La Quinta Holdings filed a Form 10 Registration Statement yesterday with the U.S. Securities and Exchange Commission to begin the process of spinning off its real estate business into a separate entity. La Quinta's new business will be a real estate investment trust operating under the name CorePoint Lodging, and will be independent of La Quinta's franchise and management business.
Once active, CorePoint will initially consist of 316 properties with approximately 40,500 rooms. The spinoff of La Quinta's real estate business was hinted at in January, with Keith Cline, president and CEO of La Quinta, saying at the time that the move was being taken in part to maximize the company's value. In an investor call Thursday, Cline said La Quinta has already received pre-clearance from the Securities and Exchange Commission for the spinoff.
“This new La Quinta will be a market-leading, asset-light, fee-based franchise and management business that expects to capitalize on the growth opportunity with a large and growing pipeline and strong interest from developers to develop the La Quinta brand into new markets and a highly scalable property-management platform,” Cline said during the call.
Through yesterday's announcement, Cline said the separation of businesses will "result in greater strategic clarity, with distinct management teams that can fully activate and run the respective businesses." In today's call, Cline was asked if La Quinta is also mulling over a possible divergence between its management and franchising operations, but Cline said that discussion would have to take place under management at the "new" La Quinta.
By Any Means
In January, Cline said La Quinta was looking at creating a REIT in order to grow in the midscale and upper-midscale space, but creating a REIT comes with stipulations. New tax regulations that went into effect in December of 2015 restricted the access to exemptions from corporate-level taxes in spinoff REITs, but La Quinta previously was a REIT until 2014, when it delisted after going public. Cline noted earlier this year that the company had to wait out a five-year period before it could pursue REIT status once again, which is what initially prompted the decision to spin off the company's real estate business into CorePoint. Through the spinoff, La Quinta believes it can shorten the waiting period for REIT reclassification, positioning the spinoff for early 2018.
While Cline said the company is optimistic about tax reform in the near future as a result of changes taking place within the federal government, the transaction is expected to be taxable at the corporate and shareholder levels, though La Quinta is unsure of the total cost.
During today's call, Cline said the company was open to "any option we believe would drive value to the business and the shareholders," including a potential company sale. However, he wasn't willing to discuss hypothetical situations, and instead focused on the $180 million in capital improvements carried out at La Quinta hotels in 2016 and 2017.
As a standalone company, CorePoint is expected to have a 2017 total adjusted earnings between $200 million and $215 million before interest, taxes, depreciation and amortization. CorePoint will pay 5 percent of gross hotel revenues in La Quinta management fees in return for daily hotel management, as well as a 5-percent royalty fee on gross room revenues.
Two Heads are Better
In a statement to HOTEL MANAGEMENT, Cline said CorePoint Lodging's biggest benefit will be its ability to fly other flags and acquire other hotels under different brand networks in addition to La Quinta. While CorePoint will launch with an initial 316 La Quinta properties, Cline said the company is set to diversify quickly.
"CorePoint has the opportunity to become a consolidator in this space across all brands, and it's a different opportunity from La Quinta," Cline said.
Cline also said both La Quinta and CorePoint will benefit from having isolated leadership organizations capable of focusing on their core competencies of hospitality and real estate, while assisting one another when necessary.
"We believe this separation provides a lot of strategic clarity for both organizations," Cline said. "With two different management teams, it's a unique opportunity to fully activate and run each independently. It will provide us advantages in capital markets and through capital efficiencies, so we are looking forward to completing the spin."