Under Pressure To Deleverage, HNA Exits Hilton Spin Off Investments At Nice Profit

Before trade war news jumped to the front pages, China was making headlines for cracking down on its financial firms’ leverage by forcing them to unload some of their overseas holdings. Anbang and its CEO received a lot of headlines, but other companies, such as HNA, were impacted as well. A few years ago, HNA went on a worldwide asset acquisition spree, scooping up a number of hard real estate assets and large stakes in certain real estate related publicly traded companies such as Hilton. GlobalStockPicking published a piece recently looking at Rezidor and dives a bit deeper into HNA and its wild spending.

When the Chinese government says sell though, you sell, and as many 2009 long/short hedge fund managers can attest, those seeking liquidity often turn to equities first, regardless of the merits. No exceptions here. According to recent SEC filings and news reports, some of the first assets to be unloaded by HNA are its stakes in Hilton Worldwide (HLT), Hilton Grand Vacations (HGV) and REIT Park Hotels & Resorts (PK).

The sales comes less than two years after the company made a splash by acquiring a 25% stake in Hilton Hotels from Blackstone (BX) at what was then a nice premium. Shortly after HNA’s acquisition, the company split into three parts, the asset light hotel business, a timeshare business (Hilton Grand Vacations) and a hotel REIT (Park Hotels & Resorts) leaving HNA as a major holder in all three companies. The idea was for HNA to be, in the words of Hilton Worldwide’s President & CEO Christopher Nassetta, ‘a long-term investor and strategic partner’. Well so much for that, but to be fair, compared to most investors holding for approximately two years may qualify as ‘long term’.

The good news for HNA (and its creditors) is that their investments in Hilton properties have done pretty well. Here are some simple returns (no time weighting, dividends etc.) on the names since the January 2017 spinoff:

1. Hilton Worldwide +43.1%
2. Hilton Grand Vacations +73.2%
3. Park Resorts & Hotels -5.7% (this doesn’t include its 6+% dividend yield)

Not bad and of course, their actual returns are a bit different (and higher) because they invested in Hilton prior to the spinoff. Bloomberg actually pegged the firm’s HGV returns at over 90% and according to the WSJ, HNA’s returns on all three names are higher due to the firm funding its initial purchase with a healthy dose of leverage. While the mass selling might create an overhang in the stocks I doubt most shareholders care that HNA has exited. Management on the other hand might be disappointed to have lost its ‘strategic partner’.

History is riddled with foreign investors unloading assets at steep losses, but not in this case. The obvious lesson for overseas investors is to bet on spinoffs. Just be sure to avoid the ones from Sears (SHLD).

Disclosure: Author holds no position in any stock mentioned.