Hilton Grand Vacations - Q3 2023

Transcript

Operator (participant)

Good morning, and welcome to the Hilton Grand Vacations third quarter 2023 earnings and acquisition announcement conference call. The telephone replay will be available for seven days following the call. The dial-in number is 844-512-2921, and enter the PIN 13735181. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you'd like to ask a question, please press star one on your touchtone phone to enter the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. If you should require operator assistance, please press star zero. If using a speakerphone, please lift your handset to allow the signal to reach our equipment.

Please limit yourself to one question and one follow-up to allow the opportunity for everyone to ask questions. You may then reenter the queue to ask additional questions. I would now like to turn the call over to Mark Melnyk, Senior Vice President of Investor Relations. Please go ahead, sir.

Mark Melnyk (VP of Investor Relations)

Thank you, operator, and welcome to the Hilton Grand Vacations third quarter 2023 and acquisition announcement call. Please note that we've uploaded slides to our investor relations website that are available for you to follow along. As a reminder, our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements. These statements are effective only as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our SEC filing. We'll also be referring to certain non-GAAP financial measures. You can find definitions and components of such non-GAAP numbers, as well as reconciliations of non-GAAP and GAAP financial measures discussed today in our earnings press release and on our website at investors.hgv.com.

Our reported results for all periods reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606, we're required to defer certain revenues and expenses related to sales made in the period when a project is under construction, and then hold off on recognizing those revenues and expenses until the period when construction is completed. To help you make more meaningful period-to-period comparisons, you can find details of our current and historical deferrals and recognitions in Table T-1 of our earnings release. For ease of comparability and to simplify our discussion today, our comments on Adjusted EBITDA and our real estate results refer to results excluding the net impact of construction-related deferrals and recognitions for all reporting periods.

A complete accounting of our historical deferral and recognition activity can be found in Excel format on the Financial Reporting section of our Investor Relations website. In a moment, Mark Wang, our President and Chief Executive Officer, will provide highlights from the quarter, in addition to an update of our current operations and company strategy and today's acquisition announcement. After Mark's comments, our Chief Financial-- Dan Mathewes, Chief Financial Officer Dan Mathewes, will go through the financial details for the quarter. Mark and Dan will then make themselves available for your questions. With that, let me turn the call over to our President and CEO, Mark Wang. Mark?

Mark Wang (President and CEO)

Good morning, everyone, and thanks for being flexible and joining our earlier call this morning. As you've seen from our announcement today, we have a lot of things to go through. The first is that I'm happy to announce our definitive agreement to acquire Bluegreen Vacations, along with a 10-year exclusive marketing and JV agreement with the nation's premier outdoor and conservation company, Bass Pro Shops. We're really excited about this transaction and think that it will open up new avenues for growth while also enhancing the resilience of our business and building long-term value. We'll get into those details shortly after I walk through our third quarter earnings. Before we get started, I'd like to extend my best wishes to our team members and the people of Maui as they continue their recovery efforts from the devastating wildfires in August.

We're committed to providing our support to the local community during the rebuilding process, including our many team members who live and work on the island. Turning to our results, contract sales in the third quarter were $603 million, and EBITDA was $276 million, with margins of 27%. Tours grew 15% for the quarter, and our VPG was 10% ahead of 2019's levels within our target range, despite some of the unique challenges we saw in the quarter. The first was the devastating wildfires that impacted our Maui business directly. Additionally, we believe that the macroeconomic crosscurrents played more of a role in our Q3 results than they have in prior quarters. In the face of these challenges, our owner business was resilient during the quarter and has remained a source of strength for our business.

HGV Max has continued to resonate with our owners, and our Max membership growth has exceeded our overall member growth as we attract more owners to upgrade into the program and deepen our member engagement. On the new buyer side, our performance for the quarter was solid in absolute terms, with mid-teens growth in tours driving positive growth in transaction and contract sales. But after a solid start in July, we saw a softening in the segment as we moved through the quarter, resulting in tours, VPG, and contract sales coming in short of our expectations. We believe the compounding effects of inflation and interest rates affected the mentality of our new buyers more than owners. However, the good news is that we still grew transactions as we saw more people touring and previewing our offerings.

We remain committed to growing our new buyer channel and believe that it's the right thing to do for the long-term health of the business.... That said, given some of these near-term headwinds, along with some ongoing Maui impact in Q4, we updated our guidance to better align our expectations with the trends we're seeing. Dan will share more details on our outlook in here in a few minutes. Now let's take a look at our performance in the third quarter. Contract sales in the quarter were driven by growth in tours, which offset the expected declines in VPG. Our new buyer tours again grew faster than our owner tours, with year-over-year growth of more than 17%. And I'm really pleased with how our owner channels remained resilient despite the unforeseen headwinds from losing tours in Maui for most of the quarter.

Owner tours showed an acceleration in growth versus Q2 on a year-over-year basis, as well as further exceeding our pace against 2019. As I mentioned earlier, we saw a softening of our tour trends as we moved through the quarter, particularly in August, although trends stabilized in September. VPG for the quarter was just over $3,600, which was within our expected range, despite the loss of high VPG Maui sales. Our close rates were roughly in line with Q2 levels and remained nicely ahead of 2019. Turning to our demand indicators, occupancy for the quarter was 81%. Our arrivals in the fourth quarter are ahead of the prior year and are currently indicating a step-up in growth in the first half of next year that will support occupancy levels.

I'm also encouraged that our marketing pipeline and activations remain near record highs to build a solid base of tour flow growth going forward. Moving to our non-real estate segments, our rental club finance business showed solid growth in the quarter. Rental revenues were nearly on par with the seasonally stronger second quarter, and we maintained double-digit margins. Club profits continued to benefit from both improved revenue and margins, along with new member growth, and our financing team executed on an oversubscribed securitization with great pricing. Finally, during the quarter, we repurchased $64 million worth of shares, demonstrating our ongoing commitment to returning capital to our shareholders. With that, I'll turn it over to Dan to talk you through the numbers. Dan?

Dan Mathewes (EVP and CFO)

Thank you, Mark, and good morning, everyone. Before we start, note that our reported results for this quarter included $7 million of net deferrals related to presales of the newest phase of our Sosua project, which re-reduced reported EBITDA. Adjusting for these deferrals would increase the EBITDA reported in our press release by $7 million to $276 million. In my prepared remarks, I'll only refer to metrics excluding net deferrals, which more accurately reflects the cash flow dynamics of our financial performance during the period. Turning to our results for the quarter. Total revenue, excluding cost reimbursements in the quarter, was down about 2% against the prior year at $933 million. We saw strong growth in our financing, resort and club, and rental and ancillary businesses that was offset by a reduction in real estate revenue.

Q3 reported Adjusted EBITDA was $276 million, with margins of 27%, or 30% when excluding cost reimbursements. Coming to our segments. Within real estate, total contract sales of $603 million were down 3% versus the prior year. Tours were up 15% against another tough comparison, despite the loss of over 2,000 tours directly attributable to the property closures in Maui. Our new buyer channel continued to show tour strength, with tours up 17% in the quarter and positive contract sales growth versus the prior year, reflecting just over 30% of total sales in Q3.

VPG was just over $3,650 for the quarter and 10% ahead of 2019 levels, still within our expected range, despite the drag from losing roughly $15 million of high VPG Maui sales during the quarter. Cost of product was 12% of net VOI sales for the quarter, lower versus last quarter and last year, owing to favorable sales mix. Real estate sales and marketing expense was $273 million for the quarter, or 45% of contract sales. This is in line with the sales and marketing expense ratio in Q2 and was higher than our expectations due to carrying the same level of fixed expense in our Maui operations, with no offsetting revenue, along with new buyer sales that were below our expectations, which created operating deleverage on our marketing expense for the quarter.

That being said, we are still expecting a sequential improvement in our sales and marketing expense ratio in Q4. Real estate profit of $167 million had margins of 34%, which improved against our Q2 and first half 2023 margins, despite some of the headwinds in the quarter. In our financing business, third quarter revenue was $75 million, and segment profit was $50 million, with margins of 67%, versus margins of 63% in the prior year. Combined gross receivables for the quarter were $2.52 billion, or $1.82 billion net of allowance, and our interest income was $68 million. Our allowance for bad debt of $731 million included $258 million related to the acquired Diamond portfolio, which has a balance of $539 million.

Our annualized default rate for our consolidated portfolios, including the Diamond acquired and underwritten portfolios, was 8.53%, compared to 8.68% in the prior quarter. Our provision for bad debt was $46 million, or 11% of owned contract sales. As previously discussed, we continue to see normalizing credit trends with the termination of certain government stimulus plans, but we believe our current loan loss provision is adequate. In our resort and club business, our consolidated member count was 526,000, and our consolidated NOG was 2.1% at the end of the third quarter. Revenue of $138 million was up 6% for the quarter, and segment profit was $95 million, with margins of 69%, showing 200 basis points of improvement sequentially.

Rental and ancillary revenues were $171 million in the quarter, with segment profit of $17 million and margins of 10% versus 9% last year. Revenue growth was driven by ADR gains in most markets, offset by slightly lower occupancy and the loss of high dollar rental room nights in our Maui properties due to the wildfires. Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA, corporate G&A was $27 million, license fees were $37 million, and JV adjusted EBITDA was $2 million. Our adjusted free cash flow in the quarter was $257 million, which included inventory spending of $36 million and excludes acquisition-related costs of $25 million. The adjusted free cash flow conversion rate for the quarter was 93%, due to the timing of cash flows associated with our recent securitization.

We remain confident in achieving the low end of our target, 50%-60% conversion range for the year. During the quarter, the company repurchased 1.5 million shares of common stock for $64 million. Through October 30, we have repurchased an additional 690,000 shares for $26 million, leaving us with $432 million of remaining availability under our 2023 repurchase plan. Year to date, we have repurchased an average of $90 million per quarter, which is in line with our goal of roughly $100 million per quarter. Turning to our outlook, as you saw in the press release, we are lowering our 2023 Adjusted EBITDA guidance to $1 billion-$1.02 billion, from a prior guidance of $1.09 billion-$1.12 billion.

There are two drivers of the adjustment: the impact of the Maui wildfires in Q3 of $10 million, along with an expected further drag of $7 million-$10 million in Q4, for a total impact of $17 million-$20 million, including the Q3 impact, and an adjustment to our expectation of contract sales growth for the fourth quarter. As of September 30th, our liquidity position consisted of $227 million of unrestricted cash and $866 million of availability under our revolving credit facility. Our debt balance at quarter end was comprised of corporate debt of $2.7 billion and non-recourse debt balance of approximately $1 billion.

At quarter end, we had $750 million of remaining capacity in our warehouse facility, of which we had $395 million of notes available to securitize, and another $359 million of mortgage notes we anticipate being eligible following certain customary milestones, such as first payment, deeding, and recording. Turning to our credit metrics, at the end of Q3, the company's total net leverage on an LTM basis was 2.56x. With that, I'll turn the call back over to Mark to walk through this morning's transaction announcement. Mark?

Mark Wang (President and CEO)

Great. Thanks, Dan. Now that we discussed our results, I'm excited to share our other announcement today, and that's our definitive agreement to acquire Bluegreen Vacations, along with a 10-year exclusive marketing and JV agreement with the nation's premier outdoor and conservation company, Bass Pro Shops. This acquisition gives us the unique opportunity to create the industry leader in vacation ownership and experiential travel. Bluegreen Vacations is the highest quality, independently branded vacation ownership operator, and it's one more critical piece of the strategic journey of expansion and diversification that we started two years ago with the acquisition of Diamond Resorts. With nearly 50 resorts and over 200,000 members, we'll add scale that would have taken us a decade of growth to do organically.

It will enable us to solidify our leadership in the industry while positioning us to win in the experiential membership space, where we see a growing convergence between the travel and leisure sector. It will create value for our shareholders, adding resiliency to the business by increasing recurring EBITDA and Adjusted Free Cash Flow. Starting on slide two, let me take a moment to walk you through the key highlights of the transaction. First, we'll add scale to the business and drive additional growth. Bluegreen has a large base of loyal members, many of whom haven't yet upgraded, that we think would be a great fit with our HGV brands.

This acquisition will also expand our reach with enhanced sales distribution in new key locations, enabling us to engage additional new buyers with attractive price points at an earlier stage in their lives, providing additional opportunities for upgrades and improving lifetime value. And with our robust suite of brands, backed by the power of our Hilton partnership, we'll give members plenty of options to upgrade through their years of membership with HGV. Second, our partnership with Bass Pro allows us to expand our lead generation, which is critical to driving tour flow, net owner growth, and ultimately, embedded value. And importantly, it also adds a source of leads that is not levered to lodging, diversifying our lead generation and improving our resilience across cycles.

We see this transaction as a perfect complement to the business evolution that we have undergone over the last two years, and it will enable us to fully leverage all the amazing programs and infrastructure we created with our Hilton Vacation Club brand, HGV Max membership program, and Ultimate Access experiential platform. On the cost front, we expect to generate $100 million in cost synergies within the first two years of operation. We have a proven track record of executing on synergy capture, as demonstrated by outperforming our synergy estimates with the Diamond acquisition and doing it earlier than expected. Finally, Bluegreen's trust structure and efficient inventory model will also add additional recurring EBITDA and strengthen our free cash flow, flow conversion, further improving the resilience of our business and financial model. I'll turn it over to Dan to walk you through the transaction on the next slide.

Dan?

Dan Mathewes (EVP and CFO)

Thanks, Mark. Let me start with a quick overview of the transaction. This is an all-cash deal, and we're acquiring Bluegreen for $1.5 billion, or 6x the pro forma EBITDA, including identified cost synergies. The HGV management team will run the combined entity with Mark Wang as CEO, Gordon Gurnik as COO, and myself as CFO, and the composition of the board will remain unchanged. This transaction is double-digit accretive on an adjusted free cash flow per share basis. Pro forma leverage as of 9/30 was 3.4x, and we will return to our target range of 2-3x within 18 months of close. We also expect to realize $100 million in run rate cost synergies within two years of transaction close, along with future revenue synergy opportunities.

Regarding timing, we anticipate closing the transaction in the first half of 2024. I'll now turn it back to Mark to talk a little bit more about Bluegreen.

Mark Wang (President and CEO)

All right. Well, thanks, Dan. So looking at slide four, we view Bluegreen as a highly successful operator that has achieved unique scale in the vacation ownership marketplace, and we believe it will be a great complement to HGV's overall brand portfolio. They have a large, geographically diverse base of over 218,000 members, over 75% whom are Gen X or younger, with strong FICO scores. And Bluegreen has historically also stood out with the industry for its focus on new buyers, which has also been a key strength of HGV. And perhaps most importantly, they've outshone others with their innovative marketing programs.

Through their network of partnerships, they've built a robust pipeline of over 165,000 vacation preview packages to enhance visibility and support tour growth, which will build upon the nearly 550,000 packages that we have at HGV. If you turn to the next slide, they have 48 resorts throughout the country, including 14 geographies in eight states that will be new to HGV. Nearly 90% of their members live within a four-hour drive of a Bluegreen resort, which complements our portfolio with additional drive to properties. We've been impressed with the consistent high-quality nature of the resorts, and we believe they'll be readily able to convert over to HGV brands.

As you see on slide six, once rebranded, the additional Bluegreen will enable us to span the entire breadth of the Hilton offering, providing us with additional scale and creating synergy with our key partner and their Hilton Honors membership. From a people perspective, we believe their teams will be a great cultural and business fit, and we think they'll quickly integrate into the culture here at HGV. They're focused on providing exceptional experiences through a commitment to service and quality, as we've seen throughout our interactions with their leadership. On slide seven, we see this acquisition as very synergistic to HGV, adding scale to our member base, package pipeline, and resort network, while enabling us to leverage our key partnerships to drive additional growth, reinforcing our leadership position in the vacation ownership space.

Now, if you turn to slide eight, as I mentioned, a key contributor to Bluegreen's organic growth has been their partnership with leading brands, including Choice Hotels, NASCAR, and most importantly, with Bass Pro, the nation's leading outdoor retailer. Bass Pro currently has over 200 destination superstores across the U.S., where they serve more than 200 million visitors per year, and their customer base is a dedicated group of outdoor enthusiasts for whom the outdoors is very much a lifestyle. Bass Pro's passion about their product, culture of service, and dedication to their customers drives tremendous loyalty and engagement, and it aligns with the values that guide us here at HGV. That's why I'm also really excited to announce a new 10-year strategic partnership with Bass Pro, along with the extension of the Bluegreen joint venture, featuring four high-end wilderness resorts under the Big Cedar Lodge brand.

This partnership will provide us with a source of high-quality leads from a loyal customer base and will generate that lead flow outside the lodging channel, providing us with additional diversification in our marketing efforts. Looking at the strategic rationale for this deal, it really enhances the vision that we had with the Diamond acquisition. Leadership in not just vacation ownership, but also providing unforgettable experiences for our members... It's a strategy that drives engagement and builds loyalty with our members by catering to more than just a great stay. Additionally, looking at slide nine, our focus will be expanding on the aspects of our relationship with Bass Pro. We'll benefit from the growth in their store network and customer base, with increased and diversified lead flow that's incremental to our existing channels with Hilton.

Our relationship with Bass Pro also enhances our credibility and experience offerings in the outdoor space, opening up a new avenue of growth for our Ultimate Access platform and increasing the attractiveness of the HGV membership for the adventure-seeking traveler. We've already seen great success with Ultimate Access, and we think that providing unique and memorable experiences to our guests is a key differentiator that drives owner engagement and supports the health and long-term value of the business. We know that the HGV's quality of service and network of properties will be appealing to Bass Pro customers, and we know that we can go further expand the program by combining an elevated in-store experience with our digital marketing and analytics capabilities.

We also see a lot of potential in the JV, building on the four existing properties and adding new locations with a club formula that highlights Bass Pro's connection to the outdoor lifestyle and targets the outdoor experiential market. I've met several times with their founder, Johnny Morris, and we're both excited about bringing together the quality of HGV's offering and the power of the Hilton brand, with the outdoor expertise of Bass Pro, to create a high-quality platform of experiences for their customers and our members. On the next few slides, you'll see how we'll benefit from the programs and processes we've already developed, de-risking the integration process while enabling additional growth by leveraging their proprietary platforms. Over the past two years, we've transformed our business, launching a new brand with Hilton Vacation Club, a new membership club with HGV Max, and a new experiential platform with Ultimate Access.

We've also integrated our sales forces, team members, and systems, and built the capabilities to sell deed and trust across a wide range of price points. The acquisition of Bluegreen furthers this evolution, leveraging the strength of the Hilton brand with these best-in-class offerings and differentiating capabilities, including our marketing expertise, enabling better personalization of offerings and driving net owner growth. We'll also add scale by building upon the solid foundation that Bluegreen's team has laid out through their years of steady organic growth and focus on new buyers. As I mentioned earlier, Bluegreen's base of over 200,000 owners is less penetrated than ours from an upgrade perspective, and we see a lot of opportunity to leverage our key partnership with Hilton and the compelling value proposition of HGV Max and Ultimate Access to realize that embedded value.

We'll also add additional distribution by expanding into new states and destinations. States like Texas, which has our third-largest member base, yet where we don't currently have resort or sales presence, along with sought-after leisure destinations like Nashville, Vail, Colorado, and additional beach locations along Florida and the East Coast. We'll leverage this transformative infrastructure to accelerate the integration of Bluegreen and unlock additional sources of growth that would have been difficult to achieve without the benefit of those programs and capabilities. Now, I'll turn it over to Dan to talk you through some of the financial merits of the acquisition. Dan?

Dan Mathewes (EVP and CFO)

Thanks, Mark. Looking at slide 12, we've identified $100 million in cost synergies in this transaction, with savings in G&A and headcount, along with additional operational and financial efficiencies. Given our recent track record, we are very confident in our ability to realize those synergies and expect to do so within 24 months of closing the acquisition. In addition, if we turn to the next slide, we think there are a number of attractive financial aspects of this transaction. First, Bluegreen's robust member base and financing business create additional sources of recurring EBITDA, which will further enhance the resilience of our business. Next, as Bluegreen is a trust product, it carries many of the same attractive capital-efficient features as we noted when we acquired Diamond.

In general, the inventory carries a lower cost of product and increased pricing incrementality, enabling us to offer more attractive price points to consumers, growing HGV's member base and fueling embedded value creation. It also allows efficient recapture of inventory, reducing the level of maintenance inventory spending required to drive sales growth. Those two factors will support increased conversion of EBITDA into adjusted free cash flow. That cash flow will allow rapid deleverage following the close of the transaction. Pro forma leverage is 3.4x, and we expect to reduce our leverage to under 3x within 18 months, and we are maintaining our target leverage of 2x-3x. And importantly, this transaction will not impact our ability to return cash to shareholders through share repurchases, preserving our capital allocation strategy and enabling us to maintain our focus on maximizing shareholder value. Mark?

Mark Wang (President and CEO)

All right, well, thanks, Dan. So in conclusion, with this acquisition, we'll not only solidify our position as a leader in the vacation ownership industry, but we'll also expand our corporate vision to providing exclusive, memorable experiences to our members. Bluegreen has a complementary asset that will add scale to our business. Our strategic partnership with Bass Pro will expand and diversify our lead flow channels, opening new avenues for growth, will unlock additional upside by leveraging the strong value proposition of HGV Max and Ultimate Access, and will improve the financial resilience of the business by strengthening our sources of recurring EBITDA and our free cash flow generation. We have a track record of achieving our cost synergies and building upon the processes and tools from our successful integration of Diamond Resorts. We're confident in our ability to execute on this transaction.

With that, I'll turn the call back over to the operator to open the line for questions. Operator?

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question at this time, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. Just since you're using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask you please limit yourself to one question and one follow-up to allow the opportunity for everyone to ask questions. You may then reenter the queue to ask additional questions. Thank you. Our first question today is from the line of Patrick Scholes with Truist Securities. Please proceed with your questions.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Hi, good morning, everyone. I suspect I'll probably be reentering the queue here with any questions. But, Mark, congratulations on the acquisition, and Alan, I believe you're on the line, congratulations as well. Mark, first, let's talk about the acquisition. Certainly, you know, with the recent Diamond acquisition, you know, is it fair to almost categorize this as, you know, now that you've done Diamond, that this would be called, you know, something plug and play for you at this point? And then, related to that, you know, if you could summarize maybe your top two or three lessons learned from the Diamond acquisition that you would be applying to this. Thank you.

Mark Wang (President and CEO)

Sure. Well, thanks, Patrick, and yeah, so we're very, very excited about today's announcement. And you know, we think it's the perfect complement to what we've built at HGV, and it is clearly an evolution of where we've been focused on in the last two years and what we've been able to accomplish with the Diamond acquisition. With Bluegreen, you know, we get a what we think is a great and very innovative company. We've known them, obviously, for a long time. I've known Alan for a long time. The industry is very aware of Bluegreen and what they've done. We think from a strategic standpoint, it made a lot of sense for us to pursue this opportunity.

And, you know, obviously, the scale and the diversity is important, right? And with over 200,000 members, you know, and additional 50 properties, you know, we're... That really improves our overall scale. And we're getting new distribution. We're gonna have over 10 new distribution centers in eight new states. And this partnership, you know, the partnership, you know, these guys have been super innovative. No one, when you think about their pipeline of new buyers, they've got 160,000 people in their pipeline for new buyers. That's the third largest in our space. When you add that to our 550,000, you know, we have 700,000 new buyers in our pipeline on a collective basis.

So they've really been able to do this with third parties because they haven't been able to leverage, like, the Hilton database like we have. So Bass Pro clearly has been the biggest generator of those, but they also have a relationship with Choice and NASCAR. But Bass Pro super excited to work with them, and we have some really big plans, you know, I think, ahead with them. But anyways, I think it fits perfectly. As I said, I think it's, you know, it's an evolution of what we've achieved. And as you mentioned, Patrick, it really plugs into all the things that we did to stand up Diamond. You know, we were fortunate to be able to create a new brand with Hilton under Hilton Vacation Club.

We created a whole new membership program, which we'll be able to apply to this acquisition. And Ultimate Access, our experiential platform, we're gonna be able to expand that, especially with this Bass Pro new announcement with the new agreement with Bass Pro. So all in all, it really de-risks our deal. And when I look at Bluegreen, I really look at Bluegreen as kind of like legacy HGV. You know, very focused on new buyers. They've been very strategic in their growth. Their properties are very consistent. So all in all, very, very happy. Look, I think we, you know, always lessons learned when you do a transaction.

I think a lot of the lessons that, you know, we've learned through the Diamond transaction, we can apply here. I think the biggest one is just continuing to work extremely hard to integrate the teams. I think we did a good job with Diamond, and we're gonna even do a better job with Bluegreen.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay, thank you. Has this been approved by Hilton Corporation or does it need to be approved?

Mark Wang (President and CEO)

It does need to be approved, and it was approved yesterday. So we're really thankful for Hilton's you know cooperation and most importantly, their investment into this transaction. We're very aligned with Hilton. They are our biggest partner and will always be our biggest partner, and we appreciate all their support.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay. Let's move on to the quarter and to the guidance. You know, you called out some macroeconomic and cross-current concerns beginning, I think it was after August. You know, specifically, where are you seeing this? Is this going to be in your, sort of your legacy higher-end business or more of the mass-market Diamond? You know, is this... Are you seeing this in a hit to your tour flow, your close rates, your VPG? You know, where, if you could—if you can drill down a little bit more on that. Thank you.

Mark Wang (President and CEO)

Yeah. So, you know, so within the third quarter, you know, new buyer sales and transactions actually rose year-over-year, right? And tour flow grew by 15% versus where we were last year, for new buyers. And that said, though, we had high expectations, and we had high expectations for the second half of the year. Look, I think the consumer is now finally behaving more in line with what you'd expect, given, you know, the rapidly rising interest rates and sustained inflationary periods. And then obviously, the unexpected pressure we've had from Maui in that unfortunate situation. But we're focused on controlling what we can control, and that's our execution. And maybe I'll have Dan kind of walk you through a little bit more detail on that.

Dan Mathewes (EVP and CFO)

Yeah. Thanks, Mark. So the other thing I would add, Patrick, is when you take a look at the portfolio, we've seen, we've seen actually some good trends. Sequentially, just trying to break it out against, you know, the legacy Diamond portfolio versus the HGV portfolio. HGV is, you know, in line, slightly ahead of where we were in 2019. Sequentially, you know, some modest movement up, nothing material, but nonetheless, a little bit of movement up. Now, when you look at the Diamond, we've talked historically at, you know, various points in time about how they have been significantly underperforming 2019 levels, and that holds true today as well. Sequentially, they've actually, modestly improved. So you're not seeing from an annualized default rate, material movement between, the different, consumer bases, if you will.

From the guidance, you know, to Mark's point, a lot of this, what you're seeing is, you know, we are still anticipating heavy tour flow growth on the new buyer side. That clearly, you know, causes compression in upon itself. That, coupled with the macro side, is really driving a lot of this. When you look at the balance of the segments, you'll see some margin compression in finance because, as you saw, you know, just recently, we completed a new securitization, and that's just under 6%, but that will clearly impact financing margins in Q4. You know, on the benefit side, though, Q4 for Resort and Club is really strong because that's when a lot of transaction fees come into play. So Q4 historically has always been our strongest on that front.

And then when it comes to rental, you'll have some seasonality, so it'll be in line with prior margin levels, slightly down to where we finished Q3.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay.

Dan Mathewes (EVP and CFO)

So when you look at Q4, you know, the implied guidance obviously gives you a number that's lower than the previous guide, but, you know, we've got a lot of things, a lot of things going on in addition to the Maui fires. Right.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay. I have a follow-up question on that, and then I'll come back and put myself back in the queue here. You know, one of the other major players here had a sizable charge in the loan loss provision. Am I correct? It didn't sound like that you're seeing similar issues in delinquencies. Is that correct, or... And am I correct that you did not take any material charge at this point?

Dan Mathewes (EVP and CFO)

No, we definitely didn't take a material charge at this point. I mean, if we look at delinquencies and we look at the annualized default rates, they're very consistent with the trends that we've been talking about all year. Some modest, reversion to the mean. Our provision as a percent of contract sales was just north of, 10%. We do not see, at this time, any reason to take a material charge against our portfolio.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay. And, you know, another major trend here, sort of along the lines of normalization. Do you think it's, you know, just sort of normalization also being caused by Americans traveling abroad? You know, you're primarily a domestic company or, you know, taking cruises. You know, do you think that's also a driver of that, and that was maybe more impactful than you initially thought?

Mark Wang (President and CEO)

You know, I think, I, I think, Patrick, the bottom line is we, our expectations was an acceleration into the back half of the year. And what we saw is we saw some softening in arrivals, but still strong arrivals, better than we, we saw in the previous year. And, and as I mentioned earlier, I think, you know, there's some compounding effects with the consumer right now around just all, all the information out there. So, so there's been a moderation in the, in our VPGs and our conversion rates, and we expected that moderation, but not to the level that we saw. Now, we saw stabilization early in October, and we also saw it in the back half of September. So, yeah, all in all, you know, I think it was just very high expectations.

Still, you know, performing well from a relative standpoint when you look at overall transactions and tour flow. But, I think at the end of the day was, you know, just very high expectations.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay, thank you. I'll hop back in the queue and while others ask questions. Thank you.

Mark Wang (President and CEO)

All right, thank you.

Operator (participant)

The next question comes from the line of Brandt Montour with Barclays. Please proceed with your questions.

Brandt Montour (Director of Equity Research)

Hey, good morning, everybody, and congrats on the announcement. So curious on how—if you're willing to share, Mark or Dan, how you sort of got to the price premium, and if there was sort of a process that was ran for Bluegreen, or how that sort of came together between you two organizations?

Mark Wang (President and CEO)

Yeah, there was a process. And, you know, I think as you know, when we went through that process and, you know, we've known Bluegreen for a long time, and, as I mentioned earlier, we think they're a very innovative operator, and we think this deal has a lot of strategic value for us. And I talked about a lot of the value, you know, the pipelines, the new buyer, the Bass Pro deal, et cetera. You know, we valued the business on a future cash flow and EBITDA, you know, inclusive of the $100 million in cost synergies. So, you know, that's how we got to the basis on the value. But, Dan, if you want to lean in here.

Dan Mathewes (EVP and CFO)

Yeah, Brandt, just to add a little color to that. Look, when you look at Bluegreen's stock, how they historically traded, they've got the, you know, AB structure, which always has some kind of impact to where it trades. When we went through a valuation process, it was, you know, based on a classic, discounted cash flow, structure. That then translates into the multiple that we disclosed today on a synergized basis. But as you can see, you know, the synergies play a key role in the valuation. I think we're very happy where we landed at 6x LTM 9/30 on a synergized basis, and it's, you know, actually almost actually a full turn less than what we acquired Diamond for on a synergized basis.

When you look at our two transactions, they are by far the lowest multiple paid for any entity in the last five-seven years. So we're pretty, we're pretty pleased with where we landed up.

Brandt Montour (Director of Equity Research)

That's, that's excellent color, guys. Thanks for that. And then, on the synergy number, is, is the... How, how do we think about the $750 million odd Bluegreen LTM sales, BOI, and, and how that would, you know, how, how would that, how do we calculate fees to Hilton on that hitting the system, and is that included in the $100 million cost synergies?

Dan Mathewes (EVP and CFO)

The cost synergies does not include the license fee. So there's... Okay, so there's a couple components here, right? So cost synergies of roughly $100 million, and then there's revenue synergy opportunity between $75 million and $100 million, which more than offset the license fee increase to Hilton. The license fee increase at the low end of that revenue synergy would be floating around the mid-forties, just to give some color on that perspective. Mark mentioned earlier that Hilton did invest in this transaction, and they did it in a very similar fashion that they did with the Diamond transaction, and that's with the fee ramp.

To oversimplify, because there's a lot of ins and outs, but to oversimplify it, it's effectively a four-year ramp at 3%, 3%, 4%, and 5%, which is consistent when you hit run rate where we are today. There's some ins and outs on different pieces, but that's, that's where it boils down to.

Mark Wang (President and CEO)

Yeah, they also invested in, you know, the Bass Pro and other partnership relationships, where we have a lower license fee for those partnerships because there obviously are costs related to those partnerships that drive the deal. And you know, I think the actual performance we've seen with Diamond obviously informed us around these estimates, especially around the cost side.

Brandt Montour (Director of Equity Research)

Great. Thank you. Best of luck.

Dan Mathewes (EVP and CFO)

Thank you.

Mark Wang (President and CEO)

Thank you.

Operator (participant)

Our next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Chris Woronka (Senior Equity Research Analyst)

Hey, good morning, guys, and also congratulations on the announcement. I guess a higher level question for you, Mark, is when you looked at this, you know, when you looked at Bluegreen and the customer and kind of similar to what you did a few years back with Diamond, is there any, I guess, correlation with the fact that Hilton is also kind of shifting some of its unit growth initiatives into the, I guess, what we call kind of the more mid-scale area of the lodging business? I mean, is that kind of where you see the biggest buyer pool opportunity growing, if that makes sense?

Dan Mathewes (EVP and CFO)

Yeah, no, a great question. I think... Look, when, when we looked at this deal, one, one of the things that was very attractive to us was the demographics, right? It's a, it's a younger owner. You know, 75% of the, the members are at Bluegreen are Gen X or younger, you know, still a very good FICO score above 725. So, you know, for us, attracting, you know, solid customers earlier in the stage of their, their life is, is important. And we have, you know, with HGV Max and Ultimate Access, we have over time, the ability to grow them through our system and move them, through our brand portfolio. You know, from a property perspective, you know, the one thing that we really like about Bluegreen is just the the consistency of the quality of the properties.

Mark Wang (President and CEO)

They do fully align with the growth of Hilton's portfolio, as you mentioned earlier, as well as the Honor member base. So, you know, Hilton, as you know, Chris and Kevin announced last week, you know, they now have 173 million members. It's still the fastest growing hotel loyalty program. So we thought it made a lot of sense strategically, and it will really support our net owner growth and allow us to continue to build embedded value in the business.

Chris Woronka (Senior Equity Research Analyst)

Okay, appreciate that, that color, Mark. And then kind of another, I guess, somewhat theoretical question or higher level question for you. You know, obviously, Bass Pro, that's a, that's a very unique asset. But at a higher level, you know, do you think maybe going forward, there's more of a focus on some of these retail partnerships with, you know, with, with companies that, that maybe have that, whether it's an outdoor angle or a travel angle? It seems like this is kind of becoming a, a new way to source customers in a, maybe in an indirect way. But any, any thoughts on that as to whether that's gonna be, you know, a new, I guess, secondary avenue for customer acquisition?

Mark Wang (President and CEO)

Yeah, look. Well, look, Bass Pro is extremely unique in itself, right? And I don't know if you've had the opportunity to visit one of their destination superstores, but they are a destination unto themselves, right? And you know, as I mentioned earlier, I've had you know the opportunity to meet with Johnny and his teams, and they've done amazing work at their Big Cedar Lodge and their stores. The quality of commitment, their focus on conservation, it's just it's so impressive. And for us, we think it's just a massive opportunity with the marketing pipeline. And now being able to leverage our brand with them, and they're excited about that.

We believe we're gonna be able to do much more with Bass Pro than Bluegreen was because of our portfolio and, you know, diversification of our platform and then our Ultimate Access experiential platform. So yeah, there could be other opportunities out there and but we think we have found our and are acquiring the best one for sure.

Chris Woronka (Senior Equity Research Analyst)

Okay, fair enough. Thanks, Mark. Just a, I guess, kind of a quick follow-up to the quarter now, if I could. Is there any common theme, and this is probably more as we look out the fourth quarter than kind of dissect third quarter. But, you know, on the lower outlook for Q4, is there any common theme geographically or if you look at the customer, you know, where they're not showing up or where the conversion rate is lower, whatever it might be, and maybe we need to strip Hawaii out of that, even though it's obviously a big piece. Just trying to get a sense as to whether there's anything you can pinpoint to, you know, identify as the one specific area of softness.

Mark Wang (President and CEO)

Yeah, I would say that Orlando has been off more than we had expected, right? There's been some softening there, and I you know, we think it's, you know, partially just driven around just some of the noise around Disney and what's going on there. But overall, when you look at our mainland business, though, it is strong. Tour flow is essentially recovered, and we're at historical levels for owners VPGs. The real impact, you know, one of the drags for us is unfortunately, it's been the APAC. And we, we've talked about Maui, so I won't, you know, dive into that. But we're also, you know, continuing to wait for the Japanese to come back to Hawaii, which is really important.

Now, our owners are coming back pretty well, and but the Japanese in general are still down, you know, 65%-70% from pre-pandemic. And really, part of that is, you know, it's less about the pandemic now. It's more about the, you know, the currency. So, you know, all in all, I would say our mainland business is generally in good shape, other than a little softness in Orlando. It's really more around our APAC business, and you know, it'll come back, and it's just gonna take, it's just gonna take longer than we expected.

Chris Woronka (Senior Equity Research Analyst)

Okay. Very good. Very helpful. Thanks, guys.

Mark Wang (President and CEO)

Thank you.

Operator (participant)

The next questions are a follow-up from the line of Patrick Scholes with Truist. Please proceed with your questions.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay, thank you. Right now, Bluegreen has a licensing agreement with Choice Hotels. I want—You know, how long—how much longer does that agreement last for, and is it realistic to expect, when that expires, you'll be dropping that agreement?

Mark Wang (President and CEO)

Yeah, we're not gonna talk about the, you know, the agreement in detail here. But I would say, look, we're excited to work with Choice, and, you know, we believe they've been a good source of incremental and diversified lead flow for Bluegreen. And we've been in active discussions with them about the structure, and we look forward to sharing more with you as we get closer to the deal closing. But you know, Bluegreen formed a nice partnership with them, and they built a nice little pipeline of tour flow. And you know, on a relative basis and put in context of the combined company, you know, it's small. It's about 5%-6% of what it...

what the combined company will be. But we've got a plan to accommodate those leads, and we're gonna have the appropriate guardrails in place around, you know, the customer and the brand. And you know, all the partners are aware of the structure, and again, we'll share more, Patrick, as we go further down the road here.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay, fair enough. And then my last question here. You know, I would say the other major competitor last week talked about their maintenance fees going up mid-teens, you know, for next year, and that will, you know, be a higher cost for them for any unsold inventory. Curious what you think your maintenance fees might be going up next year, and would that be a similar challenge for you folks as well? Thanks.

Mark Wang (President and CEO)

Look, we anticipate maintenance fees going up, driven by, you know, various cost pressures, most notably property insurance. But ours will not be going up mid-teens, probably mid-single digits plus, in that ballpark.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay. Okay, so more, more in line with inflation as opposed to much higher than inflation.

Mark Wang (President and CEO)

That's correct.

Charles Patrick Scholes (Managing Director of Lodging and Leisure Equity Research)

Okay. I think I'm all set for the moment. Thank you.

Mark Wang (President and CEO)

Great. Thanks, Patrick.

Operator (participant)

Our next question is from a follow-up from the line of Brandt Montour with Barclays. Please proceed with your question.

Brandt Montour (Director of Equity Research)

Hi again, everybody. So I just had another one. I wanted to dig in a little bit more on the synergies. The cost synergies of $100 million versus, and I think, you know, you know, Diamond was $125 at announcement, and Mark kind of made it sound like you feel a little bit better about these ones this time around because, you know, you have the integration platform ready to go. You've got all these learnings and like someone else said, it was more plug and play. But it also sounds like the Bluegreen system is, the owner base is undersold, whereas we could probably argue that Diamond was oversold. So that's an interesting sort of dichotomy.

Is, is that firmly on the revenue synergy side, I would expect, though? So I guess, do you agree with that, that assessment?

Mark Wang (President and CEO)

No. Yeah, I totally agree that the revenue synergy opportunity really lies, you know, in VPGs around owners. Their new buyer VPGs actually hold up pretty well against ours. When I think about, you know, our VPGs to owners are almost double what Bluegreen is generating today. And, you know, we're not looking to double those. We're taking a kind of a conservative approach and somewhere in between that. You know, on the cost synergy side, I think, you know, we think these cost synergies are achievable in 18-24 months, and you know, we have a pretty good track record now of being able to achieve those through the Diamond acquisition.

And we've looked at it very carefully, and I think we've been very thoughtful in our approach.

Dan Mathewes (EVP and CFO)

Yeah, I think the only thing I'd add, Brandt, is, you know, going through the Diamond transaction, obviously, we learned different lessons. But when we talk about roughly $100 million in cost synergies with regards to Bluegreen, you know, cost synergies still require a lot of work, right? And it's, and you have to have a thoughtful process. But it, you know, roughly 65% of the cost synergies is driven by headcount, which when you think about cost synergies, is probably the easier ones to garnish, if you will. But the thought process around who is, where the, you know, the redundancy is identified, that's where the Diamond history plays in well, right?

Now we, you know, we've learned, hey, in Diamond situations, we had made certain estimates where we cut too deep here and not too much there, and we applied those learnings here, and we're really comfortable that we're gonna get to that $100 million in cost synergies, really confident. So that's good.

Brandt Montour (Director of Equity Research)

Okay, that's helpful. Then, you know, for those of us that don't cover Bluegreen or maybe know that asset as well, in, again, contrasting with Diamond, is it fair to say that, you know, there's no friction that you expect from the removal of the Bluegreen brand from the consumer process, right? The consumer is always sensitive to sort of confusion and brands change around. But the Bass Pro is really where the consumer affinity lies, and so, you know, Hilton sort of cutting Bluegreen out of that process is probably sort of a no-risk situation. Is that right?

Mark Wang (President and CEO)

Yeah, we believe, when, you know, and as the members at Bluegreen understand that they're being acquired by Hilton, that they're gonna be very excited about what that means for them and what that means for their club going forward. When you think about, you know, Hilton is just such an iconic lodging brand. And look, Bluegreen has done a great job taking care of their customers, building loyalty within their brand. But when you think about the opportunity to be able to improve your value proposition, and this kind of goes back to the revenue synergy question, part of the reason we think there's gonna be good revenue synergies on the owner side is the ability to move across 200 properties versus 50 properties, and the ability to move into the Hilton.

You know, ecosystem and utilize those properties, those are powerful, right? And then you put on top of that the Ultimate Access program, and those are, you know, those are, you know, really compelling for them. And the other thing I would say, Brett, is Bluegreen is actually simpler business model than Diamond was. And I say that because Bluegreen has one trust, and Diamond had, like, seven trusts, and so there was a lot more complexity. And the reason Diamond had so many more trust product is because, you know, Diamond's strategy was acquisition of various companies, right? So that it was M&A and tuck-in, and Bluegreen has been 100% organic from day one. They weren't acquiring any other companies.

So in a way, the company is much. I wouldn't say cleaner, it's just a lot simpler, and it's a lot more in tune with the way HGV was born and with one club at one point going forward. It's just gonna be a lot simpler for us to connect this all together.

Brandt Montour (Director of Equity Research)

Great. That's all for me. Thanks again.

Operator (participant)

Thank you. Our next question is a follow-up from the line of Chris Woronka with Deutsche Bank. Please proceed with your questions.

Chris Woronka (Senior Equity Research Analyst)

Hey, guys. Thanks. Just a quick follow-up, and apologize if I may have missed it, but is it possible to know kind of what percentage of Bluegreen owners today are already Hilton Honors members, and maybe how that compares to what percentage of Diamond members were Honors members at the time of that announcement or acquisition?

Mark Wang (President and CEO)

No, don't. We don't have that information in front of us, and we haven't really looked into that. So, but you know, there's obviously gonna be some crossover when you have—when Hilton has 173 million members out there. And as you know, people are typically members of various hospitality loyalty programs. But you know, our goal, though, is gonna be getting all of those Bluegreen members to be Hilton Honors members going forward, and yep.

Chris Woronka (Senior Equity Research Analyst)

Sure. Okay, fair enough. Thanks, guys.

Operator (participant)

Thank you. Before we end, I will turn the call back over to Mr. Mark Wang for any closing remarks. Mr. Wang?

Mark Wang (President and CEO)

All right. Thank you. I wanna, I wanna reiterate how excited I am about the opportunity in front of us and my confidence in our strategy. I wanna also thank Alan Levan, Ray Lopez, and his entire leadership team. I also wanna thank the Bluegreen team, and we look forward to working with you. I'd also say thank you to Johnny Morris and the entire Bass Pro Shops for their warm welcome. We look forward to an exciting future working with these great organizations, and thanks, everyone, for joining us this morning.

Operator (participant)

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.