Hilton Grand Vacations Inc (HGV) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Hilton Grand Vacations Third Quarter 2017 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning at 2:00 p.m. Eastern daylight time today. The dial-in number is (888) 203-1112, and enter PIN number 3802457. (Operator Instructions)

I would now like to turn the call over to Robert LaFleur, Vice President of Investor Relations. Please go ahead

Thank you, Melinda. And welcome to the Hilton Grand Vacations Third Quarter 2017 Earnings Call.

Before we get started, we would like to remind you that our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements, and the forward-looking statements made today 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 cause actual results to differ, please see the Risk Factor section of our previously filed 10-K or our 10-Q which we expect to file later today.

In addition, we will refer to certain non-GAAP financial measures in our call this morning. 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 our website, investors.hgv.com.

This morning, Mark Wang, our President and Chief Executive Officer, will provide highlights from the third quarter in addition to an overview of current operations and company strategy. Jim Mikolaichik, our Executive Vice President and Chief Financial Officer, will then provide more details on our third quarter and expectations for the balance of 2017. Following their remarks, we will open the line for questions.

With that, let me turn the call over to Mark.

Well, thank you, Bob, and good morning, everyone. I'd like to open by acknowledging the tragedies that occurred the past few months in many areas of the country. Whether directly or indirectly, many of our owners, team members and their families have been affected by these events. As always, the safety and care of our team members, owners and guests is most important, and we are focused on providing direct assistance to help with the healing process.

Our business was directly affected by Hurricane Irma. In Orlando and South Carolina, we saw cancellations and closed our sales centers for several days. Our resorts in both markets remained open throughout the storm, and our properties in Orlando were full as many evacuees headed inland. We also have 17 managed properties in South Florida that were located in evacuation zones along the coast. Ahead of the storm, our dedicated team members showed incredible generosity and compassion to safely evacuate our owners and secure our properties. Many did so before attending to their own homes and families, and they returned right after the storm to help reopen our properties as quickly as possible. Within weeks, most of our properties were reopened, and all of our South Florida properties are fully open today. I'm thankful for our team's efforts during Irma.

With that in mind, let's discuss how the business performed. We had another solid quarter as the resilience of HGV's diversified business model overcame the challenges I just discussed. We're confident heading into year-end and are reiterating our 2017 operating guidance, which Jim will discuss in more detail shortly. For the second consecutive quarter, we posted high single-digit tour growth, and contract sales were up by mid-single digits. Meanwhile, adjusted EBITDA in our resort and club segments increased nearly 20%, producing margins in the mid-50s.

In real estate, Las Vegas was our strongest region, with mid-teen contract sales growth, and the Asia Pacific region grew by double digits for the third quarter in a row. Contract sales were a bit soft in Orlando and South Carolina due to the sales center closures. None of our South Florida properties are in active sales so there was no impact to contract sales from property closures there. Despite these disruptions and some tough comps, total contract sales increased 6.5%, driven by a 9% tour growth and 1% decline in VPG.

As we discussed last quarter, we are seeing strong tour growth from first-time buyers as our marketing and sales teams continue to outperform the industry in engaging new customers. In fact, the future investment we're making by focusing on first-time buyer of tours is critical to driving the one metric that ties together our entire business and touches on each one of our strategic priorities, and that metric is NOG or net owner growth. As you've heard me say before, the importance of NOG to HGV's business cannot be emphasized enough. Third quarter NOG was 7%. In other words, there were 7% more owners in our system at the end of the third quarter of 2017 than there were a year ago.

And why is this number so important? Because each one of our 25,000 new members that we welcomed to HGV in the past 12 months embeds meaningful future value into our business. We estimate that 60% of the lifetime revenue we see from each owner comes after their initial purchase. It comes from club dues, transaction fees, management fees, financing revenue and future real estate transactions, and most future real estate transactions occur within 7 years of the owner's initial purchase.

So strong and consistent NOG means we always have a healthy base of owners who are within their upgrade window. In fact, over half of our current owners made their initial purchase within the past 7 years. Now some have already upgraded, but we estimate there are over 75,000 future real estate transactions currently embedded in our owner base. That's the power of NOG.

And in our business, without marketing, there is no NOG. So I'd like to take a few moments to welcome the newest member of our executive team, Chief Marketing Officer, Sherri Silver. Sherri joined us shortly after our last earnings call, and she brings over 20 years of strategic marketing experience and expertise in managing change and innovation. Sherri comes to us from outside of our industry, and that's important because I wanted to bring in a fresh set of eyes that could help us expand our horizon and think about new and innovative ways to evolve our product offering and customer acquisition practices, ways to grow the business, expand the market and build upon the strength of what is already the industry's leading marketing and sales organization.

Shifting gears. I'd like to spend a few minutes updating you on the recent investments and development opportunities. Then I'll talk a little bit about the benefits of our fully diversified and capital-efficient business model. So first, the joint venture we announced in July contributed $3 million of adjusted EBITDA in its first quarter out of the gate, which is right in line with expectations. The transition is going smoothly, and we continue to believe the JV will produce very attractive returns on our investments.

We followed Elara with a second fee-for-service buyout at our Sunrise property in Park City, a project we've been involved with since 2012. While much smaller than the Elara deal, Sunrise was an opportunistic investment that allows us to fully participate in a project with many real estate and financing economics. It also locks in a long-term management agreement and provides an anchor for potential sequel projects in the region.

Looking at another one of our fee-for-service projects, Phase 2 of our Hilton Head property is set to break ground later this month. We entered this market last year, and owners' response to this property in the short time it's been opened is a good example of how we can leverage our third-party developer relationships to expand vacation options for our owners and grow our business.

On the just-in-time front, construction is under way at 2 new projects, our 48th Street property in New York and Ocean Tower Waikoloa, which is a conversion of an asset that we transferred -- that was transferred to us in the spin. Elsewhere, our development team continues to make progress on projects in U.S., Mexico, the Caribbean and Japan, and we still anticipate to formally announce some new destinations by year-end. In fact, I'm heading to Japan in a few weeks and expect to have some good news to share afterwards.

When I look at our pipeline today, in only our 11th month as an independent company, I've never been more excited about the opportunities ahead of us. Now that we're free to deploy our own capital and, at the same time, continue leveraging our fee-for-service relationships, we've been able to build a pipeline of incredible projects in exciting markets.

Running through our list of recent investments, ongoing projects and future opportunities really demonstrates the scope and power of our diversified capital-efficient approach to growing the business.

While the term capital efficient is used a lot in the industry these days, the definition seems very broad and means different things to different people. So I'd like to take a minute and walk you through HGV's approach to capital efficiency. We believe our approach provides the maximum flexibility regardless of where we are in the cycle. We have multiple levers at our disposal, from full capital commitment on development projects to no capital commitment on fee-for-service deals, to ladder commitments in just-in-time deals. And as we showed with Elara, where we made a direct equity investment with a fee-for-service developer, we can also mix and match our approach with hybrid structures.

Having 3 available approaches plus hybrid expands the number of projects we can look at and the number of projects we can pursue at the same time. Rather than spend $200 million in 1 year on 1 project in 1 market, we can spend $50 million on 4 projects with different structures and different markets. And as we do this with our own capital, third parties can invest that much or more on our behalf. So our approach to capital efficiency allows us to multiply the amount of capital being deployed to expand our system and grow our business.

So clearly, having a robust fee-for-service program gives us tremendous flexibility. We didn't invent fee-for-service but the current scale of our program is unmatched in the industry, and we believe this position is secure because making a meaningful shift towards fee-for-service as a public company would be difficult given the risk it poses to bottom line growth. So tying this all together, we believe that our growing direct investment capacity plus the ability to leverage our fee-for-service program is a key differentiator that gives HGV a strong competitive advantage in pursuing growth.

To wrap up, since we started the journey of becoming an independent company, we stressed the resiliency and sustainability of our diverse earning streams and capital-efficient business model. As we've talked with investors and analysts, I've been encouraged by the Street's openness to the timeshare industry in general and HGV in particular. We know this is a complex business, and our goal from the outset was to be as transparent and forthcoming as we could. And we're pleased with the reception so far. Even given the challenges we faced this quarter, HGV continued to execute and invest in our future. Going forward, we intend to stay focused on growing our sales and member base, maximizing our customer experience, strengthening our brand presence and focusing on our talent. If we can do that, we should continue to create meaningful value for our team members, our owners and our shareholders.

And with that, I'll turn things over to Jim.

Thank you, Mark, and good morning, everyone. As Mark indicated, despite some challenges, third quarter results were in line with our expectations. Despite hurricanes and the tougher second half comps we've discussed on previous calls, we feel confident about the remainder of the year, and we are reiterating our 2017 operating guidance.

And with that, let's move on to our third quarter results. This quarter's results reflect the benefits of HGV's diverse earnings model as strong third quarter trends in our resort and club business offset more modest trends in our real estate business. Third quarter revenues were $426 million, an increase of $19 million or approximately 5% in comparison to the third quarter of 2016. Our Resort operations and club management segment revenues increased by 11%, led by 25% increase in resort management revenues and an 11% increase in rental revenues. Higher resort management revenues reflect the contribution from strong NOG and the opening of Grand Islander. The strong growth in rental revenues reflect higher ADRs in Las Vegas and a shift to rental occupancy from owner occupancy in Orlando during Hurricane Irma.

Net income in the quarter was $43 million. This represented an $8 million increase over the third quarter of 2016 as G&A declined modestly in the quarter and we benefited from a more normalized effective tax rate. At this point, we believe our full year 2017 tax rate will normalize at approximately 39%, which is consistent with the guidance we updated last quarter. In our operating segments, total segment adjusted EBITDA increased by 3.1% in the quarter to $131 million.

Third quarter results in the real estate business line experienced an increase in contract sales of 6.5% with owned sales up 26% and fee-for-service sales down 7%. As Mark mentioned, we saw strong same-store sales results in Las Vegas, Hawaii and Japan. The real -- total real estate revenues were up 2% in the quarter as lower fee-for-service sales and a change in sales mix led to an 11% decrease in commissions and other fees in the quarter. Real estate margin was down $9 million compared to the third quarter of 2016, and the real estate margin percentage decreased 430 basis points to 23.5%.

Product cost on an absolute basis and percentage basis were lower in the quarter despite a 26% increase in owned contract sales. The reduction is attributable to favorable inventory mix and lower fee-for-service upgrade volumes. Sales and marketing cost, net increased on an absolute basis by $17 million; as a percentage of contract sales, by 270 basis points. We are still witnessing elevated costs from our new market distribution channels and building our tour pipeline. And as Mark mentioned, we also saw stronger growth in more expensive first-time buyers of tours this quarter. Additionally, this line item captures the R&D cost associated with new development projects targeted at international expansion.

In our financing business, revenues increased 12% on higher interest income from growing receivable balances and higher servicing fees. The financing margin increased 4% while financing margin percentage declined to 71.1% as the higher nonrecourse debt balance has led to higher consumer finance interest expense. At the end of the quarter, our consumer finance portfolio stood at approximately $1.2 billion and carried an average interest rate of 12.1%. Delinquencies remained low on an absolute basis at 1.7%, 40 basis points lower than they were at the end of the second quarter. Our default rate was essentially unchanged from year-end at just under 3.7%, and our long-term allowance for loan loss stood at 11.6%, a 40-basis point increase from last quarter.

Combining these 2 business lines into our real estate and financing segment, third quarter segment revenues increased 3% and segment adjusted EBITDA decreased 4.7%. Real estate sales and financing segment adjusted EBITDA margin decreased 210 basis points to 26.1%.

Our resort and club management business line experienced an increase in third quarter revenue of 12.1%. The increase was a result of net owner growth, price increases, incremental management fees from recently opened properties. Resort and club margin increased 4.2% as higher costs related to our growing member base, newly opened properties and ongoing investments in customer experiences offset some of the stronger top line growth. Resort and club margin percentage declined 510 basis points to 67.6%, reflecting those same trends.

In our rental and ancillary business line, third quarter revenues increased $4 million as rental revenues increased 11% for the reasons we discussed earlier. Ancillary revenues were flat, and rental and ancillary expenses were also flat in the quarter. Rental and ancillary margin increased 36% in the quarter, and the margin percentage expanded 650 basis points.

Combining these 2 business lines into our resort operations and club management segment, third quarter segment revenues increased 11% and segment adjusted EBITDA increased 19%. Resort operations and club segment adjusted EBITDA margin percentage increased 370 basis points to 55.6%.

Bridging the gap between segment adjusted EBITDA and adjusted EBITDA. License fees were flat in the quarter, and general and administrative costs increased $6 million. It's worth pointing out that year-over-year increases in G&A related to additional public company expenses are starting to moderate as we comp against the pre-spin ramp-up in these areas in the back half of 2016. Finally, the Elara joint venture contributed $3 million to adjusted EBITDA in the quarter, bringing total third quarter adjusted EBITDA to $94 million, a $1 million increase from third quarter 2016.

With respect to inventory management, we remain capital efficient with 75% of our contract sales in the third quarter coming from either fee-for-service or just-in-time inventory. And our fee-for-service sales mix was 52% for the quarter. Year-to-date, we are within our 2017 guidance range of 52% to 57% and still expect to finish the year in that range. At the end of the quarter, our pipeline of inventory represented 4.8 years of sales at our current pace, including 2.5 years of owned inventory and 2.3 years of fee-for-service inventory. Approximately 88% of our pipeline is capital-efficient fee-for-service or just-in-time inventory. And as Mark discussed in greater detail, we have a robust deal pipeline that should provide sufficient inventory to support our current and future sales strategy.

Our capital structure remains flexible and capable of supporting new development projects and other growth opportunities, and we ended the quarter with $484 million of corporate debt and $612 million of nonrecourse debt. Our corporate leverage is approximately 1.2x on a trailing 12-month basis or 0.7x using net debt. From a capacity standpoint, our $200 million bank revolver is fully available, and we have over $320 million of capacity on our timeshare facility. We also have approximately $284 million in cash comprised of $226 million in unrestricted cash and $58 million in restricted cash.

In the quarter, we generated $106 million of free cash flow compared to $45 million in the third quarter last year. Year-to-date, we've generated $262 million of free cash flow compared to $119 million for the first 9 months of 2016. As we've discussed throughout the year, some of the year-to-date strength in free cash flow is spin-related payment timing and timing of inventory spend. We also received a $32 million benefit in the quarter when the IRS granted an extension on income tax payment to businesses in hurricane-affected areas like Orlando.

Given these items, we believe free cash flow for the year is likely to come in above the high end of our previous guidance range of $180 million to $200 million, and our full year free cash flow guidance is now $280 million to $300 million. Again, we would like to point out that most of the payment timing and inventory spending flows should reverse themselves next year, and as a result, we believe our average annual cash flow over this year and next combined should be in the range of $180 million to $200 million.

I'll wrap up by reviewing our 2017 guidance. We still expect full year contract sales growth of 6.5% to 8.5%, delivering net income of $180 million to $198 million and adjusted EBITDA of $380 million to $410 million. Despite the direct and indirect impacts of storms in Florida and Texas, coupled with the uncertainties related to the incident in Las Vegas, we are maintaining our 2017 guidance at the elevated level discussed last quarter. Looking forward to 2018, we expect to release full guidance details on our next earnings call.

This completes the prepared remarks. We'll now turn the call back over to the operator, and we look forward to your questions. Operator?

(Operator Instructions) And we will go to Stephen Grambling, Goldman Sachs.

So on the 2 properties, the just-in-time properties, Ocean Tower and New York City, can you just provide a little bit more color on the timing of these projects and how the economics could maybe compare to existing projects that are being sold through now?

Yes. So on the first one, Ocean Tower, again, that's the property that we received in the spin. We're looking to start sales in early '18. Construction and conversion started just recently, and we're anticipating that we're going to be able to open the first phase in the fourth quarter of '18. I think if you look at it from a comparative standpoint, the difference between this project and what we currently have in Waikoloa, this project is going to be a higher-priced product. It's oceanfront inventory. But I think from a COP standpoint, it's pretty close to what we're developing today. So Ocean Tower really is more of a sequel-type product for us in that market. New York, 48th Street, the timing on that is -- we're -- it started construction, but I don't believe we're going to actually be able to start sales until late '18, early '19. And again, I think the economics are very similar to our sequel properties -- our previous properties in that market.

And Stephen, I'd say both of these projects were included in our original guidance that we went out in late '16. So we had already anticipated these. These are not incremental development opportunities that Mark was touching on earlier. So they're not economically sort of stacking on top of the existing guidance.

And so maybe on that note, you gave some color on the free cash flow between this year and next year. And I realize it's still early, but are there any other kind of onetime things or factors that we should be considering as we look into 2018 that have come up relative to your initial expectations when you look at that 3-year outlook versus where you've come over the course of the year?

No. I think the bulk of what we're seeing is we probably put a little less money to work on the development side than we would have liked to. We've got a nice pipeline of really good opportunities in a bunch of different markets that we think can be incremental. There's some new distribution opportunities and some new product opportunities that we're tracking. And we may get some of that spending done before the end of the year, but it's likely that it may push into the beginning of next. The tax phenomenon, there's about a $57 million tax deferral that we get to push to the beginning of next year. It will reverse itself completely. We did benefit from 1 less license fee payment in 2017 as a result of a cash [slip] that happened right before the spin. And we -- as I said, we pushed the inventory spend on Ocean Tower, which I touched on, on an earlier call, related to our desire to make sure that we really got the model room accurately complete. But we're still on pace to complete that project by the end of next year, which is what we intended to do to begin with. So I think we're realizing a little better cash flow than we expected. So the guidance for the 2 years on average is still higher than what we initially came out with by about $10 million to $20 million. But we do expect a number of these things to reverse, and we do expect the number of the development projects to start to roll through either late this year or early next.

And one very quick follow-up, if I may, before I jump back in the queue. Just on that comment that there's been a little bit less development, is there any reason for that -- either based on what you're seeing in the market or even as we look at corporate tax reform, could that have any impact on your capital allocation or decisions?

Yes. Stephen, this is Mark. No, it's really -- it's just about timing. We're real -- we've got a robust deal pipeline right now. The activity around getting these deals done is at an all-time high. And so I realize, with the audience that we have today, you're trying to understand what the timing and the benefits are for this. But at the end of the day, it's just a timing issue. We feel really good. I think we're going to be putting some of this capital to work potentially at the end of this year, but more likely early into '18.

And we'll go next to Bradford Dalinka, SunTrust.

So the first one, just a quick one, can you quantify the impact of the storm in 3Q? I know you touched on it quite a bit, but is there any way you could give us kind of tours you lost in Orlando or anything like that?

Yes. Brad, I'll have Jim give you an approximate on that. Again, it's a difficult number. But again, it's very unfortunate these types of events become -- are becoming more frequent. But that being said, our financial performance wasn't significantly impacted. It sounds like we're a bit more fortunate than the others as we had less exposure in impacted areas. Our closures were really temporary so there's no infrastructure or ongoing impact. The fact that -- the fact of the matter is, though, the hurricane did affect 2 of our larger markets, Orlando and Myrtle Beach, and we're coming off of 14% year-over-year comps. I think the fact that we grew 6.5% in the quarter really demonstrates not only the resiliency of the business but also how our leadership and team have put the customer first and we still met our objectives. So again, I want to thank our teams for everything they do for us every day. And...

And Brad, the -- I'd say approximately 1% to 2% of volume is probably what we saw. So 6.5% for the quarter would have likely been closer to 8% to 8.5%, probably about $5 million to $10 million of volume at margins, depending on what the sales mix would be, somewhere between kind of 28% to 35%, maybe a little north of there. But what we're saying though, at the end of the day, is we really sold through it. The quarter was still a very strong quarter. We saw a great uplift on the rental side, and as a result, it didn't impact our expectations from an earnings standpoint for the end of the year. We're still targeted exactly where we were previously, and we saw it as an immaterial piece of the puzzle during the quarter.

Understood. Appreciate it. And one more, if I can. I know you're not giving 2018 guidance today. You made that clear. But any breadcrumbs you can put out there for us would be helpful, just kind of the tour flow versus VPG-driven growth continuum, any major comps, anything like that. That's it for me.

Yes. I don't see -- if you go back to the guidance that we rolled out at the Investor Day in late 2016, I think we've paced against that well through 2017 and, in fact, upped the guidance last quarter, and we're targeted exactly where we thought we would be for the end of the year. I think the guidance that we laid out in -- for 2018 and '19 during that time frame, from a contract sales standpoint, revenue standpoint, adjusted EBITDA sort of down through the entire model, I think are coming true. About the only thing we're talking about for 2018 and '17 is we see a little bit more free cash flow coming out of the business than we originally expected. But I'd say if there are breadcrumbs, I think we're doing what we set out to do when we finished the year in '16.

And we'll go to Brandt Montour, JPMorgan.

So I just wanted to touch on Las Vegas. I know you don't give quarterly guidance, but what form -- or if you've seen any impact at all of the tragic event there in 4Q tours.

Obviously, we've had a bit of softening with the event out there, the tragic event. But I have to tell you, I think it's bounced back really well. And anything that -- quite frankly, that we lost and maybe softness in tour flow, right after the event, we've caught up in conversion. So again, very resilient. And it's interesting, timeshare owners, they have a vested interest in their property, and they tend to come back quicker than you see with lodging just because of that vested interest they have. So our owners are backfilling the property, and we've got a good tour flow happening right now. So we don't see any really long-term impact on it.

Great. That's helpful. And then just on the timeshare cost side, the 2 parts. So cost of sales, just wondering how much of this favorable change year-over-year was in line with your internal expectations. How much of the difference was mix versus maybe more recapture activity? And then on the sales and marketing expense, you mentioned the R&D cost of international expansion there. I'm just wondering how much of the lift in the quarter was sort of related to forward investment.

Sorry, I missed the piece right before the sales and marketing, the last piece of what you said.

Yes, sure. Just the cost of sales came in favorable again this quarter, like it did in the first quarter. I'm just wondering how much of that help was from mix versus more recapture activity.

Yes. I'd say it was more mix related, but the other impact was related to lower fee-for-service upgrade. As a result of lower fee-for-service sales, they flowed through some impairments into the cost of products. So they add back on the revenue side, and they add inventory back to our balance sheet. And the residual is run through as an impairment. So it's an accounting nuance that when you have lower fee-for-service sales -- or upgrades, rather, you will have a changing impact on the cost of products. So there is -- a piece of was that, and a piece of it was mix-related. On the sales and marketing cost side, we actually have been continuing to really invest in the business. And part of the reason the development spending has been maybe tempered is because we're really focused on a few opportunities internationally, and these have some different product structures to them. And we're working to operate in some environments that we haven't historically, and we wanted to make sure we get it right and have the right model going forward. And that specifically is we're looking at some at Japan. We're looking at Mexico and the Caribbean. So you are seeing some R&D costs that are not capitalizable as we get those markets figured out and structured for the future.

And we'll next go to Brian Dobson, Nomura Instinet.

So you've spoken a little bit about Japan in your prepared remarks. I was wondering if you could give, perhaps, a little bit more detail there. And then over the next few years, how do you see your portfolio evolving in terms of your international presence and your customer sourcing when it comes to domestic customers versus international customers?

Yes. As far as Japan goes, I think I've commented a few times on it. We've got a great base of owners in Japan. We've been marketing to Japanese since, let's see, 2000, and so about 18 years now. And we've been looking at Japan as an opportunistic source of inventory. Our members keep telling us they'd like some options closer to home. We've got 2 really good opportunities that are very, very close to getting completed. In fact, as I mentioned in my prepared remarks, I'll be in Japan in a couple of weeks. So we think Japan has tremendous runway for us and potential growth as we bring product into that particular market. As it relates to the domestic market, one thing about our pipeline is we've got a really great cross-section of opportunities both in the U.S. and international. And I think Jim spoke to the international ones, the Caribbean, Mexico, and I spoke to Japan. But we've got some really good mix of new and core market opportunities. And so we expect that some of these are going to be available for us and beneficial to our business in '18 and '19, and then we have some more longer-term ones. As it relates to Japan, one is more longer term. I mean, it will be built out of the ground. The other one is a conversion. So we think we're going to be able to benefit shorter term with 1 project in Japan and longer term with 1 project in Japan.

(Operator Instructions) And we'll go to Chris Agnew, MKM Partners.

You talked about fee-for-service as a key source of differentiation. I was just wondering, like given your pipeline mix and the deals like Sunrise and maybe potential few more deals like that at the end of this year, is it fair to think that fee-for-service mix in 2018 drops closer to, if not below, 50%? And what are your thoughts long term? Is 40% to 50% the right mix? Or is it more towards 50% to 60%?

Yes. No, year-to-date, we're running 54%. I think that compares to 60% last year. Our goal is and objective is to remain highly capital efficient. We're -- the mix is going to ebb and flow depending on market opportunities. And I think we've said 50-50 is our long-term goal. There's no specific target date. That being said, I don't think, near term, we're going to be able to get to 50% next year. We've got 2 really big projects that are both fee, one in Hawaii and one in Vegas. So I think near term, we'll still be over 50% fee-for-service.

Longer term, I think we're focused in the same place. I think as we get out to '20, '21, plus or minus, we start to see some of those big projects roll off. So we do have an intention to make sure that we continue to fill that pipeline behind it.

Got it. And can you expand and share any preliminary thoughts on your comments around expanding the product offering and new marketing initiatives? And then just to clarify, with the new product offering, are you talking about new locations or just a new sort of form of selling timeshare?

Yes. No, that's a great question. Customer acquisition, as you know, is the most important driver in our direct-to-consumer model, which makes evolving how we engage with our customers really a top priority. We started off with a great brand and this great relationship with Hilton, which provides this rich pool of highly qualified customers. Then, it's really about how do we introduce HGV to this loyal base of customers, and we've had great success at certain channels. But there's great opportunities in other channels, and really the biggest opportunity sits in the online digital channels. And we realize that this wave of digitalization is washing over everything today. And so what we're doing is we're building new competencies into our business to ensure we capture these opportunities. And one of the things -- we think we've been out in front of the innovation curve in our sector. We're the first to put in an inbound call transfer program, the first to develop this fee-for-service model. So it's important for us to keep evolving our business. And as it relates to product form, those are things that we're going to be looking at, too. And I think at the end of the day, we're in the business of providing great future vacations, and that's our product. And so while our core product continues to be very strong and the demand is -- continues to be strong, we've got to keep looking out to the future because we realize that not everything that got us here is going to get us where we need to be in the future. So we continue to think about how we're going to innovate the business.

Ladies and gentlemen, at this time, we will conclude the question-and-answer session. I would now like to turn the call back to Mr. Mark Wang for any additional comments and closing remarks.

Well, thank you again for joining us this morning. We continue to be very excited about what's happening at HGV. And in spite of the recent events, we have strong momentum going into the end of the year. And we look forward to speaking with you after Q4. Thank you.

And this concludes today's call. Thank you for your participation. You may now disconnect.