Strategy

Hilton to Spin off Most of Its Real Estate Assets

The move may be one of the last of its kind since, under a new law, corporations are required to pay capital gains taxes on REIT spinoffs.
Katie Kuehner-HebertFebruary 26, 2016

Hilton Worldwide Holdings announced Friday it will spin off real estate assets into a real estate investment trust to maximize shareholder returns, becoming the latest corporate to make the tax-efficient move.

The McLean, Va., company said it had received permission from the Internal Revenue Service to spin off about 70 properties totaling 35,000 rooms into an REIT through a tax-free transaction.

Hilton owned or leased 144 hotel properties around the world at the end of 2014, estimated to be worth more than $10 billion, according to Reuters. It is also spinning off its timeshare business into a separate publicly traded company, which would continue to be called Hilton Grand Vacations.

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The spinoffs should be completed by the end of the year, leaving Hilton as primarily a hotel management company.

“We think this makes sense by simplifying the businesses and should result in a higher net valuation multiple,” JPMorgan analyst Joseph Greff said of Hilton’s move.

Hilton CEO Chris Nassetta has said “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 Washington Business Journal said.

In 2014, Hilton sold the Waldorf-Astoria Hotel in New York City in 2014 for $1.95 billion, and it sold part of its Hilton Hawaiian Village property for a timeshare development in 2013.

REITs typically don’t pay much corporate income tax and distribute almost all of their profits to shareholders, who pay taxes on the dividends at the same tax rates that apply to ordinary income.

Over the past year, other corporations including MGM Resorts and Darden Restaurants have spun off assets into REITs. But according to the Journal, the Hilton spinoff could be “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.”

Companies that contacted the IRS before Dec. 7, 2015 are exempt from the law, according to SellYourHome.com.

Hilton Grand Vacations manages nearly 50 club resorts in the United States and Europe and accounted for about 12 percent of Hilton’s total revenue in the fourth quarter.

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