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

3

Historical Data

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

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Economics of a Timeshare

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

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Timeshare Accounting Principles

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Revenue Recognition

Record Transaction in one of three ways:

1. Full Sales Recognition

2. Percentage of Completion

3. Lease Accounting

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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

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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

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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.

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New Projects

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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

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New Projects – 2006 / 2007

• Hawaii – The Big IslandKings’ Land

Projected 786 units

• Honolulu, HawaiiGrand Waikikian

Projected 331 units

The Grand WaikikianArtist’s Rendering

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Hilton Grand Vacations

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