1 Economics/Accounting
2
Lifecycle of a Timeshare ProjectFeasibility / Investigative
Stage
All costs expensed in period incurred
Finance Committee and Board of Directors Approves Project
• All costs associated with project now capitalized
• Revenue recognized by % of completion
Development / Construction Stage
• Sales begin up to 18 months before opening and after registration is completed.
• Cost of sales are costed out over sales period using relative sales value method
Construction Substantially Complete
Certificate of Occupancy Received
• Interest, taxes and insurance no longer capitalized
• 100% sales revenue recognized
Resort Completed
• Soft Opening• Start-up costs incurred• Generally 1-30 days
Resort officially opens for business
Renting begins; HGVC manages property
Property sold-out 2 – 12 years
Subsidy ends; HOA responsible for operating
cost of property
HGVC continues to collect on financing for up to 10
years after last sale
HGVClub books reservations and collects Club Dues
HGVC manages properties and collects management fees
Fees collected!
HGVC has never lost a Management Contract
4
Revenue GrowthHilton Grand Vacations Company
Revenue Growth 1997 - 2006
($ in Millions)
$0
$100
$200
$300
$400
$500
$600
$700
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Revenue
5
Hilton Grand Vacations CompanyProfit Margin
1997 - 2006 Actual
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Prof
it M
argi
n
Profit Margin
7
97%
3%
89%
3% 8%
80%
7%13%
76%
7%17%
72%
9%
19%
71%
8%
21%
73%
5%
22%
39%
61%
47%
53%
59%41%
72%28%
87%
13%
97%3%
10 0 %
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Hilton Grand Vacations CompanyHYPOTHETICAL Timeshare Project Illustration% Of Total Project Revenue Earned Each Year
Timeshare Sales Resort Financing
8
Dynamics of Timeshare Cash Flow
Hilton Grand Vacations CompanyHYPOTHETICAL Timeshare Project Illustration
Cash Flow($ in Millions)
$(50)
$(30)$(10)
$10
$30$50
$70$90
$110
$130$150
$170
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Years
Cas
h Fl
ow
Annual Cash Flow Cumulative Cash Flow
10
Revenue Recognition
Record Transaction in one of three ways:
1. Full Sales Recognition
2. Percentage of Completion
3. Lease Accounting
11
Full Sales Recognition CriteriaFAS 66
• Title passes to buyer and timeshare unit does not revert back toseller in the future
• Receive minimum down payment of 10%
• Risk of reversion to rental property remote
• For new markets, must be 10%+ sold out or all revenue and direct expenses are deferred
– Administrative expenses are recognized in period incurred
• Building is substantially complete (generally receipt of Certificate of Occupancy) otherwise must use Percent of Completion if sellerfinanced
• Collectibility is reasonably assured
12
Percent of Completion AccountingARB 45
• Project is under construction, no Certificate of Occupancy
• Profit recognized as the construction progresses on the project• Defer Sales Revenue and relevant expenses in direct relation to the
percent the project is incomplete
• No profit is recognized until construction is “beyond a preliminary stage”
• Will result in either more or less income reported in a period than the actual economic results of sales.
• In 2007, International Drive Phases VI and VII, Ruby Lake Phase I, New York 57th Street, Grand Waikikian, and Kings’ Land Phase I will be impacted by Percent of Completion accounting.
13
Percent of Completion AccountingNew Projects Influence Reported Results
Under Construction Completed
International Drive Phase VII International Drive Phase VI
Grand Waikikian
Kings’ Land Phase I
Ruby Lake Phase I
New York 57th Street
Under Construction Completed
Ruby Lake Phase I International Drive Phase VII
New York 57th Street Grand Waikikian
Kings’ Land Phase I
2007
2008
14
Cost of Product Recognition
• Equals the total CAPEX cost of building a project
• COP% = Total Estimated Final Cost of Project Total Estimated Future Sales Revenue
• Results in a constant COP% over project sales period
• Changes in estimates are applied retrospectively as a current period adjustment
15
Accounting for Real EstateTimesharing Transactions
FAS 152 (SOP 04-2)
• Effective for fiscal years beginning after June 15, 2005; impacts 2006 and beyond.
• HGVC revenue is very slightly lowered due to change in definition.
• Operating income impact to HGVC is negligible.
• There were no net balance sheet write-offs due to HGVC’s past conservative accounting practices.
17
New Projects – 2006 / 2007
• Orlando, FloridaRuby Lake
Projected 1,200 units
• New York, New York57th Street in New York (between 6th and 7th)
Projected 161 units
57th Street New YorkArtist’s Rendering
18
New Projects – 2006 / 2007
• Hawaii – The Big IslandKings’ Land
Projected 786 units
• Honolulu, HawaiiGrand Waikikian
Projected 331 units
The Grand WaikikianArtist’s Rendering