The Hilton Worldwide Holdings company turns to take a back seat on real estate investment, by converting it to a real estate investment trust to amplify shareholder earnings and timeshare business. This has resulted in a net income which has multiplied five times.
In pre-market trading, its shares were up 5% on the news.
Waldorf Astoria hotels owner Hilton Worldwide Holdings will spin off most of its real estate assets into a real estate investment trust, joining a list of companies turning to the tax-efficient structure to maximize shareholder returns.
In the past year, companies including casino operator MGM Resorts International MGM 1.96% and restaurants owner Darden Restaurant DRI -0.08% have announced REITs, which distribute 90 percent of their taxable income to shareholders.
Hilton, which is also spinning off its timeshare business into a separate publicly traded company, said on Friday that the REIT would own about 70 hotel properties with 35,000 rooms.
The company’s shares rose 8% in light premarket trading.
Hilton HLT 2.87% owned or leased 144 hotel properties around the world at the end of 2014. Analysts estimate that the properties are worth more than $10 billion.
“We think this (the spinoffs) makes sense by simplifying the businesses and should result in a higher net valuation multiple,” J.P.Morgan analyst Joseph Greff wrote in a note.
The hotel operator expects to complete the spinoffs of both its real estate assets and its timeshare business, Hilton Grand Vacations, by the end of the year.
Hilton Grand Vacations manages nearly 50 club resorts in the United States and Europe. The business accounted for about 12% of Hilton‘s total revenue in the fourth quarter.
The net income attributable to Hilton‘s shareholders rose five-fold to $814 million, or 82 cents per share, in the quarter ended Dec. 31, mainly due to a tax benefit of $640 million.
Excluding items, the company earned 22 cents per share, in line with the average analyst estimate, according to Thomson Reuters I/B/E/S.
Revenue rose about 1% to $2.86 billion, but missed the average estimate of $2.96 billion, hurt by a decline in occupancy and room rates in the Middle East and Africa.
The company’s shares were trading at $21.85 before the bell.
Up to Thursday’s close, the stock had fallen about 28% in the past 12 months, while the Dow Jones U.S. Hotels index had declined about 17%.
Deutsche Bank Securities and Goldman Sachs were Hilton‘s financial advisers for the spinoffs.
Hilton Worldwide Holdings Inc. (NYSE: HLT) will separate its real estate holdings and its timeshare business into new companies, creating three separate entities and leaving Hilton as primarily a hotel management company.
The move was suggested in December, and the statement Friday from Hilton confirms the scuttlebutt at the time: Hilton has received permission from the Internal Revenue Service to spin off its real estate into a REIT through a tax-free transaction.
The Hilton REIT spinoff will be perhaps one of the last of its kind, given that Congress recently passed legislation that would require corporations to pay capital gains taxes on those transactions, although it agreed to create an exception for companies that had contacted the IRS before Dec. 7, 2015.
The moves will create a publicly traded REIT that holds Hilton’s considerable real estate portfolio, as well as a separate, publicly traded company for the timeshare business, which will continue to be called Hilton Grand Vacations.
The REIT, which is to be named, will include about 70 properties totaling 35,000 rooms. In all, Hilton Worldwide’s real estate portfolio is worth more than $10 billion, and sales from those properties represented more than 42 percent of the company’s revenue in 2013. Shareholders and analysts have been asking about the company’s plans for that real estate practically since the company’s 2013 initial public offering.
Hilton CEO Chris Nassetta has said since the IPO that it was his goal to pursue an asset-light model, and that the company was considering a number of alternatives to address the real estate. The company has already made some moves toward this goal: Hilton sold the Waldorf-Astoria Hotel in New York City in 2014 for $1.95 billion, and sold part of its Hilton Hawaiian Village property for a timeshare development in 2013.
Hilton will distribute the new entities’ stocks to existing shareholders, according to a statement from the company. The transactions are expected to be complete by the end of the year.
The company also reported earnings Friday, reporting revenue of $2.89 billion for the fourth quarter of 2015, which was up 2.2 percent from the same period last year but missed projections by $70 million.
Hilton shares were trading at $20.47 shortly after the bell Friday morning, up 1.3 percent.