The Best Hotel Stock Just Got Better

The top hotel stock by market cap, Hilton Worldwide Holdings (NYSE: HLT), has announced plans to spin off its hotels into a real estate investment trust. This makes Hilton an interesting stock for a number of reasons.
First, Hilton made it in just under the wire. Congress is changing the REIT formation rules through legislation that will remove the tax advantages of companies spinning off their real estate into a publicly traded REIT.
(For some of our favorite cash-rich REITs, click here.)
The key with REITs is that they pay less corporate taxes, which is part of the reason the government is looking to limit the ease of creating them. The Internal Revenue Service has already approved Hilton’s deal.
With the Hilton news, there’s been a lot of action going on in the hotel industry – and it’s not just REIT formations; there are buyouts as well.
As I mentioned, Hilton is the leader in the industry, but Marriott International (NASDAQ: MAR) is buying Starwood Hotels & Resorts Worldwide (NYSE: HOT) in an effort to better compete with Hilton. It’s an interesting deal that will allow both hoteliers to further penetrate the large and fast-growing Chinese market.
The deal also allows the two companies to leverage economies of scale and enjoy cost reductions. Then there’s the fact that it will create a more rounded portfolio, combining Marriott’s lifestyle brands with Starwood’s higher-end brands like W.

Why Hilton Is the Best Hotel Stock

Hilton owns or leases nearly 150 hotels across the globe and is trading with a $21 billion market cap. But it hasn’t been a great stock to own over the last couple years. Blackstone Group (NYSE: BX) took Hilton private in 2007 and then brought it public in 2013.
Since its IPO, Hilton shares are down 1%. Meanwhile, Marriott shares are up 48% and the S&P 500 is up 13%. Blackstone still owns 46% of Hilton.
Nonetheless, the spinoff of its owned real estate is an easy way to close the trading gap between Hilton and Marriott. It also sets Hilton up with another key catalyst to unlock shareholder value going forward: the potential separation of its timeshare business.
Recall that Marriott did a similar move in 2011 and shares have doubled the S&P 500 since then. Its timeshare business has also done quite well – outperforming the S&P 500 by fourfold since. Marriott also managed to spin off its real estate properties over 20 years ago into Host Hotels and Resorts (NYSE: HST), a REIT offering a 5.1% dividend yield. These are all positive catalysts that have helped Marriott outperform.
2016 is expected to be a strong year for Hilton. The hotelier already expects revenue growth, and the transition into an asset-light business means higher margins and higher returns on capital for investors. It will also be able to grow its already large brand faster by leveraging its strong branding with franchises. And regarding the merger of Starwood and Marriott, Hilton can capitalize on the increased pricing power from industry consolidation.
It looks like Hilton will be the final major company to see the benefits of forming a REIT. Hilton has been a laggard in the industry, but it could be the top pick going forward as it has a number of catalysts to push shares higher. And let’s not forget that Hilton also offers a 1.3% dividend yield.
(For higher-yielding REITs you can count on, click here.)