La Quinta pursuing spin off of real estate into separate company

La Quinta Holdings, in a strategy to create maximum value for shareholders, is pursuing the separation of its businesses into two publicly traded companies. The move would involve spinning off its owned real estate assets into a real estate investment trust.

As La Quinta pointed out, the split is not a done deal and "there is no assurance that the separation of the company’s business will occur," it said in a statement. 

But Keith Cline, president and CEO of La Quinta, is sanguine about the prospects. "The reason we are doing this is because it's the best way to lead to maximum created value," he said. "Our enterprise strategy is about three things: 1) driving consistency of product; 2) driving consistency and delivery of the guest experience; 3) driving engagement. Our next logical step in creating more value is to unlock both companies and let them float independently where each can focus on their own strategy with a distinct management team."

As of the end of Q3, La Quinta had a total portfolio of 900 hotels, 326 of which, or 40 percent, were company owned. (Cline reiterated that the company, a year ago, made the decision that it would like to sell 50-100 hotels.) "That's a sizeable REIT," Cline said, alluding to the potential of a 326-property REIT, which would be the only single-branded REIT on the market. That could change. "Most REITs have a diversification strategy, so it might grow through other brands and become a consolidator in this chain scale in the industry. There is a unique opportunity to grow the REIT in the midscale and upper-midscale space," Cline said.

Part of the urgency with floating the REIT is a tax concern. In recent years, the IRS has made it more difficult for companies to advantageously spin off REITs, which generally were not subject to corporate-level taxes on income distributed to its shareholders. New tax legislation, effective for distributions on or after Dec. 7, 2015, curbs this tax planning strategy by severely restricting the application of tax-free spinoff treatment under Sec. 355 to REITs.

La Quinta, however, was a REIT up to 2014 when it went public; it then delisted the REIT. Now, as Cline noted, it had to undergo a five-year wait period before it could reelect REIT status. "We are looking to minimize tax leakage," Cline said. "By effecting the spin the way we are, we can shorten that timing and reelect REIT status by beginning of next year."

The split would allow La Quinta to realize more value in both businesses. "For people who invest in hotel companies, many times there is a different shareholder profile: one who is interested in owning companies that have assets and those that are interested in owning asset-light vehicles. [This split] increases optionality," Cline said.

La Quinta's move is not unlike other hotel companies seeking to unlock shareholder and investor value. Earlier this month, Hilton Worldwide Holdings announced the completion of the spin-offs of Park Hotels & Resorts and Hilton Grand Vacations, resulting in three independent, publicly traded companies.