What Are Paired Shares?

Quinlyn Manfull
November 10, 2022

What Are Paired Shares?

Paired shares are two stocks sold and traded as one unit that operate under the management or supervision of a single corporation.

They can also be called “Stapled Stocks.”

How Do Paired Shares Work?

Buying paired shares means investing in the common stock of two corporations run as a single unit. The companies are linked and can’t be separated from each other, so investing in one means investing in the other as well. These companies trade together as one security on the stock exchange (i.e. the New York Stock Exchange (NYSE) or NASDAQ).

Two separate stock certificates are not usually issued to reflect the stakes in two separate companies that a paired share offers. The stocks of both companies typically appear on one stock certificate, with each stock printed on one side of the document.

In general, one stock focuses on income — typically yielding a high dividend — while the other targets capital appreciation and has a greater potential for growth.

Examples of Paired Shares

While paired shares are not common in the modern US stock market, there are a few popular examples. Carnival Cruise Lines Corp. (CCL) and plc, the British-American operator known previously as P&O Princess Cruises plc, completed a dual-listed company transaction in April 2003.

Carnival Corp. common stock was paired with trust shares of beneficial interest in the P&O Princess Special Voting Trust. As part of this process each holder of Carnival Corp. stock was given an equivalent number of these new shares, called “trust shares” or “paired shares.”

Trust shares are a way of investing in multiple companies that are set up in a single trust. 

Another example is Extended Stay America Inc. (STAY). The budget hotel chain is publicly traded as a paired share with the owner of its hotels, the real estate investment trust (REIT) ESH Hospitality Inc. (STAY). Here you can see both companies share the same stock ticker.

One share of Extended Stay America Inc. common stock, with a par value of $0.01, together with one share of ESH Hospitality Inc. Class B common stock, par value of $0.01, is attached and traded as a single unit.

History of Paired Shares

The paired share structure was popular in the REIT industry until the IRS Restructuring and Reform Act of 1998 ended the corporate tax advantages previously facilitated.

In the 1980s, paired share REITs could own their properties while an attached traditional corporation operated them, with the two companies trading as a single unit. Through this structure the REIT avoided taxes because the operating company could transfer the majority of its revenues to the REIT via rents.

By 1984, Congress prohibited the formation of new paired share REITs but allowed a few existing ones to continue as a legacy, including Patriot American Hospitality, MediTrust, Starwood Hotels & Resorts and First Union Real Estate.

However when Starwood purchased ITT Corp. for $14.6 billion in 1998, the Treasury Department and Congress began to ratify legislation that completely ended this loophole. Following the IRS bill’s enactment in July 1998, Starwood changed from a REIT to a traditional corporation, effectively ending the paired share structure.

Why Were Paired Shares Phased Out?

The grandfathered position of the four paired share REITs had two impacts on equity markets that led Congress to eliminate them.

First, these REITs were beneficiaries of inflated operating company lease payments because of their special status. As a result the returns on paired share REITs should exceed that received from other REITs, everything else being the same.

Investors recognized this higher potential gain and favored these paired share REITs above other REITs, placing the hundreds of other REITs at a competitive disadvantage. This also made capital markets less efficient by causing investment capital to respond to non-market incentives.

Second, the attractiveness of the paired share structure extended beyond the equity market for REITs. To fuel their expansionary plans the paired share REITs had to attract large sums from the broader market for equity and debt issues. The process also produced windfall gains for stockholders of merged companies as the projected tax savings are factored into earnings.

For these loopholes and inefficiencies Congress stepped in to regulate paired share REITs out of capital markets.

Key Takeaways

Paired shares refer to the stock of two separate companies that operate as a single company and often a single stock ticker. They used to be prominent in the REITs market, but they have been vastly phased out since the 1980s. 

Quinlyn Manfull
Quinlyn Manfull is a a New York based finance writer covering alternative investments, crypto, and NFTs. Previously she worked as an Investment Analyst for HSBC Private Bank covering capital markets. Her byline has been featured in the Anchorage Daily News, and her university newspaper, The Willamette Collegian. Quinlyn earned a B.A. in Economics from Willamette University and holds her FINRA Series 7 License.