Good morning, and welcome to the Hilton Grand Vacations Fourth Quarter 2022 earnings conference call. A telephone replay will be available for seven days following the call. The dial-in number is 844-512-2921 and enter pin number 13735178. 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 would like to ask a question, please press star one on your touch-tone 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 question 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 IR and G&A. Please go ahead, sir.
Thank you, Operator. Welcome to the Hilton Grand Vacations Fourth Quarter 2022 earnings call. 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 10-K or other applicable SEC filings. 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 T1 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 in 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. After Mark's comments, our 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?
Morning, everyone, and welcome to our fourth quarter earnings call. This past quarter was a great finish to a standout year. Contract sales of $634 million remained nicely ahead of 2019, and EBITDA of $253 million was nearly 25% higher than our pro forma 2019, with margins nearly 300 basis points higher. We had a solid contribution from new buyer channels, which has been a key area of focus and investment. With continued strength in leisure demand and good execution from our teams, we've been successful at activating our package sales pipeline to drive tour growth, which generates NOG and importantly embeds future value into the business. I'm extremely proud of our entire team and what they accomplished in the past year.
We laid the groundwork for a combined organization through the launch of major programs and integration initiatives, due to their efforts, we hit several milestones faster than we initially modeled while outperforming our initial underwriting expectations. We've also continued to benefit from consumers' pivot toward experiences in leisure travel in particular. While we're monitoring the macro environment, our leisure focus and strong value proposition leaves us well-positioned for these ongoing shifts in consumer spending preferences. Earlier this quarter, we wrapped up another successful LPGA Tournament of Champions, which was the second held under the HGV brand. We had great attendance during the week, our media exposure was up dramatically across all channels this year, with social media impressions tripling to over 750 million and active engagements up six-fold to 1.2 million on top of expanded international television and media coverage.
The tournament also serves as our marquee HGV Ultimate Access event of the year. We kicked off this calendar with exclusive programming set up for our members throughout the week. As a result, we generated 40% more tours from the tournament this year, with new buyer tours more than doubling versus last year. During the tournament, I spent a lot of time with our owners and guests. I can say that the energy around our brand and the engagement of our member base is really high, which leaves us optimistic about 2023 and beyond. We're confident in our business as evidenced by our guidance. We're committed to enhancing shareholder value through continued capital returns.
Before I get into the details of the quarter, I'll start by taking a quick look at what we accomplished over the past 12 months. It was around this time last year that I said 2022 would be a transformational year for HGV, and that certainly proved to be the case. We launched HGV Max, our new membership offering that links our resort collections and was also the first major club redesign in our history. We launched HGV Ultimate Access, our exclusive experiential platform, and hosted over 100,000 members and guests at over 3,000 events, including private concerts, culinary experiences, shows, excursions, and sporting events. We rebranded our sales center to provide a dramatically improved experience to our marketing guests and trained our sales staff to uphold HGV's rigorous standards of integrity.
We also rebranded Diamond's largest properties, adding nearly 5,700 keys in new markets like Sedona, Lake Tahoe, Palm Desert, and Virginia Beach. We also merged our financial and HR systems and integrated the former DRI teams to unify the organization under our HGV culture and values. From a financial perspective, we produced record cash flow and EBITDA exceeding our initial underwriting expectations. We built the largest new buyer pipeline in our history, which will provide a source of tour flow in coming years and embed additional value into the business for years to come. We achieved an upsized cost synergy goal several quarters ahead of schedule. Equally, as important for our shareholders, however, is that the Diamond acquisition has created real economic value.
Dan will get into the details here in a minute, our cash flow, returns on capital, and member base are all well ahead of pro forma combined entity pre-acquisition metrics. These improvements were the results of longer-term value creation initiatives like cost efficiencies, process improvement, and enhancing our product offerings rather than just taking outside pricing. After a year of hard work, we've laid a strong foundation to continue growing the long-term value of the business. Looking forward, 2023 will be a year for further execution of our integration plans. We'll build upon the successful launch of both Ultimate Access and HGV Max with new programming and features. We'll rebrand nearly a dozen additional Diamond properties to add to the Hilton Vacation Club collection. As we've done throughout our history, we'll maintain our focus on driving new buyer sales and net owner growth.
Now let me take you through a more detailed look at our performance in the fourth quarter. Contract sales strength was driven by the continued improvement in tour flow, which more than offset the expected normalization of VPG. Tours were nearly 85% of 2019, demonstrating continued progress in our pace of recovery. New buyer tours drove the improvement, showing the positive results from our investment efforts. Additionally, transaction volumes were exceptional this quarter, driven by the tour flow improvements and a close rate that remains near all-time highs. That close rate drove VPGs of $4,350, which remains well ahead of 2019 and decelerated only modestly from the recovery pace we saw in Q3. Turning to the demand indicators, our system occupancy was 79%, seasonally lower than Q3 and in line with fourth quarter of last year.
We saw some softening of occupancy at the end of the quarter that coincided with the holiday airline disruption and unusual storm activity in some markets, but believe that those were isolated issues. Looking forward, on the book arrivals are nicely ahead of 2019 through the entire first half of 2023, with particular strength in our rental arrivals. I'm encouraged that our marketing package pipeline ticked up slightly from Q3, but more importantly, our number of packages with set travel dates also grew, which will drive additional new buyer tour flow in the months ahead and support net owner growth. We ended the year with 519,000 members and NOG at 3.9% on a combined basis, having grown our member base at both HGV and Diamond throughout the year.
This is the highest NOG we've generated since we reopened our properties in mid-2020, and I'm really pleased with the results of the investments we've made to drive new buyer channel. This combination of new buyer growth and increased member activity drove club and resort revenue to a record $155 million. Our rental business produced solid revenue results owing to the strong leisure travel environment. We feel great about how we closed out a transformational year for HGV. The teams executed against an ambitious and complex plan that involved a lot of heavy lifting, and I'm proud to say we accomplished even more than we anticipated at the close of the acquisition. We've built a strong foundation to build upon in 2023 and beyond.
With our new membership, new programming, new destinations, and rebranded resorts, we think that our value proposition is the strongest that it's ever been. Which is why we're seeing such a great response from our owners and new buyers. We're continuously focused on creating value for our shareholders through operational improvements of the business as well as a commitment to capital returns. With that, I'll turn it over to Dan to talk you through the numbers. Dan?
Thank you, Mark. Good morning, everyone. Before we start, note that our reported results for this quarter included $3 million of sales deferrals, reducing the reported GAAP revenue associated with presales of the next phase of our Maui project. We also recorded an associated $2 million of direct expense deferrals, resulting in a net benefit of $1 million to our reported EBITDA for the quarter. In my prepared remarks, I'll only refer to metrics excluding the impact of deferrals, which more accurately reflects the cash flow dynamics of our financial performance during the period. We had a very strong 2022 in the midst of a material amount of integration work and major initiative launches, so we're very proud of everything that the team's accomplished.
Contract sales for the year were a record $2.4 billion. EBITDA of $1 billion was nearly 40% ahead of pro forma 2019, with a margin improvement of nearly 600 basis points to 28%. As Mark mentioned, we're extremely proud of the progress we've made on our integration, and we've created real shareholder value with the acquisition. Our 2022 Adjusted Free Cash Flow of $563 million was significantly ahead of the pro forma 2019 cash flow. We've maintained our exceptional return on invested capital of over 20% on a much higher capital base, creating additional value annually. Despite several years of the pandemic, we still drove net owner growth ending 2022 with a member base roughly 25,000 members higher than in pro forma 2019, which will drive additional future value creation.
Now let's review the results for the quarter. Total revenue in the fourth quarter was just under $1 billion. We saw year-over-year revenue growth in all of our segments, led by strength in real estate and financing segments. Q4 reported Adjusted EBITDA was $253 million, with margins of 25%. Turning to our segments, within real estate, total contract sales were $634 million. Sales momentum in our owner channel has remained strong and ahead of 2019 levels. We also saw a nice jump in the recovery pace of our new buyer channel, with sales quickly approaching 2019. We're pleased with the initial results of the recent investments in our new buyer channel.
From the first half of the year prior to our investment to the second half of the year, we saw strong improvements in new buyer tour flow and contract sales pace against 2019 that well exceeded the growth from our owner channel and helped to drive solid NOG growth of 3.9%. We've been monetizing our package pipeline, Our activated packages are at the highest level since 2019. Our investment should continue paying dividends. As Mark mentioned, we're seeing very strong arrival growth in our marketing channel as we look out over the coming months. VPG was $4,350 for the quarter, which grew against prior year and 2019. For the year, VPG finished 31% ahead of 2019.
Looking at 2023, as we've said for a number of quarters, we expect to see continued normalization of VPG performance against 2019 as we move through the year. For your modeling purposes, it's important to note that in the first quarter of 23, we're lapping the highest VPG in the history of the company, and thus we anticipate that while VPG will be ahead of 2019, it will decline against that record from Q1 of last year. Cost of product was 19% of net VOI sales for the quarter. Real estate S&M expense of $243 million for the quarter was 38% of gross contract sales, similar to third quarter levels and reflecting our investments in the new buyer channel. Real estate profit was $172 million for the quarter, with margins of 36%.
In our financing business, fourth quarter revenue was $71 million, and segment profit was $34 million. I'd note that financing expenses this quarter included a one-time non-cash true-up adjustment to the premium amortization associated with the acquired Diamond portfolio of approximately $9 million. Combined gross receivables for the quarter were $2.5 billion, or $1.8 billion net of allowance, and our interest income was $65 million. Our originated portfolio weighted average interest rate was 14.3%, while our acquired portfolio had a weighted average interest rate of 15.6% and includes a $6 million contra revenue for the amortization of non-cash premium associated with the portfolio of receivables that we acquired from Diamond during the acquisition. Our allowance for bad debt was $742 million on that $2.5 billion receivable balance.
Of these amounts, the acquired Diamond portfolio, which used Diamond's underwriting standards, was $338 million on a portfolio balance of $709 million. Our annualized default rate for our consolidated portfolios, including the Diamond acquired and underwritten portfolios, was 7.9%. This is over 100 basis points lower than last year, with both the acquired and originated portfolios continuing to demonstrate substantial outperformance from our initial underwriting assumptions. Our provision for bad debt was $39 million or 9% of owned contract sales, which remains below our steady-state expectations of a normalized provision driven by higher down payments and continued levels of elevated prepayments. In our resort and club business, our consolidated member count was 519,000.
Our consolidated NOG was 3.9% at the end of the quarter, which I'd note now includes both HGV and Diamond members. Revenue was $155 million for the quarter, and segment profit was $112 million, with margins of 72%. Rental and ancillary revenues were $160 million in the quarter, with a segment profit of $7 million. Fourth quarter margins reflect additional expenses associated with the seasonal effect of member points conversion activity, along with the continued elevated developer maintenance fees associated with the unsold inventory from our recently opened projects.
For remodeling, it is important to note that due to the changes made to unify the reporting of HGV and Diamond, there is a timing shift associated with Diamond's member benefit expense that will cause rental and ancillary expenses in the first half to be up materially versus the first half of 2022. For Q1 specifically, we expect that this will result in a year-over-year impact of roughly $14 million, which will impact our reported rental and ancillary profit as well as our overall Adjusted EBITDA. I'd emphasize that this adjustment is only timing and reflects a change in the seasonality of expenses in the rental and ancillary segment. This year-over-year impact will reverse through the year to become a fully offsetting benefit in the back half and will not itself have any impact to rental and ancillary profit or Adjusted EBITDA for the year.
Bridging the gap between segment Adjusted EBITDA and total Adjusted EBITDA, corporate G&A was $47 million, license fees were $34 million, JV income was $3 million. Our Adjusted Free Cash Flow in the quarter was a use of $92 million, which included inventory spending of $73 million and excludes acquisition-related costs of $40 million. As we mentioned on our prior call, in Q4 we had additional contractual inventory spending for our Sesoko project, along with the payment of our cash taxes, which drove the negative Adjusted Free Cash Flow in the quarter. For the year, I'm really happy to say we generated Adjusted Free Cash Flow of $563 million, which is a record for the company.
We converted 54% of our economic EBITDA into Adjusted Free Cash Flow, which was nicely inside of our 50%-60% target range. We expect to maintain this conversion range in the years ahead. It is important to note, however, that in 2023 specifically, we do have an additional just-in-time inventory payment for The Central in New York of roughly $140 million, which includes a payment that was deferred during the pandemic. Considering this additional payment, total inventory spend for 2023 is expected to be approximately $400 million versus $175 million in 2022. Despite that, however, we still anticipate achieving the low end of our 50%-60% target EBITDA conversion range.
During the quarter, the company repurchased 2.5 million shares of common stock for $100 million at an average price of $39.88. For the year, we repurchased 7 million shares of stock for $272 million. On top of spending on our integration, funding our growth, and paying down our debt, we returned nearly half of our Adjusted Free Cash Flow to our investors through share repurchases. We're continuing that trend thus far in 2023. Through February 24th, the company has repurchased an additional 1.8 million shares for $80 million. We currently have $148 million remaining of the $500 million repurchase plan approved by the board in May of 2022, and we remain committed to enhancing the total return for our shareholders by returning capital.
Turning to our outlook, we are setting our 2023 Adjusted EBITDA guidance to a range of $1.09 billion-$1.12 billion. Excluding the special reserve release that benefited our third quarter, our guidance implies EBITDA growth of 4%-7%, which is a great result on top of the strong EBITDA growth we produced this year. For your modeling, I would note that from a seasonal perspective, Q1 EBITDA is typically lower than the preceding fourth quarter and is also typically the lowest EBITDA quarter for the year. Q1 of 2023 will also have the timing impact of the $14 million expense impact in our rental and ancillary segment that I mentioned earlier.
As of December 31st, our liquidity position consisted of $223 million of unrestricted cash and $959 million of availability under our revolving credit facility. Our debt balance at quarter end was comprised of corporate debt of $2.7 billion and a non-recourse debt balance of $1.1 billion. At quarter end, we had $652 million of remaining capacity in our warehouse facility, of which we had $279 million of notes available to securitize and another $338 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 Q4, the company's total net leverage was 2.4 times.
Finally, before we wrap up our prepared remarks, I wanted to address an item that you will be seeing on our 10-K once it is filed later today. We have identified a material weakness related to Diamond. These items did not impact our business operations or reporting processes in any way. They also did not impact our current financial results or our historical results, nor will they result in any revision or restatement of historical financials. We already have a remediation plan in place and will provide additional updates through the year, but we fully expect to have these items resolved expeditiously. We will now turn the call over to the operator, and we look forward to your questions. Operator?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Ben Chaiken with Credit Suisse. Please proceed.
Hey, good morning. If I'm not mistaken, I think there's kinda two initiatives underway with the rebrand. I guess one is updating and rebranding the sales centers, which I think you noted on the last call was completed towards the end of 2022. Second is updating and rebranding the Diamond properties themselves. On this first part, the sales centers, is there any type of feedback, whether anecdotal or otherwise, to help us understand the benefit so far? On part two, the property rebrand, have you started to market those properties to Hilton Honors members, or is this further down the line? I have one follow-up. Thanks.
Yeah, sure, Ben. On the rebranding front, we basically have rebranded all the legacy Diamond sales centers, implemented our HGV selling technology, our sales approach, our new training. Of course, we're now introduced HGV Max into those sales centers. A lot of heavy lifting, great work by the teams to get all that done. As far as marketing into those sales centers, utilizing the Hilton database or Hilton customer base, we've sold 72,000 packages to these locations, and we're starting to see those tourists out now arrive to the property. As you recall, these packages, these vacation packages we sell have a 12-18 month window for travel.
We started selling these, probably the beginning of the second quarter of last year. We're starting to see those guests travel. We're starting to see some revenue synergies there. I think some of the benefits that we've seen in our outside VPGs last year have come through the work we've done in repositioning these sales centers and lifting up this new membership program.
Got it. That's very helpful. Then switching gears a little bit. Fee-for-service mix moved higher in the quarter sequentially. I think you called out the pipeline is 85% owned, if I'm not mistaken, in the press release. How do we think about the mix in 2023 and 2024 for that matter?
Hey, Ben. Excuse me. Dan here. Just the easy way to think about it, to your point, most of the inventory that's coming online is owned. Most of the pipeline is owned. I would look for the fee-for-service to decrease in 2023 to be more in that range of 20%-25%. You know, it ebbs and flows because obviously when a consumer comes in the door, we take the time to really get to know them. You know, some people are just interested in a deeded product that happens to be fee-for-service. There is a bit of that play. With the dynamic of the pipeline being primarily owned inventory, it should decrease to that 20%-25% range.
Got it. Thank you very much.
Our next question is from Patrick Scholes with Truist Securities. Please proceed.
Hi, great. Thank you. Good morning, everyone. Couple questions here. You had used the adverb on some of your forward trends, the adverb being nicely ahead or nicely the adverb. Can you give a little more granularity, perhaps some percentages on some of those metrics that you brought up?
Hey, Patrick. It's Dan. Any particular metrics, you know.
I think you were referring to, I think it was owner visitation and tour packages.
Sure.
I think those were the ones you were referring to.
Patrick, this is Mark. As it relates to tour flow, 2023 is gonna be really the year for tour flow growth, and we've had some really good tour flow growth last year. We continue to see strong demand from a leisure travel standpoint. Our owners and rental guests on the books are above what we saw in 2019. The real growth is gonna come from our new buyer, from a new buyer perspective. You know, total packages and activated packages are at record high. Just to give you kind of a sense of how that's been trending, if you look at our new buyer tour flow, compared to 2019, in Q1 we're at 60%, Q2 68%, Q3 74%, Q4 78%.
Our expectations is that that trend is gonna continue building, because our activations have really picked up, and our package pipeline is well over a half a million packages that we have in the pipeline. Importantly to note is our new buyer, our new buyer sales are actually back up to 94% of where they were in 2019, because of the, you know, better closing percentages and better VPGs we're seeing out there. All in all, you know, our expectation is strong tour flow growth, this coming year. I should note, though, that if you remember, coming out of the pandemic, our owners came back first with elevated tour flow transactions and close rates.
You know, the pent-up demand for travel from our most committed owners really led this high VPG, especially in Q1 2022, which I think Dan noted in his prepared remarks, was our a record VPG for us. Important to note that, you know, we're coming up against a tough VPG comp in Q1. As we've indicated for several quarters, we think the mix shift as we shift into more new buyers will moderate our VPG from these 2022 highs. More on a glide path to, you know, what we've been saying for a number of quarters now to about 10%-15% above what we saw in 2019.
Patrick, just to add to that, just to give you another nicely adverb. You know, as Mark was talking about the, you know, the package sales were well over half a million. Year-over-year, that's increased 18%. The investment we've made to activating those packages, I think is really underscored by the fact that the percent activated has grown 80% year-over-year. I think that just speaks to that. It also talks to that moderation in VPG, right? As new buyers come on, as Mark just went over, obviously VPGs will moderate, and that'll ultimately have an impact on the margins, the EBITDA margins that we see for the overall business. This is the same story we've been talking about for a number of quarters, so it's no surprise.
That moderation should ultimately fall out to be, you know, ahead of where the pro forma was in 2019. Obviously, we've capitalized on a lot of cost synergies. Will that moderate, normalize in 2023? It'll probably carry into 2024, but that's 100-200 basis points, something of that nature, where it ultimately falls out. To avoid any confusion, that's a percentage moderation from an absolute dollar earning. Keep in mind, new buyers, we sell new buyers at a profit, so we're not talking about lack of earnings growth, it's just a margin percentage moderation.
I do have some follow-up questions regarding all that. You know, certainly it sounds like new buyers in the packages and pipeline, a very high percentage. Is the target actually still 40% for new buyers actually buying by the end of 2023? It sounds like it might be ahead of that.
Yeah, look, I think that's our targeted goal. You have to remember, new buyer sales are growing and tour flows are growing, accelerating faster than we're seeing owner tour flow grow. You have to remember, the VPG and close rate is considerably less than owners. Our goal is to get back up to 40%. I'm not sure if we'll get to that level by the end of the year, but that's our ultimate goal. Look, at the end of the day, NOG is core to our strategy. We know that the lifetime value of the customer is so important. We know since 2016, that every new buyer that we generate, we generate an additional 1.7 additional transactions.
Not only is it embedding recurring revenue from management, and club fees and any mortgages that we may initiate, but it's also embedding future high margin sales. A very core to our strategy. You know, early on when the pandemic began, we really focused on our owners, because that made the most sense, from a standpoint of generating as much cash and margin as possible. We are now back on course and this year will be the year of tour flow growth, and in particular around new buyers.
Okay. Thank you. I do have more questions, but I will go to the end of the queue and let some other people ask questions. Thank you.
As a reminder to star one on your telephone keypad if you would like to ask a question. Our next question is from David Katz with Jefferies. Please proceed.
Hi. Good morning, everyone. Thanks for taking my questions. Given I have a couple going on this morning, I hope I'm not asking something twice. My most important issue is just figuring out how you think about the contingencies and sensitivities and leverages, you know, as we get through this year and potentially get into a recession that still has yet to sort of be defined as to what that would look like. You know, help us walk through, you know, a range of scenarios if you can.
Well, look, David, I think, you know, obviously we're aware and mindful of, you know, potential impacts of the macro environment. Clearly there's, you know, there's a lot of crosscurrents on the consumers out there. You know, what we're seeing right now is consumers continue to prioritize travel. We're seeing more owners and rental guests on our books than we saw in 2019, and so that's a great indicator. You know, we just, you know, we just answered a question earlier around new buyer tour flow. New buyer tour flow is really outpacing all of our other channels, and we continue to activate those tours at a very healthy pace. All in all of this activity is increasing traffic in our sales centers and it's gonna drive transactions.
You know, I do think we have some distinct advantages in our model. Our direct sales approach, which allows us to engage with our owners and prospects in pretty much any environment. You saw how fast our industry and particularly HGVs come back from the pandemic. You know, we've got this high quality pool of customers from Hilton through their Hilton Honors member base.
Who have a high affinity to travel. Again, packages remain strong. We drove increases in tour flow. I just gave out some numbers. If you go back and you listen to the transcript, I gave out some detailed numbers on the sequential growth of our new buyer tour flow. Our inventory position is really good. While, you know, look, we're certainly not immune from macro pressures, we do believe we'll hold up well, even if we face some incremental headwinds on VPG and margin.
Understood. Can I just ask for a quick comment with respect to the balance sheet and how you think about, not that leverage, you know, is a challenge for you in any way, but how do you think about kind of managing your leverage levels as you sort of progress through this year as well?
Hey, David, it's Dan. Thanks. Look, great question. We are right now 2.4 times levered. I think when we worked our way through COVID, we've proven that we tend to be a little bit conservative on the balance sheet in preparation for, you know, macroeconomic events. That being said, I think COVID also proved out that ourselves, as well as the vast majority of timeshare, can operate at significantly higher leverage if necessary. I think ultimately what you would see us do, barring some kind of material called great financial crisis type recession, you'd see us continue down the path that we're on right now, and that's actively returning capital to shareholders, continuing to do that, and maintaining a leverage ratio someplace in the range of two to three times.
We've been able to pull back on inventory spend where necessary, and if something material were to happen, we'd probably look at pulling that lever again as well.
Understood. Thanks very much.
We have a follow-up question from Patrick Scholes with Truist Securities. Please proceed.
Okay, great. Thank you. I definitely do have some more questions here. You know, at the end of the prepared, Mark threw a little curve ball there with talking about material weakness. I'm wondering if you could give us any more color whatsoever that might mean or what it might refer to at all. Thank you.
Hey, Patrick, it's Dan. Thanks. That's a great question. Was a little bit vague. The disclosure in our Form 10-K under item nine today will be a little bit more transparent but will be more transparent. Just to give you an example or maybe some background, as you know, Diamond was taken private in 2016, and to be perfectly honest, there was a lack of investment in infrastructure associated with internal controls. As you would expect, that's very typical of any private organization. One of the items, just to give an example, was a shortfall in user access controls associated with their property management system as well as their tour system, et cetera.
What we had to do was literally go in and clean up every single user that had access, define the roles and responsibilities of every single users. Those controls need to be in place for a specific amount of time in order to avoid a material weakness, if you will. They were not in place for the specified amount of time, and we're working through a remediation plan, but this in no way impacts the financials, no way impacts the processes of selling a contract. There's no restatements. Don't confuse me. I'm not trying to be dismissive. No one wants to have a material weakness, but this is the one that you would take, especially since it has no financial impact.
Okay.
We fully expect to be on track with regards to internal controls at both HGV. Keep in mind, no material weakness on the legacy HGV side. This was strictly Diamond. We believe both entities will be in a solid position for this year's audit that progresses, starts to progress in Q2.
Okay. Would a way of maybe summing that up, would be they didn't follow the required best practices where you folks do have the best practices, you identified it, and you are working on rectifying it. Is that a good summary?
That would be a nice summary, yes.
Okay. Okay, good. Okay. Just a couple other follow-up questions. You had in our conversation earlier, had mentioned close rates. Can you tell us what the close rates were, either year-over-year and/or versus 2019? Thank you.
Yeah. Look, we're What we can tell you is that our close rates have been running approximately 400 basis points ahead of where they were in 2019. That was pretty consistent. It happened pretty quickly right after the reopening. Again, it's interesting because our close rates, if you go back over multiple decades, have been pretty stable. You know, for us, clearly, you know, we benefited from, you know, the pent-up demand. I don't know if you wanna really call it revenge travel or what. You know, clearly, the consumers' balance sheets were in really good shape.
You know, but at the end of the day, you know, our expectations is those close rates would moderate back down, just like our VPG. VPG is really an outcome of close rate and average transaction price. At the end of the day, you know, our expectations is close rates will moderate back down, especially as we shift our mix, new buyer tours. All in all, you know, our expectations, it won't go back to where it was in 2019. It'll still hover above that, as we think our, you know, overall value proposition is improved. You know, we've added new product in new markets, and we continue to really enhance our precision around finding the best customer that fits our product.
Okay. Thank you. One last question, I promise here. The provision, did you say you're trying to take it sub 10%, but I remember in my notes you said targeting 15%-16%? Can you clarify, where you are and where you wanna be with that? Thank you.
Yeah. Hey, Patrick. The provision in 2022 was, you know, we had, as you may recall, a benefit in Q3. All in, it was right around that 10% level. With regards to where is it going, at some point in time, you're gonna have a more normalization in credit trends, right? We haven't seen that to date, and what we're very happy about is if we look at our default rate on the legacy Diamond side and the delinquency rate on the legacy Diamond side pre our acquisition to post our acquisition, where our underwriting and sales practices and standards have kicked in, it is materially down. It's outperforming our underwrite. Our underwrite anticipated that provision on a consolidated basis to be north of 15%.
Not ready to ring the bell that we're, you know, we've changed things permanently, but it's significantly outperforming the underwrite. On the HGV side, we see the delinquency rates and the default rates very consistent with 2019, which we're also pleased with. Ultimately, you're gonna see that provision as a percent of contract sales increase this year. We anticipate it to increase this year. Don't think it will fully get to 16% or 15%, but it will begin to normalize, we believe.
Well, thank you. Actually, I have one last question here, a modeling question. Anything we should think about with sort of quarter-to-quarter volatility and expected recognition of net deferrals, when we're modeling the deferral-- excuse me, Adjusted EBITDA by quarter? Thank you.
Yeah, Patrick, we've actually, you know, I think we may have discussed this before. We've actually shied away from giving specifics because it's all associated with the timing of specific deeded projects that are sold. As I mentioned earlier, you know, we do allow the consumer to choose exactly where they wanna buy, right? I would assume just zero by quarter.
Okay.
As that plays out.
Okay. No, that's great. You know, I recall a number of years ago that definitely created a lot of volatility, so it's great to, great to hear that. I am all set. Thank you.
Thank you.
Thanks, Patrick.
This will conclude our question-and-answer session, but before we end, I will turn the call back over to Mark Wang for any closing remarks. Mr. Wang?
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Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.