Hilton as a REIT & FelCor on a Roll

chart01Last Friday, Hilton Worldwide finally announced a plan to spin off its hotel and timeshare businesses and to create an REIT from the hotel assets. The new hotel REIT will encompass 70 properties and 35,000 rooms and will likely be one of the largest hotel REITs. The properties that are going into the REIT will be largely domestic, which according to the company will be more appealing to investors.

Although new legislation prevents an immediate tax-free spinoff into an REIT, Hilton should be exempted from such legislation because it had submitted a request to the IRS before December 7, 2015. The new legislation denies tax-free treatment to a spin-off in which either the distributing corporation or the spun-off corporation is an REIT. It also prevents a distributing corporation or a spun-off corporation from electing REIT status for a 10-year period following a tax-free spin-off.

FelCor

chart02Among all lodging REITs, FelCor Lodging Trust seems to be on a roll over the past weeks, especially after Land and Buildings made a series of proposals in late January. FelCor argued that they have already been pursuing the proposed initiatives. Land and Buildings cited an upside of 60% to NAV to justify a 2% ownership.

The first visible development is that FelCor and Land and Buildings have recently agreed to nominate two new independent directors to the board and reduce average board tenure. Two long-serving board members will step down by 2017. FelCor will also de-stagger the board, as proposed by Land and Buildings. This is what the board looks like today (Name, Position, Director Since):

Thomas J. Corcoran, Jr., Chairman of the Board and Co-Founder, 1994

Richard A Smith, President and Chief Executive Officer, 2006

Glenn A Carlin, Outside, 2009

Robert F. Cotter, Outside, 2006

Christopher J. Hartung, Outside, 2010

Charles A. Ledsinger, Outside, 1997

Robert H. Lutz, Jr., Outside, 1998

Robert A. Mathewson, Outside, 2002

Mark D. Rozells, Outside, 2008.

The decision to revamp the board seems to be in the right direction. FelCor also announced in its Q4 results that it is pursuing the sale of five hotels, including three in New York, to repay debt balances and repurchase stocks. Last April, Standard & Poor’s rated the company B, which is two notches below investment grade. The company posted a total debt to total capitalization of approximately 52%.

What is in the company’s favor is its portfolio composed of suburban, airport, and resorts, which is not one of the subsectors potentially affected by supply growth.

FelCor has come a long way before realizing its full NAV. Besides reducing leverage and renewing its board, FelCor is faced by the cyclical nature of the lodging industry. The possibility that hotels have reached its peak has scared off many investors.

FelCor stocks rallied by 34% from its 52-week low on January 19, but it still has to rally another 34% to reach Land and Buildings’ target of $10.50.

I’d place this stock in speculative/activist portfolio.

Source: Hilton Worldwide (NYSE:HLT), FelCor Lodging Trust (NYSE:FCH)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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