Spinning off from La Quinta will help CorePoint Lodging Inc. grow and consolidate the fragmented mid- and upper-mid-scale hotel industry.

Irving-based La Quinta first announced in January the possibility of separating into two businesses, a deal it confirmed this week with filings submitted to the U.S. Securities and Exchange Commission. La Quinta (NYSE: LQ) will continue to trade under its ticker symbol and oversee its franchise and management business.

CorePoint will become a stand-alone publicly-traded real estate investment trust with 316 hotels representing 40,500 rooms. It is estimated to have 2017 total adjusted earnings before interest, taxes, depreciation and amortization between $200 million and $215 million.

It will continue to grow the La Quinta brand, paying 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 hotel room revenues.

La Quinta will own 886 hotels, with a pipeline of 249 additional lodgings. It’s yearly EBITDA is estimated to be between $110 million and $115 million.

“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.

The transaction is expected to be complete in fourth quarter 2017 or early 2018, subject to closing conditions like the SEC declaring its paperwork effective.

For more details on the spinoff, see our previous coverage here.

Cline also told the Dallas Business Journal more about the spinoff’s benefits for both businesses.

Why did La Quinta submit paperwork for the spinoff now?

Back in January, we announced that we could pursue a separation of our asset-owned business from our brand and management businesses. At that time, we said the process could take seven to 10 months. We’re six-plus months in, and this would be the timing we would have expected. We’re on our timelines, and we would expect to have permission from the SEC to go effective some time during the fourth quarter. However, because we can’t control the timing, we expect to be effective by early 2018.

What are the advantages to splitting the company?

About a year ago we announced a three-pronged strategy to drive consistency in our product, an outstanding guest experience and engagement in our brand. As we go forward, we think splitting the business gives us more clarity on those strategies. CorePoint will not only have the opportunity to franchise with La Quinta, they can branch into other brands. This also affords tax benefits for CorePoint because the spinoff is close to a time when CorePoint can become a REIT. And La Quinta now has the opportunity to grow unencumbered by the cash required to own and operate hotels.

How will CorePoint collaborate with La Quinta post-spinoff?

CorePoint Lodging will certainly benefit from a long-standing relationship with the management company that La Quinta will own. Today, La Quinta has almost 900 hotels, roughly 320 of which we own. After the separation, CorePoint will be the largest franchisee of the La Quinta brand and the largest hotel company that the La Quinta brand is managing operations for.

What are CorePoint’s growth plans as a stand-alone company?

Today, La Quinta is investing substantial capital into our repositioning into mid- and upper-mid-grade hotels. We’re elevating roughly 50 of the hotels that will be part of CorePoint, and they will capture additional rates and occupancy versus competitors. Those investments will finish up mostly during 2017.

The company’s continued growth will come from organic growth of the La Quinta brand, and it will grow from investing in properties by different flags and brands. It’s becoming a consolidator, and over time will have a lot of opportunity for that. It won’t happen overnight, though, because you’re buying hotels and you need to make sure you have a solid capital allocation and balance sheet to allow that.

How will La Quinta continue to grow?

Today, La Quinta is in two-thirds of the represented markets in the U.S., and even then we’re still under-penetrated compared to our closest competitors. We have the ability to double in the U.S. and still have a footprint the size of our closest competitors. So with two different management teams activating the businesses, we could launch into other chain scales over time.

How does the split help La Quinta compete with other hotel chains?

Competition for share depends on a lot of factors. If you think about the strategy we deployed about consistency and engagement, driving engagement is around investments to allow people to personalize their stay and engage with our brand. We have found since that strategy started gaining traction that the La Quinta brand has posted three consecutive quarters of market share gain against our closest competitors. The separation really helps to accelerate that by allowing each business to focus on those things more narrowly.

Who will lead La Quinta and CorePoint?

At this point, the nomination and governance committee of La Quinta’s board is going through a process and will provide a recommendation to the board on how to staff the executive teams of both companies. Once they have that analysis, we’ll communicate that to the markets.

How as the CorePoint name chosen?

CorePoint Lodging is a great name for a REIT enterprise. When we think about who would invest in a REIT brand, we went through an exercise internally to establish the types of messages we’re trying to convey. We really felt that the name CorePoint speaks to several things. Number one is that we have a core set of assets serving the mid- and upper-mid-scale space.

Then, using the word point showed that the company was pointed forward and that we’re looking at opportunities for the company. We think there’s a big opportunity for a consolidator to put together a fragmented industry across the country.

 

Presented by Dallas Business Journal – July 28, 2017

Print Friendly