Editor’s note: This cover story ran in Asian Hospitality, February 2017 (Volume 17 #146)
As hotel investors everywhere seek increased value and returns in a market most perceive as softening, La Quinta Holdings Inc. of Irving, Texas, is taking significant steps to boost its business and reassure its stakeholders.
Since the company went public three years ago, it’s been a hard slog. Life on Wall Street is not easy for a select-service hotel company with a single brand, but La Quinta is trying to spin that into a positive. That’s what it does best. The niche player has not merely survived for nearly 50 years, it has sincerely thrived.
It continues to grow from the seed of one hotel planted in 1968 in San Antonio to nearly 900 owned and franchised properties today with hundreds more in the pipeline. It is building an “elite” group of upper-midscale franchised hotels and entering top MSAs it could only dream of just three years ago, say company leaders.
Leading the charge is Keith Cline, a fresh face in the lineup of CEOs of publicly traded U.S. hotel companies. The 48-year-old’s corporate leadership background is varied, having spent considerable time in retail. He came to La Quinta as chief financial officer four years ago, spearheading the company’s strategy to go public in 2014. La Quinta Holdings’ board, chaired by Mit Shah of Noble Investment Group, named him president and CEO a year ago this month.
In the six months prior, Cline was interim CEO. During that time, he and others in the top line huddled to draft a new playbook to dramatically advance a company that operates in a league of its own.
A mature brand that stays current with evolving guest expectation through design and amenities often deals with the issue of what to do with aging assets as well as hotel managers and owners stuck in their ways.
The team adopted a three-pronged strategy to create “consistency” across the brand, starting with its own hotels. Talk to any C-suite exec and you get the recitation: Drive consistency in product, consistency in delivering an outstanding guest experience and consistency in customer engagement.
For a single brand, executing on the strategy “is absolutely essential” for both its short-term (think shareholders) and long-term (think franchisees) success, said Rajiv Trivedi, executive vice president and chief development officer.
In an exclusive interview with Asian Hospitality in December at La Quinta’s headquarters, Cline frequently recited the mantra, which overlays the company’s more intricate game plan – a growth initiative already underway. It includes upgrading and repositioning a large portion of its owned hotels and taking a serious look at its aging fleet of both owned and franchised properties.
Its major focus and investment these days is on its owned assets. La Quinta Holdings’ owned hotels comprise 40 percent of its portfolio, “much higher on a percentage basis than other hotel companies that also own and franchise,” Cline said.
For the most part, it is La Quinta’s older, midscale hotels – owned and franchised – that are a drag on its value. STR continues to list the brand in the midscale segment. “It’s a fact that we have 100 or more La Quinta Inns at that price point; it pulls the average down,” Cline said, noting 85 percent of its hotels are priced in the upper midscale category.
In the third quarter 2016, La Quinta separated its operations group into two divisions – one for the inns and another for the inns & suites, the younger of the two asset groups it owns. As time goes on, Cline said, “inns will become less and less a part of our brand. The math will work in our favor, and it will work itself out as we execute our real estate strategy.”
He stopped at saying the inns will phase out completely. “There’s a reason why there are midscale- and economy-segmented hotels. There is a customer that selects that price point. Where there are street corners with La Quinta Inns, we own the markets.”
Last year, the company identified 55 owned assets it wants to keep and renovate, repositioning them from midscale to decidedly upper midscale. “And this is where we are spending more than on a regular-cycle renovation – on average, north of $25,000 per key,” Cline said. The targeted comp set is La Quinta’s four biggest competitors – Hampton Inn, Holiday Inn Express, Fairfield Inn & Suites and Comfort Inn and Suites.
In 2015, it renovated 29 hotels for $30 million. It started work in November on its current wave of hotels and expects to finish before the end of the year. Later this year, La Quinta will earmark more assets for upgrades. In all, it plans to spend $160 million over the next two years on renovations – whole guts aimed at increasing occupancy and rate and boosting value.
Thinning the Herd
When looking at its owned fleet, La Quinta asks three questions of each hotel: Is it properly positioned to effectively compete among its desired comp set? If not, would a renovation improve its prospects? Or is it a non-core asset in need of divesting?
The third question reveals another leg of La Quinta’s strategy to enhance value. In late 2015 and in 2016, it sold 35 company-owned hotels for approximately $56.4 million. A partnership of three Asian American hotel companies acquired 24 of the hotels – Champion Hotels of Oklahoma, NewcrestImage of Texas and Baywood Hotels of Maryland. Each company also agreed to build and franchise five La Quinta Inn & Suites. The partners sold most of the 24 hotels, in some cases providing financing and helping the new owner acquire an economy segment brand from another franchiser. In 2013, NewcrestImage acquired and flipped 25 La Quinta Inn hotels. La Quinta sold another 22 assets to other buyers that year.
The company continues to comb through its fleet of owned hotels, determining whether to maintain, improve or divest. In the first quarter of 2016, La Quinta earmarked 50 hotels for divestiture. By the third quarter, three of those had been sold and three more sales agreements were inked.
The strategy is coming into play in its franchising business. Last year, for the first time in La Quinta’s franchising history, the company terminated or did not renew 25 licenses.
Other hotel franchisers have executed the same strategy over the past several years, having a significant impact on Asian American hoteliers as they own most of the midscale and economy branded hotels in the U.S. What makes it particularly painful for La Quinta franchisees is there is no lower-segmented La Quinta brand to opt into.
When making the decision, Cline said the company asks the same questions it poses for its owned assets. “It’s a street-corner-by-street corner business,” he said, “and we look at the corner and say, ‘You know, 10 years ago it was the right street corner but today it is not.’
“We partner very closely with the franchising community to make sure it’s an orderly transition,” he said. “If there is a chance for the property to reposition itself and the owner wants to spend the money to do it, we will talk about it. If it can stay in the system and drive product and brand consistency, then we will do it. At the end of the day, the franchisee relationship is important to us.”
Raj Chudasama, managing partner of Kriya Hotels of Irving, Texas, sits on La Quinta’s brand council, whose members are elected by the franchisees. “La Quinta is making a lot of changes, but they are very cautious changes,” he said. “A lot of older properties with 50 to 60 rooms cannot integrate the new standards.” Owners whose licensing agreements were not renewed have older properties – mostly two-story exterior corridor with no elevator.
Raj Trivedi has been with La Quinta Inns & Suites as head of franchise development for more than 15 years. “La Quinta has always been an attractive company to do business with because it has good ROI,” he said. “However, owners’ continued concern has been as La Quinta ages, how it will keep up with the changing select-service competitive environment.”
Ray of Sunshine
La Quinta’s commitment to upgrading its owned assets and holding itself to higher standards has elevated the value of the franchised properties, Trivedi said.
Two years ago, La Quinta rolled out its Del Sol design, a comprehensive transformation of the physical asset – switching out the southwest-inspired elements such as the terra cotta tiled roof and yellow stucco exterior for a flat roof and a skin of brick and glass. Inside, the lobby is flooded with natural light. It is larger and wide open with arm chairs and sofas arranged in settings and tables scattered throughout. The breakfast buffet is partitioned off so it is not the first thing a guest sees when entering the hotel.
Del Sol has proven to be a versatile prototype. It is meant for hotels with less than 100 or so rooms, but elements of the modern design, including its color pallets, are being incorporated into the renovated owned assets as well as larger existing franchised hotels undergoing a refresh. Of the new-build hotels in the franchised pipeline, all of them are Del Sols, Trivedi said.
Chudasama can relate to Cline’s explanation of market differentiations. Kriya owns a La Quinta Inn & Suites in Grand Prairie and another, a Del Sol, in Plano. Kriya opened its La Quinta Inn & Suites in Grand Prairie, Texas, in 2009. The company exceeded the brand design standards at the time. “When we opened, we looked at competing with Comfort Suites, Fairfield Inn and Hampton Inn. Once we started construction, it was announced a new Cowboys stadium was going up in Arlington (a straight 10-mile drive from the LQ),” Chudasama said. AT&T Stadium opened the same year as Kriya’s hotel. “Our revenue has increased every year since we opened.” This year, he said, Kriya will significantly renovate the 8-year-old asset.
Chudasama and his partners at Kriya live a charmed life. When the company began construction of its La Quinta Del Sol prototype in Plano, Toyota announced it was building its North American headquarters on 100 acres less than seven miles away, bringing 5,000 jobs. The Plano hotel opened in August, and Toyota’s HQ is expected to open this spring.
The hotel, said Chudasama, is handily competing against full-service properties Courtyard and SpringHill Suites, both Marriott brands. La Quinta does not have an F&B requirement beyond breakfast so Kriya has been testing a bar concept, offering appetizers and a variety of beverages in the afternoon and evening.
Trivedi said the Del Sol prototype has attracted sophisticated owners and investors who have taken the modernized brand into high-barrier-to-entry markets where it could not have been able to compete before.
Champion Hotels is building a La Quinta Inn & Suites in Oklahoma City’s trendy Brickyard neighborhood. A landmark hotel in downtown Dallas has been renovated into a La Quinta while one is about to open in downtown Memphis. Two are going up in New York City, one in Manhattan and the other in Brooklyn; and a franchise agreement has been signed for a La Quinta in the Gas Lamp District of San Diego. Many more existing franchised hotels are undergoing renovations to keep up with the new image.
“We are now having conversations with institutional investors, people with larger portfolios that include many other premium brands,” Trivedi said. “We have become very careful about new locations now. It has become a tremendous priority for us that we identify locations that are absolutely attractive for business. As a result, our franchising is growing in new markets at an aggressive pace.”
La Quinta Inns & Suites has a lot of runway left to expand in the U.S., Cline said. Of the 629 market tracts carved out by STR, the brand is not present in a third of them. And in markets where it does have a presence, it is underpenetrated.
“We can roughly double the size of the La Quinta brand today,” he said. “The market opportunity for us is to go to 1,800 or 1,900 properties in the U.S. It will take a little while; I wish we could do it overnight, but we have to prove our concept is more than a Southwest brand.”
Divide and Conquer
La Quinta REIT may be ‘next logical step,’ says CEO
La Quinta Motors Inns Inc., as it was called in 1968, has shape-shifted into various forms over the decades – including a private venture, a franchiser, a limited partnership and a REIT before owner Blackstone Group took it public in 2014.
In April 2015, one year after beginning to trade on the New York Stock Exchange, the company saw its stock price reach an average monthly high of $24.86. That was a halcyon moment. Since then the stock has fluctuated, going as low as $10.01 per share last September and ending January with an average of $14.31 and a market cap of $1.64 billion.
Its stock performance of late and its lackluster third-quarter results belie the company’s optimistic outlook, which is fueled by three things: Its pipeline of 240 franchised hotels, 90 percent of which are new builds in 38 new markets; its $160 million capital improvement and repositioning of 55 owned hotels; and its history of creatively dodging the impact of negative financial trends, at least enough to avoid getting mortally wounded.
True to its history, La Quinta may morph into yet another business structure. The company’s shares jumped 4 percent Jan. 18 after it announced it was exploring a shift in strategy that would split its corporate-owned hotels from its managed and franchised properties, creating two separate publicly traded companies. As of the third quarter of 2016, it had 325 owned assets.
Keith Cline, president and CEO, said the maneuver “could prove to be the most logical next step” for La Quinta. There are no other single-branded REITs and that would be an attraction for investors, Cline said during a Jan. 19 conference call with analysts. “It would be the only publicly traded REIT out there strategically focused on servicing the midscale and upper-midscale segments of lodging.”
Cline said the split would create “two separate companies that can deploy against their own strategy.” He said the franchising and management business generated more than $100 million in revenue in 2016.
Transitioning to a REIT would take a year to accomplish. It may not even occur, but the announcement signals the company recognizes the need to carve out more value overall.
Hotel companies split into REITs for two fundamental reasons, said Jack Corgel, adviser to CBRE Hotels Americas Research and a professor at Cornell University’s School of Hotel Administration who recently taught a class in real estate securities.
The first reason: Companies with combined owned and franchised and managed assets see the value of their owned real estate “get lost,” he said.
“By splitting the company into parts,” Corgel said, “it allows shareholders to trade on the fundamental promises of each company.” The franchising and management company would trade on the basis of operations (business performance). The REIT would trade on the basis of the owned real estate’s value. Business performance of the owned hotels would impact that value.
The second reason is to give securities analysts a clear focus of the company. Mixing owned, managed and franchised assets paints a fuzzy picture. “Analysts can upgrade or downgrade a company depending on how focused it is on each of its businesses,” Corgel said.
Another reason to split into a REIT is for tax purposes. During the call with analysts, Cline said the tax basis of its owned hotels is $1.7 billion. The rules, however, have recently changed and La Quinta Holdings will face a significant capital gains tax if it goes through with the owned-asset REIT, Corgel said.
Cline told analysts La Quinta is exploring ways it can minimize “tax leakage” in forming a REIT.
During the call, several analysts asked why La Quinta doesn’t explore selling off all or part of the business. Cline continually responded the company is not privy to what its competitors may be up to, and decided the split is a way the company can maximize its value at this time.