Inside Hilton’s REIT, timeshare spinoff plans
 
Inside Hilton’s REIT, timeshare spinoff plans
26 FEBRUARY 2016 10:45 AM

Hilton Worldwide Holdings shared its plans to create two new entities—a spinoff of the bulk of its owned real estate into a publicly traded REIT, and its timeshare business into a separate publicly traded company.

MCLEAN, Virginia—Talk has been floating for the last year about the possibility of Hilton Worldwide Holdings spinning off some of its business units, and the company confirmed the rumors on Friday. 

 
The company announced plans to spin off much of its real estate into a publicly traded real estate investment trust; and its timeshare business, Hilton Grand Vacations, into a separate publicly traded company. 
 
Hilton Worldwide President and CEO Chris Nassetta said Friday morning during the company’s quarterly earnings call with analysts that he looks at the spinoff process as a way to excel in many areas of the business. 
 
“The reason (for doing this) is to have dedicated management teams for each, and dedicated investor bases,” he said. “It will create cost-to-capital and tax efficiencies, and last but not least, we’re doing this to be able to activate all three businesses fully. That means both organic and inorganic growth. That includes inorganic opportunities, and (these companies) will have the capability to pursue those.” 
 
Regulatory compliance processes are underway for both spinoffs, and the company intends to file registration statements with the Securities and Exchange Commission during the second quarter and to complete both spinoffs by the end of the year. The transactions are subject to customary conditions, including final approval by Hilton’s board of directors. 
 
The company did confirm in a news release that it has received a private letter ruling from the Internal Revenue Service “on certain issues relevant to the qualification of the spinoffs as tax-free.” 
 
Hilton Worldwide’s largest stakeholder, Blackstone Group, owns about 45% of the company, and Nassetta confirmed that Blackstone would not need to sell down in order for the spinoff transactions to occur.
 
In terms of leadership, Nassetta said Hilton Grand Vacations President Mark Wang will serve as CEO of the new timeshare business, and the company is still considering leadership options—both internally and externally—for the REIT business. 
 
As of press time, Hilton’s stock price was up 0.4% to $20.41.
 
The new REIT in town
The newly formed REIT would include approximately 70 of what Nassetta called “bellwether assets” and 35,000 guestrooms, largely in the luxury and upper-upscale segments.
 
As of year-end 2015, the company owned or leased 146 hotels worldwide comprising 59,463 guestrooms. It’s not yet clear what specific properties will enter the REIT, but Nassetta said that the company has “tried to set up the REIT in a way that will be appealing to the investor base. It’ll be largely domestic U.S. assets (with) a small complement of international assets where it makes sense, but it’ll be a very small minority.”  
 
“Running a REIT really well involves managing a balance sheet, being really good at asset management and being a great capital allocator—knowing when to buy and when to sell,” Nassetta said. 
 
Most of Hilton Worldwide’s owned assets sit in the upper-upscale Hilton Hotels & Resorts brand. The company owned 28 hotels in the Americas (25 in the U.S.), 69 in Europe, six in Middle East/Africa and seven in Asia/Pacific as of 2015. The company owned six hotels in the luxury Waldorf Astoria brand in 2015 (four in the U.S. and two in Europe), two hotels in the luxury Conrad brand (one in Europe and one in MEA), and 10 in the upper-upscale Embassy Suites by Hilton brand in the U.S. 
 
The company also owns 11 upscale DoubleTree by Hilton hotels in the U.S.
 
Timeshare company
The newly formed timeshare company would manage nearly 50 club resorts in the United States and Europe and have an exclusive long-term license agreement with Hilton Worldwide to market, sell and operate resorts under the Hilton Grand Vacations name. 
 
In 2015, timeshare segment revenue for the company was $1.3 billion, a 12% increase over 2014. 
 
“We think Hilton Grand Vacations can grow its bottom line a bit faster on its own than with us,” Nassetta said on the call. 
 
Nassetta said last July that the company was constantly exploring its options for increasing shareholder value, including forming a REIT for owned assets and spinning off the timeshare segment. 
 
At the time, he emphasized Hilton Grand Vacations’ strong performance. 
 
We have really transformed this business over the last three to four years,” he said during the company’s second-quarter earnings call with analysts in July. “The majority—over 80%—of our inventory here is capital-light, and this business is cranking. It’s hitting on all cylinders.” 
 

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