Hotel chain La Quinta Holdings has confirmed it will divide into two stand-alone public companies, separating its real estate business from its franchise and management arm.

Irving-based La Quinta (NYSE: LQ) first discussed the possibility in January, saying splitting the company would help “to execute on our key strategic initiatives and create value for our stakeholders.” Both La Quinta’s corporate portfolio and franchise arm earned just under $1 billion each in room revenues last year.

“We’ve thought about how to really provide an opportunity for the business, to potentially maximize value,” CEO Keith Cline said in January. “As we’ve always said, management, the board and this team is open to all ideas that we feel will maximize value and create a catalyst for the business.”

“And … if you think about separating the businesses in this fashion, it really allows each business … to have a lot of laser focus on all the opportunities that naturally flow to each type of business, and it allows them to pursue those strategies independently,” he added.

La Quinta filed documents with the U.S. Securities and Exchange Commission on Wednesday stating that its real estate arm will be spun off into a business to be called CorePoint Lodging Inc.

CorePoint will elect to become a real estate investment trust as quickly as possible, and could earn the status as quickly as Jan. 1. When La Quinta went public in 2014, it gave up REIT status, and has to undergo a five-year wait period before it can reelect that status. Cline believes the way the spin off would be executed could shorten the wait.

Becoming a REIT would be advantageous for the company, giving it an opportunity to minimize tax leakage from the spin off. CorePoint will be taxable at both the corporate and shareholder levels, La Quinta said.

“REITs are afforded certain tax benefits assuming they meet the qualifications, which could help attract the appropriate investors and capital resources,” addedJason Moser , an analyst for Million Dollar Portfolio at The Motley Fool.

In May, Reuters reported that La Quinta was looking for a sale that would make the two companies more attractive to investors, lessening the deal’s tax impact. Cline said in a Thursday call with investors that the spin off would make merger and acquisition options for both companies, and that they would consider any deals that would provide value for the companies and shareholders.

Once separated, CorePoint will operate a portfolio of 316 hotels with 40,500 rooms. As a stand-alone company, it is expected to have 2017 total adjusted earnings before interest, taxes, depreciation and amortization between $200 million and $215 million.

The business will pay La Quinta a management fee of 5 percent of gross hotel revenues in return for day-to-day hotel management, and a royalty fee of 5 percent of gross room revenues.

In return, La Quinta will continue to invest more than $180 million in CorePoint hotels it identified in 2016 as having the ability to be upper-scale lodgings. The money will be used to upgrade guest rooms, expand public areas and improve exterior elements.

The renovations are expected to be completed throughout the second half of the year.

After the spin off, La Quinta will have 886 hotels, with a pipeline of 249 additional lodgings. Its yearly EBITDA is estimated between $110 million and $115 million.

It will continue to trade under the LQ ticker symbol.

Executive teams for each of the companies have yet to be determined. The nominating and governance committee within the company’s board of directors is still evaluating appointments, Cline said Thursday.

The transaction is subject to closing conditions, including the SEC declaring its documents are effective. J.P. Morgan is acting as financial adviser, while Simpson Thacher & Bartlett LLP is legal adviser to La Quinta with the deal.

Before Thursday’s market open, shares of La Quinta were trading at $14.46. Over the past year, the stock is trading up nearly 17 percent.

Presented by Dallas Business Journal – July 26, 2017
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