Editor’s note: This story was updated to include new comments from La Quinta Holdings President and CEO Keith Cline and reaction from La Quinta owners.
IRVING, Texas—Newly announced plans could result in La Quinta Holdings spinning off its owned assets as a single-branded real estate investment trust as early as 1 January 2018, company officials said Thursday morning.
On a conference call with analysts, La Quinta Holdings President and CEO Keith Cline said the company is pursuing the separation of its owned real estate and franchise and management businesses to grow and add value to the brand.
“We really believe that a REIT confined to our own hotels would be an attractive investment opportunity, and in fact, we’d be the only publicly-traded REIT out there focused on servicing the midscale and upper midscale segments of lodging,” he said. “We also believe this type of REIT provides a very interesting opportunity for growth given the migration of customers and developers to this chain scale, as well as opportunities for consolidation. I think this REIT could be an extraordinarily interesting investment.”
A news release from the company states that “there is no assurance that the separation of the company’s business will occur,” but on the conference call Cline said La Quinta has “put quite a bit of work into this process.”
Cline told analysts he expects splitting up the business would “be a taxable event.”
“So we are not pursuing or would have a need to pursue a private letting ruling (from the IRS),” he said. “As we think about it being a taxable event, how we’re affecting the spin out of (the property company), we believe, allows us to satisfy that five-year active trade* or business rule early, which could be as early as 1 January of next year.”
He added that the separation of businesses could be an advantage for each company.
“Now you would have two separate companies that can deploy against their own (strategy); you have a REIT business, which I mentioned, is a compelling investment, especially given the ability for this REIT to grow business and to consolidate as we think about how it participates in the upper midscale segment; and the operating company continues to have an extraordinarily strong growth profile and the ability to grow,” he said.
If the plan comes together as laid out by Cline, it will be the second such real estate spinoff by a hotel branding company in as many years, following Hilton Worldwide Holdings' recent separation of the new Park Hotels & Resorts REIT. Park began trading as its own entity on 4 January.
In a one-on-one interview with HNN, Cline said Hilton’s move had no influence over La Quinta’s decision. He said the company’s “next logical step to unlock value is separating the business.”
La Quinta announced 24 of its properties were to be sold in 2015, but 21 of those closed at the end of the third quarter in 2016 and the sale of the remaining three closed sometime after the third quarter ended.
Cline said the timing and pace of these sales were not factors in La Quinta’s decision to possibly split up its businesses.
“Sometimes real estate transactions take on a timeline of their own,” he said, “and our strategy, it continues to be … driving product consistency, consistency of experiences and engagement, and our expectation. Whether the ownership of the (property) is part of LQ Holdings or spun off on its own, it’ll continue to recycle capital as any normal property-owning entity would.”
Owners’ takes
Imesh Vaidya, CEO of Premier Hospitality, said that if La Quinta follows through with a spinoff, it won’t make much of a difference initially to owners. Speaking as a former brand council member, however, he said it would help the agenda of owners who have been pushing for changes at their properties.
“If it does split into two, it allows a majority of franchisees to have more of a say in hopefully getting changes,” he said.
Franchisees knew La Quinta has been selling off owned assets slowly but surely, he said, but it was selling at such a slow pace that franchisees were getting restless. For a while, there was talk La Quinta would come out with a two-tiered brand system, he said, but that hasn’t gotten any traction.
Overall, this would be a good development for owners, he said, and they’re likely to want it sooner than La Quinta has indicated it would proceed.
Raj Chudasama, managing partner at Kriya Hotels, said his initial assessment of La Quinta’s proposal is that it could be a good move for the company and for owners.
“For them to move forward with the new reposition, I think it’s smart for them to separate the older hotels,” he said. “It frees them up on what they want to do with those hotels.”
Chudasama, a brand council member, said in the past franchisees have gotten pushback when they have tried to move the brand in a direction contrary to what La Quinta’s management team wanted. The return on investment for expenditures at newer properties is different from those at older hotels, he said.
“I think it’s easier now because the franchise company doesn’t have to listen to the operations team from the owned portfolio,” he said. “They can listen to the franchisees. The feedback won’t be hindered by what its own portfolio wants to do.”
*Correction, 20 January 2017: A previous version of the story misquoted Cline.