A recent SEC filing has revealed plans for a new real estate investment trust named CorePoint Lodging, made up of La Quinta Holdings’ owned assets.
IRVING, Texas—Officials with La Quinta Holdings took a step Wednesday they’ve been openly pondering for most of a year when they filed a Form 10-Q with the U.S. Securities and Exchange Commission, formally starting the process of spinning off their owned assets as a real estate investment trust.
The newly formed company, which will technically be the result of a “reverse spin,” will be publicly traded under the name CorePoint Lodging, and will include 316 properties with approximately 40,500 rooms at its outset. Since first disclosing plans for a possible spinoff in January, company officials have touted what they believe to be the new company’s unique positioning among lodging REITs.
“CorePoint Lodging expects to be the only publicly-traded U.S. lodging REIT strategically focused on serving the midscale and upper-midscale select-service segments, offering a geographically diverse portfolio of hotels with significant underlying real estate value,” states a news release from La Quinta.
La Quinta President and CEO Keith Cline noted his company has received preclearance from the SEC on the planned reverse spin.
La Quinta Holdings will continue to operate with the same name and New York Stock Exchange symbol for its managed and franchised hotels business.
“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 a call with investors Thursday.
When asked by analysts if the new version of La Quinta would look at splitting its management and franchising operations eventually, Cline said it’s too early to say.
“That kind of next iteration would be a strategy or discussion that would be undertaken by the management team that’s put in place for the new La Quinta,” he said.
La Quinta hasn’t announced plans for management teams for either of the post-spin companies.
The planned spin would make La Quinta the latest in a line of hotel companies that have pursued separations of their owned real estate to operate as asset-light branding companies. AccorHotels is currently pursuing a partial carve-out of its owned real estate, while Hilton completed a spinoff at the beginning of the year, creating Park Hotels & Resorts in the process. And the largest lodging REIT, Host Hotels & Resorts, was once a spinoff of Marriott International’s owned assets.
On the table
“We believe this separation will result in greater strategic clarity, with distinct management teams that can fully activate and run the respective businesses,” Cline said in a news release.
Asked if either of the post-spin businesses would have potential for a sale to another company, Cline told analysts everything is on the table.
“We would consider any option we believe would drive value to the business and the shareholders,” he said, noting he couldn’t comment on a “theoretical transaction.”
Cline told analysts the plan for CorePoint post-spin would be to diversify both geographically and in terms of brand. He also said the company would benefit from $180 million in capital improvements to the properties in 2016 and 2017.
Cline said he expects to have the SEC approvals required to make the spin official as early as the fourth quarter of 2017, but noted he expects it to be completed in early 2018.
Company officials said the transaction would be “taxable at both the corporate and shareholder levels.” Cline said it’s unclear what the tax hit for the deal would be at this point. He said it could be affected by tax reform efforts in the federal government, and the timing of completion could be adjusted to take advantage of potential tax reform.
Part of La Quinta’s planned transaction will be signing franchise and management agreements with CorePoint for the new company’s hotels.
The deals are expected to have 20-year initial terms with options to extend up to another 10 years and to pay La Quinta “a management fee of 5% of gross hotel revenues in return for day-to-day management of (CorePoint’s) hotels and a royalty fee of 5% of gross room revenues,” according to the news release.
Cline said those rates are consistent with those seen by other franchisees.
Company officials outlined some of their financial expectations for the new asset-light La Quinta, presuming the spinoff is completed. The leaner La Quinta projects full-year 2017 earnings before interest, taxes, depreciation and amortization between $110 million and $115 million, including the planned agreements with CorePoint. The REIT’s projected full-year EBITDA is $200 million to $215 million.
In the company’s release of its first-quarter earnings results, officials projected adjusted EBITDA for the company with its owned assets between $320 million and $340 million for the full year.
La Quinta has noted that no further approvals are required from the company’s shareholders to move forward with the spinoff and they have already “authorized a reverse stock split of La Quinta’s common stock in connection with the spinoff.”
*Correction 27 July 2017: A previous version of this story included a photo of a property that is franchised and not an owned asset of La Quinta Holdings.