matters Agreement, the Employee Matters Agreement, the Transition Services Agreement and the other ancillary agreements shall have been executed by each party.

 

  Completion of the spin-off of Park Hotels & Resorts will be subject to similar conditions as those listed above.

 

  The fulfillment of the foregoing conditions will not create any obligation on the part of Hilton to effect the spin-off. We are not aware of any material federal, foreign or state regulatory requirements that must be complied with or any material approvals that must be obtained, other than compliance with SEC rules and regulations, approval for listing on the NYSE and the declaration of effectiveness of the Registration Statement on Form 10, of which this information statement forms a part, by the SEC, in connection with the distribution. Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents or that it is not advisable for HGV to separate from Hilton at that time. For more information, see “The Spin-Off—Conditions to the Spin-Off.”

 

Trading Market and Symbol

We intend to list HGV Parent common stock on the NYSE under the ticker symbol “HGV.” We anticipate that, at least two trading days prior to the record date, trading of shares of HGV Parent common stock will begin on a “when-issued” basis and will continue up to and including the distribution date, and we expect “regular-way” trading

 



 

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of HGV Parent common stock will begin the first trading day after the distribution date. We also anticipate that, at least two trading days prior to the record date, there will be two markets in Hilton Parent common stock: (i) a “regular-way” market on which shares of Hilton Parent common stock will trade with an entitlement for the purchaser of Hilton Parent common stock to shares of HGV Parent common stock to be distributed pursuant to the distribution; and (ii) an “ex-distribution” market on which shares of Hilton Parent common stock will trade without an entitlement for the purchaser of Hilton Parent common stock to shares of HGV Parent common stock. For more information, see “Trading Market.”

 

Tax Consequences of the Spin-Off

Hilton Parent has received the IRS Ruling regarding certain U.S. federal income tax aspects of the spin-off. The spin-off is conditioned upon, among other things, the IRS Ruling remaining in effect as of the distribution date. In addition, the spin-off is conditioned on the receipt of an opinion of Spin-off Tax Counsel confirming the tax-free treatment of the spin-off. See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 

  Each stockholder is urged to consult his, her or its tax advisor as to the specific tax consequences of the spin-off to such stockholder, including the effect of any state, local or non-U.S. tax laws and of changes in applicable tax laws.

 

Relationship with Hilton after the Spin-Off

We will enter into a Distribution Agreement and several other agreements with Hilton Parent and Park Parent related to the spin-off. These agreements will govern the relationship among us, Hilton and Park Hotels & Resorts after completion of the spin-off and provide for the allocation among us, Hilton and Park Hotels & Resorts of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities). The Distribution Agreement will provide for the allocation of assets and liabilities among Hilton, HGV and Park Hotels & Resorts and will establish the rights and obligations between and among the parties following the distribution. We intend to enter into one or more Transition Services Agreements with Hilton Parent pursuant to which certain services will be provided on an interim basis following the distribution. We also intend to enter into an Employee Matters Agreement that will set forth the agreements among us, Park Hotels & Resorts and Hilton concerning certain employee, compensation and benefit-related matters. Further, we intend to enter into a Tax Matters Agreement with Hilton Parent and Park Parent regarding the sharing of taxes incurred before and after completion of the spin-off, certain indemnification rights with respect to tax matters and certain restrictions on our conduct following the distribution intended to preserve the tax-free status of the spin-off. In addition, our long-term license agreement with Hilton will give us the exclusive right to market, sell and rent VOI inventory and manage resorts under the

 



 

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Hilton Grand Vacations brand. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off,” and describe some of the risks of these arrangements under “Risk Factors—Risks Related to the Spin-Off.”

 

Dividend Policy

Although we expect to return capital to stockholders through dividends or otherwise in the future, we have no current plans to pay dividends on our common stock. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Financing Transactions

Subject to market conditions, we expect to complete one or more financing transactions on or prior to the completion of the spin-off. As a result of these financing transactions, upon consummation of the spin-off we expect to have total recourse indebtedness of approximately $500 million, excluding $450 million expected to be outstanding under the non-recourse Timeshare Facility and between $250 million and $300 million of non-recourse Securitized Debt expected to be outstanding. Included in our expected outstanding non-recourse Timeshare Facility balance is an intended borrowing of an additional $300 million, which proceeds will be used to distribute cash to Hilton Parent. After giving effect to the foregoing financing transactions, upon consummation of the spin-off, we expect to have $1.22 billion of total recourse and non-recourse indebtedness outstanding. There can be no assurances that any such financing transactions will be completed in the timeframe or size indicated or at all. See “The Spin-Off—Financing Transactions” and “Description of Certain Indebtedness.”

 

Transfer Agent

Wells Fargo Bank, N.A.

 

Risk Factors

We face both general and specific risks and uncertainties relating to our business, our relationship with Hilton and our being an independent, publicly traded company. We also are subject to risks relating to the spin-off. You should carefully read the risk factors set forth in the section entitled “Risk Factors” in this information statement.

 



 

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Summary Historical and Unaudited Pro Forma Consolidated Financial Data

We derived the summary statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the summary balance sheet data as of December 31, 2015 and 2014 from our audited consolidated financial statements included elsewhere in this information statement. We derived the summary statement of operations data for the nine months ended September 30, 2016 and 2015 and the summary balance sheet data as of September 30, 2016 from our unaudited condensed consolidated financial statements included elsewhere in this information statement. We derived the summary balance sheet data as of September 30, 2015 and December 31, 2013 from our unaudited consolidated financial statements that are not included in this information statement. We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and, in our opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results for any interim period are not necessarily indicative of the results that may be expected for the full year. Our historical results are not necessarily indicative of the results expected for any future period.

The unaudited summary pro forma financial information has been prepared to reflect the spin-off and related transactions described under “Unaudited Pro Forma Consolidated Financial Statements.” The following unaudited summary pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the relevant transactions had been consummated on the date indicated, nor is it indicative of future operating results. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and we believe such assumptions are reasonable under the circumstances.

This summary financial data is not indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we been operating as an independent, publicly traded company during the periods presented, including changes that will occur in our operations and capitalization as a result of the spin-off from Hilton. For example, our historical consolidated financial statements include allocations of expenses for certain functions and services provided by Hilton. These costs may not be representative of the future costs we will incur, either positively or negatively, as an independent, public company. Our historical consolidated financial statements also include allocations of debt, and related balances, related to debt entered into by Hilton, which was secured by our assets.

The summary historical financial data below should be read together with the consolidated financial statements and related notes thereto, as well as “Selected Historical Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness” and the other financial information included elsewhere in this information statement.

 

    Pro Forma                                
    Nine Months
Ended
September 30,
2016
    Year Ended
December 31,
2015
    Nine Months
Ended
September 30,
    Year Ended December 31,  
($ in millions)           2016             2015         2015     2014     2013  

Summary Statement of Operations Data:

             

Total revenues

  $ 1,168      $ 1,475      $ 1,168      $ 1,094      $ 1,475      $ 1,317      $ 1,224   

Total expenses

    912        1,167        921        863        1,154        1,004        975   

Net income

    136        168        130        125        174        167        128   

 



 

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    Pro Forma                                
    September 30,
2016
    September 30,     December 31,  
($ in millions)         2016             2015         2015     2014     2013  

Summary Balance Sheet Data:

           

Cash

  $ 48      $ 7      $ 2      $ 4      $ 2      $ 2   

Restricted cash

    90        90        86        75        62        61   

Securitized timeshare financing receivables

    268        268        377        350        468        221   

Unsecuritized timeshare financing receivables

    724        724        574        626        460        681   

Total assets

    2,143        1,859        1,706        1,724        1,621        1,568   

Non-recourse debt(1)

    717        417        530        502        625        670   

Debt(1)(2)

    492        743        644        634        719        828   

Total liabilities(1)(2)

    2,024        1,907        1,856        1,830        1,994        2,103   

 

(1)  All periods presented reflect the adoption of Accounting Standards Updated No. 2015-03 and No. 2015-15.
(2)  Includes allocated Parent debt of $743 million and $644 million as of September 30, 2016 and 2015, respectively, and $634 million, $719 million and $828 million as of December 31, 2015, 2014 and 2013, respectively.

 

    Nine Months Ended
September 30,
    Year Ended
December 31,
 
($ in millions)       2016             2015         2015     2014     2013  

Other Financial Data:

         

Contract sales(1)

  $ 863      $ 794      $ 1,068      $ 905      $ 829   

EBITDA(2)

    274        257        356        349        289   

Adjusted EBITDA(2)

    301        270        373        353        306   

Real estate sales and financing segment Adjusted EBITDA

    259        236        329        305        294   

Resort operations and club management segment Adjusted EBITDA

    139        119        162        144        104   

Segment Adjusted EBITDA margin(3)

    36.4     34.5     35.5     36.7     35.0

ROIC(4)

        41.3     47.7     29.5

 

(1)  Contract sales represent the total amount of vacation ownership interest products under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales is not a recognized term under generally accepted accounting principles in the United States (“U.S. GAAP”), and should not be considered in isolation or as an alternative to sales of VOIs, net or any other comparable operating measure derived in accordance with U.S. GAAP. For a reconciliation of contract sales to sales of VOIs, net, which we believe is the most closely comparable U.S. GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Real Estate.”
(2)  EBITDA is defined by us as net income before interest expense, income tax expense and depreciation and amortization. We evaluate our operating performance using a metric we refer to as “Adjusted EBITDA” which is defined as EBITDA further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs; (vi) share-based compensation expenses; (vii) severance, relocation and other expenses; and (viii) other items. EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. For further discussion on EBITDA and Adjusted EBITDA see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” For a reconciliation of EBITDA and Adjusted EBITDA to net income, which we believe is the most closely comparable U.S. GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Segment Results.”

 



 

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(3)  Segment Adjusted EBITDA margin is defined as total segment Adjusted EBITDA as a percentage of total segment revenues. Segment Adjusted EBITDA margin is not a recognized term under U.S. GAAP and should not be considered as an alternative measure of financial performance derived in accordance with U.S. GAAP. The following table provides the calculation of segment Adjusted EBITDA margin:

 

     Nine Months Ended
September 30,
    Year Ended December 31,  
($ in millions)        2016             2015         2015     2014     2013  

Real estate sales and financing revenues

   $ 843      $ 803      $ 1,078      $ 942      $ 898   

Resort operations and club management revenues

     251        225        307        283        239   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenues

   $ 1,094      $ 1,028      $ 1,385      $ 1,225      $ 1,137   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate sales and financing segment Adjusted EBITDA

   $ 259      $ 236      $ 329      $ 305      $ 294   

Resort operations and club management segment Adjusted EBITDA

     139        119        162        144        104   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segment Adjusted EBITDA

   $ 398      $ 355      $ 491      $ 449      $ 398   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment Adjusted EBITDA margin

     36.4     34.5     35.5     36.7     35.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(4)  We define return on invested capital (“ROIC”) as Adjusted EBITDA less non-recourse debt interest expense and depreciation and amortization (“Adjusted EBIT”), divided by average invested capital. Invested capital includes allocated Parent debt, deferred revenues, deferred income tax liabilities and total Parent deficit. ROIC and Adjusted EBIT are not recognized terms under U.S. GAAP and should not be considered as alternatives to other measures of financial performance or liquidity derived in accordance with U.S. GAAP. ROIC should not be considered as a measure of our stockholders’ return on investment. In addition, our definition of ROIC may not be comparable to similarly titled measures of other companies. We believe ROIC is a meaningful performance metric for investors and analysts because it measures how effectively we use capital to generate profits. The following table provides the calculation of ROIC:

 

     As of and for the Year Ended December 31,  
($ in millions)            2015                     2014                     2013          

Adjusted EBITDA

   $ 373      $ 353      $ 306   

Less:

      

Non-recourse debt interest expense

     13        15        7   

Depreciation and amortization

     22        18        16   
  

 

 

   

 

 

   

 

 

 

Adjusted EBIT

   $ 338      $ 320      $ 283   
  

 

 

   

 

 

   

 

 

 

Allocated Parent debt

   $ 634      $ 719      $ 828   

Deferred revenues

     103        100        112   

Deferred income tax liabilities

     287        272        218   

Total Parent deficit

     (106     (373     (535
  

 

 

   

 

 

   

 

 

 

Invested capital

   $ 918      $ 718      $ 623   
  

 

 

   

 

 

   

 

 

 

Average invested capital(a)

   $ 818      $ 671      $ 960   
  

 

 

   

 

 

   

 

 

 

ROIC

     41.3     47.7     29.5
  

 

 

   

 

 

   

 

 

 

 

  (a)  Represents the average of the invested capital as of the year end presented and the invested capital as of the end of the immediate preceding year.

 



 

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RISK FACTORS

Owning our common stock involves a high degree of risk. You should consider carefully the following risk factors and all other information contained in this information statement. If any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, occur, our business, liquidity, financial condition and results of operations could be materially and adversely affected. If this were to happen, the market price of our common stock could decline significantly, and you could lose all or a part of the value of your ownership in our common stock. Some statements in this information statement, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section in this information statement entitled “Forward-Looking Statements.”

Risks Related to Our Business and Industry

We are subject to the business, financial and operating risks inherent to the timeshare industry, any of which could reduce our revenues and limit opportunities for growth.

Our business is subject to a number of business, financial and operating risks inherent to the timeshare industry, including:

 

    significant competition from other timeshare businesses and hospitality providers in the markets in which we operate;

 

    market and/or consumer perception of timeshare companies and the industry in general;

 

    changes in operating costs, including energy, food, employee compensation and benefits and insurance;

 

    increases in costs due to inflation or otherwise, including increases in our operating costs, that may not be fully offset by price and fee increases in our business;

 

    changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs;

 

    the costs and administrative burdens associated with complying with applicable laws and regulations;

 

    significant increases in cost for health care coverage for employees and potential government regulation with respect to health care coverage;

 

    shortages of labor or labor disruptions;

 

    increases in the use of third-party and competitor internet services to book hotel reservations, secure short-term lodging accommodations and market vacation rental properties;

 

    the availability and cost of capital necessary for us and third-party developers with whom we do business to fund investments, capital expenditures and service debt obligations;

 

    our ability to securitize the receivables that we originate in connection with VOI sales;

 

    delays in or cancellations of planned or future development or refurbishment projects;

 

    the financial condition of third-party developers with whom we do business;

 

    relationships with third-party developers, our Club members and HOAs;

 

    changes in desirability of geographic regions of our resorts and affiliated resorts, geographic concentration of our operations and shortages of desirable locations for development;

 

    changes in the supply and demand for our products and services;

 

    private resales of VOIs and the sale of VOIs in the secondary market; and

 

    unlawful or deceptive third-party VOI resale or vacation package sales schemes.

 

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Any of these factors could increase our costs or limit or reduce the prices we are able to charge for our products and services or otherwise affect our ability to maintain existing properties, develop new properties or source VOI supply from third parties. As a result, any of these factors can reduce our revenues and limit opportunities for growth.

Macroeconomic and other factors beyond our control can adversely affect and reduce demand for our products and services.

Macroeconomic and other factors beyond our control can reduce demand for our products and services, including demand for timeshare properties. These factors include, but are not limited to:

 

    changes in general economic conditions, including low consumer confidence, unemployment levels and depressed real estate prices resulting from the severity and duration of any downturn in the U.S. or global economy;

 

    war, political conditions or civil unrest, violence or terrorist activities or threats and heightened travel security measures instituted in response to these events;

 

    the financial and general business condition of the travel industry;

 

    statements, actions or interventions by governmental officials related to travel and the resulting negative public perception of such travel;

 

    conditions that negatively shape public perception of travel, including travel-related accidents and outbreaks of pandemic or contagious diseases, such as Ebola, avian flu, severe acute respiratory syndrome (SARS), H1N1 (swine flu) and the Zika virus;

 

    cyber-attacks;

 

    climate change or availability of natural resources;

 

    natural or manmade disasters, such as earthquakes, windstorms, tornadoes, hurricanes, typhoons, tsunamis, volcanic eruptions, floods, drought, fires, oil spills and nuclear incidents;

 

    changes in the desirability of particular locations or travel patterns of customers; and

 

    organized labor activities, which could cause a diversion of business from resorts involved in labor negotiations and loss of business generally for the resorts we manage as a result of certain labor tactics.

Any one or more of these factors can adversely affect, and from time to time have adversely affected, individual resorts, particular regions and our business, financial condition and results of operations.

Contraction in the global economy or low levels of economic growth could adversely affect our revenues and profitability as well as limit or slow our future growth.

Consumer demand for products and services provided by the timeshare industry is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Decreased global or regional demand for products and services provided by the timeshare industry can be especially pronounced during periods of economic contraction or low levels of economic growth, and the recovery period in our industry may lag overall economic improvement. Declines in demand for our products and services due to general economic conditions could negatively affect our business by decreasing the revenues we are able to generate from our VOI sales, financing activities and Club and resort operations. In addition, many of the expenses associated with our business, including personnel costs, interest, rent, property taxes, insurance and utilities, are relatively fixed. During a period of overall economic weakness, if we are unable to meaningfully decrease these costs as demand for our products and services decreases, our business operations and financial performance may be adversely affected.

 

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We do not own the Hilton brands and our business will be materially harmed if we breach our license agreement with Hilton or it is terminated.

In connection with the spin-off, Hilton will retain ownership of the Hilton-branded trademarks, tradenames and certain related intellectual property used in the operation of our business. We will enter into a license agreement with Hilton granting us the right to use the Hilton-branded trademarks, trade names and related intellectual property in our business for the term of the agreement. If we breach our obligations under the license agreement, Hilton may be entitled to terminate the license agreement or terminate our rights to use the Hilton brands and other Hilton intellectual property at properties that do not meet applicable standards and policies, or to exercise other remedies, any of which could have a material adverse effect on the results of our operations.

The termination of the license agreement or exercise of other remedies would materially harm our business and results of operations and impair our ability to market and sell our products and maintain our competitive position. For example, if we are not able to rely on the strength of the Hilton brands to attract prospective members and guests in the marketplace, our revenue and profits would decline and our marketing and sales expenses would increase. If we are not able to use Hilton’s marketing databases and corporate-level advertising channels to reach potential members and guests, including www.hilton.com as a channel through which to market available inventory, our member growth would be adversely affected and our revenue would materially decline, and it is uncertain whether we would be able to replace the revenue associated with those channels.

Even if the license agreement remains in effect, the termination of our rights to use the licensed marks (as described below) at properties that fail to meet applicable standards and policies, or any deterioration of quality or reputation of the Hilton brands (even deterioration not leading to termination of our rights under the license agreement or not caused by us), could also harm our reputation and impair our ability to market and sell our products at the subject properties, which could materially harm our business.

In addition, if license agreement terms relating to the Hilton HHonors loyalty program also terminate, we would not be able to offer Hilton HHonors points to our members and guests. This would adversely affect our ability to sell our products, offer the flexibility associated with our Club membership and sustain our collection performance on our timeshare financing receivables portfolio. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off—License Agreement.”

We will rely on Hilton to consent to our use of its trademarks at new properties we manage in the future.

Under the terms of our license agreement with Hilton, we will be required to obtain Hilton’s consent to use its trademarks in circumstances specified in the agreement. Hilton may reject a proposed project in certain circumstances. Any requirements to obtain Hilton’s consent to our expansion plans, or the need to identify and secure alternative expansion opportunities because Hilton does not allow us to use its trademarks with proposed new projects, may delay implementation of our expansion plans, cause us to incur additional expense or reduce the financial viability of our projects. Further, if Hilton does not permit us to use its trademarks in connection with our expansion plans, our ability to expand our Hilton-branded timeshare business would cease and our ability to remain competitive may be materially adversely affected.

Our business depends on the quality and reputation of the Hilton brands and affiliation with the Hilton HHonors loyalty program.

Currently, all of our products and services are offered under the Hilton brand names and affiliated with Hilton’s HHonors loyalty program, and we intend to continue to develop and offer products and services under the Hilton brands and affiliated with the Hilton HHonors loyalty program in the future. The concentration of our products and services under these brands and program may expose us to risks of brand or program deterioration, or reputational decline, that are greater than if our portfolio were more diverse. Furthermore, as we are not the owner of the Hilton brands or the Hilton HHonors loyalty program, changes to these brands and program or our

 

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access to them, including our ability to buy points to offer to our members and potential members, could negatively affect our business. Any failure by Hilton to protect the trademarks, tradenames and intellectual property that we license from it could reduce the value of the Hilton brands and also harm our business. If these brands or program deteriorate or materially change in an adverse manner, or the reputation of these brands or program declines, our market share, reputation, business, financial condition or results of operations could be materially adversely affected.

Our dependence on development activities exposes us to project cost and completion risks.

We secure VOI inventory in part by developing new timeshare properties and new phases of existing timeshare properties. Our ongoing involvement in the development of inventory presents a number of risks, including:

 

    future weakness in the capital markets limiting our ability to raise capital for completion of projects or for development of future properties;

 

    construction costs, to the extent they escalate faster than the pace at which we can increase the price of VOIs, adversely affecting our margins;

 

    construction delays, zoning and other local, state or federal governmental approvals, cost overruns, lender financial defaults, or natural or man-made disasters, such as earthquakes, tsunamis, hurricanes, floods, fires, volcanic eruptions and oil spills, increasing overall project costs, affecting timing of project completion or resulting in project cancellations;

 

    any liability or alleged liability or resultant delays associated with latent defects in design or construction of projects we have developed or that we construct in the future adversely affecting our business, financial condition and reputation;

 

    failure by third-party contractors to perform for any reason, exposing us to operational, reputational and financial harm; and

 

    the existence of any title defects in properties we acquire.

We also source inventory from third-party developers that are exposed to such risks, and the occurrence of any of these risks could have a material adverse effect on our access to the inventory sourced from these developers.

A decline in developed or acquired VOI inventory or our failure to enter into and maintain fee-for-service agreements may have an adverse effect on our business or results of operations.

In addition to VOI supply that we develop or acquire, we source VOIs through fee-for-service agreements with third-party developers. If we fail to develop timeshare properties, acquire inventory or are unsuccessful in entering into new agreements with third-party developers, we may experience a decline in VOI supply, which could result in a decrease in our revenues. 78 percent of our contract sales were from capital-efficient sources for the year ended December 31, 2015. As part of our strategy to optimize our sales mix of capital-efficient inventory, we will continue to acquire inventory and enter into additional fee-for-service agreements to source inventory. These arrangements may expose us to additional risk as we will not control development activities or timing of development completion. If third parties with whom we enter into agreements are not able to fulfill their obligations to us, the inventory we expect to acquire or market and sell on their behalf may not be available on time or at all, or may not otherwise be within agreed-upon specifications. If our counterparties do not perform as expected and we do not have access to the expected inventory or obtain access to inventory from alternative sources on a timely basis, our ability to achieve sales goals may be adversely affected.

In addition, a decline in VOI supply could result in a decrease of financing revenues that are generated by VOI purchases and fee and rental revenues that are generated by our resort and club management services.

 

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We operate in a highly competitive industry.

The timeshare industry is highly competitive. The Hilton brands we use compete with the timeshare brands affiliated with major hotel chains in national and international venues, as well as more generally with other vacation options such as cruises and the vacation rental options (e.g., hotels, resorts and condominium rentals) generally offered by the lodging and travel industry.

We also compete with other timeshare developers for sales of VOIs based principally on location, quality of accommodations, price, service levels and amenities, financing terms, quality of service, terms of property use, reservation systems, flexibility for VOI owners to exchange into time at other timeshare properties or other travel rewards, including access to hotel loyalty programs, as well as brand name recognition and reputation. A number of our competitors are significantly larger with potentially greater access to capital resources and broader marketing, sales and distribution capabilities than we have. We also compete with numerous other smaller owners and operators of timeshare resorts, as well as home and apartment sharing services that market available privately owned residential properties that can be rented on a nightly, weekly or monthly basis. In addition, we compete with national and independent timeshare resale companies and members reselling existing VOIs, which could reduce demand or prices for sales of new VOIs. We also compete with other timeshare management companies in the management of resorts on behalf of owners on the basis of quality, cost, types of services offered and relationship. There is also significant competition for talent at all levels within the industry, in particular for sales and management.

We also compete for property acquisitions and partnerships with entities that have similar investment objectives as we do. This competition could limit the number of, or negatively affect the cost of, suitable investment opportunities available to us.

Recent and potential future consolidation in the highly fragmented timeshare industry may increase competition. For example, Interval Leisure Group, Inc., which operates the Interval International exchange program, acquired Hyatt Residence Club in October 2014 and in May 2016 acquired the timeshare operations of Starwood Hotels & Resorts Worldwide, Inc. (which includes the Westin and Sheraton brands), to be known as Vistana Signature Experiences, Inc. Diamond Resorts International, Inc. completed the acquisition of the timeshare business of Gold Key Resorts in October 2015, completed the acquisition of the timeshare business of Intrawest Resort Club Group in January 2016 and recently announced it was initiating a process to explore a wide range of strategic alternatives. Consolidation may create competitors that enjoy significant advantages resulting from, among other things, a lower cost of, and greater access to, capital and enhanced operating efficiencies.

Our ability to remain competitive and to attract and retain members depends on our success in distinguishing the quality and value of our products and services from those offered by others. If we cannot compete successfully in these areas or if our marketing and sales efforts are not successful and we are unable to convert customers to a sufficient number of sales, this could negatively affect our operating margins and our ability to recover the expense of our marketing programs and grow our business, diminish our market share and reduce our earnings.

The sale of VOIs in the secondary market by existing members could cause our sales revenues and profits to decline.

Existing members have offered, and are expected to continue to offer, their VOIs for sale on the secondary market. The prices at which these intervals are sold are typically less than the prices at which we would sell the intervals. As a result, these sales create additional pricing pressure on our sale of VOIs, which could cause our sales revenues and profits to decline. In addition, if the secondary market for VOIs becomes more organized or financing for such resales becomes more available, our ability to sell VOIs could be adversely affected and/or the resulting availability of VOIs (particularly where the VOIs are available for sale at lower prices than the prices at

 

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which we would sell them) could adversely affect our sales revenues. Further, unlawful or deceptive third-party VOI resale or vacation package sales schemes could damage the reputation of the industry, our reputation and brand value or affect our ability to collect management fees, which may adversely affect our sales revenues and results of operations.

Development of a viable secondary market may also cause the volume of VOI inventory that we are able to repurchase to decline, which could adversely affect our development margin, as we utilize this low-cost inventory source to supplement our inventory needs and help manage our cost of vacation ownership products.

Our business is regulated under a wide variety of laws, regulations and policies, and failure to comply with these regulations could adversely affect our business.

Our business is subject to extensive regulation, and any failure to comply with applicable laws and regulations could have a material adverse effect on our business. Our real estate development activities, for example, are subject to laws and regulations typically applicable to real estate development, subdivision and construction activities, such as laws relating to zoning, entitlement, permitting, land use restrictions, environmental regulation, title transfers, title insurance, taxation and eminent domain. Laws in some jurisdictions also impose liability on property developers for construction defects discovered or repairs made by future owners of property developed by the developer. In addition, the sales of VOIs must be registered with governmental authorities in most jurisdictions in which we do business. The preparation of VOI registrations requires time and cost, and in many jurisdictions the exact date of registration approval cannot be accurately predicted. Various laws also govern our lending activities and our resort management activities, including the laws described in “Business—Government Regulation.”

A number of laws govern our marketing and sales activities, such as timeshare and land sales acts, fair housing statutes, anti-fraud laws, sweepstakes laws, real estate licensing laws, telemarketing laws, home solicitation sales laws, tour operator laws, seller of travel laws, securities laws, consumer privacy laws and consumer protection laws. In addition, laws in many jurisdictions in which we sell VOIs grant the purchaser of a VOI the right to cancel a purchase contract during a specified rescission period.

In recent years, telemarketing legislation has significantly increased the costs associated with telemarketing. We have implemented procedures that we believe will help reduce the possibility of violating such laws, but such procedures may not be effective in ensuring regulatory compliance. In March 2016, we reached a settlement with the New York Attorney General relating to charges that we made unsolicited telemarketing calls to New York residents who had signed up for the National Do Not Call Registry. We agreed to pay a settlement in the amount of $250,500 and may continue to place some calls to consumers with whom Hilton already does business, subject to the conditions of the settlement. However, because our relationship with Hilton will be changing, it may be more difficult for us to utilize customer information we obtain from Hilton in the future for marketing purposes.

Under the Americans with Disabilities Act of 1990 and the Accessibility Guidelines promulgated thereunder, which we refer to collectively as the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. Our properties also are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. Furthermore, various laws govern our resort management activities, including laws and regulations regarding community association management, public lodging, food and beverage services, liquor licensing, labor, employment, health care, health and safety, accessibility, discrimination, immigration, gaming and the environment (including climate change).

Our lending activities are also subject to a number of laws and regulations, including laws and regulations related to consumer loans, retail installment contracts, mortgage lending, fair debt collection and credit reporting practices, consumer collection practices, contacting debtors by telephone, mortgage disclosure, lender licenses and money laundering.

 

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We may not be successful in maintaining compliance with all laws, regulations and policies to which we are currently subject, and such compliance could be expensive and time consuming. We do not know whether existing requirements will change or whether compliance with future requirements would require significant unanticipated expenditures that would affect our cash flow and results of operations. Failure to comply with current or future applicable laws, regulations and policies could have a material adverse effect on our business. For example, if we do not comply with applicable laws, regulations and policies, governmental authorities in the jurisdictions where the violations occurred may revoke or refuse to renew licenses or registrations we must have to operate our business. Failure to comply with applicable laws, regulations and policies could also render sales contracts for our products void or voidable, subject us to fines or other sanctions and increase our exposure to litigation.

We may experience financial and operational risks in connection with acquisitions and other opportunistic business ventures.

We will consider strategic acquisitions to expand our inventory options and distribution capabilities; however, we may be unable to identify attractive acquisition candidates or complete transactions on favorable terms. Future acquisitions could result in potentially dilutive issuances of equity securities and/or the assumption of contingent liabilities. These acquisitions may also be structured in such a way that we will be assuming unknown or undisclosed liabilities or obligations. Moreover, we may be unable to efficiently integrate acquisitions, management attention and other resources may be diverted away from other potentially more profitable areas of our business and in some cases these acquisitions may turn out to be less compatible with our growth strategy than originally anticipated. The occurrence of any of these events could adversely affect our business, financial condition and results of operations.

As part of our business strategy, we also intend to continue collaborating with Hilton on timeshare development opportunities at new and existing hotel properties and explore growth opportunities along the Hilton brand spectrum, as well as expand our marketing partnerships and travel exchange partners. However, we may be unable to successfully enter into these arrangements on favorable terms or launch related products and services, or such products and services may not gain acceptance among our members or be profitable. The failure to develop and execute any such initiatives on a cost-effective basis could have an adverse effect on our business, financial condition and results of operations.

In addition, our ability to engage in acquisitions may be limited by restrictions on our ability to raise additional equity capital. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off—Tax Matters Agreement,” and “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off—Stockholder Agreement.”

Disagreements with VOI owners, HOAs and other third parties may result in litigation and/or loss of management contracts.

The nature of our responsibilities in managing timeshare properties may from time to time give rise to disagreements with VOI owners and HOAs. To develop and maintain positive relations with current and potential owners and HOAs, we seek to resolve any disagreements but may not always be able to do so. Failure to resolve such disagreements may result in litigation. Further, disagreements with HOAs could also result in the loss of management contracts, a significant loss of which could negatively affect our profits or limit our ability to operate our business, and our ongoing ability to generate sales from our existing member base may be adversely affected.

In the normal course of our business, we are involved in various legal proceedings and in the future we could become the subject of claims by current or former members, persons to whom we market our products, third-party developers, guests who use our properties, our employees or contractors, our investors or regulators.

 

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The outcome of these proceedings cannot be predicted. If any such litigation results in a significant adverse judgment, settlement or court order, we could suffer significant losses, our profits could be reduced, our reputation could be harmed and our future ability to operate our business could be constrained.

We manage a concentration of properties in particular geographic areas, which exposes our business to the effects of regional events and occurrences.

A significant number, approximately 80 percent, of the resorts we manage are concentrated in Florida, Hawaii, Nevada, New York and South Carolina and are, therefore, particularly susceptible to adverse economic developments in those areas. These economic developments include regional economic downturns, significant increases in the number of our competitors’ products in these markets and potentially higher labor, real estate, tax or other costs in the geographic markets in which we are concentrated. In addition, the properties we manage are subject to the effects of adverse acts of natural or manmade disasters, including earthquakes, windstorms, tornadoes, hurricanes, typhoons, tsunamis, volcanic eruptions, floods, drought, fires, oil spills and nuclear incidents. Depending on the severity of these disasters, the damage could require closure of all or substantially all of these properties in one or more markets for a period of time while the necessary repairs and renovations, as applicable, are undertaken. In addition, we cannot guarantee that the amount of insurance maintained for these properties from time to time would entirely cover damages caused by any such event.

Fear of exposure to pandemic or contagious diseases, such as Ebola, avian flu, SARs, swine flu and the Zika virus, or natural or manmade disasters, may also deter travelers from scheduling vacations or cause them to cancel vacation plans to the markets in which the properties we manage are concentrated. Actual or threatened war, political conditions or civil unrest, violence or terrorist activities or threats and heightened travel security measures instituted in response to these events, could also interrupt or deter vacation plans to our key markets.

As a result of this geographic concentration of properties, we face a greater risk of a negative effect on our revenues in the event these areas are more severely affected by adverse economic and competitive conditions, extreme weather, manmade disasters or pandemic or contagious diseases.

Our operations outside of the United States make us susceptible to the risks of doing business internationally, which could lower our revenues, increase our costs, reduce our profits or disrupt our business.

We currently offer timeshare properties located in the United States, the United Kingdom and Italy. We also market both our international and U.S. properties in Europe and the Asia Pacific region, primarily in Japan and South Korea. In addition, as part of our business strategy, we intend to continue the expansion of our operations in Japan as well as explore further expansion opportunities in Asia. International operations expose us to a number of additional challenges and risks, including the following:

 

    rapid changes in governmental, economic and political policy, political or civil unrest, acts of terrorism or the threat of international boycotts or U.S. anti-boycott legislation;

 

    increases in anti-American sentiment and the identification of the Hilton brands as American brands;

 

    recessionary trends or economic instability in international markets;

 

    changes in foreign currency exchange rates or currency restructurings and hyperinflation or deflation in the countries in which we operate;

 

    the effect of disruptions caused by severe weather, natural disasters, outbreak of disease or other events that make travel to a particular region less attractive or more difficult;

 

    the presence and acceptance of varying levels of business corruption in international markets and the effect of various anti-corruption and other laws;

 

    the imposition of restrictions on currency conversion or the transfer of funds or limitations on our ability to repatriate non-U.S. earnings in a tax-efficient manner;

 

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    the ability to comply with or effect of complying with complex and changing laws, regulations and policies of foreign governments that may affect investments or operations, including foreign ownership restrictions, import and export controls, tariffs, embargoes, increases in taxes paid and other changes in applicable tax laws;

 

    uncertainties as to local laws regarding, and enforcement of, contract and intellectual property rights;

 

    forced nationalization of resort properties by local, state or national governments; and

 

    the difficulties involved in managing an organization doing business in different countries.

These factors may adversely affect the revenues from international markets. While these factors and the effect of these factors are difficult to predict, any one or more of them could lower our revenues, increase our costs, reduce our profits or disrupt our business operations. Moreover, our experience operating internationally is limited to certain markets, which may result in greater inefficiencies in navigating the risks of operating internationally should we expand our international operations into other countries and territories, and could result in greater effects on our business than would be experienced by a company with greater international experience.

Our insurance policies may not cover all potential losses.

We maintain insurance coverage for liability, property, business interruption and other risks with respect to business operations. While we expect to have comprehensive property and liability insurance policies with coverage features and insured limits that we believe are customary, market forces beyond our control may limit the scope of the insurance coverage we can obtain or our ability to obtain coverage at reasonable rates. The cost of our insurance may increase and our coverage levels may decrease, which may affect our ability to maintain customary insurance coverage and deductibles at acceptable costs. There is a limit as well as various sub-limits on the amount of insurance proceeds we will receive in excess of applicable deductibles. If an insurable event occurs that affects more than one of our properties, the claims from each affected property may be considered together per policy provisions to determine whether the per occurrence limit, annual aggregate limit or sub-limits, depending on the type of claim, have been reached. If the limits or sub-limits are exceeded, each affected property may only receive a proportional share of the amount of insurance proceeds provided for under the policy. Further, certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, terrorist acts, such as biological or chemical terrorism, political risks, some environmental hazards and/or natural or manmade disasters, may be outside the general coverage limits of our policy, subject to large deductibles, deemed uninsurable or too cost-prohibitive to justify insuring against. In addition, in the event of a substantial loss, the insurance coverage we carry may not be sufficient to pay the full market value or replacement cost of the affected resort or in some cases may not provide a recovery for any part of a loss. As a result, we could lose some or all of the capital we have invested in a property, as well as the anticipated future marketing, sales or revenue opportunities from the property. Further, we could remain obligated under guarantees or other financial obligations related to the property despite the loss of product inventory, and our members could be required to contribute toward deductibles to help cover losses.

Failure of HOA boards to levy sufficient fees, or the failure of members to pay those fees, could lead to inadequate funds to maintain or improve the properties we manage.

Owners of our VOIs and those we sell on behalf of third-party developers must pay maintenance fees levied by HOA boards, which include reserve amounts for capital replacements and refurbishments. These maintenance fees are used to maintain and refurbish the timeshare properties and to keep the properties in compliance with applicable Hilton standards and policies. If HOA boards do not levy sufficient maintenance fees, including capital reserves required by applicable law, or manage their reserves appropriately, or if members do not pay their maintenance fees, the timeshare properties could fall into disrepair and fail to comply with applicable standards and policies and/or state regulators could impose requirements, obligations and penalties. A decline in the quality or standards of the resorts we manage would negatively affect our ability to attract new members and

 

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maintain member satisfaction. In addition, if a resort fails to comply with applicable standards and policies because maintenance fees are not paid or otherwise, Hilton could terminate our rights under the license agreement to use its trademarks at the non-compliant resort, which could result in the loss of management fees, and could decrease member satisfaction and impair our ability to market and sell our products at the non-compliant locations.

If maintenance fees at our resorts are required to be increased, our product could become less attractive and our business could be harmed.

The maintenance fees that are levied by HOA boards on VOI owners may increase as the costs to maintain and refurbish the timeshare properties and to keep the properties in compliance with Hilton brand standards increase. Increased maintenance fees could make our products less desirable, which could have a negative effect on VOI sales. Further, if our maintenance fees increase substantially year over year or are not competitive with other VOI providers, we may not be able to attract new members or retain existing members.

If purchasers default on the loans that we provide to finance their VOI purchases, our revenues, cash flows and profits could be reduced.

Providing secured financing to some purchasers of VOIs subjects us to the risk of purchaser default. As of December 31, 2015, our consumer loan portfolio had a balance of approximately $1,082 million and experienced default rates of 2.84 percent, 3.22 percent and 2.99 percent for the years ended December 31, 2015, 2014 and 2013, respectively. If a purchaser defaults under the financing that we provide, we could be forced to write off the loan and reclaim ownership of the VOI. We may be unable to resell the property in a timely manner or at the same price, or at all. Also, if a purchaser of a VOI defaults on the related loan during the early part of the amortization period, we may not have recovered the marketing, selling and general and administrative costs associated with the sale of that VOI. If we are unable to recover any of the principal amount of the loan from a defaulting purchaser, or if the allowances for losses from such defaults are inadequate, our revenues and profits could be reduced.

If default rates increase beyond current projections and result in higher than expected foreclosure activity, our results of operations could be adversely affected. In addition, the transactions in which we have securitized timeshare financing receivables in the capital markets contain certain portfolio performance requirements related to default, delinquency and recovery rates, which, if not met, would result in loss or disruption of cash flow until portfolio performance sufficiently improves to satisfy the requirements. In addition, we may not be able to resell foreclosed intervals in a timely manner or for an attractive price.

If the default rates or other credit metrics underlying our timeshare financing receivables deteriorate, our timeshare financing receivable securitization program could be adversely affected.

Our timeshare financing receivable securitization program could be adversely affected if a particular timeshare financing receivables pool fails to meet certain performance ratios, which could occur if the default rate or other credit metrics of the underlying timeshare financing receivables deteriorate. In addition, if we offer timeshare financings to our customers with terms longer than those generally offered in the industry, we may not be able to securitize those timeshare financing receivables. Our ability to sell securities backed by our timeshare financing receivables depends on the continued ability and willingness of capital market participants to invest in such securities. Asset-backed securities issued in our timeshare financing receivable securitization program could be downgraded by credit agencies in the future. If a downgrade occurs, our ability to complete other securitization transactions on acceptable terms or at all could be jeopardized, and we could be forced to rely on other potentially more expensive and less attractive funding sources, to the extent available. Similarly, if other operators of vacation ownership products were to experience significant financial difficulties, or if the timeshare industry as a whole were to contract, we could experience difficulty in securing funding on acceptable terms. The occurrence of any of the foregoing would decrease our profitability and might require us to adjust our business

 

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operations, including by reducing or suspending our provision of financing to purchasers of VOIs. Sales of VOIs may decline if we reduce or suspend the provision of financing to purchasers, which may adversely affect our cash flows, revenues and profits.

A failure to keep pace with developments in technology could impair our operations, competitive position or reputation.

Our business model and competitive conditions in the timeshare industry demand the use of sophisticated technology and systems, including those used for our marketing, sales, reservation, inventory management and property management systems, and technologies we make available to our members and more generally to support our business. We must refine, update and/or replace these technologies and systems with more advanced systems on a regular basis. If we cannot do so as quickly as our competitors or within budgeted costs and time frames, our business could suffer. We also may not achieve the benefits that we anticipate from any new technology or system, and a failure to do so could result in higher than anticipated costs or could harm our operating results.

In addition, the proliferation and global reach of social media continues to expand rapidly and could cause us to suffer reputational harm. The continuing evolution of social media presents new challenges and requires us to keep pace with new developments, technology and trends. Negative posts or comments about us, the properties we manage or the Hilton brands we use on any social networking or user-generated review website, including travel and/or vacation property websites, could affect consumer opinions of us and our products, and we cannot guarantee that we will timely or adequately redress such instances.

Failure to maintain the integrity of internal or customer data could result in faulty business decisions or operational inefficiencies, damage our reputation and/or subject us to costs, fines or lawsuits.

We collect and retain large volumes of customer data, including credit card numbers and other personally identifiable information in various information systems and those of our service providers. We also maintain personally identifiable information of our employees. The integrity and protection of this customer and employee data is critical to us. We could make faulty decisions if that data is inaccurate or incomplete. Customers and employees also have a high expectation that we and our service providers will adequately protect their personal information. The regulatory environment surrounding information, security and privacy is also increasingly demanding, in both the United States and other jurisdictions in which we operate.

Our systems may be unable to satisfy changing regulatory requirements and customer and employee expectations, or may require significant additional investments or time to do so. We depend upon the secure transmission of information over public networks. Our information systems and records, including those we maintain with our service providers, may be subject to security breaches, unauthorized access by hackers, cyber-attacks, which are rapidly evolving and becoming increasingly sophisticated, system failures, viruses, operator error or malfeasance or inadvertent releases of data. For instance, security breaches could result in the dissemination of member and guest credit card information, which could lead to affected members and guests experiencing fraudulent charges. In some cases it may be difficult to anticipate or immediately detect such incidents and the damage caused thereby. A significant theft, loss or fraudulent use of customer, employee or company data maintained by us or by a service provider could adversely affect our reputation and could result in remedial and other expenses, fines or litigation.

A breach in the security of our information systems or those of our service providers could lead to an interruption in the operation of our systems, potentially resulting in operational inefficiencies and a loss of profits.

 

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Changes in privacy law could adversely affect our ability to market our products effectively.

We rely on a variety of direct marketing techniques, including telemarketing, email and social media marketing and postal mailings, and we are subject to various laws and regulations in the United States and internationally that govern marketing and advertising practices. Adoption of new state or federal laws regulating marketing and solicitation, or international data protection laws that govern these activities, or changes to existing laws, such as the Telemarketing Sales Rule, the Telephone Consumer Protection Act and the CAN-SPAM Act of 2003, could adversely affect current or planned marketing activities and cause us to change our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could affect the amount and timing of our VOI sales. We also obtain access to potential members and guests from travel service providers or other companies, including Hilton, and we market to some individuals on these lists directly or through other companies’ marketing materials. If access to these lists were prohibited or otherwise restricted, including access to Hilton HHonors loyalty program member information, our ability to access potential members and guests and introduce them to our products could be significantly impaired. Additionally, because our relationship with Hilton will be changing, it may be more difficult for us to utilize customer information we obtain from Hilton in the future.

The growth of our business and the execution of our business strategies depend on the services of our management team and our employees.

We believe that our future growth depends, in part, on the continued services of our management team and our ability to attract and retain key officers and other highly qualified personnel. Competition for such personnel is intense. There can be no assurance that we will be successful in retaining and attracting management and other highly qualified personnel. The loss of any members of our management team could adversely affect our strategic, member and guest relationships and impede our ability to execute our business strategies.

In addition, insufficient numbers of talented employees at our properties could constrain our ability to maintain our current levels of business, or expand our business. We compete with other companies both within and outside of our industry for talented personnel across a diverse array of operating disciplines. If we cannot recruit, train, develop or retain sufficient numbers of talented employees, we could experience increased employee turnover, decreased member and guest satisfaction, low morale, inefficiency or internal control failures, which could materially reduce our profits.

Third-party reservation channels may negatively affect our bookings for room rental revenues.

Some stays at the properties we manage are booked through third-party internet travel intermediaries, such as expedia.com, orbitz.com and booking.com, as well as lesser-known and/or newly emerging online travel service providers. As the percentage of internet bookings increases, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of these internet travel intermediaries are attempting to commoditize lodging by increasing the importance of price and general indicators of quality (such as “three-star property”) at the expense of brand identification. These intermediaries also generally employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. Additionally, consumers can book stays at the properties we manage through other distribution channels, including travel agents, travel membership associations and meeting procurement firms. Over time, consumers may develop loyalties to these third-party reservation systems rather than to our booking channels. Although we expect to derive most of our business from traditional channels and our websites (and those of Hilton Parent), our business and profitability could be adversely affected if customer loyalties change significantly, diverting bookings away from our distribution channels.

 

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Our real estate investments subject us to numerous risks.

We are subject to the risks that generally relate to investments in, and development of, real property. A variety of factors affect income from properties and real estate values, including laws and regulations, insurance, interest rate levels and the availability of financing. Our license agreement, or other agreements, with Hilton may require us to incur unexpected costs required to cause our properties to comply with applicable standards and policies. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decrease, and in recent years our financial results have benefited from low interest rates. Similarly, as financing becomes less available, it becomes more difficult both to acquire and develop real property. Many costs of real estate investments, such as real estate taxes, insurance premiums, maintenance costs and certain operating costs, are generally more fixed than variable and as a result are not reduced even when a property is not fully sold or occupied. If any of these risks were realized, they could have a material adverse effect on our results of operations or financial condition.

U.S. or foreign environmental laws and regulations may cause us to incur substantial costs or subject us to potential liabilities.

We are subject to certain compliance costs and potential liabilities under various U.S. federal, state and local and foreign environmental, health and safety laws and regulations. These laws and regulations govern actions including air emissions, the use, storage and disposal of hazardous and toxic substances, and wastewater disposal. Our failure to comply with such laws, including any required permits or licenses, could result in substantial fines or possible revocation of our authority to conduct some of our operations. We could also be liable under such laws for the costs of investigation, removal or remediation of hazardous or toxic substances at our currently or formerly owned real property or at third-party locations in connection with our waste disposal operations, regardless of whether or not we knew of, or caused, the presence or release of such substances. From time to time, we may be required to remediate such substances or remove, abate or manage asbestos, mold, radon gas, lead or other hazardous conditions at our properties. The presence or release of such toxic or hazardous substances could result in third-party claims for personal injury, property or natural resource damages, business interruption or other losses. Such claims and the need to investigate, remediate or otherwise address hazardous, toxic or unsafe conditions could adversely affect our operations, the value of any affected real property, or our ability to sell, lease or assign our rights in any such property, or could otherwise harm our business or reputation. Environmental, health and safety requirements have also become increasingly stringent, and our costs may increase as a result.

The U.S. Congress, some U.S. states and various countries are considering or have undertaken actions to regulate and reduce greenhouse gas emissions. New or revised laws and regulations, or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of the properties we manage or result in significant additional expense and operating restrictions on us. The cost of such legislation, regulation or new interpretations would depend upon the specific requirements enacted and cannot be determined at this time.

Our ability to source VOI inventory and finance VOI sales may be impaired if we or the third-party developers with whom we do business are unable to access capital when necessary.

The availability of funds for new investments, primarily developing, acquiring or repurchasing VOI inventory, depends in part on liquidity factors and capital markets over which we can exert little, if any, control. Instability in the financial markets and any resulting contraction of available liquidity and leverage could constrain the capital markets for investments in timeshare products. In addition, we intend to access the securitization markets to securitize our timeshare financing receivables. Any future deterioration in the financial markets could preclude, delay or increase the cost to us of future securitizations. Such deterioration could also affect our ability to complete the financing transactions we expect to undertake in connection with the spin-off on terms favorable to us, or at all. We also require the issuance of surety bonds in connection with our real estate development and VOI sales activity. The availability, terms and conditions and pricing of our bonding capacity is

 

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dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating. If bonding capacity is unavailable, or alternatively, if the terms and conditions and pricing of such bonding capacity are unacceptable to us, our business could be negatively affected. Instability in the financial markets could also affect the timing and volume of any securitizations we undertake, as well as the financial terms of such securitizations. Any indebtedness we incur, including indebtedness under these facilities, may adversely affect our ability to obtain any additional financing necessary to develop or acquire additional VOI inventory or make other investments in our business, or to repurchase VOIs on the secondary market. Furthermore, volatility in the financial markets, due to tightening of underwriting standards by lenders and credit rating agencies, among other things, could result in less availability of credit and increased costs for what is available, and we may find it difficult, costly or impossible to obtain financing on attractive terms. If the overall cost of borrowing increases, either by increases in the index rates or by increases in lender spreads, the increased costs would likely reduce future cash flow available for distribution, affecting our growth and development plans.

We have and will continue to enter into fee-for-service agreements with third-party developers to source inventory. These agreements enable us to generate fees from the marketing and sales services we provide, Club memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs. If these developers are not able to obtain or maintain financing necessary for their operations, we may not be able to enter into these arrangements, which would limit opportunities for growth and reduce our revenues.

Changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations.

New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may require retrospective application and affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our audited consolidated financial statements included elsewhere in this information statement for a summary of accounting standards issued but not yet adopted.

Changes to estimates or projections used to assess the fair value of our assets, or operating results that are lower than our current estimates at certain locations, may cause us to incur impairment losses that could adversely affect our results of operations.

Our total assets include intangible assets with finite useful lives and long-lived assets, principally property and equipment and VOI inventory. We evaluate our intangible assets with finite useful lives and long-lived assets for impairment when circumstances indicate that the carrying amount may not be recoverable. Our evaluation of impairment requires us to make certain estimates and assumptions including projections of future results. After performing our evaluation for impairment, including an analysis to determine the recoverability of long-lived assets, we will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. We carry our VOI inventory at the lower of cost or estimated fair value, less costs to sell. If the estimates or assumptions used in our evaluation of impairment or fair value change, we may be required to record impairment losses on certain of these assets. If these impairment losses are significant, our results of operations would be adversely affected.

Changes in U.S. federal, state and local or foreign tax law, interpretations of existing tax law, or adverse determinations by tax authorities, could increase our tax burden or otherwise adversely affect our financial condition or results of operations.

We are subject to taxation at the federal, state and local levels in the United States and various other countries and jurisdictions. Our future effective tax rate could be affected by changes in the composition of

 

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earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, changes in the valuation of our deferred tax assets and liabilities, or changes in determinations regarding the jurisdictions in which we are subject to tax. From time to time, the U.S. federal, state and local and foreign governments make substantive changes to tax rules and their application, which could result in materially higher corporate taxes than would be incurred under existing tax law and could adversely affect our financial condition or results of operations. Changes in the non-income tax rates to which we are subject could also have an adverse effect on the maintenance fees charged to our members, which could result in materially lower sales and higher operating costs.

We are subject to ongoing and periodic tax audits and disputes in U.S. federal and various state, local and foreign jurisdictions. An unfavorable outcome from any tax audit could result in higher tax costs, penalties and interest, thereby adversely affecting our financial condition or results of operations.

The expiration, termination or renegotiation of our management agreements could adversely affect our cash flows, revenues and profits.

We enter into management agreements with the HOAs of the VOI owners for the timeshare resorts developed by us or by third parties with whom we have entered into fee-for-service agreements. Our management agreements generally provide for a cost-plus management fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. We also receive revenues that represent reimbursement for the costs incurred to perform our services, principally related to personnel providing on-site services. The original term of our management agreements is typically governed by state timeshare laws and ranges from three to five years, and many of these agreements renew automatically for one- to three-year periods unless either party provides advance notice of termination before the expiration of the term. Although none of the management agreements relating to our developed or fee-for-service properties have been terminated or lapsed since our inception, any of these agreements may expire at the end of its then-current term (following notice by a party of non-renewal) or be terminated, or the contract terms may be renegotiated in a manner adverse to us. If a management agreement is terminated or not renewed on favorable terms, our cash flows, revenues and profits could be adversely affected.

Failure to comply with laws and regulations applicable to our international operations may increase costs, reduce profits, limit growth or subject us to broader liability.

Our business operations in countries outside the United States are subject to a number of laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”), as well as trade sanctions administered by the Office of Foreign Assets Control (“OFAC”). The FCPA is intended to prohibit bribery of foreign officials and requires us to keep books and records that accurately and fairly reflect our transactions. OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals. Although we have policies in place designed to comply with applicable sanctions, rules and regulations, it is possible that the timeshare properties we own or manage in the countries and territories in which we operate may provide services to or receive funds from persons subject to sanctions. In addition, some of our operations may be subject to the laws and regulations of non-U.S. jurisdictions, including the U.K.’s Bribery Act 2010, which contains significant prohibitions on bribery and other corrupt business activities, and other local anti-corruption laws in the countries and territories in which we conduct operations.

If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm and incarceration of employees or restrictions on our operation or ownership of timeshare and other properties, including the termination of ownership and management rights. In addition, in certain circumstances, the actions of parties affiliated with us (including Hilton, third-party developers, and our and their respective employees and agents) may expose us to liability under the FCPA, U.S. sanctions or other laws. These restrictions could increase costs of operations, reduce profits or cause us to forgo development opportunities that would otherwise support growth.

 

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In August 2012, Congress enacted the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”), which expands the scope of U.S. sanctions against Iran and Syria. In particular, Section 219 of the ITRSHRA amended the Exchange Act of 1934, as amended (the “Exchange Act”), to require SEC-reporting companies to disclose in their periodic reports specified dealings or transactions involving Iran or other individuals and entities targeted by certain OFAC sanctions engaged in by the reporting company or any of its affiliates. These companies are required to separately file with the SEC a notice that such activities have been disclosed in the relevant periodic report, and the SEC is required to post this notice of disclosure on its website and send the report to the U.S. President and certain U.S. Congressional committees. The U.S. President thereafter is required to initiate an investigation and, within 180 days of initiating such an investigation with respect to certain disclosed activities, to determine whether sanctions should be imposed.

Under ITRSHRA, we will be required to report if we or any of our “affiliates” knowingly engaged in certain specified activities during a period covered by one of our Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q. We may engage in activities that would require disclosure pursuant to Section 219 of ITRSHRA. In addition, because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us. Because we may be deemed to be a controlled affiliate of Blackstone, affiliates of Blackstone may also be considered our affiliates. Hilton Parent and other affiliates of Blackstone have in the past and may in the future be required to make disclosures pursuant to ITRSHRA, including the activities discussed in the disclosures included on Exhibit 99.2 to the registration statement of which this information statement forms a part, which disclosures are hereby incorporated by reference herein. Disclosure of such activities, even if such activities are permissible under applicable law, and any sanctions imposed on us or our affiliates as a result of these activities could harm our reputation and the Hilton brands we use and have a negative effect on our results of operations.

Risks Related to Our Indebtedness

Our indebtedness and other contractual obligations could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts and could divert our cash flow from operations for debt payments.

As of September 30, 2016, on a pro forma basis after giving effect to the spin-off and the financing transactions described in “Unaudited Pro Forma Consolidated Financial Statements,” our total indebtedness would have been approximately $1.22 billion. Our substantial debt and other contractual obligations could have important consequences, including:

 

    requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, dividends to stockholders and to pursue future business opportunities;

 

    increasing our vulnerability to adverse economic, industry or competitive developments;

 

    exposing us to increased interest expense, as our degree of leverage may cause the interest rates of any future indebtedness (whether fixed or floating rate interest) to be higher than they would be otherwise;

 

    exposing us to the risk of increased interest rates because certain of our indebtedness is at variable rates of interest;

 

    making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants, could result in an event of default that accelerates our obligation to repay indebtedness;

 

    restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

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    limiting our ability to obtain additional financing for working capital, capital expenditures, product development, satisfaction of debt service requirements, acquisitions and general corporate or other purposes; and

 

    limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who may be better positioned to take advantage of opportunities that our leverage prevents us from exploiting.

For additional discussion on our indebtedness and allocated Parent debt, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Allocated Parent Debt and Non-recourse Debt” and Note 10: Allocated Parent Debt and Non-recourse Debt in our audited consolidated financial statements included elsewhere in this information statement.

Certain of our debt agreements impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities.

The debt agreements that govern our outstanding indebtedness impose, and we expect the credit agreement that will govern our new senior secured credit facilities will impose, significant operating and financial restrictions on us. These restrictions may limit our ability and/or the ability of our subsidiaries to, among other things:

 

    incur or guarantee additional debt or issue disqualified stock or preferred stock;

 

    pay dividends (including to us) and make other distributions on, or redeem or repurchase, capital stock;

 

    make certain investments;

 

    incur certain liens;

 

    enter into transactions with affiliates;

 

    merge or consolidate;

 

    enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments to us;

 

    designate restricted subsidiaries as unrestricted subsidiaries; and

 

    transfer or sell assets.

In addition, we expect that the credit agreement that will govern our new senior secured credit facilities

will contain certain affirmative covenants that will require us to be in compliance with certain leverage and financial ratios.

As a result of these restrictions, we are limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any other future indebtedness we may incur could include more restrictive covenants. We may not be able to maintain compliance with these covenants in the future and, if we fail to do so, we may not be able to obtain waivers from the lenders and/or amend the covenants.

Our failure to comply with the restrictive covenants described above, as well as other terms of our other indebtedness and/or the terms of any future indebtedness from time to time, could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or are unable to refinance these borrowings, our financial condition and results of operations could be adversely affected.

 

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Servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on many factors, some of which are not within our control.

Our ability to make payments on our indebtedness, to fund planned capital expenditures and to pay dividends to our stockholders will depend on our ability to generate cash in the future. To a certain extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In particular, compliance with state and local laws applicable to our business, including those relating to deeds, title transfers and certain other regulations applicable to sales of VOIs, may at times delay or hinder our ability to access cash flows generated by our VOI sales. If we are unable to generate and access sufficient cash flow to service our debt and meet our other commitments, we may need to restructure or refinance all or a portion of our debt, sell material assets or operations or raise additional debt or equity capital. We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms or at all, and these actions may not be sufficient to meet our capital requirements. In addition, the terms of our existing or future debt arrangements may restrict us from effecting any of these alternatives. Finally, our ability to raise additional equity capital may be restricted because the issuance of our stock may cause the spin-off to be a taxable event for Hilton Parent under Section 355(e) of the Code, and under the Tax Matters Agreement, we could be required to indemnify Hilton Parent or Park Parent for that tax and certain covenants may restrict issuances of our stock during the two-year period following the spin-off. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off—Tax Matters Agreement.”

Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions, which could further exacerbate the risks to our financial condition described above.

We may be able to incur significant additional indebtedness, including secured debt, in the future. Although we expect that the agreements that will govern substantially all of our indebtedness will contain restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, these restrictions will be subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt instruments. To the extent new debt is added to our current debt levels, the substantial leverage risks described in the preceding three risk factors would increase.

Risks Related to the Spin-Off

We may be responsible for U.S. federal income tax liabilities that relate to the distribution.

Unless waived by Hilton Parent, the completion of the spin-off is conditioned upon the absence of any withdrawal, invalidation or modification of the IRS Ruling in an adverse manner prior to the effective time of the spin-off. Although the IRS Ruling generally will be binding on the IRS, the continued validity of the IRS Ruling will be based upon and subject to the accuracy of factual statements and representations made to the IRS by Hilton Parent. In addition, there is a risk that the IRS could promulgate new administrative guidance prior to the spin-off that could adversely impact the tax-free treatment of the spin-off (even taking into account the receipt of the IRS Ruling). As a result of the IRS’s general ruling policy with respect to transactions under Section 355 of the Code, the IRS Ruling is limited to specified aspects of the spin-off under Section 355 of the Code and will not represent a determination by the IRS that all of the requirements necessary to obtain tax-free treatment to holders of Hilton Parent’s common stock and to Hilton Parent have been satisfied. Moreover, if any statement or representation upon which the IRS Ruling is based is incorrect or untrue in any material respect, or if the facts upon which the IRS Ruling is based are materially different from the facts that prevail at the time of the spin-off, the IRS Ruling could be invalidated.

In addition, the spin-off is conditioned on the receipt of an opinion of Spin-off Tax Counsel to the effect that the distributions of HGV Parent and Park Parent common stock will qualify as tax-free distributions under Section 355 of the Code. An opinion of Spin-off Tax Counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion.

 

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The opinion will be based on certain factual statements and representations, which, if incomplete or untrue in any material respect, could alter Spin-off Tax Counsel’s conclusions.

Hilton Parent is not aware of any facts or circumstances that would cause any such factual statements or representations in the IRS Ruling or the opinion of Spin-off Tax Counsel to be incomplete or untrue or cause the facts on which the IRS Ruling and legal opinion are based to be materially different from the facts at the time of the spin-off.

If all or a portion of the spin-off does not qualify as a tax-free transaction for any reason, including because any of the factual statements or representations in the IRS Ruling or the legal opinion are incomplete or untrue, because the facts upon which the IRS Ruling is based are materially different from the facts at the time of the spin-off or because one or more sales of our common stock, Hilton Parent common stock or Park Parent common stock by our respective stockholders, including Blackstone, after the spin-off cause the spin-off not to qualify as a tax-free transaction, Park Parent would recognize a substantial gain attributable to the management and franchising business and/or the Timeshare business for U.S. federal income tax purposes and Hilton Parent may recognize a substantial gain attributable to the Separated Real Estate business and/or Timeshare business for U.S. federal income tax purposes. In such case, under U.S. Treasury regulations, each member of the Hilton consolidated group at the time of the spin-off (including us and our subsidiaries) would be jointly and severally liable for the resulting entire amount of any U.S. federal income tax liability. Additionally, if the distribution of HGV Parent common stock and/or the distribution of Park Parent common stock do not qualify as tax-free under Section 355 of the Code, Hilton Parent stockholders will be treated as having received a taxable dividend to the extent of Hilton Parent’s current and accumulated earnings and profits and then would have a tax-free basis recovery up to the amount of their tax basis in their shares and then would have taxable gain from the sale or exchange of the shares to the extent of any excess.

Even if the spin-off otherwise qualifies as a tax-free transaction for U.S. federal income tax purposes, the distribution will be taxable to Park Parent and/or Hilton Parent (but not to Hilton Parent stockholders) pursuant to Section 355(e) of the Code if there are (or have been) one or more acquisitions (including issuances) of our stock, the stock of Park Parent or the stock of Hilton Parent, representing 50 percent or more, measured by vote or value, of the stock of any such corporation and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Any acquisition of our common stock within two years before or after the distribution (with exceptions, including public trading by less-than-5% stockholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. The resulting tax liability would be substantial, and under U.S. Treasury regulations, each member of the Hilton consolidated group at the time of the spin-off (including us and our subsidiaries) would be jointly and severally liable for the resulting U.S. federal income tax liability.

We will agree not to enter into certain transactions that could cause any portion of the spin-off to be taxable to Hilton Parent, including under Section 355(e) of the Code. Pursuant to the Tax Matters Agreement, we also will agree to indemnify Hilton Parent and Park Parent for any tax liabilities resulting from such transactions or other actions we take, and Hilton Parent and Park Parent will agree to indemnify us for any tax liabilities resulting from transactions entered into by Hilton Parent or Park Parent. These obligations may discourage, delay or prevent a change of control of our company. For additional detail, see “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off—Tax Matters Agreement.”

We may be unable to take certain actions after the spin-off because such actions could jeopardize the tax-free status of the spin-off, and such restrictions could be significant.

To preserve the tax-free treatment of the spin-off, for the initial two-year period following the spin-off, we are prohibited, except in limited circumstances, from taking or failing to take certain actions that would prevent the spin-off and related transactions from being tax-free, including: (1) entering into any transaction pursuant to which our stock would be acquired, whether by merger or otherwise; (2) issuing any equity securities or securities that could possibly be converted into our equity securities; (3) selling or disposing of more than 35% of our assets; or (4) repurchasing our equity securities.

 

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These restrictions may limit our ability to issue equity and to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. In addition, if we take, or fail to take, actions that prevent the spin-off and related transactions from being tax-free, we could be liable for the adverse tax consequences resulting from such actions. For a more detailed description, see “Certain Relationships and Related Party Transactions—Tax Matters Agreement” and “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

The spin-off and related transactions may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal distribution requirements.

The spin-off could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor or an entity vested with the power of such creditor (such as a trustee or debtor-in-possession in a bankruptcy) could claim that Hilton Parent did not receive fair consideration or reasonably equivalent value in the spin-off, and that the spin-off left Hilton Parent insolvent or with unreasonably small capital or that Hilton Parent intended or believed it would incur debts beyond its ability to pay such debts as they mature. If a court were to agree with such a plaintiff, then such court could void the spin-off as a fraudulent transfer and could impose a number of different remedies, including without limitation, returning our assets or your shares in our company to Hilton Parent or providing Hilton Parent with a claim for money damages against us in an amount equal to the difference between the consideration received by Hilton Parent and the fair market value of our company at the time of the spin-off.

The measure of insolvency for purposes of the fraudulent conveyance laws may vary depending on which jurisdiction’s law is applied. Generally, however, an entity would be considered insolvent if the fair saleable value of its assets is less than the amount of its liabilities (including the probable amount of contingent liabilities), and such entity would be considered to have unreasonably small capital if it lacked adequate capital to conduct its business in the ordinary course and pay its liabilities as they become due. No assurance can be given as to what standard a court would apply to determine insolvency or that a court would determine that Hilton Parent were solvent at the time of or after giving effect to the spin-off, including the distribution of our common stock.

We could be required to assume responsibility for obligations allocated to Hilton Parent or Park Parent under the Distribution Agreement.

Under the Distribution Agreement and related ancillary agreements, from and after the spin-off, each of Hilton Parent, HGV Parent and Park Parent will be generally responsible for the debts, liabilities and other obligations related to the business or businesses which they own and operate following the consummation of the spin-off. Although we do not expect to be liable for any obligations that are not allocated to us under the Distribution Agreement, a court could disregard the allocation agreed to among the parties, and require that we assume responsibility for obligations allocated to Hilton Parent or Park Parent (for example, tax and/or environmental liabilities), particularly if Hilton Parent or Park Parent were to refuse or were unable to pay or perform the allocated obligations. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off—Distribution Agreement.”

In addition, losses in respect of certain shared contingent liabilities, which generally are not specifically attributable to any of the Timeshare business, the Separated Real Estate business or the retained business of Hilton, will be determined on or prior to the date on which the Distribution Agreement is entered (“Shared Contingent Liabilities”). The percentage of Shared Contingent Liabilities for which we are responsible will be fixed in a manner that is intended to approximate our estimated enterprise value on the distribution date relative to the estimated enterprise values of Park Hotels & Resorts and Hilton. Subject to certain limitations and exceptions, Hilton will generally be vested with the exclusive management and control of all matters pertaining to any such Shared Contingent Liabilities, including the prosecution of any claim and the conduct of any defense. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off—Distribution Agreement.”

 

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We do not have a recent operating history as an independent company and our historical financial information does not predict our future results.

The historical financial information we have included in this information statement has been derived from the consolidated financial statements of Hilton Parent and does not necessarily reflect what our financial position, results of operations and cash flows would have been as a separate, stand-alone entity during the periods presented. Hilton Parent did not account for us, and we were not operated, as a single stand-alone entity for the periods presented. The costs and expenses reflected in our historical financial statements include an allocation for certain corporate functions historically provided by Hilton Parent. These allocations were based on what we and Hilton Parent considered to be reasonable reflections of the historical utilization levels of these services required in support of our business. The historical information does not necessarily indicate what our results of operations, financial position, cash flows or costs and expenses will be in the future. Our pro forma adjustments reflect changes that may occur in our funding and operations as a result of the separation. However, there can be no assurances that these adjustments will reflect our costs as a publicly traded, stand-alone company. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Statements” and the notes to those statements included elsewhere in this information statement.

We may incur greater costs as an independent company than we did when we were part of Hilton.

As part of Hilton, we can take advantage of its size and purchasing power in procuring certain goods and services such as insurance and health care benefits, and technology such as computer software licenses. We also rely on Hilton to provide various corporate functions. After the spin-off, as a separate, independent entity, we may be unable to obtain these goods, services and technologies at prices or on terms as favorable to us as those we obtained prior to the distribution. We may also incur costs for functions previously performed by Hilton that are higher than the amounts reflected in our historical financial statements, which could cause our profitability to decrease.

Our ability to meet our capital needs may be harmed by the loss of financial support from Hilton.

The loss of financial support from Hilton could harm our ability to meet our capital needs. Hilton can currently provide certain capital that may be needed in excess of the amounts generated by our operating activities and historically has provided financing to us at rates that we believe are not representative of the cost of financing that we will incur as a stand-alone company. After the spin-off, we expect to obtain any funds needed in excess of the amounts generated by our operating activities through the capital markets or bank financing, and not from Hilton. However, given the smaller relative size of our company, as compared to Hilton after the spin-off, we may incur higher debt servicing and other costs relating to new indebtedness than we would have otherwise incurred as a part of Hilton. As a stand-alone company, the cost of our financing also will depend on other factors such as our performance and financial market conditions generally. Further, we cannot guarantee you that we will be able to obtain capital market financing or credit on favorable terms, or at all, in the future. We cannot assure you that our ability to meet our capital needs, including servicing our own debt, will not be harmed by the loss of financial support from Hilton.

We may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off.

As discussed under “The Spin-Off—Reasons for the Spin-Off,” we and Hilton believe that a tax-free spin-off will enhance our long-term value. However, by separating from Hilton, we may be more susceptible to market fluctuations and other adverse events than we would have been were we still a part of Hilton. In addition, we may not be able to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all.

 

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Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the distribution, and failure to achieve and maintain effective internal controls could have a material adverse effect on our business and the price of our common stock.

Our financial results previously were included within the consolidated results of Hilton Parent, and we believe that our financial reporting and internal controls were appropriate for a subsidiary of a public company. However, we were not directly subject to the reporting and other requirements of the Exchange Act. As a result of the distribution, we will be directly subject to reporting and other obligations under the Exchange Act. Beginning with our Annual Report on Form 10-K for the year ending December 31, 2017, we will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) which will require annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm as to whether we maintained, in all material respects, effective internal controls over financial reporting as of the last day of the year. These reporting and other obligations may place significant demands on our management, administrative and operational resources, including accounting systems and resources.

The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. Under the Sarbanes-Oxley Act, we are required to maintain effective disclosure controls and procedures and internal controls over financial reporting. To comply with these requirements, we may need to upgrade our systems; implement additional financial and management controls, reporting systems and procedures; and hire additional accounting and finance staff. We expect to incur additional annual expenses for the purpose of addressing these requirements, and those expenses may be significant. If we are unable to upgrade our financial and management controls, reporting systems, information technology systems and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired.

If, during periods we are required to assess the effectiveness of our internal controls, we are unable to conclude that we have effective internal controls over financial reporting or our independent public accounting firm is unwilling or unable to provide us with an unqualified report on the effectiveness of our internal controls as required by Section 404 of the Sarbanes-Oxley Act, we may be unable to report our financial information on a timely basis, investors may lose confidence in our operating results, the price of our common stock could decline and we may be subject to litigation or regulatory enforcement actions, which would require additional financial and management resources. This could have a material adverse effect on our business and lead to a decline in the price of our common stock.

Following the spin-off, we will be dependent on Hilton Parent to provide certain services pursuant to the Transition Services Agreement.

Currently, we rely on Hilton Parent to provide certain corporate and administrative services such as certain information technology, financial and human resource services. We expect to develop the capability to provide all such services internally at HGV. However, to the extent that we are unable to develop such capabilities prior to the separation, we will rely on Hilton Parent to continue to provide certain services for a period of time pursuant to a Transition Services Agreement that we intend to enter in connection with the spin-off. If Hilton Parent is unable or unwilling to provide such services pursuant to the Transition Services Agreement, or if the agreement is terminated prior to the end of its term, we may be unable to provide such services ourselves or we may have to incur additional expenditures to obtain such services from another provider.

We may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements related to the spin-off.

We expect that the agreements related to the spin-off, including the Distribution Agreement, Employee Matters Agreement, Tax Matters Agreement, Transition Services Agreement and any other agreements, will be

 

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negotiated in the context of our separation from Hilton while we are still part of Hilton. Accordingly, these agreements may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements being negotiated in the context of our separation are related to, among other things, allocations of assets and liabilities, rights and indemnification and other obligations among Hilton Parent, Park Parent and us. To the extent that certain terms of those agreements provide for rights and obligations that could have been procured from third parties, we may have received better terms from third parties because third parties may have competed with each other to win our business. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off.”

The spin-off may not be completed on the terms or timeline currently contemplated, if at all.

We are actively engaged in planning for the spin-off. We expect to incur expenses in connection with the spin-off and any delays in the anticipated completion of the distribution may increase these expenses. Unanticipated developments could delay or negatively affect the distribution, including those related to the filing and effectiveness of appropriate filings with the SEC, the listing of our common stock on a trading market, obtaining the tax opinion regarding the tax-free nature of the spin-off and receiving any required regulatory approvals. In addition, Hilton Parent’s board of directors may, in its absolute and sole discretion, decide at any time prior to the consummation of the spin-off not to proceed with the spin-off. Therefore, we cannot assure that the spin-off will be completed. Until the consummation of the spin-off, Hilton Parent’s board of directors will have the sole and absolute discretion to determine and change the terms of the spin-off, including the establishment of the record date and distribution date.

Risks Related to Ownership of Our Common Stock

Upon consummation of the spin-off, approximately 40% of the voting power in HGV Parent will be controlled by Blackstone and its affiliates and, upon consummation of the Sale, 25% of the voting power in HGV Parent will be controlled by HNA and approximately 15% will be controlled by Blackstone and their respective interests may conflict with ours or yours in the future.

Immediately following the spin-off, Blackstone and its affiliates will beneficially own approximately 40% of our common stock, although less than a majority of the total voting power and, upon consummation of the Sale, 25% of the voting power in HGV Parent will be controlled by HNA and approximately 15% will be controlled by Blackstone. We expect that one member of our initial board of directors will be a Blackstone employee and upon consummation of the Sale our board of directors will include designees of HNA. Accordingly, for so long as Blackstone, HNA and their respective affiliates retain significant ownership of us, Blackstone and HNA will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as Blackstone, HNA and their respective affiliates continue to own a significant percentage of our stock, Blackstone or HNA may be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our company and ultimately might affect the market price of our common stock.

Blackstone, HNA and their respective affiliates engage in a broad spectrum of activities, including investments in real estate generally and in the hospitality industry in particular. In the ordinary course of their business activities, Blackstone, HNA and their respective affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. For example, all of the timeshare properties that we manage as of the date of this information statement utilize certain Hilton-branded trademarks and Hilton trade names and related intellectual property. Blackstone and its affiliates own a significant portion of the outstanding stock of Hilton Parent and have significant influence with respect to the management, business plans and policies of Hilton. In addition, Blackstone, HNA and their respective affiliates may pursue ventures that compete directly or indirectly with us. Moreover, affiliates of Blackstone or HNA may directly and indirectly own interests in timeshare property developers or others with whom we may engage in the future, may compete with us for investment opportunities and may enter into other transactions with us that could result in their having interests

 

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that could conflict with ours. Our amended and restated certificate of incorporation will provide that none of Blackstone, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Upon consummation of the Sale, we will amend and restate our charter to include a similar provision with respect to HNA. Blackstone or HNA also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may be unavailable to us. In addition, Blackstone or HNA may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their respective investments, even though such transactions might involve risks to you.

Our board of directors may change significant corporate policies without stockholder approval.

Our financing, borrowing and dividend policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, will be determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of our board of directors without a vote of our stockholders. In addition, our board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A change in these policies could have an adverse effect on our financial condition, our results of operations, our cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders.

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and bylaws will contain provisions that may make the merger or acquisition of our company more difficult without the approval of our board of directors. Among other things:

 

    although we do not have a stockholder rights plan, and would either submit any such plan to stockholders for ratification or cause such plan to expire within a year, these provisions would allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

    these provisions prohibit stockholder action by written consent from and after the date on which Blackstone and its affiliates cease to beneficially own at least 40 percent of the total voting power of all then outstanding shares of our capital stock unless such action is recommended by all directors then in office;

 

    these provisions provide that our board of directors is expressly authorized to make, alter or repeal our bylaws and that our stockholders may only amend our bylaws with the approval of 80 percent or more of all the outstanding shares of our capital stock entitled to vote; and

 

    these provisions establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

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There is no existing market for our common stock and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price and trading volume of our common stock may fluctuate widely.

There is no current trading market for our common stock. Our common stock distributed in the spin-off will be trading publicly for the first time. We expect that a limited trading market for HGV Parent common stock, commonly known as a “when-issued” trading market, will develop at least two trading days prior to the record date for the distribution, and we expect “regular-way” trading of HGV Parent common stock will begin the first trading day after the distribution date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the spin-off or be sustained in the future. The lack of an active trading market may make it more difficult for you to sell your shares and could lead to our share price being depressed or more volatile.

For many reasons, including the risks identified in this information statement, the market price of our common stock following the spin-off may be more volatile than the market price of Hilton Parent common stock before the spin-off. These factors may result in short-term or long-term negative pressure on the value of our common stock.

We cannot predict the prices at which our common stock may trade after the spin-off. The market price of our common stock may fluctuate significantly, depending upon many factors, some of which may be beyond our control, including, but not limited to:

 

    a shift in our investor base;

 

    our quarterly or annual earnings, or those of comparable companies;

 

    actual or anticipated fluctuations in our operating results;

 

    our ability to obtain financing as needed;

 

    changes in laws and regulations affecting our business;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    announcements by us or our competitors of significant investments, acquisitions or dispositions;

 

    the failure of securities analysts to cover our common stock after the spin-off;

 

    changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

    the operating performance and stock price of comparable companies;

 

    overall market fluctuations;

 

    a decline in the real estate markets; and

 

    general economic conditions and other external factors.

Future issuances of common stock by us, and the availability for resale of shares held by Blackstone and its affiliates, may cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, could substantially decrease the market price of our common stock. Upon consummation of the spin-off, substantially all of the outstanding shares of our common stock will be available for resale in the public market. The market price of our common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. In addition, Blackstone will pledge substantially all of the shares of our common stock held by it pursuant to a margin loan agreement and any foreclosure upon those shares could result in sales of a substantial number of shares of our common stock in the public market, which could substantially decrease the market price of our common stock.

 

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Pursuant to a registration rights agreement that we will enter into in connection with the spin-off as described under “Certain Relationships and Related Party Transactions—Registration Rights Agreements,” we will grant Blackstone an unlimited number of “demand” registrations and customary “piggyback” registration rights. In addition, in connection with the Sale, HGV Parent entered into a registration rights agreement with HNA that will be effective upon the closing of the Sale. The HNA registration rights agreement provides that, beginning two years after the closing of the Sale, HNA will have customary “demand” and “piggyback” registration rights. See “Certain Relationships and Related Party Transactions—Registration Rights Agreements” for additional information. In addition, none of the shares outstanding upon consummation of the spin-off, including those held by Blackstone and its affiliates, will be “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), and will be freely tradable subject to certain restrictions in the case of shares held by persons deemed to be our affiliates. Accordingly, the market price of our stock could decline if Blackstone or its affiliates exercise their registration rights, sell their shares in the open market or otherwise or are perceived by the market as intending to sell them.

In connection with the spin-off, we expect to adopt an Omnibus Incentive Plan, under which an aggregate of 10,000,000 shares of common stock will be available for future issuance. Equity-based awards that are outstanding under the Hilton Parent Incentive Plan on the distribution date and held by HGV Employees will be converted into awards that will be exercisable for or settleable in shares of HGV Parent common stock, and the number of shares available for future issuance under the Omnibus Incentive Plan includes approximately 1,175,000 shares of HGV Parent common stock which would be issuable under such converted awards. The number of shares subject to such converted awards is calculated based on assumed adjustments to Hilton Parent using an assumed conversion ratio of 1:1 and assuming that all performance-vesting awards vest at target performance levels. The actual number of shares of HGV Parent common stock subject to converted awards may differ from the assumed amounts presented herein. In addition, in connection with the spin-off, we expect to adopt a Non-Employee Director Stock Plan, under which an aggregate of 325,000 shares of HGV Parent common stock will be available for future issuance. See “The Spin-Off—Treatment of Outstanding Equity Awards.” We will file a registration statement on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our Omnibus Incentive Plan and Non-Employee Director Stock Plan. Accordingly, shares registered under such registration statements will be available for sale in the open market.

We have no current plans to pay cash dividends on our common stock, and our indebtedness could limit our ability to pay dividends in the future.

Although we expect to return capital to stockholders through dividends or otherwise in the future, we have no current plans to pay any cash dividends. The declaration, amount and payment of any future dividends on shares of common stock will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. In addition, our ability to pay dividends will be limited by the indebtedness we expect to incur in connection with the spin-off and may be limited by covenants of other indebtedness we or our subsidiaries incur in the future.

 

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This information statement contains forward-looking statements including in the sections entitled “Summary,” “Risk Factors,” “The Spin-Off,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the benefits resulting from our separation from Hilton, the effects of competition and the effects of future legislation or regulations and other non-historical statements. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements in this information statement. We do not have any intention or obligation to update forward-looking statements after we distribute this information statement.

The risk factors discussed in “Risk Factors” could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our results to differ materially from those expressed in forward-looking statements.

 

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THE SPIN-OFF

Background

On February 26, 2016, Hilton Parent announced its intention to implement the spin-off of HGV and Park Hotels & Resorts from Hilton, following which HGV Parent and Park Parent will be independent, publicly traded companies. As part of the spin-off, Hilton will effect an internal reorganization to properly align the appropriate businesses within each of HGV, Park Hotels & Resorts and Hilton. We refer to such reorganization as the “internal reorganization.”

To complete the spin-off, Hilton Parent will, following the internal reorganization, distribute to its stockholders all of the outstanding shares of our common stock and the common stock of Park Hotels & Resorts. The distribution will occur on the distribution date, which is expected to be January 3, 2017. Each holder of Hilton Parent common stock will receive one share of our common stock for every ten shares of Hilton Parent common stock held at 5:00 p.m., Eastern time, on December 15, 2016, the record date. After completion of the spin-off:

 

    we will be an independent, publicly traded company (NYSE: HGV), and will own and operate Hilton’s timeshare business;

 

    Park Parent will be an independent, self-administered, publicly traded company (NYSE: PK), and will hold a portfolio of Hilton’s real estate assets and certain other assets and operations as described herein; and

 

    Hilton will continue to be an independent, publicly traded company (NYSE: HLT) and continue to own and operate its management and franchising business and will continue to hold certain real estate assets not transferred to Park Hotels & Resorts as part of the spin-off.

Each holder of Hilton Parent common stock will continue to hold his, her or its shares in Hilton Parent. No vote of Hilton Parent stockholders is required or is being sought in connection with the spin-off, including the internal reorganization, and Hilton Parent stockholders will not have any appraisal rights in connection with the spin-off.

The distribution of our common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. In addition, Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents or that it is not advisable for us to separate from Hilton at that time. See “—Conditions to the Spin-Off.”

Reasons for the Spin-Off

Hilton Parent’s board of directors has determined that the spin-off is in the best interests of Hilton Parent and its stockholders because the spin-off will provide the following key benefits:

 

    Direct and Differentiated Access to Capital Resources to Pursue Tailored Growth Strategies. Following the spin-off, HGV will be better positioned to target a 50/50 mix between fee-for-service and owned VOI inventory sales by opportunistically allocating capital toward owned inventory. We believe that optimizing our sales mix will enable us to maximize earnings growth, free cash flow production and returns on invested capital. As a company focused solely on the timeshare business with direct access to capital and independent financial resources, we believe we will be able to execute our business and growth strategies to drive overall value to our stockholders. Similarly, as a company focused on hotel management and franchising, Hilton Parent expects to benefit from alignment with a dedicated investor base, resulting in enhanced and more efficient access to capital to pursue a growth strategy best suited for its core, capital-light fee business.

 

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    Enhanced Investor Choices by Offering Investment Opportunities in Separate Entities. Hilton’s management and franchising and timeshare businesses exhibit different financial and operating characteristics and appeal to different types of investors with different investment goals and risk profiles. Finding investors who want to invest in the businesses together is more challenging than finding investors for each business individually. After the spin-off, investors should be better able to evaluate the financial performance of each company, as well as its strategy within the context of its particular market, thereby enhancing the likelihood that each company will achieve an appropriate market valuation.

 

    Dedicated Management Team with Enhanced Strategic Focus. Following the spin-off, Hilton’s management and franchising and timeshare businesses will no longer compete for the attention and resources of a single management team and will benefit from dedicated management teams focused on designing and implementing tailored strategies to achieve the distinct goals and opportunities of each business. Moreover, free from constraints that arise from being part of a larger hospitality company, HGV’s dedicated management team will be able to respond more quickly and effectively to acquisition and market opportunities as well as execute its business and growth strategies.

 

    Improved Management Incentive Tools. We expect to use equity-based and other incentive awards to compensate current and future employees. In multi-business companies such as Hilton, it is difficult to structure incentives that reward employees in a manner directly related to the performance of their respective business units. By granting awards linked to the performance of a pure-play business, the compensation arrangements of each company should provide enhanced incentives for employee performance and improve the ability of each company to attract, retain and motivate qualified personnel.

Manner of Effecting the Spin-Off

The general terms and conditions relating to the spin-off will be set forth in a Distribution Agreement among us, Hilton Parent and Park Parent.

Internal Reorganization

As part of the spin-off, Hilton will undergo an internal reorganization, which we refer to as the “internal reorganization,” pursuant to which, among other things and subject to limited exceptions: (i) all of the assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) associated with the Timeshare business will be retained by or transferred to us or our subsidiaries; (ii) all of the assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) associated with the Separated Real Estate business will be retained by or transferred to Park Parent or its subsidiaries; (iii) all other assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) of Hilton will be retained by or transferred to Hilton Parent or its subsidiaries (other than us, Park Parent or our respective subsidiaries); and (iv) Park Parent will distribute all of the stock of HGV Parent and Hilton Domestic Operating Company Inc. to Hilton Worldwide Finance LLC, a subsidiary of Hilton Parent, in distributions intended to qualify as tax-free under Section 355 of the Code. In particular, following the internal reorganization, Hilton Grand Vacations will own HRC, the legal entity that currently owns and operates the entirety of Hilton Parent’s Timeshare business, which has historically operated as a distinct operating segment. See the financial statements of HRC included in this information statement for additional details on the historical assets, liabilities and obligations of the Timeshare business.

Distribution of Shares of Our Common Stock

Under the Distribution Agreement, the distribution will be effective as of 5:00 p.m., Eastern time, on January 3, 2017, the distribution date. As a result of the spin-off, on the distribution date, each holder of Hilton Parent common stock will receive one share of our common stock for every ten shares of Hilton Parent common stock that he, she or it owns as of 5:00 p.m. Eastern time, on December 15, 2016, the record date. The actual number of shares to be distributed will be determined based on the number of shares of Hilton Parent common stock expected to be outstanding as of the record date and will be reduced to the extent that cash payments are to be made in lieu

 

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of the issuance of fractional shares of HGV Parent. The actual number of shares of HGV Parent common stock to be distributed will be calculated on the record date. The shares of HGV Parent common stock to be distributed by Hilton Parent will constitute all of the issued and outstanding shares of HGV Parent common stock immediately prior to the distribution.

On the distribution date, Hilton Parent will release the shares of our common stock to our distribution agent to distribute to Hilton Parent stockholders. For most Hilton Parent stockholders, our distribution agent will credit their shares of our common stock to book-entry accounts established to hold their shares of our common stock. Our distribution agent will send these stockholders a statement reflecting their ownership of our common stock. Book-entry refers to a method of recording stock ownership in our records in which no physical certificates are issued. For stockholders who own Hilton Parent common stock through a broker or other nominee, their shares of our common stock will be credited to these stockholders’ accounts by the broker or other nominee. It may take the distribution agent up to two weeks to issue shares of our common stock to Hilton Parent stockholders or to their bank or brokerage firm electronically by way of direct registration in book-entry form. Trading of our stock will not be affected by this delay in issuance by the distribution agent. As further discussed below, we will not issue fractional shares of our common stock in the distribution.

Hilton Parent stockholders will not be required to make any payment or surrender or exchange their shares of Hilton Parent common stock or take any other action to receive their shares of our common stock. No vote of Hilton Parent stockholders is required or sought in connection with the spin-off, including the internal reorganization, and Hilton Parent stockholders have no appraisal rights in connection with the spin-off.

Transaction Costs

One-time costs related to the spin-offs of Park Hotels & Resorts and Hilton Grand Vacations are expected to be approximately $450 million, consisting of approximately $250 million of estimated transaction costs, including debt issuance costs, legal, accounting and capital markets fees and expenses, certain tax and other costs relating to the internal reorganization, and approximately $140 million for the acceleration of taxes associated with certain cancellation of debt income related to the financing transactions. Pursuant to the Distribution Agreement, these costs and expenses are to be borne by Hilton.

Organizational Structure

The simplified diagrams below (which omit certain wholly owned intermediate holding companies) depict the organizational structure of Hilton, Park Hotels & Resorts and Hilton Grand Vacations before and after giving effect to the spin-offs.

 

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Current Hilton Organizational Structure

 

LOGO

Organizational Structure Following the Spin-Offs

 

LOGO

Treatment of Outstanding Equity Awards

It is expected that, with respect to Hilton Parent equity-based awards outstanding under the Hilton Worldwide Holdings Inc. Omnibus Incentive Plan (the “Hilton Parent Incentive Plan”) on the distribution date held by current and former employees (the “Hilton Parent Employees”) or non-employee directors of Hilton Parent as of the separation, the number of Hilton Parent shares subject to such awards will be adjusted to reflect the distribution and any reverse stock split of shares of Hilton Parent effected in connection with the separation, but will otherwise remain outstanding and subject to the same general terms and conditions. Awards held by any individual who is employed by Hilton Grand Vacations as of the separation (each, an “HGV Employee”) will be converted into awards that will settle in shares of HGV Parent common stock and adjusted in a manner intended to preserve the intrinsic value of the award.

 

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Stock Options. It is expected that each outstanding option to purchase shares of Hilton Parent common stock held by an HGV Employee on the distribution date, whether vested or unvested, will be converted into an option to purchase shares of HGV Parent common stock, on the same general terms and conditions as the Hilton Parent stock option, with appropriate adjustments to the number of shares subject to the option and the exercise price payable per share in order to preserve its intrinsic value immediately following the separation. Hilton Parent stock options held by Hilton Parent Employees will be adjusted with respect to the number of shares subject to each such option and the exercise price payable per share in order to preserve the intrinsic value immediately following the separation.

Time-Vesting Restricted Stock Units. It is expected that outstanding restricted stock units (“RSUs”) that will settle in shares of Hilton Parent common stock held by HGV Employees on the distribution date and that are subject to time-based vesting will be converted into RSUs that will settle in HGV Parent common stock, on the same general terms and conditions of as the Hilton Parent RSUs, with appropriate adjustments to the number of shares subject to such RSUs in order to preserve their value immediately following the separation. As discussed above, it is not expected that any changes will be made with respect to RSUs held by Hilton Parent Employees other than appropriate adjustments to the number of Hilton Parent shares subject to the RSUs in order to preserve the value of the award immediately following the separation.

Performance-Vesting Restricted Stock Units and Restricted Shares. It is expected that outstanding performance-vesting restricted stock units (“PSUs”) granted with respect to shares of Hilton Parent common stock in 2014, which are held by HGV Employees on the distribution date will be converted into an award of PSUs that will settle in shares of HGV Parent based on the actual performance level achieved by Hilton Parent during the performance period applicable to such awards, which will end on December 31, 2016. It is not expected that any changes will be made with respect to PSUs held by Hilton Parent Employees other than appropriate adjustments to the number of Hilton Parent shares subject to the PSUs in order to preserve the value of the award immediately following the separation. The Hilton Parent Compensation Committee will determine and certify the extent to which such awards have vested based on actual performance through such date. Such PSUs will then vest and be settled in shares of Hilton Parent common stock or HGV Parent common stock, as applicable, following the separation.

It is expected that outstanding PSUs and performance-vesting restricted stock (“Performance Shares”) that will settle in shares of Hilton Parent common stock that were granted in 2015 and 2016 and are held by Hilton Parent Employees and HGV Employees on the distribution date will be converted into time-vesting RSUs or restricted shares that will settle in shares of Hilton Parent common stock or HGV Parent common stock, as applicable, assuming target-level performance. The number of shares of Hilton Parent common stock or HGV Parent common stock, as applicable, subject to each award will be adjusted in order to preserve the value of the award immediately following the separation (the “Converted PSUs” or “Converted Performance Shares”). Subject to each such holder’s continued employment through the applicable vesting date, the Converted PSUs and Converted Performance Shares will vest on the date that the performance period applicable to the Converted PSUs or Converted Performance Shares, as applicable, prior to their conversion would have otherwise ended and settle in shares of either Hilton Parent common stock or HGV Parent common stock, as applicable.

Director-Held Time-Vesting Restricted Stock Units. Outstanding unvested time-vesting RSUs that will settle in shares of Hilton Parent common stock that are held by non-employee directors will vest and be settled as of a date prior to the record date of the distribution in accordance with their terms, and such non-employee directors will receive shares of HGV Parent and Park Parent common stock in connection with the distribution on the same terms as other holders of Hilton Parent common stock.

Continued Vesting. It is expected that the service-vesting requirements in effect for each equity-based award will remain unchanged in connection with the separation, and HGV Employees will be given credit for service prior to the separation with Hilton Parent and continued service with HGV Parent after the separation.

 

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Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock to Hilton Parent stockholders. Instead, as soon as practicable on or after the distribution date, the distribution agent will aggregate fractional shares of our common stock to which Hilton Parent stockholders of record would otherwise be entitled into whole shares, sell them in the open market at the prevailing market prices and then distribute the aggregate net sale proceeds ratably to Hilton Parent stockholders who would otherwise have been entitled to receive fractional shares of our common stock. The amount of this payment will depend on the prices at which the distribution agent sells the aggregated fractional shares of our common stock in the open market shortly after the distribution date and will be reduced by any amount required to be withheld for tax purposes and any brokerage fees and other expenses incurred in connection with these sales of fractional shares. Receipt of the proceeds from these sales generally will result in a taxable gain or loss to those Hilton Parent stockholders. Each stockholder entitled to receive cash proceeds from these shares should consult his, her or its own tax advisor as to the stockholder’s particular circumstances. The tax consequences of the distribution are described in more detail under “—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

Material U.S. Federal Income Tax Consequences of the Spin-Off

The following is a summary of the material U.S. federal income tax consequences to the holders of shares of Hilton Parent common stock in connection with the spin-off. This summary is based on the Code, the Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect as of the date of this information statement and all of which are subject to differing interpretations and may change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below. This summary assumes that the spin-off will be consummated in accordance with the Distribution Agreement and as described in this information statement.

Except as specifically described below, this summary is limited to holders of shares of Hilton Parent common stock that are U.S. Holders, as defined immediately below. For purposes of this summary, a U.S. Holder is a beneficial owner of Hilton Parent common stock that is, for U.S. federal income tax purposes:

 

    an individual who is a citizen or a resident of the United States;

 

    a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;

 

    an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

    a trust (1) with respect to which a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or (2) that has a valid election is in place under applicable Treasury regulations to be treated as a U.S. person.

This summary does not discuss all tax considerations that may be relevant to stockholders in light of their particular circumstances, nor does it address the consequences to stockholders subject to special treatment under the U.S. federal income tax laws, such as:

 

    persons acting as nominees or otherwise not as beneficial owners;

 

    dealers or traders in securities or currencies;

 

    broker-dealers

 

    traders in securities that elect to use the mark to market method of accounting;

 

    tax-exempt entities;

 

    cooperatives;

 

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    banks, trusts, financial institutions or insurance companies;

 

    persons who acquired shares of Hilton Parent common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

    stockholders who own, or are deemed to own, at least 10% or more, by voting power or value, of Hilton Parent equity;

 

    holders owning Hilton Parent common stock as part of a position in a straddle or as part of a hedging, conversion, constructive sale, synthetic security, integrated investment, or other risk reduction transaction for U.S. federal income tax purposes;

 

    regulated investment companies;

 

    REITs;

 

    former citizens or former long-term residents of the United States;

 

    holders who are subject to the alternative minimum tax;

 

    pass-through entities (such as entities treated as partnerships for U.S. federal income tax purposes); or

 

    persons that own Hilton Parent common stock through partnerships or other pass-through entities.

This summary does not address the U.S. federal income tax consequences to Hilton Parent stockholders who do not hold shares of Hilton Parent common stock as a capital asset. Moreover, this summary does not address any state, local, or foreign tax consequences or any estate or gift tax consequences or tax consequences other than U.S. federal income tax consequences.

If a partnership (or any other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of Hilton Parent common stock, the tax treatment of a partner in that partnership generally will depend on the status of the partner and the activities of the partnership. Such a partner or partnership is urged to consult its tax advisor as to the tax consequences of the spin-off.

YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR AS TO THE SPECIFIC U.S. FEDERAL, STATE AND LOCAL, AND NON-U.S. TAX CONSEQUENCES OF THE SPIN-OFF IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES AND THE EFFECT OF POSSIBLE CHANGES IN LAW THAT MIGHT AFFECT THE TAX CONSEQUENCES DESCRIBED IN THIS INFORMATION STATEMENT.

Treatment of the Spin-Off

Hilton has received the IRS Ruling on certain specific issues relevant to the qualification of the spin-off as tax-free under Section 355 of the Code, based on certain facts and representations set forth in its request for the IRS Ruling. The IRS Ruling does not address all of the requirements for tax-free treatment of the spin-off, and Hilton Parent expects to receive an opinion from Spin-off Tax Counsel to the effect that the distributions of HGV Parent and Park Parent common stock will qualify as tax-free distributions under Section 355 of the Code. An opinion from tax counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion. The opinion will be based on certain factual statements and representations, which, if incomplete or untrue in any material respect, could alter the Spin-off Tax Counsel’s conclusions.

Assuming the distributions of our common stock and Park Parent common stock qualifies as tax-free under Section 355 of the Code, for U.S. federal income tax purposes:

 

    no gain or loss will be recognized by Hilton Parent as a result of the spin-off;

 

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    no gain or loss will be recognized by, or be includible in the income of, a holder of Hilton Parent common stock solely as a result of the receipt of our common stock in the spin-off;

 

    the aggregate tax basis of the shares of Hilton Parent common stock, shares of Park Parent common stock and shares of our common stock, including any fractional share deemed received, in the hands of each Hilton Parent stockholder immediately after the spin-off will be the same as the aggregate tax basis of the shares of Hilton Parent common stock held by such holder immediately before the spin-off, allocated between the shares of Hilton Parent common stock, shares of Park Parent common stock and shares of our common stock, including any fractional share deemed received, in proportion to their relative fair market values immediately following the spin-off;

 

    the holding period with respect to shares of our common stock received by Hilton Parent stockholders will include the holding period of their shares of Hilton Parent common stock, provided that such shares of Hilton Parent common stock are held as capital assets immediately following the spin-off; and

 

    a holder of Hilton Parent common stock who receives cash in lieu of a fractional share of our common stock in the spin-off will recognize capital gain or loss measured by the difference between the tax basis of the fractional share deemed to be received, as determined above, and the amount of cash received.

Hilton Parent stockholders that have acquired different blocks of Hilton Parent common stock at different times or at different prices are urged to consult their tax advisors regarding the allocation of their aggregate adjusted basis among, and their holding period of, our common stock, Park Parent common stock and Hilton Parent common stock.

Although a private letter ruling from the IRS is generally binding on the IRS, the IRS Ruling will be based on certain facts and representations and undertakings, from Hilton Parent, Park Parent and us that certain necessary conditions to obtain tax-free treatment under the Code have been satisfied. Furthermore, as a result of the IRS’s general ruling policy with respect to distributions under Section 355 of the Code, the IRS will only rule on significant issues relevant to the tax-free treatment of such a distribution. Accordingly, the spin-off is conditioned upon the receipt by Hilton Parent of an opinion from Spin-off Tax Counsel, in which such Spin-off Tax Counsel is expected to conclude that the distributions of HGV Parent and Park Parent common stock will qualify as tax-free under Section 355 of the Code.

The opinion will rely on the IRS Ruling as to matters covered by such ruling. The opinion will be based on, among other things, current law and certain assumptions and representations as to factual matters made by Hilton Parent, Park Parent and us. Any change in currently applicable law, which may or may not be retroactive, or the failure of any factual representation or assumption to be true, correct and complete in all material respects, could adversely affect the conclusions reached by Spin-off Tax Counsel in the opinion. The opinion will not be binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion. The opinion will be expressed as of the date issued and will not cover subsequent periods. As a result, the opinion is not expected to be issued until after the date of this information statement. The opinion will represent Spin-off Tax Counsel’s best legal judgment based on current law and is not binding on the IRS or any court. We cannot assure you that the IRS will agree with the conclusions expected to be set forth in the opinion, and it is possible that the IRS or another tax authority could adopt a position contrary to one or all of those conclusions and that a court could sustain that contrary position. If any of the facts, representations, assumptions, or undertakings described or made in connection with the IRS Ruling or the opinion are not correct, are incomplete or have been violated, the IRS Ruling could be revoked retroactively or modified by the IRS, and our ability to rely on the opinion could be jeopardized. We are not aware of any facts or circumstances, however, that would cause these facts, representations or assumptions to be untrue or incomplete, or that would cause any of these undertakings to fail to be complied with, in any material respect.

 

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If, notwithstanding the conclusions included in the IRS Ruling and the opinion, it is ultimately determined that the distribution of HGV Parent common stock, the distribution of Park Parent common stock and/or certain internal reorganization transactions and distributions do not qualify as tax-free for U.S. federal income tax purposes, then Park Parent could recognize taxable gain or loss in an amount equal to the difference, if any, of the fair market value of the shares of our common stock and/or shares of certain entities holding the management and franchising business, in each case held by Park Parent over its tax basis in such shares. Hilton Parent may recognize incremental gain, if any, equal to the excess of the fair market value of the shares of Park Parent common stock held by Hilton Parent over its tax basis in such shares. In addition, if the distribution of HGV Parent common stock and/or the distribution of Park Parent common stock do not qualify as tax-free under Section 355 of the Code, each Hilton Parent stockholder that receives shares of Park Parent common stock and shares of our common stock in the spin-off would be treated as receiving a distribution in an amount equal to the fair market value of Park Parent common stock and/or the fair market value of our common stock that was distributed to the stockholder, which would generally be taxed as a dividend to the extent of the stockholder’s pro rata share of Hilton Parent’s current and accumulated earnings and profits, including Hilton Parent’s taxable gain, if any, on the spin-off, then treated as a non-taxable return of capital to the extent of the stockholder’s basis in the Hilton Parent stock and thereafter treated as capital gain from the sale or exchange of Hilton Parent stock. Additionally, certain U.S. Holders that are individuals, estates or trusts would be required to pay an additional 3.8% tax on “net investment income,” (or, in the case of an estate or trust, on “undistributed net investment income”) which includes, among other things, any amounts treated as a dividend on or gain from the sale or exchange of Hilton Parent stock. U.S. Holders should consult their own tax advisors regarding this tax on net investment income.

Even if the spin-off otherwise qualifies for tax-free treatment under Section 355 of the Code, the spin-off may result in corporate level taxable gain to Hilton Parent and/or Park Parent under Section 355(e) of the Code if 50% or more, by vote or value, of Hilton Parent’s stock, Park Parent’s stock or our stock is treated as acquired or issued as part of a plan or series of related transactions that includes the spin-off (including as a result of transactions occurring before the spin-off). If an acquisition or issuance of Hilton’s stock, Park Parent’s stock or our stock triggers the application of Section 355(e) of the Code, Hilton Parent and/or Park Parent would recognize taxable gain as described above, but the distribution would generally be tax-free to each of Hilton Parent’s stockholders, as described above.

Treasury regulations require each U.S. Holder that owns at least 5% of the total outstanding common stock of Hilton Parent to attach to their U.S. federal income tax returns for the year in which the spin-off occurs a statement setting forth certain information with respect to the transaction. U.S. Holders are urged to consult their tax advisors to determine whether they are required to provide the foregoing statement and the contents thereof.

Cash in Lieu of Fractional Shares

No fractional shares of our common stock will be distributed to Hilton Parent stockholders in connection with the spin-off. All such fractional shares resulting from the spin-off will be aggregated and sold by the transfer agent, and the proceeds, if any, less any brokerage commissions or other fees, will be distributed to Hilton Parent stockholders in accordance with their fractional interest in the aggregate number of shares sold. A holder that receives cash in lieu of a fractional share of our common stock as a part of the spin-off generally will recognize capital gain or loss measured by the difference between the cash received for such fractional share and the holder’s tax basis in the fractional share determined as described above. Any such capital gain or loss will be long-term capital gain or loss if a Hilton Parent stockholder held such stock for more than one year at the completion of the spin-off. Long-term capital gains generally are subject to preferential rates of U.S. federal income tax for certain non-corporate U.S. Holders (including individuals). The deductibility of capital losses is subject to significant limitations.

 

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Results of the Spin-Off

After the spin-off, we will be an independent, publicly traded company. Immediately following the spin-off, we expect to have 27 record holders of shares of our common stock and approximately 99 million shares of our common stock outstanding, based on the number of stockholders and outstanding shares of Hilton Parent common stock on November 8, 2016 and the distribution ratio. The figures exclude shares of Hilton Parent common stock held directly or indirectly by Hilton Parent, if any. The actual number of shares to be distributed will be determined on the record date and will reflect any repurchases of shares of Hilton Parent common stock and issuances of shares of Hilton Parent common stock in respect of awards under Hilton Parent equity-based incentive plans between the date the Hilton Parent board of directors declares the dividend for the distribution and the record date for the distribution.

For information regarding equity awards settleable in shares of our common stock that will be outstanding after the distribution, see “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off—Employee Matters Agreement” and “Management.”

Before the spin-off, we will enter into several agreements with Hilton Parent and Park Parent to effect the spin-off and provide a framework for our relationship with Hilton and Park Hotels & Resorts after the spin-off. These agreements will govern the relationship among us, Hilton and Park Hotels & Resorts after completion of the spin-off and provide for the allocation among us, Park Hotels & Resorts and Hilton of the assets, liabilities, rights and obligations of Hilton. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent and Park Parent Related to the Spin-Off.”

Trading Prior to the Distribution Date

It is anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be a “when-issued” market in our common stock. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The when-issued trading market will be a market for shares of our common stock that will be distributed to Hilton Parent stockholders on the distribution date. Any Hilton Parent stockholder who owns shares of Hilton Parent common stock at 5:00 p.m., Eastern time, on the record date will be entitled to shares of our common stock distributed in the spin-off. Hilton Parent stockholders may trade this entitlement to shares of our common stock, without the shares of Hilton Parent common stock they own, on the when-issued market. On the first trading day following the distribution date, we expect when-issued trading with respect to our common stock will end and “regular-way” trading will begin. See “Trading Market.”

Following the distribution date, we expect shares of our common stock to be listed on the NYSE under the ticker symbol “HGV”. We will announce the when-issued ticker symbol when and if it becomes available.

It is also anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be two markets in Hilton Parent common stock: a “regular-way” market and; an “ex-distribution” market. Shares of Hilton Parent common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if shares of Hilton Parent common stock are sold in the regular-way market up to and including the distribution date, the selling stockholder’s right to receive shares of our common stock in the distribution will be sold as well. However, if Hilton Parent stockholders own shares of Hilton Parent common stock as of 5:00 p.m., Eastern time, on the record date and sell those shares on the ex-distribution market up to and including the distribution date, the selling stockholders will still receive the shares of our common stock that they would otherwise receive pursuant to the distribution. See “Trading Market.”

 

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Financing Transactions

In connection with the spin-off, Hilton, HGV and Park Hotels & Resorts will undertake a number of financing transactions. As a result of these financing transactions, upon consummation of the spin-off we expect to have total recourse indebtedness of approximately $500 million, excluding $450 million expected to be outstanding under the non-recourse Timeshare Facility and between $250 million and $300 million of non-recourse Securitized Debt expected to be outstanding. Included in our expected outstanding non-recourse Timeshare Facility balance is an intended borrowing of up to an additional $300 million, which proceeds will be used to distribute cash to Hilton Parent. After giving effect to the foregoing financing transactions, upon consummation of the spin-off, we expect to have $1.22 billion of total recourse and non-recourse indebtedness outstanding. There can be no assurances that any such financing transactions will be completed in the timeframe or size indicated or at all. See “Description of Certain Indebtedness.”

Conditions to the Spin-Off

We expect that the spin-off will be effective as of 5:00 p.m., Eastern time, on January 3, 2017, the distribution date, provided that the following conditions shall have been satisfied or waived by Hilton:

 

    the final approval by the board of directors of Hilton Parent of the spin-off and all related transactions and the determination of the record date, which approval may be given or withheld at its absolute and sole discretion;

 

    our Registration Statement on Form 10, of which this information statement forms a part, shall have been declared effective by the SEC, no stop order suspending the effectiveness thereof shall be in effect, no proceedings for such purpose shall be pending before or threatened by the SEC, and this information statement, or a notice of internet availability thereof, shall have been mailed to the Hilton Parent stockholders;

 

    HGV Parent common stock shall have been approved for listing on the NYSE, subject to official notice of distribution;

 

    Hilton Parent shall have obtained an opinion from Spin-off Tax Counsel, in form and substance satisfactory to Hilton Parent, to the effect that the distributions of HGV Parent common stock and Park Parent common stock will qualify as tax-free distributions under Section 355 of the Code;

 

    the IRS Ruling shall not have been revoked or modified in any material respect;

 

    prior to the distribution date, the Hilton Parent board of directors shall have obtained opinions from a nationally recognized valuation firm, in form and substance satisfactory to Hilton, with respect to the capital adequacy and solvency of each of Hilton, HGV and Park Hotels & Resorts after giving effect to the spin-off;

 

    any material governmental approvals and other consents necessary to consummate the spin-off shall have been received;

 

    no order, injunction or decree issued by any governmental entity of competent jurisdiction or other legal restraint or prohibition preventing the consummation of all or any portion of the spin-off shall be pending, threatened, issued or in effect, and no other event shall have occurred or failed to occur that prevents the consummation of all or any portion of the spin-off;

 

    no other events or developments shall have occurred or failed to occur that, in the judgment of the board of directors of Hilton Parent, would result in the distribution having a material adverse effect on Hilton or its stockholders;

 

    the internal reorganization shall have been completed, except for such steps as Hilton Parent in its sole discretion shall have determined may be completed after the distribution date;

 

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    all necessary actions shall have been taken to cause the board of directors of HGV Parent to consist of the individuals identified in this information statement as directors of HGV Parent;

 

    all necessary actions shall have been taken to cause the officers of HGV to be the individuals identified as such in this information statement;

 

    all necessary actions shall have been taken to adopt the forms of amended and restated certificate of incorporation and bylaws filed by HGV Parent with the SEC as exhibits to the Registration Statement on Form 10, of which this information statement forms a part; and

 

    each of the Distribution Agreement, the Tax Matters Agreement, the Employee Matters Agreement and the Transition Services Agreement shall have been executed by each party.

Completion of the spin-off of Park Hotels & Resorts will be subject to similar conditions as those listed above. The fulfillment of the foregoing conditions will not create any obligation on the part of Hilton to effect the spin-off. We are not aware of any material federal, foreign or state regulatory requirements that must be complied with or any material approvals that must be obtained, other than compliance with SEC rules and regulations, approval for listing on the NYSE and the declaration of effectiveness of the Registration Statement on Form 10, of which this information statement forms a part, by the SEC, in connection with the distribution. Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents or that it is not advisable for HGV to separate from Hilton at that time. In the event the board of directors of Hilton Parent determines to waive a material condition to the distribution, modify a material term of the distribution or not to proceed with the spin-off, Hilton intends to promptly issue a press release or other public announcement and file a Current Report on Form 8-K to report such event.

Reasons for Furnishing this Information Statement

This information statement is being furnished solely to provide information to Hilton Parent stockholders that are entitled to receive shares of our common stock in the spin-off. This information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities or any securities of Hilton. We believe that the information in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither Hilton nor we undertake any obligation to update the information except in the normal course of our respective public disclosure obligations.

 

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TRADING MARKET

Market for Our Common Stock

There is currently no public market for our common stock and an active trading market may not develop or may not be sustained. We anticipate that trading of our common stock will commence on a “when-issued” basis at least two trading days prior to the record date and continue through the distribution date. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. When-issued trades generally settle within four trading days after the distribution date. If you own shares of Hilton Parent common stock as of 5:00 p.m., Eastern time on the record date, you will be entitled to shares of our common stock distributed pursuant to the spin-off. You may trade this entitlement to shares of our common stock, without the shares of Hilton Parent common stock you own, on the when-issued market. On the first trading day following the distribution date, any when-issued trading with respect to our common stock will end and “regular-way” trading will begin. We intend to list our common stock on the NYSE under the ticker symbol “HGV”. We will announce our when-issued trading symbol when and if it becomes available.

It is also anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be two markets in Hilton Parent common stock: (i) a “regular-way” market; and (ii) an “ex-distribution” market. Shares of Hilton Parent common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if you sell shares of Hilton Parent common stock in the regular-way market up to and including the distribution date, you will be selling your right to receive shares of our common stock in the distribution. However, if you own shares of Hilton Parent common stock as of 5:00 p.m., Eastern time, on the record date and sell those shares on the ex-distribution market up to and including the distribution date, you will still receive the shares of our common stock that you would otherwise receive pursuant to the distribution.

We cannot predict the prices at which our common stock may trade before the spin-off on a “when-issued” basis or after the spin-off. Those prices will be determined by the marketplace. Prices at which trading in our common stock occurs may fluctuate significantly. Those prices may be influenced by many factors, including anticipated or actual fluctuations in our operating results or those of other companies in our industry, investor perception of our company and the timeshare industry, market fluctuations and general economic conditions. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the performance of many stocks and that have often been unrelated or disproportionate to the operating performance of these companies. These are just some factors that may adversely affect the market price of our common stock. See “Risk Factors—Risks Related to Ownership of Our Common Stock” for further discussion of risks relating to the trading prices of our common stock.

Transferability of Shares of Our Common Stock

On November 8, 2016, Hilton Parent had approximately 990 million shares of its common stock issued and outstanding. Based on this number, we expect that upon completion of the spin-off, we will have approximately 99 million shares of common stock issued and outstanding. The shares of our common stock that you will receive in the distribution will be freely transferable, unless you are considered an “affiliate” of ours under Rule 144 under the Securities Act. Persons who can be considered our affiliates after the spin-off generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with, us, and may include certain of our officers and directors. As of the distribution date, we estimate that our directors and officers will beneficially own in the aggregate less than one percent of our shares. In addition, individuals who are affiliates of Hilton Parent on the distribution date may be deemed to be affiliates of ours. Our affiliates may sell shares of our common stock received in the distribution only:

 

    under a registration statement that the SEC has declared effective under the Securities Act; or

 

    under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.

 

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In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell, within any three-month period commencing 90 days after the date that the registration statement of which this information statement is a part is declared effective, a number of shares of our common stock that does not exceed the greater of:

 

    1.0 percent of our common stock then outstanding; or

 

    the average weekly trading volume of our common stock on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

In connection with the Sale, HGV entered into a registration rights agreement with HNA, which will become effective upon the later to occur of (i) the closing of the Sale and (ii) the consummation of the spin-off. HGV also entered into a registration rights agreement with Blackstone. See “Certain Relationships and Related Party Transactions—Registration Rights Agreements” for additional information.

Sales under Rule 144 are also subject to restrictions relating to manner of sale and the availability of current public information about us.

In the future, we may adopt new equity-based compensation plans and issue stock-based awards. We currently expect to file a registration statement under the Securities Act to register shares to be issued under these equity plans. Shares issued pursuant to awards after the effective date of that registration statement, other than shares issued to affiliates, generally will be freely tradable without further registration under the Securities Act.

Except for our common stock distributed in the distribution and employee-based equity awards, none of our equity securities will be outstanding immediately after the spin-off.

As of the date of this information statement, Blackstone entities have pledged, hypothecated or granted security interests in substantially all of the shares of Hilton Parent common stock held by them pursuant to a margin loan agreement with customary default provisions. We anticipate that shares of our common stock received by Blackstone in the spin-off in respect of such pledged Hilton Parent shares would similarly be subject to the lien of such margin loan agreement. Accordingly, in the event of a default under the margin loan agreement, the secured parties may foreclose upon any and all shares of common stock pledged to them and may seek recourse against the borrower.

 

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DIVIDEND POLICY

Although we expect to return capital to stockholders through dividends or otherwise in the future, we have no current plans to pay dividends on our common stock. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of September 30, 2016 on a historical basis and on a pro forma basis to give effect to the spin-off and the related transactions, as if they occurred on September 30, 2016. Explanation of the pro forma adjustments made to the historical consolidated financial statements can be found under “Unaudited Pro Forma Consolidated Financial Statements.” The following table should be reviewed in conjunction with “Unaudited Pro Forma Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this information statement.

 

     September 30, 2016  
($ in millions)    Historical     Pro Forma(1)  

Cash

   $ 7      $ 48   

Restricted cash

     90        90   
  

 

 

   

 

 

 

Total

   $ 97      $ 138   
  

 

 

   

 

 

 

Debt:

    

Allocated Hilton Parent debt

   $ 743      $   

Debt(2)

            500   

Non-recourse debt(2)

     420        720   
  

 

 

   

 

 

 

Total debt

     1,163        1,220   

Equity:

    

Common stock, $0.01 par value; 3,000,000,000 shares authorized, 98,978,319 shares issued and outstanding, pro forma

            1   

Paid in capital

            118   

Parent deficit

     (48       
  

 

 

   

 

 

 

Total equity (deficit)

     (48     119   
  

 

 

   

 

 

 

Total capitalization

   $ 1,115      $ 1,339   
  

 

 

   

 

 

 

 

(1)  See “Unaudited Pro Forma Consolidated Financial Statements.”
(2)  Amounts are not presented net of unamortized deferred financing costs.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following selected consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the selected historical consolidated balance sheet data as of December 31, 2015 and 2014 are derived from our audited consolidated financial statements included elsewhere in this information statement. The selected historical consolidated statement of operations data for the years ended December 31, 2012 and 2011 and the selected historical consolidated balance sheet data as of December 31, 2013, 2012 and 2011 are derived from our unaudited consolidated financial statements that are not included in this information statement. The selected condensed consolidated statement of operations data for the nine months ended September 30, 2016 and 2015 and the selected condensed consolidated balance sheet data as of September 30, 2016 are derived from our unaudited condensed consolidated financial statements included elsewhere in this information statement. We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and, in our opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results for any interim period are not necessarily indicative of the results that may be expected for the full year. Additionally, our historical results are not necessarily indicative of the results expected for any future period.

This selected financial data is not necessarily indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we been operating as an independent, publicly traded company during the periods presented, including changes that will occur in our operations and capitalization as a result of the spin-off from Hilton. For example, our historical consolidated financial statements include allocations of expenses for certain functions and services provided by Hilton. These costs may not be representative of the future costs we will incur, either positively or negatively, as an independent, public company. Our historical consolidated financial statements also include allocations of debt, and related balances, related to debt entered into by Hilton, which was secured by our assets.

The selected consolidated financial data below should be read together with the audited consolidated financial statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement.

 

     Nine Months
Ended
September 30,
     Year Ended December 31,  
($ in millions)    2016      2015      2015      2014      2013      2012      2011  

Statement of Operations Data:

                    

Total revenues

   $ 1,168       $ 1,094       $ 1,475       $ 1,317       $ 1,224       $ 1,172       $ 1,007   

Total expenses

     921         863         1,154         1,004         975         924         829   

Net income

     130         125         174         167         128         118         73   

 

     September 30,      December 31,  
($ in millions)    2016      2015      2014      2013      2012      2011  

Balance Sheet Data:

                 

Securitized timeshare financing receivables

   $ 268       $ 350       $ 468       $ 221       $     —       $     —   

Unsecuritized timeshare financing receivables

     724         626         460         681         891         827   

Total assets

     1,859         1,724         1,621         1,568         1,532         1,562   

Total non-recourse debt

     417         502         625         670                   

Total liabilities(1)

     1,907         1,830         1,994         2,103         2,038         1,993   

 

(1)  Includes allocated Parent debt of $743 million as of September 30, 2016 and $634 million, $719 million, $828 million, $1,496 million and $1,542 million as of December 31, 2015, 2014, 2013, 2012 and 2011, respectively.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma consolidated balance sheet and unaudited pro forma consolidated statements of operations present the historical consolidated financial statements of Hilton Resorts Corporation, adjusted to give effect to the financing transactions and the other Spin-Off Transactions as described under “The Spin-Off Transactions.” The unaudited pro forma consolidated balance sheet as of September 30, 2016 and unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2016 and year ended December 31, 2015 have been prepared to reflect the spin-off and related transactions as if they had occurred on September 30, 2016 for the unaudited pro forma consolidated balance sheet and January 1, 2015 for the unaudited pro forma consolidated statements of operations.

The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The unaudited pro forma consolidated financial statements should be read in conjunction with the sections entitled “Business,” “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our consolidated financial statements, condensed consolidated financial statements and accompanying notes, which are included elsewhere in this information statement.

Our historical consolidated financial statements include allocations of certain expenses from Hilton, including expenses for costs related to functions such as executive office, finance and other administrative support. These costs may not be representative, either positively or negatively, of the future costs we will incur as an independent, public company. Effective with the spin-off, we will assume responsibility for all of these functions and related costs. Certain of these activities will continue to be performed by Hilton under transition service agreements for a limited period of time. We will incur incremental costs as an independent public company, including costs to replace services previously provided by Hilton, as well as other stand-alone costs. Due to the scope and complexity of these activities, the amount and timing of these incremental costs could vary and, therefore, are not included as adjustments within the unaudited pro forma consolidated financial statements.

We currently estimate that the separation costs we will incur during our transition to being a stand-alone public company will range from approximately $25 million to $30 million. We have not adjusted the accompanying unaudited pro forma consolidated statement of operations for these estimated separation costs as the costs are not expected to have an ongoing effect on our operating results. We anticipate that substantially all of these costs will be incurred within 24 months of the distribution. These costs relate to the following:

 

    finance, tax and other professional costs pertaining to the spin-off and establishing us as a stand-alone public company;

 

    compensation, such as modifications to certain bonus awards, upon completion of the spin-off;

 

    recruiting and relocation costs associated with hiring key senior management personnel new to our company;
    costs to separate our information systems from Hilton; and

 

    other separation costs.

Due to the scope and complexity of these activities, the amount of these costs could increase or decrease materially and the timing of incurrence could change.

The unaudited pro forma consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of our financial position or results of operations had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such unaudited pro forma financial information indicative of the results to be expected for any future period. A number of factors may affect our results. See “Risk Factors” and “Special Note About Forward-Looking Statements.”

 

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Hilton Resorts Corporation

Unaudited Pro Forma Consolidated Balance Sheet

As of September 30, 2016

(in millions)

 

    Historical     Pro Forma
Adjustments(1)
        Pro
Forma
 

ASSETS

       

Cash

  $ 7      $ 41      (a)   $ 48   

Restricted cash

    90                 90   

Accounts receivable, net of allowance for doubtful accounts

    117                 117   

Timeshare financing receivables, net

    992                 992   

Inventory

    482        54      (b)     536   

Property and equipment, net

    55        189      (c)     244   

Intangible assets, net

    71                 71   

Other assets

    45                 45   
 

 

 

   

 

 

     

 

 

 

TOTAL ASSETS

  $ 1,859      $ 284        $ 2,143   
 

 

 

   

 

 

     

 

 

 

LIABILITIES AND EQUITY

       

Accounts payable, accrued expenses and other

  $ 221      $        $ 221   

Advanced deposits

    102                 102   

Allocated Parent debt

    743        (743   (d)       

Debt

           492      (d)     492   

Non-recourse debt

    417        300      (d)     717   

Deferred revenues

    113                 113   

Deferred income tax liabilities

    311        68      (b)(c)     379   
 

 

 

   

 

 

     

 

 

 

Total liabilities

    1,907        117          2,024   

Equity:

       

Common stock, $0.01 par value

           1      (g)     1   

Stockholders’ equity

           118      (g)     118   

Parent deficit

    (48     48      (g)       
 

 

 

   

 

 

     

 

 

 

Total equity (deficit)

    (48     167          119   
 

 

 

   

 

 

     

 

 

 

TOTAL LIABILITIES AND EQUITY

  $ 1,859      $           284        $ 2,143   
 

 

 

   

 

 

     

 

 

 

 

(1)  For details of the adjustments referenced, see Note 3: Pro Forma Adjustments.

See notes to unaudited pro forma consolidated financial statements.

 

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Hilton Resorts Corporation

Unaudited Pro Forma Consolidated Statement of Operations

For the Nine Months Ended September 30, 2016

(in millions, except per share data)

 

     Historical     Pro Forma
Adjustments(1)
          Pro Forma  

Revenues

        

Sales of VOIs, net

   $ 359      $        $ 359   

Sales, marketing, brand and other fees

     382                 382   

Financing

     100                 100   

Club and resort management

     98                 98   

Rental and ancillary services

     135                 135   

Cost reimbursements

     94                 94   
  

 

 

   

 

 

     

 

 

 

Total revenues

     1,168                 1,168   
  

 

 

   

 

 

     

 

 

 

Expenses

        

Cost of VOI sales

     110                 110   

Sales and marketing

     443                 443   

Financing

     24        4        (e)        28   

Club and resort management

     25                 25   

Rental and ancillary services

     86                 86   

General and administrative

     61        (18     (h)        43   

Depreciation and amortization

     17        5        (c)        22   

License fee expense

     61                 61   

Cost reimbursements

     94                 94   
  

 

 

   

 

 

     

 

 

 

Total expenses

     921        (9       912   
  

 

 

   

 

 

     

 

 

 

Gain on foreign currency transactions

     2                 2   

Allocated Parent interest expense

     (20     20        (d)          

Other loss, net

     (1              (1

Interest expense

            (19     (d)        (19
  

 

 

   

 

 

     

 

 

 

Income before income taxes

     228        10          238   

Income tax expense

     (98     (4     (f)        (102
  

 

 

   

 

 

     

 

 

 

Net income

   $ 130      $ 6        $ 136   
  

 

 

   

 

 

     

 

 

 

Pro forma earnings per share:

        

Basic and diluted

         (i   $ 1.37   
        

 

 

 

Pro forma shares outstanding:

        

Basic and diluted

         (i     99   
        

 

 

 

 

(1)  For details of the adjustments referenced, see Note 3: Pro Forma Adjustments.

See notes to unaudited pro forma consolidated financial statements.

 

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Hilton Resorts Corporation

Unaudited Pro Forma Consolidated Statement of Operations

For the Year Ended December 31, 2015

(in millions, except per share data)

 

     Historical     Pro Forma
Adjustments(1)
          Pro
Forma
 

Revenues

        

Sales of VOIs, net

   $ 492      $ —          $ 492   

Sales, marketing, brand and other fees

     457        —            457   

Financing

     127        —            127   

Club and resort management

     125        —            125   

Rental and ancillary services

     164        —            164   

Cost reimbursements

     110        —            110   
  

 

 

   

 

 

     

 

 

 

Total revenues

     1,475        —            1,475   
  

 

 

   

 

 

     

 

 

 

Expenses

        

Cost of VOI sales

     173        —            173   

Sales and marketing

     541        —            541   

Financing

     32        6        (e     38   

Club and resort management

     32        —            32   

Rental and ancillary services

     113        —            113   

General and administrative

     57        —          (h     57   

Depreciation and amortization

     22        7        (c     29   

License fee expense

     74        —            74   

Cost reimbursements

     110        —            110   
  

 

 

   

 

 

     

 

 

 

Total expenses

     1,154        13          1,167   
  

 

 

   

 

 

     

 

 

 

Allocated Parent interest expense

     (29     29        (d     —     

Other loss, net

     —          —            —     

Interest expense

     —          (26     (d     (26
  

 

 

   

 

 

     

 

 

 

Income before income taxes

     292        (10       282   

Income tax expense

     (118     4        (f     (114
  

 

 

   

 

 

     

 

 

 

Net income

   $ 174      $ (6     $ 168   
  

 

 

   

 

 

     

 

 

 

Pro forma earnings per share:

        

Basic and diluted

         (i   $ 1.70   
        

 

 

 

Pro forma shares outstanding:

        

Basic and diluted

         (i     99   
        

 

 

 

 

(1)  For details of the adjustments referenced, see Note 3: Pro Forma Adjustments.

See notes to unaudited pro forma consolidated financial statements.

 

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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Pro Forma Presentation

On February 26, 2016, Hilton Worldwide Holdings Inc. (“Parent,” together with its consolidated subsidiaries, “Hilton”) announced a plan to spin-off Hilton’s timeshare business to stockholders as a separate, publicly traded company. The spin-off transaction, which is expected to be tax-free to Hilton stockholders, will be effected through a pro rata distribution of our stock to existing Hilton stockholders. Immediately following completion of the spin-off, Hilton stockholders will own 100 percent of the outstanding shares of our common stock. After the spin-off, we will operate as an independent, publicly traded company. Unless otherwise indicated or except where the context otherwise requires, references to “we,” “us” or “our” refer to Hilton Grand Vacations Inc. after giving effect to the transfer of the assets and liabilities from Hilton.

In connection with the spin-off, among other things, we intend to consummate the financing transactions as described in more detail in Note 2: The Spin-Off Transactions, below.

The unaudited pro forma financial statements are based on our historical consolidated financial statements, which are included elsewhere in this information statement, and have been prepared to reflect the spin-off and related transactions.

The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. These adjustments are included only to the extent they are directly attributable to the spin-off and related transactions and the appropriate information is known and factually supportable. Pro forma adjustments reflected in the unaudited pro forma consolidated statement of operations are expected to have a continuing effect on us. As a result, the unaudited pro forma consolidated statement of operations excludes gains and losses related to the transactions described in Note 2: The Spin-Off Transactions below that will not have a continuing effect on us, although these items are reflected in the unaudited pro forma consolidated balance sheet.

Note 2: The Spin-Off Transactions

The Spin-Off

Prior to the spin-off, Hilton will undergo an internal reorganization including the transfer to us of certain assets and related deferred tax liabilities for future conversion to vacation ownership units:

 

    Hilton New York – $11 million assets and $3 million deferred tax liabilities;

 

    Hilton Waikoloa Village – $178 million of assets and $49 million deferred tax liabilities; and

 

    Land parcel – $54 million land parcel adjacent to Hilton Waikoloa Village and $16 million deferred tax liabilities.

The Hilton New York and Hilton Waikoloa Village assets will be subject to an arrangement with Park Hotels & Resorts whereby Park Hotels & Resorts will retain the right to occupy and operate the assets as a hotel until the conversion to vacation ownership units.

Upon completion of the spin-off, we will enter into a license agreement with Hilton pursuant to which Hilton will grant us the exclusive right to use certain Hilton-branded trademarks, trade names and related intellectual property in our business for the term of the agreement. We will pay royalties to Hilton under the agreement that are equal to five percent of owned and fee-for-service timeshare interval sales, as well as five percent of certain other revenues earned in association with operating our business using certain Hilton trademarks licensed from Hilton under the license agreement, as well as specified additional fees, including in regard to our participation in the Hilton HHonors program (see “Certain Relationships and Related Party Transactions—Agreements between Hilton Parent and Park Parent Related to the Spin-Off-License Agreement” for additional discussion of the license agreement).

 

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Financing Transactions

In connection with the spin-off, we expect to complete certain financing transactions on or prior to the completion of the spin-off. As a result of these financing transactions, upon consummation of the spin-off we expect to have total recourse indebtedness of approximately $500 million, excluding $450 million expected to be outstanding under the non-recourse Timeshare Facility and between $250 million and $300 million of non-recourse Securitized Debt expected to be outstanding. Included in our expected outstanding non-recourse Timeshare Facility balance is an intended borrowing of an additional $300 million, which proceeds will be used to distribute cash to Hilton Parent. After giving effect to the foregoing financing transactions, upon consummation of the spin-off, we expect to have $1.22 billion of total recourse and non-recourse indebtedness outstanding.

Note 3: Pro Forma Adjustments

 

  (a) After the spin-off, we will no longer be party to Hilton’s cash management program, discussed further in Note 16: Related Party Transactions to the consolidated financial statements included elsewhere in this information statement. The available cash amount upon consummation of the financing transactions will depend on the timing of the closings of the various financing transactions and our cash generation between September 30, 2016 and the closing dates of such financing transactions. We expect to enter into one or more transactions with Parent prior to the consummation of the spin-off such that we will have aggregate cash and restricted cash balances within the range of $125 million to $150 million as of the distribution date. The $138 million pro forma cash and restricted cash aggregate balance reflects the mid-point estimate that we expect to have at the distribution date. To the extent that our aggregate cash and restricted cash balances, immediately prior to the distribution, exceed $125 million to $150 million, we expect to effect distributions or other transactions that would result in a net transfer from us to Parent of such excess amount. To the extent that our aggregate cash and restricted cash balances immediately prior to the distribution are less than $125 million to $150 million, we expect that Parent would make an equity contribution to us in the amount of such shortfall.

 

  (b) Reflects the net book value of the land parcel adjacent to Hilton Waikoloa Village to be transferred to us from an entity under common control as part of Hilton Parent’s internal reorganization prior to the spin. See Note 2: The Spin-Off Transactions for additional discussion.

 

  (c) Reflects the net book value and related depreciation expense of certain assets at the Hilton New York and the Hilton Waikoloa Village to be transferred to us from an entity under common control as part of Hilton Parent’s internal reorganization prior to the spin. The land has a net book value of $64 million. The depreciable assets have a net book value of $125 million and a weighted average remaining useful life of 29 years. See Note 2: The Spin-Off Transactions for additional discussion.

 

  (d) Reflects the adjustment to our historical debt and related balances and interest expense to give net effect to the following financing transactions as discussed in Note 2: The Spin-Off Transactions above:

 

($ in millions)    Historical      Pro Forma
Adjustments
    Pro Forma(1)  

Senior Secured Credit Facility

   $ —         $ 197      $ 197   

Senior Notes due 2024(2)

     —           295        295   

Allocated Parent debt

     743         (743     —     
  

 

 

    

 

 

   

 

 

 

Total Recourse debt

     743         (251     492   
  

 

 

    

 

 

   

 

 

 

Timeshare Facility

   $ 150       $ 300      $ 450   

Securitized debt

     270         —          270   
  

 

 

    

 

 

   

 

 

 

Total Non-recourse debt

     420         300        720   
  

 

 

    

 

 

   

 

 

 

Total Debt

     1,163         49        1,212   
  

 

 

    

 

 

   

 

 

 

 

(1)  Net of expected deferred financing costs.
(2) 

On October 24, 2016 we issued $300 million aggregate principal amount of Senior Notes due 2024, which were acquired by Park Hotels & Resorts as part of the internal reorganization. Pursuant to a cashless debt

 

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  exchange, Park Hotels & Resorts exchanged such senior notes with certain holders of indebtedness under their $450 million mortgage loan secured by their Bonnet Creek Resort and cancelled a like amount of indebtedness.

Pro forma interest expense reflects an assumed weighted average annual interest rate of 4.75% on the Senior Notes due 2024 and the Senior Secured Credit Facility. Additionally, pro forma interest expense includes amortization expense on debt issuance costs incurred in connection with these financing transactions as well as approximately $1 million in fees related to an undrawn line of credit. A 0.125% change in the weighted average interest rate on our total pro forma indebtedness would change our pro forma annual interest expense by less than $1 million.

 

  (e) Reflects the adjustment to our historical, non-recourse debt interest expense expected to be outstanding under the non-recourse Timeshare Facility with an assumed annual interest rate of 1.73%.

 

  (f) Reflects the associated income tax benefit (expense) for all of the adjustments noted above. The income tax provision was based on the estimated statutory tax rate of 38.3%.

 

  (g) Reflects Hilton Grand Vacations Inc.’s issuance of one share of its common stock, par value $0.01 per share, to Park Hotels & Resorts Inc. in exchange for all of Hilton Resorts Corporation’s shares of common stock owned by Park Hotels & Resorts and the pro forma recapitalization of our equity, including a net-impact pro forma increase of $167 million. As of the distribution date, Parent equity will be re-designated as our Stockholders’ equity and will be allocated between Common stock and Stockholders’ equity based on the number of shares of our common stock outstanding at the distribution date.

 

  (h) Reflects the removal of non-recurring, spin-off related transaction costs of $18 million and less than $1 million for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively.

 

  (i) Reflects the number of shares of our common stock used to compute the pro forma basic and diluted earnings per share for the nine months ended September 30, 2016 and year ended December 31, 2015, respectively, assuming a distribution ratio of one share of our common stock for every ten shares of Hilton common stock outstanding. The number of Hilton shares used to determine the assumed distribution reflects Hilton shares outstanding as of the balance sheet date.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “SummarySummary Historical and Unaudited Pro Forma Consolidated Financial Data,” “Selected Historical Consolidated Financial Data” and our consolidated financial statements and related notes that appear elsewhere in this information statement. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this information statement, particularly in “Risk Factors.”

Overview

Our Business

We market and sell VOIs, manage vacation resorts in top leisure and urban destinations and operate a point-based vacation club. As of September 30, 2016, we had 46 resorts, representing 7,592 units, and approximately 265,000 Hilton Grand Vacations Club (the “Club”) members. Club members have the flexibility to exchange their Club points for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 12 industry-leading brands across more than 4,700 properties, as well as numerous experiential vacation options, such as cruises and guided tours.

Upon completion of the spin-off, we will enter into agreements with Hilton and other third parties, including a license agreement to use the Hilton Grand Vacations brand, that have either not existed historically, or that may be on different terms than the terms of the arrangement or agreements that existed prior to the spin-off. The consolidated financial statements do not reflect the effect of these new or revised agreements and our historical expenses, including corporate and other expense and management fee expense, may not be reflective of our consolidated results of operations, financial position and cash flows had we been a stand-alone company during the periods discussed in our “—Results of Operations” section. For a more detailed description of the spin-off, see “The Spin-Off.”

We operate our business across two segments: (1) real estate sales and financing; and (2) resort operations and club management.

Real Estate Sales and Financing

Our primary product is the marketing and selling of fee-simple VOIs deeded in perpetuity, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week annually, at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In 2010, we began sourcing VOIs through fee-for-service agreements with third-party developers and have successfully transformed from a capital-intensive business to one that is highly capital-efficient. These agreements enable us to generate fees from the sales and marketing of the VOIs and Club memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs. Sales of owned inventory generally result in greater Adjusted EBITDA contributions, while fee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory and fee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital.

We originate loans for members purchasing our developed and acquired inventory and generate interest income. Our loans are collateralized by the underlying VOIs and are generally structured as 10-year, fully-amortizing loans that bear a fixed interest rate typically ranging from 9 percent to 18 percent per annum.

 

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The interest rate on our loans is determined by the amount of the down payment, the borrower’s credit profile and the loan term. The weighted average FICO score for new loans to U.S. and Canadian borrowers at the time of origination were as follows:

 

     Nine Months Ended September 30,      Year Ended December 31,  
     2016      2015      2015      2014      2013  

Weighted average FICO score

     736         736         743         747         747   

Prepayment is permitted without penalty. When a member defaults, we ultimately return their VOI to inventory for resale and that member no longer participates in our Club. We typically return interests that we reacquire through foreclosure to inventory. Historical default rates, which represent annual defaults as a percentage of each year’s beginning gross timeshare financing receivables balance, were as follows:

 

     Year Ended December 31,  
     2015     2014     2013  

Historical default rates(1)

     2.84     3.22     2.99

 

(1)  A loan is considered to be in default if it is equal to or greater than 121 days past due as of the prior month end.

Some of our loans have been pledged as collateral in our securitization transactions, which have in the past and may in the future provide funding for our activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and cash deposits. For additional information see Note 4: Timeshare Financing Receivables in our audited consolidated financial statements included elsewhere in this information statement.

In addition, we earn fees from servicing our own portfolio and the loans provided by third-party developers of our fee-for-service projects to purchasers of their VOIs.

Resort Operations and Club Management

We enter into a management agreement with the HOA of the VOI owners for timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprising owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services include day-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees generally are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The original term of our management agreements typically ranges from three to five years and the agreements are subject to periodic renewal for one- to three-year periods. Many of these agreements renew automatically unless either party provides advance notice of termination before the expiration of the term. Retaining our company as the manager of our resorts and those of third-party developers entitles the HOA to continue to identify the property as a Hilton Grand Vacations property and gives members access to our Club.

We also manage and operate the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Club members. When an owner purchases a VOI, he or she is automatically enrolled in a club and given an annual allotment of points

 

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that allow the member to exchange his or her annual usage rights in the VOI that they own for a number of vacation and travel options. The Hilton Club operates for owners of VOIs at the Hilton New York, but whose members also enjoy exchange benefits with the Hilton Grand Vacations Club. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system.

We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges through our club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.

Principal Components of and Factors Affecting Our Results of Operations

Principal Components of Revenues

 

    Sales of VOIs, net represents revenue recognized from the sale of owned VOIs.

 

    Sales, marketing, brand and other fees represents sales commissions, brand fees and other fees earned on the sale of VOIs through fee-for-service agreements with third-party developers. The sales commissions and brand fees are based on the total sales price of the VOI. Also included in Sales, marketing, brand and other fees are revenues from marketing and incentive programs, including redemption of Club Bonus Points and prepaid vacation packages, excluding stays at Hilton Grand Vacations properties, which are included in Rental and ancillary services.

 

    Financing represents revenue from the financing of sales of our owned intervals, which includes interest income and fees from servicing loans. We also earn fees from servicing the loans provided by third-party developers to purchasers of their VOIs.

 

    Club and resort management represents revenues from Club activation fees, annual dues and transaction fees from member exchanges. Club and resort management also includes recurring management fees under our agreements with HOAs for day-to-day-management services, including housekeeping services, operation of a reservation system, maintenance, and certain accounting and administrative services for HOAs, generally based on a percentage of costs to operate the resorts.

 

    Rental and ancillary services represents revenues from transient rentals of unoccupied vacation ownership units and revenues recognized from the utilization of Club points and vacation packages when points and packages are redeemed for rental stays at one of our resorts. We also earn fees from the rental of inventory owned by third parties. Ancillary revenues include food and beverage, retail, spa offerings and other guest services provided to resort guests.

 

    Cost reimbursements include costs that HOAs and developers reimburse to us. These costs primarily consist of payroll and payroll-related costs for management of the HOAs and other services we provide where we are the employer. The corresponding expenses are presented as Cost reimbursements expense in our consolidated statements of operations resulting in no effect on net income.

Factors Affecting Revenues

 

   

Relationships with developers. In recent years, we have entered into fee-for-service agreements to sell VOIs on behalf of third-party developers. We expect the sales of VOIs developed by third parties and resort operations and club management to comprise a growing percentage of our revenue and revenues derived from the sale of developed VOIs to comprise a smaller percentage of our revenue in future periods, consistent with our strategy to focus our business on the management aspects and deploy less of our capital to asset construction. The success and sustainability of our capital efficient business model depends on our ability to maintain good relationships with third-party developers. Our relationships with these third parties also generate new relationships with developers and opportunities for property development that can support our growth. We believe that we have strong relationships

 

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with our third-party developers and are committed to the continued growth and development of these relationships. These relationships exist with a diverse group of developers and are not significantly concentrated with any particular third party.

 

    Consumer demand and global economic conditions. Consumer demand for our products and services may be affected by the performance of the general economy and is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and adverse political conditions can subject and have subjected our revenues to significant volatility.

 

    Interest rates. We generate interest income from consumer loans we originate and declines in interest rates may cause us to lower our interest rates on our originated loans, which would adversely affect our income generated on future loans.

 

    Competition. We compete with other hotel and resort timeshare operators for sales of VOIs based principally on location, quality of accommodations, price, service levels and amenities, financing terms, quality of service, terms of property use, reservation systems and flexibility for VOI owners to exchange into time at other timeshare properties or other travel rewards. In addition, we compete based on brand name recognition and reputation. Our primary competitors in the timeshare space include Marriott Vacations Worldwide, Wyndham Vacation Ownership, Vistana Signature Experiences, Disney Vacation Club, Hyatt Vacation Ownership, Holiday Inn Club Vacations, Bluegreen Vacations and Diamond Resorts International.

Principal Components of Expenses

 

    Cost of VOI sales represents the costs attributable to the sales of owned VOIs recognized, as well as charges incurred related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects.

 

    Sales and marketing represents costs incurred to sell and market VOIs, including costs incurred relating to marketing and incentive programs, costs for tours, rental expense and wages and sales commissions.

 

    Financing represents consumer financing interest expense related to our Securitized Debt and Timeshare Facility, amortization of the related deferred loan costs and other expenses incurred in providing consumer financing and servicing loans. See “Unaudited Pro Forma Consolidated Financial Statements” and the accompanying notes for discussion of the incremental expense related to financing expenses we expect to incur upon completion of the spin-off.

 

    Club and resort management represents costs incurred to manage resorts and the Club, including payroll and related costs and other administrative costs.

 

    Rental and ancillary services includes: payroll and related costs; costs incurred from participating in the Hilton HHonors loyalty program; retail, food and beverages costs; housekeeping; and maintenance fees on unsold inventory.

 

    General and administrative consists primarily of compensation expense for our corporate staff and personnel supporting our business segments, professional fees (including consulting, audit and legal fees), administrative and related expenses. General and administrative also includes costs for services provided to us by Hilton, as well as certain indirect general and administrative costs allocated to us by Hilton, as discussed in Note 2: Basis of Presentation and Summary of Significant Accounting Policies and Note 16: Related Party Transactions in our audited consolidated financial statements included elsewhere in this information statement. See “Unaudited Pro Forma Consolidated Financial Statements” and the accompanying notes for discussion of the incremental expense related to general and administrative expenses we expect to incur upon completion of the spin-off.

 

    Depreciation and amortization are non-cash expenses that primarily consist of amortization of our management agreement intangible and capitalized software, as well as depreciation of fixed assets such as buildings and leasehold improvements and furniture and equipment at our sales centers and corporate offices.

 

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    License fee expense represents the royalty fee paid to Hilton under a license agreement for the exclusive right to use the Hilton Grand Vacations mark, which is based on a percentage of gross revenues. See “Unaudited Pro Forma Consolidated Financial Statements” and the accompanying notes for discussion of the change in expenses related to the license agreements we will enter into with Hilton upon completion of the spin-off.

 

    Cost reimbursements include costs that HOAs and developers reimburse to us. These costs primarily consist of payroll and payroll-related costs for management of the HOAs and other services we provide where we are the employer. The corresponding revenues are presented as Cost reimbursements revenue in our consolidated statements of operations resulting in no effect on net income.

Factors Affecting Expenses

 

    Costs of VOI sales. In periods where there is increased demand for VOIs, we may incur increased costs to acquire inventory in the short-term, which can have an adverse effect on our net cash flow, margins and profits. Additionally, as we encourage owners to upgrade into other products, we incur expenses when owners upgrade from an interval in a project we developed into fee-for-service projects, on which we earn fees. In periods where more upgrades are occurring and we are not generating increased sales volume on unsold supply, we could see an adverse effect on our net cash flow, margins and profits.

 

    Sales and marketing expense. A significant portion of our costs relates to selling and marketing of our VOIs. In periods of decreased demand for VOIs, we may be unable to reduce our sales and marketing expenses quickly enough to prevent a deterioration of our profit margins on our real estate operations.

 

    Rental and ancillary services expense. Many of the expenses associated with operating timeshare resorts are relatively fixed. These expenses include personnel costs, rent, property taxes, insurance and utilities. We pay a portion of these costs through maintenance fees of unsold intervals and by subsidizing the costs of HOAs not covered by maintenance fees collected. If we are unable to decrease these costs significantly or rapidly when demand for our unit rentals decreases, the resulting decline in our revenues can have an adverse effect on our net cash flow, margins and profits.

 

    Interest rates. Increases in interest rates would increase the consumer financing interest expense we pay on the Timeshare Facility and could adversely affect our financing operations in future securitization or other debt transactions, affecting net cash flow, margins and profits.

Other Items

 

    Seasonality. We experience modest seasonality in VOI sales at certain of our resorts, with increased revenue during traditional vacation periods for those locations.

 

    Regulation. Our business activities are highly regulated. We are subject to a wide variety of complex international, national, federal, state and local laws, regulations and policies in jurisdictions in which we operate. These laws, regulations and policies primarily affect four areas of our business: real estate development activities; marketing and sales activities; lending activities; and resort management activities. We seek to actively participate in the determination of new laws or other regulations affecting the timeshare industry. For further detail of these regulations see “Risk Factors” and “Business—Government Regulation” included elsewhere in this information statement.

Key Business and Financial Metrics and Terms Used by Management

Real Estate Sales Metrics

 

   

Contract sales—Represents the total amount of VOI products under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales is not a recognized term under U.S. GAAP and should not be considered in isolation or

 

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as an alternative to Sales of VOIs, net or any other comparable operating measure derived in accordance with U.S. GAAP. Contract sales differ from revenues from the Sales of VOIs, net that we report in our consolidated statements of operations due to the requirements for revenue recognition as described in Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our audited consolidated financial statements included elsewhere in this information statement, as well as adjustments for incentives and other administrative fee revenues. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business.

 

    Sales revenue—Represents sale of VOIs, net and commissions and brand fees earned from the sale of fee-for-service intervals.

 

    Real estate margin—Represents sales revenue less the cost of VOI sales and sales and marketing costs, net of marketing revenue. Real estate margin percentage is calculated by dividing real estate margin by sales revenue. We consider this to be an important operating measure because it measures the efficiency of our sales and marketing spending and management of inventory costs.

 

    Tour flow—Represents the number of sales presentations given at our sales centers during the period.

 

    Volume per guest (“VPG”)—Represents the sales attributable to tours at our sales locations and is calculated by dividing Contract sales, excluding telesales, by tour flow. We consider VPG to be an important operating measure because it measures the effectiveness of our sales process, combining the average transaction price with closing rate.

Club and Resort Management and Rental Metrics

 

    Transient rate—Represents the total rental room revenue for transient guests divided by total number of transient room nights sold in a given period and excludes room rentals associated with marketing programs, owner usage and the redemption of Club Bonus Points. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our audited consolidated financial statements included elsewhere in this information statement for further discussion on Club Bonus Points.

 

    Resort occupancy—Represents the utilization of the resorts’ available capacity.

EBITDA and Adjusted EBITDA

EBITDA, presented herein, is a financial measure that is not recognized under U.S. GAAP that reflects net income before interest expense, a provision for income taxes and depreciation and amortization. Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs; (vi) share-based and certain other compensation expenses; (vii) severance, relocation and other expenses; and (viii) other items.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

 

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EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under U.S. GAAP. Some of these limitations are:

 

    EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

    EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

    EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;

 

    EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

 

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

 

    other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

Results of Operations

Nine Months Ended September 30, 2016 Compared with the Nine Months Ended September 30, 2015

Segment Results

We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 12: Business Segments in our unaudited condensed consolidated financial statements included elsewhere in this information statement. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses it to manage our business and material limitations on its usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” The following tables set forth revenues and Adjusted EBITDA by segment, reconciled to consolidated amounts, including net income, our most comparable U.S. GAAP financial measure:

 

     Nine Months Ended September 30,     2016 vs 2015 Variance  
($ in millions)        2016             2015             $             %      

Revenues:

        

Real estate sales and financing

   $ 843      $ 803      $ 40        5.0

Resort operations and club management

     251        225        26        11.6   
  

 

 

   

 

 

   

 

 

   

Segment revenues

     1,094        1,028        66        6.4   

Cost reimbursements

     94        82        12        14.6   

Intersegment eliminations(1)

     (20     (16     (4     25.0   
  

 

 

   

 

 

   

 

 

   

Total revenues

   $ 1,168      $ 1,094      $ 74        6.8   
  

 

 

   

 

 

   

 

 

   

 

(1)  Refer to Note 12: Business Segments in our unaudited condensed consolidated financial statements included elsewhere in this information statement for details on the intersegment eliminations.

 

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Nine Months Ended September 30,

    2016 vs 2015
Variance
 
($ in millions)        2016             2015             $             %      

Adjusted EBITDA:

        

Real estate sales and financing(2)

   $ 259      $ 236      $ 23        9.7

Resort operations and club management(2)

     139        119        20        16.8   
  

 

 

   

 

 

   

 

 

   

Segment Adjusted EBITDA

     398        355        43        12.1   

Less:

        

General and administrative(3)

     36        30        6        20.0   

License fee expense

     61        55        6        10.9   
  

 

 

   

 

 

   

 

 

   

Adjusted EBITDA

     301        270        31        11.5   

Other loss, net

     (1            (1     NM (1) 

Gain on foreign currency transactions

     2               2        NM (1) 

Share-based compensation expense

     (7     (11     4        (36.4

Other adjustment items(4)

     (21     (2     (19     NM (1) 
  

 

 

   

 

 

   

 

 

   

EBITDA

     274        257        17        6.6   

Non-recourse debt interest expense

     (9     (10     1        (10.0

Allocated Parent interest expense

     (20     (22     2        (9.1

Income tax expense

     (98     (84     (14     16.7   

Depreciation and amortization

     (17     (16     (1     6.3   
  

 

 

   

 

 

   

 

 

   

Net income

   $ 130      $ 125      $ 5        4.0   
  

 

 

   

 

 

   

 

 

   

 

(1)  Fluctuation in terms of percentage change is not meaningful.
(2)  Includes intersegment eliminations and other adjustments.
(3)  Excludes share-based compensation and other adjustment items.
(4)  For the nine months ended September 30, 2016, amounts include $18 million of costs associated with the spin-off transaction.

Real Estate Sales and Financing

Real estate sales and financing segment revenues increased for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily as a result of a $26 million increase in sales revenue due to an increase in commissions and brand fees. Additionally, marketing revenues and financing revenues increased $8 million and $5 million, respectively. Real estate sales and financing segment Adjusted EBITDA increased primarily as a result of the increase in revenues associated with Real estate sales and financing segment and a $34 million decrease in cost of VOI sales, partially offset by a $48 million increase in sales and marketing expense.

Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.

Resort Operations and Club Management

Resort operations and club management segment revenues and segment Adjusted EBITDA increased for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily as a result of a $10 million increase in Club management revenue, a $3 million increase in resort management revenue and an $10 million increase in rental and ancillary services revenues, partially offset by a $5 million increase in overall expenses for the segment.

Refer to “—Club and Resort Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.

 

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Real Estate

 

     Nine Months Ended
September 30,
    2016 vs 2015
Variance
 
($ in millions, except VPG)            2016                     2015                     $                      %          

Contract sales

   $ 863      $ 794      $ 69         8.7

Less adjustments:

         

Fee-for-service sales(1)

     514        472        42         8.9   

Loan loss provision

     37        29        8         27.6   

Reportability and other(2)

     (47     (62     15         (24.2
  

 

 

   

 

 

      

Sales of VOIs, net

   $ 359      $ 355        4         1.1   
  

 

 

   

 

 

      

Tour flow

     228,911        214,722        14,189         6.6   

VPG

   $ 3,558      $ 3,495      $ 63         1.8   

 

(1)  Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.
(2)  Includes adjustments for revenue recognition, including percentage-of-completion deferrals and amounts in rescission, and sales incentives, as well as expenses related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects.

Contract sales increased for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily as a result of an increase in tour flow, telesales and VPG. VPG increased due to a 0.46 percentage point increase in close rate in 2016 compared to the prior year, partially offset by a 1.2 percent decrease in average transaction price primarily due to greater sales volume during the prior year in a high priced fee-for-service project that launched in December 2014.

 

     Nine Months Ended
September 30,
    2016 vs 2015
Variance
 
($ in millions)        2016             2015             $             %      

Sales of VOIs, net

   $ 359      $ 355      $  4        1.1

Sales, marketing, brand and other fees

     382        352        30        8.5   

Less:

        

Marketing revenue and other fees

     87        79        8        10.1   
  

 

 

   

 

 

     

Sales revenue

     654        628        26        4.1   
  

 

 

   

 

 

     

Less:

        

Cost of VOI sales

     110        144        (34     (23.6

Sales and marketing expense, net(1)

     356        321        35        10.9   
  

 

 

   

 

 

     

Real estate margin

   $ 188      $ 163        25        15.3   
  

 

 

   

 

 

     

Real estate margin percentage

     28.7     26.0    

 

(1)  Includes revenue recognized through our marketing programs for existing owners and prospective first-time buyers.

Sales revenue increased for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily as a result of a $22 million increase in commissions and brand fees due to the launch of two new fee-for-service products, one in late 2015 and one in early 2016, that resulted in higher sales volume during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

Real estate margin and real estate margin percentage increased for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 as result of increased sales revenue and decreased cost of VOI sales, due to a decline in existing owners upgrading into fee-for-service projects, partially offset by higher sales and marketing expense based on increased contract sales volume.

 

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Financing

 

     Nine Months Ended
September 30,
    2016 vs 2015
Variance
 
($ in millions)        2016             2015             $             %      

Interest income

   $ 91      $ 87      $ 4        4.6

Other financing revenue

     9        8        1        12.5   
  

 

 

   

 

 

   

 

 

   

Financing revenue

     100        95        5        5.3   
  

 

 

   

 

 

   

 

 

   

Non-recourse debt interest expense

     9        10        (1     (10.0

Other financing expense

    

 

15

 

  

 

 

 

 

 

14

 

  

 

 

 

 

1

 

  

   

 

7.1

 

  

 

  

 

 

   

 

 

   

 

 

   

Financing expense

  

 

 

 

 

24

 

 

  

 

 

 

 

 

 

24

 

 

  

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

  

 

 

   

 

 

   

 

 

   

Financing margin

  

 

 

$

 

 

76

 

 

  

 

 

 

$

 

 

71

 

 

  

 

 

 

$

 

 

5

 

 

  

 

 

 

 

 

7.0

 

 

  

 

  

 

 

   

 

 

   

 

 

   

Financing margin percentage

     76.0     74.7    

Financing revenue and margin increased for the nine months ended September 30, 2016 compared to nine months ended September 30, 2015, primarily due to an increase in the loan portfolio, a stable interest rate environment and no additional securitizations for the nine months ended September 30, 2016.

Club and Resort Management

 

     Nine Months Ended
September 30,
    2016 vs 2015
Variance
 
($ in millions)        2016             2015             $              %      

Club management revenue

   $ 60      $ 50      $ 10         20.0

Resort management revenue

     38        35        3         8.6   
  

 

 

   

 

 

   

 

 

    

Club and resort management revenues

     98        85        13         15.3   
  

 

 

   

 

 

   

 

 

    

Club management expense

     15        14        1         7.1   

Resort management expense

     10        9        1         11.1   
  

 

 

   

 

 

   

 

 

    

Club and resort management expenses

     25        23        2         8.7   
  

 

 

   

 

 

   

 

 

    

Club and resort management margin

   $ 73      $ 62      $ 11         17.7   
  

 

 

   

 

 

   

 

 

    

Club and resort management margin percentage

     74.5     72.9     

Club and resort management revenues increased for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, due to an increase in net Club members, as well as an increase in transaction volume. Additionally, resort management revenue increased primarily as a result of an 7.2 percent increase in units open and under management.

Club and resort management margin increased primarily as a result of an increase in Club and resort management revenues.

 

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Rental and Ancillary Services

 

     Nine Months Ended
September 30,
    2016 vs 2015
Variance
 
($ in millions)        2016             2015             $              %      

Rental revenues

   $ 116      $ 107      $ 9         8.4

Ancillary services revenues

     19        18        1         5.6   
  

 

 

   

 

 

   

 

 

    

Rental and ancillary services revenues

     135        125        10         8.0   
  

 

 

   

 

 

   

 

 

    

Rental expenses

     67        66        1         1.5   

Ancillary services expense

     19        17        2         11.8   
  

 

 

   

 

 

   

 

 

    

Rental and ancillary services expenses

     86        83        3         3.6   
  

 

 

   

 

 

   

 

 

    

Rental and ancillary services margin

   $ 49      $ 42      $ 7         16.7   
  

 

 

   

 

 

   

 

 

    

Rental and ancillary services margin percentage

     36.3     33.6     

Rental and ancillary services revenues increased for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily as a result of an increase in revenues received on transient room rentals and recovery from the settlement of an insurance claim of $2 million. Additionally, ancillary services revenues increased due to higher food and beverage sales to our resort guests. Rental and ancillary services margin increased primarily as a result of the increase in rental and ancillary services revenues.

Other Operating Expenses

 

     Nine Months Ended
September 30,
     2016 vs 2015
Variance
 
($ in millions)        2016              2015              $              %      

Unallocated general and administrative

   $ 44       $ 30       $ 14         46.7

Allocated general and administrative

     17         11         6         54.5   
  

 

 

    

 

 

    

 

 

    

General and administrative

   $ 61       $ 41       $ 20         48.8   
  

 

 

    

 

 

    

 

 

    

The increase in general and administrative expenses for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 was primarily as a result of $15 million incremental expenses related to the spin-off transaction.

 

     Nine Months Ended
September 30,
     2016 vs 2015
Variance
 
($ in millions)        2016              2015              $              %      

Depreciation and amortization

   $ 17       $ 16       $ 1         6.3

License fee expense

     61         55         6         10.9   

The increase in license fee expense was as a result of the increase in revenues.

Non-Operating Expenses

 

     Nine Months Ended
September 30,
     2016 vs 2015
Variance
 
($ in millions)        2016               2015              $             %      

Allocated Parent interest expense

   $ 20       $ 22       $ (2     (9.1 )% 

Income tax expense

     98         84         14        16.7   

 

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The Allocated Parent interest expense included in our condensed consolidated statements of operations relates to the Hilton debt allocated to us. See Note 8: Allocated Parent Debt and Non-recourse Debt in our unaudited condensed consolidated financial statements included elsewhere in this information statement for further discussion. Allocated Parent interest expense for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 decreased as a result of prepayments of certain allocated Parent debt, partially offset by an increase in interest expense related to Hilton’s new debt issuances in August 2016.

The increase in income tax expense was primarily as a result of improvements in our operations resulting in an increase in income before taxes. Further, income tax expense increased as a result of a higher annual effective tax rate expected to be applied for the full year. Our annual effective tax rate was higher primarily because no tax benefit was recognized for certain transaction costs relating to the spin-off transaction that are not tax deductible.

Year Ended December 31, 2015 Compared with the Year Ended December 31, 2014 and Year Ended December 31, 2014 Compared with the Year Ended December 31, 2013

Segment Results

We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 17: Business Segments in our audited consolidated financial statements included elsewhere in this information statement. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses it to manage our business and material limitations on its usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” The following tables set forth revenues and Adjusted EBITDA by segment, reconciled to consolidated amounts, including net income, our most comparable U.S. GAAP financial measure:

 

     Year Ended December 31,     2015 vs. 2014
Variance
    2014 vs. 2013
Variance
 
($ in millions)        2015             2014             2013             $             %             $             %      

Revenues:

              

Real estate sales and financing

   $ 1,078      $ 942      $ 898      $ 136        14.4   $ 44        4.9

Resort operations and club management

     307        283        239        24        8.5        44        18.4   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Segment revenues

     1,385        1,225        1,137        160        13.1        88        7.7   

Cost reimbursements

     110        107        99        3        2.8        8        8.1   

Intersegment eliminations(1)

     (20     (15     (12     (5     33.3        (3     25.0   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total revenues

   $ 1,475      $ 1,317      $ 1,224      $ 158        12.0      $ 93        7.6   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

(1)  Refer to Note 17: Business Segments in our audited consolidated financial statements included elsewhere in this information statement for details on the intersegment eliminations.

 

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     Year Ended December 31,     2015 vs. 2014
Variance
    2014 vs. 2013
Variance
 
($ in millions)        2015             2014             2013             $             %             $             %      

Adjusted EBITDA:

          

Real estate sales and financing(2)

   $ 329      $ 305      $ 294      $ 24        7.9   $ 11        3.7

Resort operations and club management(2)

     162        144        104        18        12.5        40        38.5   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Segment Adjusted EBITDA

     491        449        398        42        9.4        51        12.8   

Less:

              

General and administrative(3)

     44        34        36        10        29.4        (2     (5.6

License fee expense

     74        62        56        12        19.4        6        10.7   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Adjusted EBITDA

     373        353        306        20        5.7        47        15.4   

Gain on debt extinguishment

                   22               NM (1)      (22     NM (1) 

Other gain, net

            5               (5     NM (1)      5        NM (1) 

Loss on foreign currency transactions

            (2     (5     2        NM (1)      3        (60.0

Share-based compensation expense

     (13     (4     (22     (9     NM (1)      18        (81.8

Other adjustment items

     (4     (3     (12     (1     33.3        9        (75.0
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

EBITDA

     356        349        289        7        2.0        60        20.8   

Non-recourse debt interest expense

     (13     (15     (7     2        (13.3     (8     NM (1) 

Allocated Parent interest expense

     (29     (36     (48     7        (19.4     12        (25.0

Income tax expense

     (118     (113     (90     (5     4.4        (23     25.6   

Depreciation and amortization

     (22     (18     (16     (4     22.2        (2     12.5   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income

   $ 174      $ 167      $ 128      $ 7        4.2      $ 39        30.5   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

(1)  Fluctuation in terms of percentage change is not meaningful.
(2)  Includes intersegment eliminations. Refer to our table presenting revenues by reportable segment above for additional discussion.
(3)  Excludes share-based compensation and other adjustment items.

Real Estate Sales and Financing

Real estate sales and financing segment revenues increased for the year ended December 31, 2015 compared to 2014 primarily as a result of a $131 million increase in sales revenue. The increase in sales revenue was primarily due to a $159 million increase in commissions and brand fees, partially offset by a $28 million decrease in sales of VOIs, net. Real estate sales and financing segment Adjusted EBITDA increased primarily as a result of the $157 million increase in sales, marketing, brand and other fees revenue, partially offset by the $28 million decrease in sales of VOIs, net and increases in sales and marketing expense and cost of VOI sales of $62 million and $47 million, respectively.

Real estate sales and financing segment revenues increased for the year ended December 31, 2014 from 2013 primarily as a result of a $40 million increase in real estate revenue. The increase in real estate revenue was primarily due to a $41 million increase in commissions and brand fees and a $24 million increase in marketing revenue, partially offset by a $26 million decrease in sales of VOIs, net. Real estate sales and financing segment Adjusted EBITDA increased primarily as a result of the increase in sales, marketing, brand and other fees revenue offset by the increase in sales and marketing expense of $29 million.

Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.

 

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Resort Operations and Club Management

Resort operations and club management segment revenues increased for the year ended December 31, 2015 compared to 2014 primarily as a result of a $9 million increase in Club management revenue, $4 million increase in resort management revenue and a $6 million increase in rental revenue. Resort operations and club management segment Adjusted EBITDA increased primarily due to the increases in Club and resort management revenues and rental and ancillary services revenues of $13 million and $7 million, respectively, partially offset by increases of $3 million each in Club and resort management expenses and rental and ancillary services expenses.

Resort operations and club management segment revenues increased for the year ended December 31, 2014 compared to 2013 primarily as a result of an $11 million increase in Club management revenue, $9 million increase in resort management revenue and a $21 million increase in rental revenue. Resort operations and club management segment Adjusted EBITDA increased primarily as a result of the increases in Club and resort management revenues and rental and ancillary services revenues of $20 million and $21 million, respectively, partially offset by increases in Club and resort management expenses and rental and ancillary services expenses of $2 million and $3 million, respectively.

Refer to “—Club and Resort Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.

Real Estate

 

     Year Ended December 31,      2015 vs. 2014
Variance
    2014 vs. 2013
Variance
 
($ in millions, except VPG)        2015             2014             2013              $             %             $             %      

Contract sales

   $ 1,068      $ 905      $ 829       $ 163        18.0   $ 76        9.2

Less adjustments:

           

Fee-for-service sales(2)

     611        351        258         260        74.1        93        36.0   

Loan loss provision

     39        35        24         4        11.4        11        45.8   

Reportability and other(3)

     (74     (1     1         (73     NM (1)      (2     NM (1) 
  

 

 

   

 

 

   

 

 

          

Sales of VOIs, net

   $ 492      $ 520      $ 546         (28     (5.4     (26     (4.8
  

 

 

   

 

 

   

 

 

          

Tour flow

     287,855        261,853        246,407         26,002        9.9        15,446        6.3   

VPG

   $ 3,508      $ 3,292      $ 3,221       $ 216        6.6      $ 71        2.2   

 

(1)  Fluctuation in terms of percentage change is not meaningful.
(2)  Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.
(3)  Includes adjustments for revenue recognition, including percentage-of-completion deferrals and amounts in rescission, and sales incentives, as well as expenses related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects.

Contract sales increased for the years ended December 31, 2015 and 2014, compared to the respective prior periods, primarily as a result of increases in tour flow and VPG. In 2015, the VPG increase was a result of a 1.06 percentage point increase in close rate attributable to an increase in existing owner tours, as the close rate for owners is generally higher than first-time buyers, and a 0.3 percent increase in average transaction price. The VPG increase in 2014 was a result of a 0.3 percentage point increase in close rate and a 0.4 percent increase in average transaction price.

 

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     Year Ended December 31,     2015 vs. 2014
Variance
    2014 vs. 2013
Variance
 
($ in millions)        2015             2014             2013             $             %             $             %      

Sales of VOIs, net

   $ 492      $ 520      $ 546      $ (28     (5.4 )%    $ (26     (4.8 )% 

Sales, marketing, brand and other fees

     457        300        234        157        52.3        66        28.2   

Less:

          

Marketing revenue and other fees

     108        110        85        (2     (1.8     25        29.4   
  

 

 

   

 

 

   

 

 

         

Sales revenue

     841        710        695        131        18.5        15        2.2   
  

 

 

   

 

 

   

 

 

         

Less:

          

Cost of VOI sales

     173        126        128        47        37.3        (2     (1.6

Sales and marketing expense, net(1)

     437        379        371        58        15.3        8        2.2   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Real estate margin

   $ 231      $ 205      $ 196        26        12.7        9        4.6   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Real estate margin percentage

     27.5     28.9     28.2    

 

(1)  Includes revenue recognized through our marketing programs for existing owners and prospective first-time buyers.

Sales revenue increased for the years ended December 31, 2015 and 2014, compared to the respective prior periods, primarily as a result of increases in commissions and brand fees due to increases in fee-for-service sales of 74 percent and 36 percent, respectively, partially offset by declining sales of VOIs, net.

Sales of VOIs, net decreased for the years ended December 31, 2015 and 2014, compared to the respective prior periods, primarily as a result of the shift in sales mix toward fee-for-service interval sales, aligned to our capital-efficient strategy. We have increased our percentage of fee-for-service sales compared to that of sales of developed or acquired inventory over the last three years, resulting in decreases to sales of VOIs, net and increases in sales, marketing, brand and other fees revenue.

Real estate margin increased for the years ended 2015 and 2014 as a result of the increases in sales revenue. However, real estate margin percentage declined for the year ended December 31, 2015 compared to 2014 due to the lower margin on fee-for-service sales and the higher cost of VOI sales related to the cost of reacquiring inventory that we have developed from existing owners upgrading into fee-for-service projects.

Financing

 

     Year Ended December 31,     2015 vs. 2014
Variance
    2014 vs. 2013
Variance
 
($ in millions)        2015             2014             2013             $             %             $             %      

Interest income

   $ 117      $ 115      $ 112      $ 2        1.7   $ 3        2.7

Other financing revenue

     10        6        5        4        66.7        1        20.0   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Financing revenue

     127        121        117        6        5.0        4        3.4   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Consumer financing interest expense

     13        15        7        (2     (13.3     8        NM (1) 

Other financing expense

     19        18        15        1        5.6        3        20.0   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Financing expense

     32        33        22        (1     (3.0     11        50.0   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Financing margin

   $ 95      $ 88      $ 95      $ 7        8.0      $ (7     (7.4
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Financing margin percentage

     74.8     72.7     81.2    

 

(1)  Fluctuation in terms of percentage change is not meaningful.

Financing revenue increased for the year ended December 31, 2015 compared to 2014 primarily as a result of an increase of $4 million in fees generated from servicing the loans provided by third-party developers to

 

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purchasers of their VOIs, consistent with the increase in fee-for-service sales. Additionally, interest income increased resulting from a higher outstanding timeshare financing receivables balance. For the year ended December 31, 2014, financing revenue increased compared to 2013 primarily as a result of an increase in interest income from a higher outstanding timeshare financing receivables balance in 2014 than 2013.

Financing margin increased for the year ended December 31, 2015 compared to 2014 primarily as a result of the increase in revenue and no additional securitization transactions occurring in 2015. For the year ended December 31, 2014, financing margin decreased compared to 2013 primarily as a result of the increase in consumer financing interest expense due to a full year of interest expense recognized in 2014 from the Timeshare Facility and the Securitized Debt issued in 2013, as they were entered into in May 2013 and August 2013, respectively, as well as interest expense from the securitization transaction that occurred in June 2014.

Club and Resort Management

 

     Year Ended December 31,     2015 vs. 2014
Variance
    2014 vs. 2013
Variance
 
($ in millions)        2015             2014             2013             $              %             $              %      

Club management revenue

   $ 78      $ 69      $ 58      $ 9         13.0   $ 11         19.0

Resort management revenue

     47        43        34        4         9.3        9         26.5   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

    

Club and resort management revenues

     125        112        92        13         11.6        20         21.7   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

    

Club management expense

     20        18        16        2         11.1        2         12.5   

Resort management expense

     12        11        11        1         9.1                  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

    

Club and resort management expenses

     32        29        27        3         10.3        2         7.4   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

    

Club and resort management margin

   $ 93      $ 83      $ 65      $ 10         12.0      $ 18         27.7   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

    

Club and resort management margin percentage

     74.4     74.1     70.7          

Club and resort management revenues increased for the years ended December 31, 2015 and 2014, compared to the respective prior periods, primarily as a result of increases in Club management revenue due to increases in net Club members, of 20,200 and 17,500, respectively, as well as increases in transaction volume per Club member. Additionally, resort management revenue increased for the years ended December 31, 2015 and 2014, compared to the respective prior periods, primarily as a result o