Large companies looking to maximise return on property assets

Just a few months ago we had fast food giant McDonald’s announcing plans to spin-off the company’s real estate portfolio into a separate entity. This week a similar move was announced by hotel giant Hilton which is expected to separate its real estate assets in a move which could be beneficial with regards to tax savings and refocusing investors on the business.

It seems that stockholders do not fully appreciate the real estate assets of these large corporations when they are presented as part of the overall business. When you bear in mind that some of these assets are worth billions of dollars this could be the perfect way to maximise returns in the longer term.

Are real estate assets really ignored?

The traditional method for valuing a company is based solely around profits and earnings per share with the exception of property investment companies. While much of the information about real estate assets, and other company-owned assets, is in the public domain it is sometimes ignored when the major focus is on the underlying profitability of the group.

It is also worth noting that in general real estate assets are not valued on an annual basis and some of the valuations in balance sheets today could be 10 or 20 years out of date. Even though the worldwide economy is struggling at the moment some companies will be hiding property gems with their book value not necessarily reflecting their value today.

Is separation the best way to maximise returns?

It may well be that some of the company assets in question are used as collateral to raise funds to invest in other areas of the business. There will be situations where companies will buy and sell real estate within the “group” thereby creating additional income and profits. However, more often than not real estate assets are left untouched and the only way to bring out their true value it seems is to separate them.

This then allows researchers and investors to focus solely upon the company, and its trading prospects, and the separate real estate company which holds the group’s real estate assets. The fact that the Hilton’s announcement was greeted with a 6% rise in the share price reflects this very interesting phenomenon. Sceptics might question, if everything is in the public domain then why is the value of these real estate assets not always reflected in the rating of the companies?

Is there any downside?

There are potential tax concessions as well as the ability to raise additional capital for the trading company when separating real estate assets. The downside is the fact that the two entities need to trade separately, even if the company were to maintain a majority shareholding in the real estate vehicle, and this may eventually lead to increased rental payments which would obviously impact the profitability the trading company.

It will be interesting to see how this trend continues in the short to medium term because as a means of releasing additional capital, which can be invested into the trading company, it is proving extremely useful. However, quite what the long-term implications are for rents charges remains to be seen.

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