Hilton Worldwide Holdings Inc. (HLT), one of the world’s largest hospitality companies, plans to separate its real estate assets into a publicly traded entity. Hilton intends to spinoff its hotel properties into a Real Estate Investment Trust (REIT). HLT, with a market cap of $22 billion, has applied for a tax-free spin-off transaction. HLT’s share price surged 5.2% before closing at $22.45 on Dec.16, 2015.
Post spin-off, Hilton will continue to operate its management and franchise segment, which comprises 4,333 hotels with 677,960 rooms and its timeshare business, which consists of 45 properties and 7,152 units. That business will continue to market and sell timeshares, operate timeshare resorts, a membership club and provide consumer financing. The newly formed REIT is expected to own or lease 147 of Hilton-branded properties around the globe.
Management first hinted at Hilton’s separation during its Q4 2014 earnings call. In subsequent calls, Hilton’s President and CEO, Christopher Nassetta, stated that the company is making progress in exploring possible strategic options for the real estate assets in order to create long-term value for its shareholders. Management expects to give a further update on the spin-off plans during its Q4 2015 earnings call (end of January).
The spin-off is a part of a long-term strategy to simplify structure and create value for shareholders. REIT spin-offs have been popular because REITs are liable to give out at least 90% of the taxable income to shareholders through dividends, which are exempted from income tax. Recently, U.S. lawmakers have been considering a ban on REIT tax-free spin-offs. However, Hilton is protected against such an action because it gained the IRS’ permission before the Dec. 7, 2015 cut-off date.
Several years ago, Marriott spun off its real estate assets into Host Hotels, which was headed by Nassetta before he became CEO of Hilton in 2007. Nassetta is adopting a similar strategy for Hilton. Hilton generates 60% of its revenues from its 147 owned and leased hotels, which are expected be spun off into a REIT.
Further, a separate entity will give shareholders an opportunity to invest in two companies. The spin-off will enable the parent to take advantage of increasing growth opportunities within the timeshare industry. The company intends to pursue an asset-light strategy and has already begun by selling the Waldorf-Astoria Hotel in New York for $1.95 billion in fiscal year 2014.