Hilton Worldwide CEO Christopher Nassetta was chief operating officer of Host Hotels & Resorts in 1998 when Marriott converted its owned hotel unit into a real estate investment trust, and now Hilton Worldwide is poised to execute a similar maneuver — and one that would escape an Internal Revenue Service clampdown on such financial restructurings.
The Wall Street Journal reports that Hilton Worldwide plans to spin off 147 properties that it owns or leases into a real estate investment trust and, because Hilton already sought IRS approval for the spinoff, Hilton would be grandfathered in and protected against an expected government tax clampdown on such spinoffs in a bill that the U.S. House of Representatives is considering this week.
During Hilton Worldwide’s third quarter earnings call October 28, Nassetta said the chain was mulling strategic alternatives for its real estate and timeshare businesses.
Hilton Worldwide’s contemplated spinoff of its hotels into a real estate investment trust isn’t a carbon copy of Marriott’s, which had years earlier created a separate corporation for its real estate business before spinning that out into a REIT. At the end of 2014, Host owned 114 upscale and luxury properties, including 59,000 rooms, primarily in the U.S.
The timing of Hilton’s planned real estate spinoff isn’t known although Nassetta said in October that he hoped to provide an update when Hilton reports its fourth quarter results, which usually takes place in February.
“Investors have been clamoring for companies to spin off their properties into REITs, which pay few corporate taxes and typically trade at higher multiples of their earnings than their parent companies,” according to the Wall Street Journal story.
Most of Hilton Worldwide’s owned or leased properties are in the Hilton brand, including 71 in Europe and 23 in the U.S. Doubletree also has 11 and Embassy Suites has 10, all in the U.S.
The year 2015 has been characterized by mergers and spinoffs for the hotel industry, and there is likely more to come.
For example, Marriott announced it would acquire Starwood in a $12.2 billion deal, Accor will plunk down $2.9 billion for Fairmont, Raffles and Swissotel, and Interval Leisure Group agreed to acquire Starwood’s timeshare business for $1.5 billion.
If Hilton Worldwide indeed goes ahead and spins off its real estate holdings that doesn’t mean the company’s strategic alternatives are complete. That’s because Nassetta said in October that Hilton is mulling moves for its timeshare business, as well.
Hilton Worldwide’s pursuit of strategic alternatives, including spinning off its real estate business into a real estate investment trust, likely won’t have a direct impact on guests but could make Hilton Worldwide shareholders, including its largest one, Blackstone, very happy.