1. 4/15/14 10:56 AMSNL: MarketWeek: La Quinta debuts as homelier Blackstone beauty | SNL
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Friday, April 11, 2014 3:01 PM ET
La Quinta debuts as homelier Blackstone beauty
By Joseph Williams
Blackstone Group LP presented another one of its hotel darlings to the world of public investing this week, but suitors were not nearly as romanced
by the midtier hotel brand La Quinta Holdings as they were with its big, beautiful sister, Hilton Worldwide Holdings Inc.
The company faltered a few times on its way down the market's red carpet. First, Blackstone tried to sell La Quinta on the private market but could
not find the right buyer, so the firm decided to take the company public. Then, La Quinta priced at just $17, below its expected range of $18 to
$21.
"They were looking for a price that they didn't get in the private markets, so they decided to bring this company public, and they didn't get the price
they wanted in the public markets," MLV & Co. analyst Ryan Meliker told SNL. "So maybe they had a view that this was worth a lot more than it
really was."
The prevailing market conditions did not help. Hilton's debut was held during a time of peak IPO interest, but in recent weeks, investors have
become a little standoffish after a glut of initial offerings. The week La Quinta hit the block was projected to be the busiest week for IPOs in seven
years, The New York Times reported April 8. Yet, investor appetite for new offerings has waned significantly, driven in part by softness in the public
markets. The SNL US REOC Hotel index is down 1.99% year-to-date after a booming year in 2013, and the S&P 500 and the Dow Jones Industrial
are down 0.83% and 2.45%, respectively.
But despite investors' seemingly jaded view of the IPO market, Meliker conceded that it is still a good time for a hotel IPO, even if that is not the very
best option. Despite the soft 2014 hotel equities market, valuations are still solid, and most prognosticators are looking for plenty of runway left in the
hotel operational cycle.
Indeed, positive talk about hotel investment has reached a fever pitch, rivaling the heady days before the economic crisis. Meliker said he believes
investors can count on two years of operational growth, and thus the equity markets are the way to play the cycle. With such a limited time horizon,
however, it may be past time to invest in real estate, which typically assumes a three-year hold or more.
In contrast, President and CEO of LW Hospitality Advisors Daniel Lesser said he sees a much longer runway and a much more advantageous
property cycle. To support his thesis, he pointed at the private equity hotel guru itself: Blackstone.
"Look at what Blackstone is doing. They are the epitome of hotel expert investor-owner. They are shedding assets, but they're also investing in new
opportunities within the hotel space," Lesser said.
Indeed, Blackstone has spun out Hilton, La Quinta and Extended Stay America Inc. in IPOs over the past several months, exiting those investments
when the cycle was perceived to be hot, but it has also picked up some properties. The firm last month bought 15 hotels from OTO Development. In
September 2013, Blackstone agreed to purchase a 16-property portfolio from Hersha Hospitality Trust, and in April 2013 the firm signed off to
buy the Hyatt Regency Waikiki for $450 million.
Lesser cited these transactions as proof that the hotel property market is still a compelling place for investors.
"That to me is the real litmus test that we really are at the sweet spot of the cycle," he said, adding that he imagines there is as much as five years of
solid growth left for lodging and that "we'll see a tremendous amount of hotel transaction activity in 2014."
So while it is a fine time for an IPO, the appetite for properties from private equity like Blackstone suggests that the private market may have been a
better route for La Quinta, even if it could not close the deal the first time around. Meliker said private equity firms are getting a much better cost of
debt, partly because debt supply and demand in the private market has hit a crescendo.
"Based on what we're hearing from a leverage standpoint and what we're seeing from transactions in the private markets, private equity has a lower
cost of capital today than the REITs," the analyst said, adding that REITs are held back by their conservative balance sheets, while private equity
has gotten the upper hand, given its propensity to leverage as high as 85% loan to value. "With cost of debt and where you have interest rates right
now, that's a very powerful cost of capital advantage that we've seen shift from the REITs to private equity over the past 12 months."
In turn, Meliker said he was surprised that the company could not find a buyer at its requisite levels on the private markets, but it could be due to the
company's business model.
La Quinta does have a massive portfolio on a per-property basis. The company reported in its Feb. 10 IPO registration statement that it owns 836
hotels comprising 84,306 rooms in the U.S., Canada and Mexico. That puts the company above every other hotel REIT and REOC besides Host
Hotels & Resorts Inc. for the most hotels and most rooms owned.
Given the nature of the cycle, hotel owners are priced at a premium to hotel managers. With expectations of performance growth for years to come,

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owners will be able to generate higher returns given their ability to work off of margins rather than the flat percentage rates franchisers tend to work
with. Meliker pointed out that REITs under his coverage on average are trading at a 13.9x 2014 earnings multiple, whereas C corporations are
discounted at a 13.3x multiple.
However, La Quinta, despite being a major owner, is held back by the nature of its properties.
For one thing, the company's hotels typically value on the low end of the property spectrum, leaving it with a softer NAV than most other public hotel
owners. Nowhere in the company's portfolio are the Grand Hyatts, Westins and Ritz-Carltons that support Host's valuation.
Furthermore, La Quinta is boxed in by its business model. Generally speaking, the company has only one type of interstate property, midscale, a
segment that has been underperforming this cycle as consumers at the low end of the income spectrum are still experiencing high unemployment
rates. Also, the one-brand model leads to problems of diversity and customer loyalty.
"I tend to not be a believer in platforms that have a single brand, particularly platforms that have a single brand at the midtier level like La Quinta or
Extended Stay, because you don't benefit from rewards programs and guest loyalty," Meliker said.
He explained that brands such as Marriott International Inc., Hyatt Hotels Corp. and Starwood Hotels & Resorts Worldwide Inc. can offer their
midscale customers loyalty points toward vacations in their upscale properties. Such programs have been a proven method of driving traffic at the
midscale. La Quinta can only offer its customers other La Quinta hotels, which do not range very far in the chain-scale spectrum.
"The reality is that taking your family on vacation for a week to the La Quinta is not that incentivizing, so that brand gets a lot more value when rolled
up into a larger platform," Meliker said.
But where Meliker sees holes in the company's model, Lesser sees opportunity.
"I don't think the fat lady has sung yet," Lesser said of the IPO. "La Quinta is a good brand that has a lot of runway in terms of being able to exploit
the brand identity. There's lots and lots of real estate in the world where La Quinta can plant their flags, so I think there's definitely an upside story
here and a growth story."
The company has options, he said. It has already begun expanding in Mexico, and Lesser would like to see it expand farther, into South America,
and capture some of the growing middle class across Latin America, not to mention the large swaths of the U.S. that still have very few or no La
Quintas. The company could also acquire or develop a higher-scale brand. And Lesser echoed Meliker when he suggested that the company could
still entertain a sale to a bigger hotel owner. A massive collection of select-service properties could certainly find a place in several existing portfolios.
"The reality is, there's a ton of argument that we need consolidation among the publicly traded hotel companies, not more of them, and this seems
like a company that would fit very nicely within another platform," Meliker concluded. "Maybe we get there; maybe we don't. We'll see what
happens."
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