S-1/A 1 d640354ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
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As filed with the Securities and Exchange Commission on March 27, 2014

Registration No. 333-193860

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

La Quinta Holdings Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7011   90-1032961

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

909 Hidden Ridge, Suite 600

Irving, Texas 75038

(214) 492-6600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Mark M. Chloupek

Executive Vice President, Secretary and General Counsel

909 Hidden Ridge, Suite 600

Irving, Texas 75038

(214) 492-6600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Michael D. Nathan, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

 

Marc D. Jaffe, Esq.

Cathy A. Birkeland, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022-4834

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered(1)

 

Proposed

maximum

offering price

per share(2)

 

Proposed

maximum

aggregate
offering price(1)(2)

 

Amount of

registration fee(3)

Common Stock, par value $0.01 per share

  42,780,000   $21.00(2)   $898,380,000   $115,711

 

 

(1)   Includes 5,580,000 shares subject to the underwriters’ option to purchase additional shares.
(2)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(3)   $83,720 of which has been previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor do we seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated March 27, 2014

37,200,000 Shares

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La Quinta Holdings Inc.

Common Stock

This is an initial public offering of shares of common stock of La Quinta Holdings Inc. All of the shares of common stock are being sold by us.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $18.00 and $21.00. We have applied to list our common stock on the New York Stock Exchange under the symbol “LQ.”

After the completion of this offering, affiliates of The Blackstone Group L.P. will continue to own a majority of the voting power of all outstanding shares of our common stock. As a result, we will be a “controlled company.” See “Management—Controlled company exception” and “Security ownership of certain beneficial owners and management.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. See “Prospectus summary—Implications of being an emerging growth company.”

See “Risk Factors” beginning on page 22 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

      Per share      Total  

Initial public offering price

   $                       $                   

Underwriting discounts and commissions

   $        $    

Proceeds, before expenses, to us(1)

   $         $     

 

 

 

(1)   See “Underwriting.”

To the extent that the underwriters sell more than 37,200,000 shares of common stock, the underwriters have the option to purchase up to an additional 5,580,000 shares of common stock from us at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the shares against payment in New York, New York on         , 2014.

 

J.P. Morgan   Morgan Stanley

 

BofA Merrill Lynch   Citigroup

 

  Credit Suisse

 

Deutsche Bank Securities  

Goldman, Sachs & Co.

 

Wells Fargo Securities

 

Blackstone Capital Markets   EA Markets   Evercore   JMP Securities

 

Lebenthal Capital Markets   Loop Capital Markets   Mischler Financial Group, Inc.

 

Ramirez & Co., Inc.   Raymond James   RBC Capital Markets   Stifel

Prospectus dated                 , 2014.


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Prospectus

 

     Page  

MARKET AND INDUSTRY DATA

     i   

TRADEMARKS, SERVICE MARKS AND TRADENAMES

     ii   

BASIS OF PRESENTATION

     ii   

CERTAIN DEFINED TERMS

     iii   

PROSPECTUS SUMMARY

     1   

THE OFFERING

     16   

SUMMARY HISTORICAL COMBINED FINANCIAL DATA

     18   

RISK FACTORS

     22   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     58   

OUR PRE-IPO TRANSACTIONS AND ORGANIZATIONAL STRUCTURE

     60   

USE OF PROCEEDS

     62   

DIVIDEND POLICY

     63   

CAPITALIZATION

     64   

DILUTION

     66   

UNAUDITED PRO FORMA FINANCIAL INFORMATION

     68   

SELECTED FINANCIAL AND OTHER DATA

     80   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     82   

INDUSTRY

     112   

BUSINESS

     116   

MANAGEMENT

     136   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     157   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     160   

DESCRIPTION OF INDEBTEDNESS

     162   

DESCRIPTION OF CAPITAL STOCK

     168   

SHARES ELIGIBLE FOR FUTURE SALE

     175   

CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS

     177   

UNDERWRITING (CONFLICTS OF INTEREST)

     181   

LEGAL MATTERS

     187   

EXPERTS

     187   

WHERE YOU CAN FIND MORE INFORMATION

     188   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 


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We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.


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Market and industry data

Within this prospectus, we reference information and statistics regarding the hotel industry and various segments within such industry. We have obtained this information and statistics from various independent third-party sources, including independent industry publications, reports by market research firms and other independent sources. Smith Travel Research (“STR”) and PKF Hospitality Research, LLC (“PKF-HR”) are the primary sources for third-party market data and industry statistics and forecasts. STR does not guarantee the performance of any company about which it collects and provides data. Nothing in the STR or PKF-HR data should be construed as advice. We have also obtained information from surveys conducted by Temkin Group (“Temkin”) and Forrester Research, Inc. Some data and other information are also based on our good faith estimates, which are derived from our review of internal surveys and independent sources. We believe that these external sources and estimates are reliable, but have not independently verified them.

RevPAR Index, which measures a hotel’s fair market share of its competitive set’s revenue per available room, is stated as a percentage and is calculated for a hotel by comparing the hotel’s RevPAR to the aggregate RevPAR of a group of competing hotels generally in the same market (referred to as a “competitive set”); and when presented for a group of hotels is a weighted average of the individual hotel results. The manager for each of our owned hotels and each franchisee exercises discretion, subject to adherence to certain guidelines published by STR and described below and to review by La Quinta management to ensure system-wide consistency, in identifying the competitive set of properties for each such hotel. They consider such factors as physical proximity, competition for similar customers, services and amenities, quality and average daily rate, with location being the most significant factor. Competitive set makeup is initially determined when a new hotel enters our system and is reviewed for continuing appropriateness as non-La Quinta hotels enter and leave our markets. Each La Quinta hotel’s competitive set complies with the following four STR published guidelines, each of which places limitations on properties that may be included in a competitive set: (1) each competitive set must include a minimum of three participating properties, in addition to the subject property; (2) no single property or brand can account for more than 40% of the total participating room supply of a competitive set, excluding the rooms of the subject property; (3) no single company can account for more than 60% of the total participating room supply of a competitive set, excluding the rooms of the subject property; and (4) each competitive set must include a minimum of two companies other than that of the subject property. We may include certain competitors in a hotel property’s competitive set and those competitors may or may not include our hotel in their competitive set. We provide, for each La Quinta hotel, our proposed competitive set to STR for publication. STR confirms that each proposed competitive set complies with their published guidelines and then uses that information, along with ADR and RevPAR for each such hotel (which ADR and RevPAR may be calculated differently than we or our competitors do for internal purposes) to calculate RevPAR Index. STR calculates RevPAR Index for the current period and prior periods based on the competitive sets existing as of the date of the STR report for the current period. Accordingly, our future filings may disclose historical RevPAR Index for prior periods that differ from those disclosed in this prospectus.

 

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Trademarks, service marks and tradenames

We own or have rights to use a number of registered and common law trademarks, service marks and trade names in connection with our business in the United States and/or in certain foreign jurisdictions, including, but not limited to, “La Quinta,” “La Quinta Inn,” “La Quinta Inn & Suites,” “LQ Instant Hold,” “LQ” and “Returns.”

Solely for convenience, the trademarks, service marks, logos and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. This prospectus contains additional trademarks, service marks and trade names of others, which are the property of their respective owners. All trademarks, service marks and trade names appearing in this prospectus are, to our knowledge, the property of their respective owners.

Basis of presentation

Prior to completion of this offering, we will effect the transactions (the “Pre-IPO Transactions”) described under “Our pre-IPO transactions and organizational structure.” Unless otherwise indicated or the context otherwise requires, all information in this prospectus reflects the consummation of the Pre-IPO Transactions and references in this prospectus to “we,” “our,” “us” and the “Company” refer to La Quinta Holdings Inc. and its consolidated subsidiaries, and references to “La Quinta Holdings Inc.” and the “Issuer” refer only to La Quinta Holdings Inc. exclusive of its subsidiaries, in each case after giving effect to the Pre-IPO Transactions.

As of December 31, 2013, four of our La Quinta-branded hotels were designated as assets held for sale and the results of their operations together with the operations of the 29 hotels sold during 2013, have been classified as discontinued operations (collectively, the “Hotels Designated for Sale”). Sales of these four hotels closed subsequent to December 31, 2013.

Presentation of historical non-financial data and pro forma financial information.    Unless otherwise indicated or the context otherwise requires, (i) operating and other non-financial data, including number of hotels and related data, disclosed in the sections of this prospectus other than the Financial Statement Sections (as defined below) and (ii) pro forma financial information in this prospectus:

 

 

reflects the combined and consolidated business and operations of the entities expected to be owned by the Company at the completion of this offering and previously under common control or otherwise consolidated for financial reporting purposes and their consolidated subsidiaries (the “Predecessor Entities”);

 

 

includes the 14 La Quinta hotels managed by the Predecessor Entities (the “Previously Managed Portfolio”) as owned hotels, which will be acquired by the Predecessor Entities at the time of the consummation of this offering (see “Our pre-IPO transactions and organizational structure”);

 

 

includes the Hotels Designated for Sale (with the Hotels Designated for Sale treated as discontinued operations in the pro forma financial information); and

 

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excludes 11 Baymont-branded hotels (the “Baymont Hotels”) which we sold on August 8, 2013 (with the Baymont Hotels treated as discontinued operations in the pro forma financial information).

We expect to present our financial results following the completion of this offering in accordance with the basis of presentation for pro forma financial information as described above.

Presentation of combined financial information and certain other non-financial data.    Unless otherwise indicated, or the context otherwise requires, (i) the historical financial data (excluding all pro forma financial data) in this prospectus and (ii) the operating and other non-financial data (but excluding all related data prepared on a pro forma basis), including number of hotels and related data, disclosed in “Summary historical combined financial data,” “Selected financial and other data” and “Management’s discussion and analysis of financial condition and results of operations” (collectively, the “Financial Statement Sections”):

 

 

reflects the combined and consolidated business and operations of the Predecessor Entities;

 

 

treats the Previously Managed Portfolio as franchised and managed hotels;

 

 

excludes the Hotels Designated for Sale (other than as discontinued operations); and

 

 

excludes the Baymont Hotels (other than as discontinued operations).

Except where the context requires otherwise, the information in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional 5,580,000 shares of common stock from us and that the shares of common stock to be sold in this offering are sold at $19.50 per share, which is the mid-point of the price range indicated on the front cover of this prospectus.

Certain defined terms

The following are definitions of certain terms used in this prospectus:

 

 

“ADR” or “average daily rate” means hotel room revenues divided by total number of rooms sold in a given period;

 

 

“Blackstone” or “our Sponsor” means The Blackstone Group, L.P. and its affiliates;

 

 

“CAGR” means compound annual growth rate;

 

 

“Comfort” refers to Comfort Inns and Comfort Suites collectively;

 

 

“comparable hotels” means hotels that: (i) were active and operating in our system for at least one full calendar year as of the end of the applicable period and were active and operating as of January 1st of the previous year; and (ii) have not sustained substantial property damage, business interruption or for which comparable results are not available. Management uses comparable hotels as the basis upon which to evaluate ADR, occupancy, RevPAR and RevPAR Index on a system-wide basis and for each of our reportable segments;

 

 

“existing owners” refers to Blackstone and the members of our management and consultants that own, directly or indirectly, interests in the Predecessor Entities;

 

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“franchised hotels” refers to La Quinta-branded hotels which are owned and operated by franchisees under franchise agreements with us;

 

 

“Hampton” refers to Hampton Inns and Hampton Inn & Suites collectively;

 

 

“main STR competitive set” refers to Comfort, Holiday Inn Express and/or Hampton, the brands most often included in our STR competitive sets;

 

 

“occupancy” means the total number of rooms sold in a given period divided by the total number of rooms available at a hotel or group of hotels;

 

 

“owned hotels” and “owned portfolio” refer to our hotels located on properties in which we have an ownership interest or leasehold interest;

 

 

“pipeline” means our portfolio of future La Quinta-branded hotels, each of which is represented by an executed franchise agreement;

 

 

“RevPAR” or “revenue per available room” means the product of the ADR charged and the average daily occupancy achieved;

 

 

“RevPAR Index” measures a hotel’s fair market share of its competitive set’s revenue per available room. See “Market and industry data”;

 

 

“system-wide” refers collectively to our owned, franchised and managed hotel portfolios;

 

 

“team members” refers to our employees at our owned hotels and the employees of our franchisees at our franchised hotels;

 

 

“Temkin Experience Ratings” means the annual ranking by Temkin of U.S. companies in terms of customer experience based on a survey of approximately 10,000 U.S. customers regarding their recent interactions with such companies; and

 

 

“U.S. defined market tracts” refers to the 628 geographic areas or locations in the United States, compiled by STR, each of which is a subset of a geographic market.

 

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Prospectus summary

This summary highlights certain significant aspects of our business and this offering. This is a summary of information contained elsewhere in this prospectus, is not complete and does not contain all of the information that you should consider before making your investment decision. You should carefully read the entire prospectus, including the information presented under the section entitled “Risk factors” and the combined financial statements and the notes thereto, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from future results contemplated in the forward-looking statements as a result of certain factors such as those set forth in “Risk factors” and “Special note regarding forward-looking statements.” When making an investment decision, you should also read the discussion under “Basis of presentation” above for the definition of certain terms used in this prospectus and a description of certain transactions and other matters described in this prospectus.

 

 

Company overview

We are a leading owner, operator and franchisor of select-service hotels primarily serving the midscale and upper-midscale segments under the La Quinta brand. Based on data provided by STR, La Quinta is the fastest growing principal select-service hotel brand in the United States primarily serving these segments in terms of percentage growth of number of hotels over the last ten years ended December 31, 2013, growing our total number of hotels from 362 in 2003 to 834 as of December 31, 2013, significantly outpacing the percentage growth of hotels franchised, owned and operated by Comfort, Holiday Inn Express and Hampton, the hotel brands one or more of which is most often included in the competitive sets we determine for STR, subject to STR’s guidelines, which we refer to as our “main STR competitive set.” Our system-wide portfolio, as of December 31, 2013, consisted of 834 hotels representing approximately 84,000 rooms located predominantly across 46 U.S. states, as well as in Canada and Mexico, of which 357 hotels were owned and operated and 477 were franchised. We also have a pipeline of 187 franchised hotels as of December 31, 2013, to be located in the United States, Mexico, Canada, Colombia and Honduras (79% of which represents new construction as opposed to the conversion of an existing hotel).

The following table illustrates the growth in number of our owned and franchised hotels from 2003 to December 31, 2013.

 

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(1)   Certain of our owned hotels were previously operated by us as non-La Quinta hotels and are not included in this table until such time as they were converted to La Quinta-branded hotels. From the Acquisition through December 31, 2013 and primarily in 2006, we converted 128 hotels.

 

 

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We primarily derive our revenues from owned hotel operations and fees generated from franchised and managed hotels. On a pro forma basis, for the year ended December 31, 2013, we generated total revenue of $909.1 million, Adjusted EBITDA of $340.2 million and net income from continuing operations of $44.9 million. For a reconciliation of Adjusted EBITDA, see “Summary historical combined financial data.”

We are focused on providing clean and comfortable guest rooms at affordable prices in convenient locations, with approximately 24% of our hotels serving the upper-midscale segment, approximately 59% of our hotels serving the midscale segment, approximately 10% (principally our owned hotels) serving the economy segment and the balance serving the remaining segments. Our hotels have fewer costly services and amenities than full-service hotels, which we believe results in a highly efficient hotel-level cost structure. Our hotels typically include common areas with amenities such as a great room (including breakfast seating area, lobby with seating area and business center), swimming pool and vending areas and generally offer a complimentary breakfast. As of December 31, 2013, the hotels in our system consisted of 565 La Quinta Inn & Suites, which include guest suites and generally are our newer hotels with interior corridors, and 269 La Quinta Inns, 145 of which include interior corridors. Our guest mix includes both business and leisure travelers.

La Quinta was founded in San Antonio, Texas in 1968 and has a 45-year history of owning and operating hotels and, from 1973 to January 2006, we operated through our predecessors as a public company. In 2006, we were acquired by Blackstone (the “Acquisition”), who identified a strategic repositioning opportunity to improve the quality and performance of our owned portfolio, narrow the RevPar Index gap between us and our main STR competitive set and accelerate growth in our franchise business. RevPAR Index measures a hotel’s fair market share of its competitive set’s revenue per available room and is calculated by comparing the hotel’s RevPAR to the aggregate RevPAR of a group of competing hotels generally in the same market.

Our strategic repositioning plan included:

 

 

assembling a management team led by lodging industry and La Quinta veteran Wayne Goldberg;

 

 

investing capital into our owned real estate, brand and technology infrastructure;

 

 

prioritizing the growth of our franchise business and dedicating resources to existing and new domestic franchise markets;

 

 

establishing a franchising infrastructure in Mexico and Central America;

 

 

increasing the focus on operating efficiencies and revenue management within our owned portfolio;

 

 

consolidating operations around the La Quinta brand; and

 

 

increasing the marketing spend with a focus on differentiating the La Quinta brand and growing our loyalty program.

In connection with our strategic repositioning plan from the Acquisition through December 31, 2013, we have expanded our franchise system by approximately three times, growing from 158 franchised hotels to 477 franchised hotels, with an additional 187 hotels in our pipeline. Based on historical experience, converted hotels in our pipeline can generally become operational between

 

 

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12 to 18 months from the date of execution of the franchise agreement, and newly constructed hotels in our pipeline can generally become operational between 36 to 48 months from the date of execution of the franchise agreement. Openings may be delayed, or franchises canceled, for a number of factors, including economic conditions, weather and construction delays, and certain of our pipeline properties may not become operational. Additionally, because revenues from franchised hotels are principally derived from franchise fees rather than room rentals, as we grow our system by increasing the number of franchised hotels, our revenues and expenses will increase at a significantly slower rate than if we were growing our system through an increase in number of owned hotels.

Additionally, over the period from 2007 through December 31, 2013, we have:

 

 

invested a total of $759 million in capital, $310 million of which we consider repositioning capital which was invested to increase our RevPAR Index. Repositioning capital investments included $148 million for improvements across our owned hotel portfolio, including acceleration of some aspects of cycle renovations and $45 million for upgrades to our technology infrastructure. Repositioning capital also included over $74 million expended to upgrade the non-La Quinta hotels we converted to La Quinta-branded hotels after the Acquisition and $42 million to develop our flagship downtown Chicago property;

 

 

after experiencing a decrease in RevPAR Index of 340 basis points from 2006 to 2007, principally due to the conversion over that period of 128 non-La Quinta hotels to La Quinta-branded hotels, increased our system-wide RevPAR Index by 990 basis points to 98.5%;

 

 

sold (or are holding for sale) 33 La Quinta hotels, the effect of which was to improve our system-wide RevPAR and guest satisfaction scores for our remaining portfolio;

 

 

increased membership in our La Quinta Returns loyalty program by 143% from 3.7 million to over 9 million members; and

 

 

improved guest satisfaction scores and we ranked #2 among the 15 and 18 hotel chains included, respectively, in the 2013 and 2014 Temkin Experience Ratings.

Additionally, following the industry-wide economic downturn that began in 2008, our operating performance has improved significantly over the past four years, during the strong lodging industry recovery that industry analysts believe will continue for the next several years. Specifically, we have:

 

 

increased our ADR 14.5% from $69.38 to $79.46 for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2010;

 

 

increased our RevPAR 26.3% from $40.49 to $51.14 for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2010; and

 

 

realized Adjusted EBITDA growth (including the Previously Managed Portfolio as franchised and managed hotels) of 42.1% for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2010.

Although we believe we have been successful in implementing our strategic repositioning plan, we believe there remains significant opportunity for future growth:

 

 

There remains a meaningful ADR differential between us and the hotels in our main STR competitive sets, which we believe we can continue to decrease over time. We estimate that in

 

 

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2013, each $1 increase in ADR across our owned portfolio would have increased our pro forma Adjusted EBITDA for our owned hotels by approximately $11 million, assuming all other variables remain constant.

 

 

Our 2013 Adjusted EBITDA and Adjusted EBITDA margins for our owned portfolio remain below comparable 2008 metrics which we believe represents significant capacity for future organic growth at our hotels.

 

 

We remain approximately half the size of the hotel brands in our main STR competitive set in terms of number of hotels in the United States, which we believe provides for significant future expansion opportunity.

Our competitive strengths

We are driven by our core values and principles that we believe drive a high level of employee and guest engagement. Together with these core values and principles, we believe that the following competitive strengths position us to execute on our business plan and growth strategies.

 

 

Scalable and efficient business model with attractive cash flow characteristics.    Our hotel product offering is efficient, replicable and supported by a scalable operational, technological and administrative platform. Over 98% of our owned hotel revenue is derived solely from room rentals, as compared to 65% for full-service hotels, according to STR, and our operating margins in 2013 were 47% as compared to operating margins in 2012 of 30% for full-service hotels (which reflects the most current available information). As a select-service hotel brand, our hotels require fewer costly services, amenities and capital expenditures than full-service hotels, resulting in what we believe to be a highly efficient hotel-level cost structure, strong Adjusted EBITDA margins and stable cash flows. Even during the height of the recent economic downturn in 2009, our Adjusted EBITDA margins remained above 32% as compared to approximately 20% for full-service hotels, based on data provided by STR. In addition, our model enables us to manage corporate overhead expenses even though the number of our hotels, particularly the number of our franchised hotels, has increased substantially.

 

 

Established and rapidly growing franchise business.    Over the last ten years, we have grown our total number of franchised hotels from 89 in 2003 to 477 as of December 31, 2013, achieving a franchise compounded annual growth rate of 18%. Our franchise business requires little or no capital investment by us (which we refer to as “capital light”), and has substantial scale and an established infrastructure that we believe positions us to achieve meaningful franchise growth as development capital for franchisees continues to become more available. The hotels in our franchise portfolio have an average age of 13 years, with 38% of our franchise portfolio less than 5 years old. Despite the strong decade of growth, we are still less than half the size of our main STR competitive set, allowing room for continued aggressive franchise growth in a number of under-penetrated U.S. markets. As of December 31, 2013, we have a large pipeline of 187 franchised hotels (of which 79% are new construction), each represented by an executed franchise agreement, which upon completion would represent a 39% expansion of our total existing franchise system. Given our founding and significant presence in Texas, our presence in the U.S. southern border states and our established brand history with travelers from this region, we believe La Quinta has significant brand awareness in Mexico and believe Mexico, Central America and South America provide opportunities for significant franchise growth internationally where we have laid the foundation for expansion. Additionally, as our franchise

 

 

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business continues to grow, we expect cash flow from this segment will comprise a higher percentage of our total cash flow. Given that the average remaining term of our existing franchise contracts is approximately 13 years, we believe that our existing franchisees provide a long-term stable income stream. Moreover, we anticipate our franchise revenues will grow over time as new franchise agreements and renewals of existing franchise agreements are executed at our newly published rates, which include a 4.5% royalty fee, which is higher than the 4.0% royalty fee generally applicable to our franchise agreements currently in effect.

 

 

Widely recognized and differentiated brand.    We own, operate and franchise all of our hotels under a single brand, La Quinta, a highly recognizable brand in the select-service market, established over a 45-year history. We also ranked #2 among the 15 and 18 hotel chains included, respectively, in the 2013 and 2014 Temkin Experience Ratings. Additionally, we have a loyal base of customers and a growing loyalty program, La Quinta Returns, with over nine million members as of December 31, 2013. We believe the capital investments we have made to upgrade and reposition our brand and hotel experience have helped to improve our brand awareness, brand perception, guest loyalty and guest experience. Our improved guest experience, brand perception and growing loyalty have contributed to consistent market share increases as reflected by our RevPAR Index growth. We believe that the demonstrated strength of our brand and loyal customer base drive revenues for our existing owned and franchised hotels and also makes us attractive to new franchisees.

 

 

Owner and operator business model promotes alignment with our franchisees.    Our position as an owner and operator of La Quinta-branded hotels creates an alignment of economic interest with our franchisees, which we believe is a differentiating factor among our competitors. We are focused on delivering value to our guests, which generates repeat stays and increases guest loyalty. Delivering value combined with the benefits of an increasing market presence through our growth in the number of hotels has strengthened our brand. We believe this focus and the powerful alignment with our franchisees drive strong operating results and financial returns which benefit both us and our franchisees and will continue to benefit and grow our business in the future. We have an active advisory Brand Council that includes both Company and franchisee representation and meets three to four times a year to discuss ways to improve the performance of our hotels. Through the Brand Council, we often test new concepts at both owned and franchised hotels, which we believe promotes collaboration between us and our franchisees. We believe our model incentivizes franchisees to invest in growing the La Quinta brand through additional capital investment into existing franchised hotels and through the development of new La Quinta hotels.

 

 

Highly experienced and successful management team.    Our management team has extensive experience in hospitality, consumer-facing and brand-based companies, with a proven track record for delivering strong results. Our executive management team has an average industry tenure of 20 years, including Wayne Goldberg with 34 years of select-service experience, Rajiv Trivedi, our Chief Development Officer, with 24 years of industry experience and Angelo Lombardi, our Chief Operating Officer, with 24 years of industry experience. In addition, Keith Cline, our Chief Financial Officer, who joined our executive management team in January 2013, brings over 21 years of finance, accounting and brand experience, including over 12 years of public company experience. Management has developed a culture of strong collaboration and teamwork that runs throughout the organization and has contributed to La Quinta’s successful performance.

 

 

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Our strategies

The following are key elements of our strategy to become the preferred select-service brand for our guests and franchise partners.

 

 

Take advantage of our significant capital investment to optimize the performance of our owned hotels.    We will continue to focus on maximizing revenues and managing costs at each of our owned hotels where we have updated our guest rooms to generally include a 32” flat panel high definition television, pillow-top mattresses, a large work desk with an ergonomic “task” chair, high speed internet access, a coffee maker, high-flow shower heads and curved shower rods. As of December 31, 2013, we had 357 owned hotels, representing 43% of our system-wide portfolio. We intend to drive revenue growth by employing our active revenue management strategies and increasing our ADR, share of hotel stays by return guests, membership in our Returns program, overall brand awareness and volume of our corporate guests. There is currently a meaningful ADR differential between us and the hotels in our main STR competitive sets. We believe the significant amount of capital we have spent since 2007 to reposition and improve the brand and the quality of our hotels, the growth in the number of hotel units in our system and the resulting increased brand awareness will allow us to continue to increase ADR. We estimate that in 2013 each $1 increase in ADR across our owned portfolio would have increased our pro forma Adjusted EBITDA for our owned hotels by approximately $11 million, assuming all other variables remained constant. We further expect to continue to enhance the profitability of our owned hotels by maximizing cost efficiencies through disciplined cost control and focusing on operational enhancements.

 

 

Continue to aggressively grow our capital light franchise business both domestically and internationally.    A primary element of our growth strategy is to continue to grow the number of units in our higher margin, scalable franchise fee-based business. As of December 31, 2013, we had 477 franchised hotels, representing 57% of our system-wide portfolio. Additionally, we have a large pipeline of 187 franchised hotels, 79% of which represents new construction, rather than the conversion of an existing hotel. We believe that there remains meaningful opportunity for continued growth in the United States, with La Quinta under-penetrated in many of the markets served by our main STR competitive set, including the Northeast and Northwest. For example, we are represented in 63% of the 628 U.S. defined market tracts and have an average 2.06 hotels in such represented markets, whereas the hotel brands of our main STR competitive set are represented in over 92% of such market tracts and have an average 3.14 hotels in our represented markets. We also intend to add new domestic franchised hotels in highly populated urban locations to serve a wider group of guests and increase brand awareness. We believe the opportunity for franchise growth in Mexico, Central America and South America is significant given our existing infrastructure, established brand history with travelers from these regions and our presence in the U.S. southern border states and Mexico. We have dedicated franchise and sales personnel who are focused exclusively on our franchise operations in these regions. As of December 31, 2013, we had 22 hotels either open or in the pipeline and continue to explore other franchise opportunities in these international markets.

 

 

Continue to increase La Quinta brand awareness.    We will continue to invest in marketing and brand building in order to increase awareness and differentiation of the La Quinta brand to improve hotel performance in our owned and franchised hotels and attract new La Quinta franchisees. We are able to concentrate our marketing and advertising efforts under a single brand rather than spreading them across multiple brands, which we believe enhances our

 

 

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ability to raise awareness of La Quinta hotels. Our owned and franchised hotels contribute 2.5% of gross room revenues to our Brand Marketing Fund (“BMF”) to support our marketing and build the brand and, from 2007 to 2013, total contributions to our BMF have grown 27% to $38.9 million, and, for the year ended December 31, 2013, 47% of contributions to the BMF, or $18.1 million, were funded by our franchisees. We expect amounts available in the BMF and the percentage of such amounts contributed by our franchisees to continue to grow as the number of hotels in the La Quinta system grows and the performance of our hotels continues to improve. We will seek to continue to expand existing relationships and develop new relationships with franchise owners who demonstrate an ability to provide an excellent guest experience and maintain our brand standards, and who can broaden our reach into existing and under penetrated markets. We will continue to focus on growing our loyal customer base by increasing the membership in La Quinta Returns, our loyalty program designed to increase stays and raise market share. Our over nine million La Quinta Returns members as of December 31, 2013 (representing growth of 143% in membership since January 1, 2008) generated 47% of room revenues at our owned and franchised hotels for the year ended December 31, 2013 (representing a 108% increase in room revenue contribution at owned and franchised hotels since 2008). In 2011, we introduced our “Taking Care of Business” national advertising campaign, featuring points of differentiation and the role of people and service in delighting our guests with our “Here For You” branded guest experience. We will continue to test media, technology, social platforms and email campaigns to find new ways to strengthen our brand.

 

 

Expand distribution channels and grow corporate accounts.    In 2013, revenues from bookings made through our website increased by 8%, while total electronic distribution revenues increased 17%, each as compared to the year ended December 31, 2012. In addition, in 2012, we launched a new mobile site and introduced our new LQ Instant Hold feature (patent pending), which permits our guests to use a mobile application to hold a room for up to 4 hours from any smart device by just entering a phone number. We will continue to develop our online and mobile channels in an effort to use lower cost, proprietary distribution channels. We will also seek to grow our market share by establishing new online relationships as new technologies and platforms are introduced. La Quinta is also well recognized in the corporate community and, for the year ended December 31, 2013, corporate accounts, including government and military accounts, generated 25% of room revenue at our owned and franchised hotels. We will seek to increase room revenues from corporate accounts, as we believe such accounts are associated with more consistent demand and longer stays.

Our industry—the select-service segment

Select-service hotels generally serve the midscale and upper-midscale chain segments as defined by STR. Select-service hotels typically have fewer costly services and amenities than full-service hotels, which results in a highly efficient hotel-level cost structure. Select-service hotels typically have limited food and beverage outlets and do not offer comprehensive business or banquet facilities. Hotels in the midscale segment had an average ADR of $76.33 in 2013, and hotels in the upper-midscale segment had an average ADR of $100.29 in 2013. As of December 31, 2013, the midscale and upper-midscale segments collectively represent 1,350,617 rooms, or 27.3% of the overall U.S. lodging industry.

 

 

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The midscale and upper-midscale segments tend to follow the cyclicality of the overall lodging industry and have also improved with the economic recovery in recent years. According to data provided by STR for the lodging industry, demand for the U.S. midscale and upper-midscale segments has improved, experiencing a CAGR of 3.3% over the three years ended December 31, 2013, while U.S. midscale and upper-midscale supply has grown at a CAGR of 0.1%. This recent demand growth has exceeded the CAGR of 1.4% over the ten years ended December 31, 2013, while supply growth has trended lower than the CAGR of 0.9% over the ten years ended December 31, 2013. We believe this positive imbalance between demand growth and supply growth, together with the economic recovery, has contributed to a RevPAR CAGR of 6.4% over the three years ended December 31, 2013, well above the CAGR of 3.4% over the ten years ended December 31, 2013. We believe that the fundamentals of the U.S. lodging industry in the midscale and upper-midscale segments will yield strong industry segment performance and support the growth of our business. According to PKF-HR, U.S. midscale and upper-midscale segment RevPAR is expected to increase 5.6% and 4.3%, respectively, in 2014 and 6.9% and 5.7%, respectively, in 2015.

For a further discussion of our industry, see “Industry.”

Refinancing transactions

Concurrently with, and subject to, the consummation of this offering, we intend to enter into a new credit agreement. The credit agreement provides for senior secured credit facilities consisting of a $2.1 billion senior secured term loan facility, which will mature in 2021, and a $250.0 million senior secured revolving credit facility, $50.0 million of which is available in the form of letters of credit, which will mature in 2019 (together, the “senior secured credit facilities’’). On February 21, 2014, we agreed with the joint lead arrangers on the terms of the credit agreement and the joint lead arrangers allocated participation in the senior secured credit facilities to the lenders.

We intend to use the net proceeds of the senior secured term loan facility, together with the net proceeds from this offering and available cash, to repay all of our indebtedness. For more information, see “Use of proceeds” and “Description of indebtedness—New senior secured credit facilities.” The closing of the senior secured credit facilities is subject to customary closing conditions and consummation of this offering.

Our sponsor

Blackstone (NYSE: BX) is one of the world’s leading investment and advisory firms. Blackstone’s alternative asset management businesses include the management of corporate private equity funds, real estate funds, hedge fund solutions, credit-oriented funds and closed-end mutual funds. Blackstone also provides various financial advisory services, including financial and strategic advisory, restructuring and reorganization advisory and fund placement services. Through its different businesses, Blackstone had total assets under management of approximately $266 billion as of December 31, 2013. Blackstone’s global real estate group is the largest private equity real estate manager in the world with $79 billion of investor capital under management as of December 31, 2013.

 

 

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Investment risks

An investment in shares of our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows. Some of the more significant challenges and risks relating to an investment in our Company include, among other things, the following:

 

 

We are subject to the business, financial, and operating risks inherent to the hospitality industry, any of which could reduce profits and limit opportunities for growth.

 

 

Macroeconomic and other factors beyond our control can adversely affect and reduce demand for rooms at hotels that we own or franchise.

 

 

Contraction in the global economy or low levels of economic growth could adversely affect our revenues and profitability as well as limit or slow our future growth.

 

 

Because we operate in a highly competitive industry, our revenues or profits could be harmed if we are unable to compete effectively.

 

 

Any deterioration in the quality or reputation of our brand could have an adverse impact on our reputation, business, financial condition or results of operations.

 

 

Some of our existing development pipeline may not be developed into La Quinta hotels, which could adversely affect our growth prospects.

 

 

Our hotels are geographically concentrated, with 25% of our hotel rooms and 29% of our pipeline properties located in Texas, which exposes our business to the effects of regional events and occurrences.

 

 

Our efforts to renovate, redevelop or develop our hotels could be delayed or become more expensive, which could reduce profits or impair our ability to compete effectively.

 

 

The hotels in our owned portfolio have an average age of 26 years, and the hotels in our franchise portfolio have an average age of 13 years. Our business is capital intensive and our failure or the failure of our franchises to make necessary investments could adversely affect the quality and reputation of our brand.

 

 

The hospitality industry is subject to seasonal and cyclical volatility, which may contribute to fluctuations in our financial condition and results of operations.

 

 

If our franchisees are unable to access the capital necessary to implement plans for growth, including our existing pipeline, our revenues may be reduced and our ability to compete effectively may be diminished.

 

 

If we are unable to maintain good relationships with our franchisees, revenues could decrease and we may be unable to expand our presence.

 

 

Franchise agreement standards are important to protecting our brand reputation and perception, and if our franchisees fail to make investments necessary to maintain or improve their hotels, guest preference for the La Quinta brand and reputation could suffer or the franchise agreements with those parties could terminate.

 

 

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If our franchisees are unable to repay or refinance loans secured by the mortgaged hotels, our revenues, profits and capital resources could be reduced and our business could be harmed.

 

 

We are exposed to the risks resulting from significant investments in owned real estate, which could increase our costs, reduce our profits and limit our ability to respond to market conditions.

 

 

Changes in local market or neighborhood conditions may diminish the value of real property.

 

 

Failure to keep pace with developments in technology could adversely affect our operations or competitive position.

 

 

Failures in, material damage to, or interruptions in our information technology systems, software or websites, including as a result of cyber-attacks, and difficulties in updating our existing software or developing or implementing new software could have a material adverse effect on our business or results of operations.

 

 

We may be exposed to risks and costs associated with protecting the integrity and security of our guests’ personal information.

 

 

Any failure to protect our trademarks and other intellectual property could reduce the value of our brand and harm our business.

 

 

The loss of senior executives or key field personnel could significantly harm our business.

 

 

As of December 31, 2013, our total indebtedness was approximately $2.7 billion. Our substantial indebtedness could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts. Our substantial indebtedness could also expose us to interest rate risk to the extent of our variable debt and divert our cash flow from operations to make debt payments. Additionally, all of our debt currently matures in July 2014. We do not expect to have sufficient cash on hand to repay in full the balances expected to exist at that time. As such, we intend to enter into a new credit agreement as described under “Description of indebtedness—New senior secured credit facilities”. On February 21, 2014, we agreed with the joint lead arrangers on the terms of the credit agreement and the joint lead arrangers allocated participation in the senior secured credit facilities to the lenders. The closing of the senior secured credit facilities is subject to customary closing conditions and consummation of this offering.

 

 

Following this offering, our Sponsor will beneficially own approximately 66.7% of our common stock (or 63.8% if the underwriters exercise in full their option to purchase additional shares), and their interests may conflict with ours or yours in the future.

 

 

We are a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements, including the requirement that a majority of the directors on our board be independent and the requirement that we have a compensation committee and nominating and corporate governance committee each composed entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

 

 

Following the completion of this offering, our Sponsor, certain of our directors and officers and other existing owners will hold approximately 85,408,318 shares of our common stock.

 

 

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Future sales or the possibility of future sales of a substantial amount of these shares may depress the price of our common stock.

Please see “Risk factors” for a discussion of these and other factors you should consider before making an investment in shares of our common stock.

Implications of being an emerging growth company

As a company with less than $1.0 billion in revenue during our most recently completed fiscal year as of the initial filing date of the registration statement of which this prospectus forms a part, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies that are not emerging growth companies. These provisions include:

 

 

reduced disclosure about our executive compensation arrangements;

 

 

no non-binding shareholder advisory votes on executive compensation or golden parachute arrangements; and

 

 

exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering; (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We have taken advantage of reduced disclosure regarding executive compensation arrangements in this prospectus, and we may choose to take advantage of some but not all of these reduced disclosure obligations in future filings. If we do, the information that we provide stockholders may be different than you might get from other public companies in which you hold stock.

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

 

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Our corporate structure

Our business is currently conducted, and our hotel properties are currently owned, through multiple entities (including the Predecessor Entities and entities that own the Previously Managed Portfolio, collectively, the “Existing Entities”). The Existing Entities are separately owned (directly and indirectly) by certain investment funds affiliated with our Sponsor and certain members of our management, whom we refer to collectively as our “existing owners,” and certain of the Existing Entities operated as real estate investment trusts, or REITs, for U.S. federal income tax purposes, which reduced the amount of taxes we owed. La Quinta Holdings Inc. is a newly incorporated entity currently owned by our existing owners. The chart below summarizes the current corporate structure of the Existing Entities before giving effect to the Pre-IPO Transactions:

LOGO

 

 

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In order to effectuate this offering, we expect to effect a series of transactions to occur at various times prior to and/or concurrently with the closing of this offering that will result in a reorganization of our business (the “Pre-IPO Transactions”), which will subsequently be owned by La Quinta Holdings Inc. and will allow us to complete a public offering of all of the business historically conducted by the Existing Entities. Specifically, (i) Holdco III will purchase the Previously Managed Portfolio, (ii) the equity interests in Holdco I, Holdco II and Holdco III (the “Holdcos”) held by the existing owners will be exchanged by the existing owners for shares of common stock of the Issuer, (iii) LQ Management L.L.C. will be sold to our wholly-owned subsidiary, La Quinta Intermediate Holdings L.L.C., for cash and (iv) certain other transactions described in the footnotes to “Unaudited pro forma condensed combined financial information” will occur. Additionally, all of the shares of capital stock held by third-party shareholders of the Existing Entities that are REITs will be redeemed for cash and the REITs will be converted into limited liability companies. Following this offering, neither we nor any of our subsidiaries will operate as a REIT, and we will be taxed as a “C” corporation at the federal and state level.

 

 

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The chart below summarizes our corporate structure after giving effect to this offering and the Pre-IPO Transactions:

LOGO

 

(1)   See “Security ownership of certain beneficial owners and management” for share ownership of Sponsor and certain members of our management following the Pre-IPO Transactions.

 

(2)   Ownership percentages assume an initial public offering price of $19.50 per share, which is the mid-point of the range set forth on the cover page of this prospectus.

For a further discussion of the Pre-IPO Transactions, see “Our Pre-IPO transactions and organizational structure.”

 

 

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Corporate history and information

La Quinta Holdings Inc. was incorporated in Delaware on December 9, 2013. Our principal executive offices are located at 909 Hidden Ridge, Suite 600, Irving, Texas 75038, and our telephone number is (214) 492-6600. We maintain a website at www.lq.com. The information contained on our website or that can be accessed through our website neither constitutes part of this prospectus nor is incorporated by reference herein.

 

 

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The offering

 

Common stock offered by us

37,200,000 shares.

 

Option to purchase additional shares of common stock from us

5,580,000 shares.

 

Common stock outstanding after giving effect to this offering

122,608,318 shares (128,188,318 shares if the underwriters exercise their option to purchase additional shares in full).

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and offering expenses, will be approximately $677.8 million (or approximately $781.2 million if the underwriters exercise their option to purchase additional shares of common stock), in each case based on an assumed initial public offering price of $19.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

  We intend to use the net proceeds from this offering, together with the net proceeds from the senior secured term loan facility and available cash, to repay all of our long-term indebtedness, with any remaining balance to be used for general corporate purposes. See “Use of proceeds.”

 

Dividend policy

We have no current plans to pay dividends on our common stock. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.

 

Conflicts of interest

An affiliate of Wells Fargo Securities, LLC holds an aggregate of approximately $100.0 million of the Company’s current debt facilities, which we intend to repay in part with the net proceeds of this offering. In addition, affiliates of Blackstone Advisory Partners L.P. own in excess of 10% of our issued and outstanding common stock. Because Wells Fargo Securities, LLC is an underwriter in this offering and its affiliate is expected to receive more than 5% of the net proceeds of this offering, and because Blackstone Advisory Partners L.P. is an Underwriter in this offering and its affiliates own in excess of 10% of our issued and outstanding common stock, Wells Fargo Securities, LLC and Blackstone Advisory Partners L.P. are deemed to have a “conflict of interest” under Rule 5121 (“Rule 5121”) of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Accordingly,

 

 

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this offering is being made in compliance with the requirements of Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any member that has a conflict of interest and meet the requirements of paragraph (f)(12)(E) of Rule 5121. See “Underwriting (conflicts of interest).”

 

Risk factors

See “Risk factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed ticker symbol

“LQ.”

 

 

The number of shares of our common stock to be outstanding after giving effect to this offering is based on 85,408,318 shares of common stock to be outstanding immediately after giving effect to the Pre-IPO Transactions and assumes an initial public offering price of $19.50 per share, which is the midpoint of the range set forth on the cover page of this prospectus. The actual number of shares of our common stock to be outstanding after completion of this offering will depend upon the actual initial public offering price per share.

In this prospectus, unless otherwise indicated, the number of shares of common stock outstanding and the other information based thereon does not reflect:

 

 

5,580,000 shares of common stock issuable upon exercise of the underwriters’ option to purchase additional shares of common stock from us; or

 

 

13,000,000 shares of common stock that may be granted under our 2014 Omnibus Incentive Plan, including 304,694 shares of common stock we intend to grant to our employees at the time of this offering. See “Management—Executive compensation—Omnibus incentive plan” and “Management—Executive compensation—Long-term incentive awards.”

 

 

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Summary historical combined financial data

The following table sets forth summary financial and operating data on a historical basis and on a pro forma basis after giving effect to the Pre-IPO Transactions and the application of the net proceeds of this offering.

Our historical financial statements were prepared by combining the financial results of the entities expected to be owned by the Company at the completion of this offering, including those entities under common control and their consolidated subsidiaries. The historical financial information below does not include the acquisition of the Previously Managed Portfolio and does not include the Hotels Designated for Sale and the Baymont Hotels (other than the information relating to discontinued operations). We derived the summary statement of operations data for the years ended December 31, 2013, 2012 and 2011 and the summary balance sheet data as of December 31, 2013 and 2012 from the audited combined financial statements of the Predecessor Entities included elsewhere in this prospectus. We derived the summary balance sheet data as of December 31, 2011 from the audited combined financial statements of the Predecessor Entities not included elsewhere in this prospectus. Historical results are not necessarily indicative of the results expected for any future period. You should read the table below, together with the combined financial statements including the related notes thereto appearing elsewhere in this prospectus, as well as “Selected financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and “Description of indebtedness,” and the other financial information included elsewhere in this prospectus.

The summary unaudited pro forma condensed combined financial information has been

prepared to reflect (1) the acquisition of the Previously Managed Portfolio (the “WIH La Quinta Inn Hotels”) by the Predecessor Entities and the sale of four hotels which were classified as held for sale as of December 31, 2013, (2) the income tax impact of the Predecessor Entities and the WIH La Quinta Inn Hotels being owned by a “C” corporation, (3) the intended refinancing of our current debt facilities and (4) the issuance of shares of our common stock offered by us in this offering and the application of the estimated net proceeds thereof (as described in “Use of proceeds”), in each case, at an assumed initial public offering price of $19.50 per share, which is the midpoint of the range set forth on the cover of this prospectus. The summary unaudited pro forma combined financial data for the year ended December 31, 2013 is derived from our unaudited pro forma financial information included elsewhere in this prospectus and is presented as if this offering and the Pre-IPO Transactions (including the acquisition of the WIH La Quinta Inn Hotels) all had occurred on December 31, 2013 for the purposes of the unaudited pro forma combined balance sheet and on January 1, 2013 for the purposes of the unaudited pro forma combined statements of operations. The unaudited pro forma condensed combined financial information excludes the Hotels Designated for Sale. The summary unaudited pro forma combined financial data has been prepared for illustrative purposes only and is not necessarily indicative of our financial position or results of operations had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such unaudited pro forma financial information necessarily indicative of the results to be expected for any future period. See “Unaudited pro forma financial information” for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma combined data.

 

 

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(in thousands)    Pro forma as of
and for the
year ended
December 31,
    As of and for the year ended
December 31
 
   2013     2013      2012     2011  

 

 

Statement of Operations Data:

         

Revenues:

         

Room revenues

   $ 796,015      $ 757,699       $ 714,143      $ 660,816   

Franchise and other fee-based revenues

     76,896        79,180         69,206        59,314   

Other hotel revenues

     18,042        17,949         17,506        16,229   
  

 

 

 
     890,953        854,828         800,855        736,359   

Brand marketing fund revenues from franchised and managed properties

     18,107        19,065         17,157        15,182   
  

 

 

 

Total revenues

     909,060        873,893         818,012        751,541   

Operating Expenses:

         

Direct lodging expenses

     352,488        344,515         334,394        330,205   

Depreciation and amortization

     170,602        164,077         155,879        149,356   

General and administrative expenses

     88,919        74,794         74,111        61,578   

Other lodging and operating expenses

     56,270        56,068         58,266        47,791   

Marketing, promotional and other advertising expenses

     59,193        59,193         48,610        45,580   
  

 

 

 
     727,472        698,647         671,260        634,510   

Brand marketing fund expenses from franchised and managed properties

     18,107        19,065         17,157        15,182   
  

 

 

 

Total operating expenses

     745,579        717,712         688,417        649,692   
  

 

 

 

Operating Income

     163,159        156,181         129,595        101,849   

Income from continuing operations before income taxes

     74,838        8,614         20,223        61,027   

Income from continuing operations, net of tax

     44,902        5,016         17,088        58,695   

Net Income (loss)

   $ 44,902      $ 2,521       $ (35,764   $ 58,939   

Net (income) loss attributable to noncontrolling interests

     (397     1,455         4,810        4,574   
  

 

 

 

Net income (loss) attributable to the Company

   $ 44,505      $ 3,976       $ (30,954   $ 63,513   

Selected Balance Sheet Data:

         

Cash and cash equivalents

   $ 94,366      $ 33,412       $ 40,813      $ 90,857   

Restricted cash

     6,900        104,026         113,407        60,745   

Total assets

     3,333,430        3,169,834         3,356,320        3,484,232   

Total debt(1)

     2,100,000        2,720,286         2,899,965        3,158,409   

Total equity (deficit)(2)

     740,359        305,253         303,385        183,095   

Adjusted EBITDA(3)

   $ 340,212      $ 326,807       $ 297,823      $ 258,389   

 

 

 

(1)   Includes current portion.

 

(2)   Reflects the impact of the Predecessor Entities and the WIH La Quinta Inn Hotels being owned by a “C” corporation, which results in the recording of a net deferred tax liability of approximately $331 million.

 

 

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(in thousands)    As of and for the year ended
December 31
 
   2013     2012     2011  

 

 

Summary Statement of Cash Flows Data:

      

Capital expenditures

   $ (115,529   $ (102,886   $ (95,552

Cash flow from operating activities

     232,858        248,187        220,429   

Cash flow from investing activities

     1,719        (150,952     (92,446

Cash flow from financing activities

     (241,978     (147,279     (78,265

Operating Data (based on comparable hotels)(4):

      

Number of hotels

     771        756        719   

Number of rooms

     78,045        76,688        73,639   

Hotel occupancy

     64.8%        63.5%        61.9%   

Hotel ADR

   $ 79.11      $ 75.66      $ 72.14   

Hotel RevPAR

   $ 51.26      $ 48.05      $ 44.67   

 

 

 

(3)   Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is a commonly used measure in many industries. We adjust EBITDA when evaluating our performance because we believe that the adjustment for certain items, such as impairment charges, discontinued operations, gains (losses) on asset sales, certain financing costs, non-cash equity-based compensation, and other items not indicative of ongoing operating performance, provides useful supplemental information to management and investors regarding our ongoing operating performance. We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors, lenders, and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

 

     EBITDA and Adjusted EBITDA are not recognized terms under GAAP, have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP. Some of these limitations are:

 

   

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

   

EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;

 

   

EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

EBITDA and Adjusted EBITDA do not reflect the impact on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

 

   

other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

 

     Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

 

 

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     The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net income attributable to the Company, which we believe is the most closely comparable U.S. GAAP financial measure:

 

(in thousands)    Pro forma for
the year ended
December 31, 2013
    For the year ended
December 31,
 
     2013     2012     2011  

 

 

Net Income (Loss) Attributable to the Company

   $ 44,505      $ 3,976      $ (30,954   $ 63,513   

Interest expense

     89,565        148,806        103,342        51,986   

Income tax expense

     29,936        3,665        3,283        2,472   

Depreciation and amortization

     171,884        170,401        172,787        165,295   

Non-controlling interest

     397        (1,455     (4,810     (4,574

EBITDA

     336,287        325,393        243,648        278,692   

Fixed asset impairment loss

            19,533        53,228          

Income from discontinued operations

            (8,636     (12,723     (13,543

(Gain) Loss on sale from discontinued operations

            (10,714              

Loss on retirement of assets

     681        359        1,562        2,168   

(Gain) Loss related to casualty disasters

     (1,926     (1,825     4,730        (3,447

Gain on extinguishment of debt, net

                   (1,192     (11,451

Management bonus related to debt amendment

                   4,932          

Financing costs expensed as incurred

                   7,749        1,668   

Other (gains) losses, net

     5,170        2,697        (4,111     (850

Termination of long-term contract

                          5,152   

Adjusted EBITDA

   $ 340,212      $ 326,807      $ 297,823      $ 258,389   

 

 

 

(4)   Operating data are for comparable hotels on a system-wide basis as of each period end. See the definition of comparable hotels in “Management’s discussion and analysis of financial condition and results of operations—Key indicators of financial condition and operating performance—Comparable hotels.”

 

 

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Risk factors

An investment in our common stock involves a high degree of risk. You should carefully consider each of the following risks as well as the other information included in this prospectus, including “Selected financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and related notes, before investing in our common stock. Any of the following risks could materially and adversely affect our business, financial condition and results of operations. In such a case, the trading price of the common stock could decline and you may lose all or part of your investment in the Company. Unless the context otherwise requires, references in this “Risk factors” section to “our hotels,” “our rooms” and similar phrases refer to hotels that we own or franchise.

Risks related to our business and industry

We are subject to the business, financial, and operating risks inherent to the hospitality industry, any of which could reduce profits and limit opportunities for growth.

Our business is subject to a number of business, financial and operating risks inherent to the hospitality industry, including:

 

 

changes in operating costs, including energy, food, compensation, benefits, insurance and unanticipated costs resulting from force majeure events;

 

 

increases in costs due to inflation that may not be fully offset by price and fee increases in our business;

 

 

changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs;

 

 

the costs and administrative burdens associated with complying with applicable laws and regulations;

 

 

the costs or desirability of complying with local practices and customs;

 

 

significant increases in cost for health care coverage for employees and potential government regulation with respect to health coverage, such as costs associated with the implementation of the requirements of the Patient Protection and Affordable Care Act;

 

 

shortages of labor or labor disruptions;

 

 

the availability and cost of capital necessary for us and our franchisees to fund investments, capital expenditures and service debt obligations;

 

 

delays in or cancellations of planned or future development or renovation projects;

 

 

the quality of services provided by franchisees;

 

 

the financial condition of franchisees;

 

 

relationships with franchisees, including the risk that our franchise agreements may be terminated early;

 

 

changes in desirability of particular geographic locations and shortages of desirable locations for development;

 

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changes in lodging preferences and travel patterns of our guests and geographic concentration of our operations and guests;

 

 

changes in the supply and demand for hotel services;

 

 

foreign exchange rate fluctuations or restructurings;

 

 

decreased business travel as a result of improvements to the alternatives to in-person meetings, including virtual meetings hosted on-line or over private teleconferencing networks; and

 

 

the ability of third-party internet and other travel intermediaries to attract and retain guests.

Any of these factors could limit or reduce the prices we and our franchisees are able to charge for rooms. These factors can also increase costs or affect the ability to develop new hotels or maintain and operate existing hotels. As a result, any of these factors can reduce our profits and limit opportunities for growth.

Macroeconomic and other factors beyond our control can adversely affect and reduce demand for rooms at hotels that we own or franchise.

Macroeconomic and other factors beyond our control can reduce demand for rooms at hotels that we own or franchise. These factors include, but are not limited to:

 

 

changes in general economic conditions, including the severity and duration of any downturn in the U.S. or global economy and financial markets;

 

 

war, political conditions or civil unrest, terrorist activities or threats and heightened travel security measures instituted in response to these events;

 

 

outbreaks of pandemic or contagious diseases, such as avian flu, severe acute respiratory syndrome (SARS) and H1N1 (swine flu);

 

 

natural or man-made disasters, such as earthquakes, tsunamis, tornadoes, hurricanes, typhoons, floods, oil spills and nuclear incidents;

 

 

decreased corporate or government travel-related budgets and spending and cancellations, deferrals or renegotiations of group business;

 

 

low consumer confidence, high levels of unemployment or depressed real estate prices;

 

 

the financial condition and general business condition of the airline, automotive, and other transportation-related industries and its impact on travel;

 

 

decreased airline capacities and routes;

 

 

travel-related accidents;

 

 

oil prices and travel costs;

 

 

statements, actions or interventions by governmental officials related to travel and corporate travel-related activities and the resulting negative public perception of such travel and activities;

 

 

climate change and resource scarcity, such as water and energy scarcity;

 

 

domestic and international political and geo-political conditions; and

 

 

cyclical over-building in the hotel and lodging industries.

 

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These factors, and the reputational repercussions of these factors, can adversely affect, and from time to time have adversely affected, individual hotels, particular regions and our business, financial condition and results of operations as a whole. Any one or more of these factors could limit or reduce the demand, or the rates that we are able to charge, for rooms. Declines in ADR and occupancy relating to declines in consumer demand will lower RevPAR and may adversely affect our business, financial condition and results of operations. In addition, these factors could increase our operating costs or affect our ability to develop or franchise new hotels or to maintain and operate our existing hotels.

Contraction in the global economy or low levels of economic growth could adversely affect our revenues and profitability as well as limit or slow our future growth.

Consumer demand for our rooms is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Decreased demand can be especially pronounced during periods of economic contraction or low levels of economic growth, and the recovery period in our industry may lag overall economic improvement. Declines in consumer demand due to adverse general economic conditions could negatively impact our business by decreasing the revenues and profitability of our owned hotels and limiting the amount of franchising fee revenues we are able to generate from our franchised hotels. For example, for the year ended December 31, 2009, our revenues declined approximately $136 million, or 17%, from revenues of $816 million for the year December 31, 2008, and our Adjusted EBITDA declined approximately 30%. In addition, many of the expenses associated with our business, including personnel costs, interest, rent, property taxes, insurance and utilities, are relatively fixed. During a period of overall economic weakness, if we are unable to meaningfully decrease these costs as demand for our hotels decreases, our business operations and financial performance may be adversely affected.

Additionally, recent global economic conditions have significantly affected consumer confidence and behavior and, as a result, historical financial results may be less effective as a means of predicting future demand and operating results. Uncertainty regarding the rate and pace of recovery from the recent economic downturn and the impact any such recovery may have on different regions of the world makes it difficult to predict future profitability levels. Moreover, if further economic weakness in the markets in which we operate were to occur, it could have an adverse impact on our revenues and negatively affect our profitability.

Because we operate in a highly competitive industry, our revenues or profits could be harmed if we are unable to compete effectively.

Competition for hotel guests

The segments of the hotel industry in which we operate are subject to intense competition. La Quinta is a select-service hotel brand that competes primarily against other select-service hotels in both the upper-midscale and the midscale segments. However, our owned and franchised hotels generally operate in segments that contain numerous competitors, including a wide range of lodging facilities offering full-service, select-service and all-suite lodging options. Hotels in other market segments, such as full-service hotels, may lower their rates to a level comparable to those of select-service hotels such as ours that, in turn, may further increase competitive pressure in our segments. Our owned and franchised hotels generally compete for guests on the basis of room rates, quality of accommodations, name recognition, service levels, convenience of locations and reward program offerings. Additionally, an increasing supply of hotel rooms in La Quinta’s market segments, and consolidations in the lodging industry generally, have resulted in

 

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the creation of several large, multi-branded hotel chains with diversified operations and greater marketing and financial resources than we have, which has increased competition for guests in the segments in which our owned and franchised hotels operate. If we are unable to compete successfully for hotel guests, our revenues or profits may decline.

Competition for franchise agreements

A primary component of our growth strategy entails increasing our system-wide portfolio of franchised hotels and further growing our franchise fee-based business. We compete for franchise agreements based primarily on brand name recognition and reputation, the room rate that can be realized, royalty fees charged and other contract terms. Some of our competitors may have substantially greater marketing and financial resources, greater brand distribution and awareness and/or offer greater financial incentives than we do. Other competitive factors for franchise agreements include relationships with hotel owners and investors, including institutional owners of multiple hotels, availability and affordability of financing, marketing support, reservation and e-commerce system capacity and efficiency and the ability to make investments that may be necessary to obtain franchise agreements. The terms of our franchise agreements for each of our franchised hotels are also influenced by contract terms offered by our competitors, among other things. As a result, the terms of new franchise agreements may not be as favorable as our current franchise agreements. For example, competition may require us to reduce or change fee structures, make greater use of key money or provide other financial incentives such as loans and guarantees to franchisees and/or reduce the level of hotel improvements required to conform to brand standards. In addition, if the availability of suitable locations for new hotels decreases, planning or other local regulations change or the availability or affordability of financing is limited, the supply of suitable hotels for franchising could be diminished. Additionally, an excess supply of hotel rooms or unfavorable borrowing conditions may discourage potential franchisees from expanding or constructing new hotels, thereby limiting a source of growth of the franchise fees received by us. Our franchise agreements generally restrict our ability to open a new owned or franchised hotel in a limited area near the franchised hotel, which can range from several city blocks in an urban area to several square miles in less populated areas. We may be prohibited from franchising or owning hotels in areas where opportunities exist due to these restrictions. If the hotels that we franchise perform less successfully than those of our competitors, if we are unable to offer terms as favorable as those offered by our competitors, or if the availability of suitable hotels is limited, our ability to compete effectively for new franchise agreements could be reduced. If we are unable to compete successfully for franchisees, our revenues or profits may decline.

Any deterioration in the quality or reputation of our brand could have an adverse impact on our reputation, business, financial condition or results of operations.

Our brand and our reputation are among our most important assets. The success of our hotel business and our ability to attract and retain guests and franchise partners depends on brand recognition and reputation. Such dependence makes our hotel business susceptible to reputational damage and to competition from other hotel management and franchise companies. Additionally, for our franchised hotels, the continued success of a hotel owner’s business and its ability to make payments to us may directly depend on the strength and reputation of our franchised hotels and our brand. We cannot assure you that the prior performance of our owned or franchised hotels will be indicative of future results or that competition from other brands will not adversely affect our market position or financial performance.

 

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In addition, the brand recognition and support that provide much of the basis for the successful operation of our owned hotels and our franchise business can also mean that changes or problems with La Quinta (e.g., changes in ownership or management or management practices, or acts or omissions that adversely affect our business), or within our hotel business or at other locations (e.g., crime, scandal, litigation, negative publicity, catastrophic fires or similar events or accidents and injuries or other harm to our guests or our team members) can have a substantial negative impact on the operations of otherwise successful individual locations, and can cause a loss of consumer confidence in La Quinta and other hotels in our segment. Adverse incidents have occurred in the past and may occur in the future. The considerable expansion in the use of social media over recent years has compounded the potential scope of the negative publicity that could be generated by such incidents. We could also face legal claims and adverse publicity from a variety of events or conditions, many of which are beyond our control. If the reputation or perceived quality of our brand declines, our reputation, business, financial condition or results of operations could be adversely affected.

Some of our existing development pipeline may not be developed into La Quinta hotels, which could adversely affect our growth prospects.

As of December 31, 2013, we had a total of 187 franchised hotels in our pipeline, each of which is represented by an executed 20-year franchise agreement. Approximately 79% of the pipeline represents new construction, rather than the conversion of an existing hotel, and, as of December 31, 2013, approximately 35% of the conversions and new construction has commenced. The commitments of owners and developers with whom we have agreements are subject to numerous conditions, and the eventual development and construction of our pipeline not currently under construction is subject to numerous risks, including, in certain cases, the ability of the franchisee to obtain governmental and regulatory approvals and adequate financing. As a result, we cannot assure you that our entire pipeline will develop into new hotels. Any of these risks could have an adverse impact on the growth of our business and future operating results.

Our efforts to renovate, redevelop or develop our hotels could be delayed or become more expensive, which could reduce profits or impair our ability to compete effectively.

We must maintain and renovate our hotels to remain competitive, maintain the value and brand standards of these hotels and comply with applicable laws and regulations. From time to time we evaluate our hotels to determine whether additional capital expenditures are required and will provide an acceptable return on investment.

Our strategy includes maintenance and renovation of our hotels and may include redevelopment, development and conversion of hotels, which is subject to a number of risks, including:

 

 

the inability to obtain financing upon favorable terms or at all;

 

 

construction delays or cost overruns (including labor and materials) that may increase project costs;

 

 

lack of availability of rooms for revenue-generating activities during construction, modernization or renovation projects;

 

 

changes in economic conditions that may result in weakened or lack of demand or negative project returns;

 

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the inability to find appropriate, strategically located hotels at commercially reasonable prices;

 

 

obtaining zoning, occupancy, and other required permits or authorizations;

 

 

governmental restrictions on the size or kind of development;

 

 

force majeure events, including earthquakes, tornadoes, hurricanes, floods, or tsunamis; and

 

 

design defects that could increase costs.

Furthermore, we generally rely heavily on local contractors, who may be inadequately capitalized or understaffed. The inability or failure of one or more local contractors to perform its obligations may result in construction or remodeling delays, increased costs and loss of revenues. As a result, we may not increase our revenues or generate expected profits and cash flows from the renovation, redevelopment or development of hotels.

If we are not able to begin operating hotels under renovation or development as scheduled, or if renovation investments adversely affect or fail to improve performance, our ability to compete effectively could be diminished and revenues could be reduced. Further, due to the lengthy development cycle, adverse economic conditions may alter or impede our development plans, thereby resulting in incremental costs to us or potential impairment charges. If the cost of funding these renovations or developments exceed budgeted amounts, profits could be reduced. Moreover, during the early stages of operations, charges related to interest expense and depreciation may substantially detract from, or even outweigh, the profitability of certain new hotel investments.

Our hotels are geographically concentrated, which exposes our business to the effects of regional events and occurrences.

We have a concentration of hotels in Texas, Florida and California. Specifically, as of December 31, 2013, approximately 42% of rooms in our system were located in Texas, Florida and California with approximately 25% of rooms in our system located in Texas. In addition, as of December 31, 2013, approximately 29% of our pipeline properties are to be located in Texas. The concentration of hotels in one region or a limited number of markets may expose us to risks of adverse economic developments that are greater than if our portfolio were more geographically diverse. These economic developments include regional economic downturns, significant increases in the number of our competitors’ hotels in these markets and potentially higher local property, sales and income taxes in the geographic markets in which we are concentrated. In addition, our hotels are subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, earthquakes and tornados, which have in the past caused damage such as flooding and other damage to our hotels in specific geographic locations, including in the Texas, Florida and California markets. Depending on the severity of these acts of nature, the damage to our hotels could require us to close all or substantially all of our hotels in one or more markets for a period of time while the necessary repairs and renovations, as applicable, are undertaken. Additionally, we cannot assure you that the amount of our hurricane, windstorm, earthquake, flood or other casualty insurance we maintain from time to time would entirely cover damages caused by any such event.

As a result of our geographic concentration of hotels, we will face a greater risk of a negative impact on our revenues in the event these areas are more severely impacted by adverse economic and competitive conditions and extreme weather than other areas in the United States.

 

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The hospitality industry is subject to seasonal and cyclical volatility, which may contribute to fluctuations in our financial condition and results of operations.

The hospitality industry is seasonal in nature. The periods during which our hotels experience higher revenues vary from hotel to hotel, depending principally upon location. Generally, our hotel revenues are greater in the second and third quarters than in the first and fourth quarters. The timing of holidays can also impact our quarterly results. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margins and net earnings. Additionally, our first quarter results may be further adversely affected by the timing of certain of our marketing production expenditures. In addition, the opening of newly constructed hotels and the timing of any hotel acquisitions or sales may cause a variation of revenue from quarter to quarter. The seasonality and cyclicality of our industry may contribute to fluctuations in our financial condition and results of operations.

Our business is capital intensive and our failure or the failure of our franchisees to make necessary investments could adversely affect the quality and reputation of our brand.

The hotels in our owned portfolio have an average age of 26 years, and the hotels in our franchise portfolio have an average age of 13 years. For our owned and franchised hotels to remain attractive and competitive, we and the owners of our franchised hotels have to make periodic investments to keep the hotels well maintained, modernized and refurbished. This creates an ongoing need for capital. We and the owners of our franchised hotels may be unable to access capital or unwilling to spend available capital when necessary, even if required by the terms of our franchise agreements. To the extent that owners of franchised hotels and we cannot fund expenditures from cash generated by the operation of the hotels, funds must be borrowed or otherwise obtained, which may be difficult to obtain. Failure to make the investments necessary to maintain or improve hotels, act in accordance with applicable brand standards or project a consistent brand image could adversely affect the quality and reputation of our brand.

If our franchisees are unable to access the capital necessary to implement plans for growth, including our existing pipeline, our revenues may be reduced and our ability to compete effectively may be diminished.

Our franchisees depend on capital to buy and develop new franchised hotels, and our franchisees may be unable to access capital as expected. The availability of funds for development depends in large measure on capital markets and liquidity factors. Instability in the worldwide financial markets and the contraction of available liquidity may constrain the capital markets for hotel and real estate investments. As a result, while lenders have shown willingness to work with borrowers to extend relief in the short to medium term, many current and prospective hotel owners may struggle to find new hotel financing on commercially viable terms. The inability of our existing or future franchisees’ to obtain adequate funding could result in the decrease, delay or stoppage of development of new franchised hotels, including our existing pipeline.

If we are unable to maintain good relationships with our franchisees, revenues could decrease and we may be unable to expand our presence.

As of December 31, 2013, approximately 57% of the La Quinta-branded hotels were operated as franchised hotels. Our franchisees pay us a franchise fee and certain other fees pursuant to our franchise agreements. The viability of the franchising business depends on our ability to establish and maintain good relationships with our franchisees. Franchisees are focused on maximizing the

 

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value of their investment and working with a franchisor that can help them be successful in the ownership of their respective hotel investments. The value of our brand and the rapport that we maintain with our franchisees affect renewals of existing agreements and are important factors for potential franchisees considering doing business with us. Our relationships with franchisees generate additional hotel development opportunities that support growth. If we are unable to maintain good relationships with franchisees, we may be unable to renew existing franchise agreements or expand relationships with them. Additionally, opportunities for developing new relationships with additional franchisees may be adversely affected. This, in turn, could have an adverse effect on our results of operations and our ability to execute our growth strategy.

Franchise agreement standards are important to protecting our brand reputation and perception, and if our franchisees fail to make investments necessary to maintain or improve their hotels, guest preference for the La Quinta brand and reputation could suffer or the franchise agreements with those parties could terminate.

Substantially all of our franchise agreements require our franchisees to comply with standards that are essential to maintaining brand integrity and reputation and protecting the quality guests ascribe to the La Quinta brand. We depend on our franchisees to comply with these requirements by maintaining and improving hotels through investments, including investments in furniture, fixtures, equipment, amenities, personnel and branding elements.

Franchisees may be unable to access capital or unwilling to spend available capital when necessary, even if required by the terms of their agreements with us. If our franchisees fail to make investments necessary to maintain or improve the hotels that we franchise, guest preference for our brand and our reputation could suffer. Moreover, our franchisees may be unwilling or unable to incur the cost of complying with brand standards as brand standards may evolve from time to time. In addition, if our franchisees breach the terms of their agreements with us, we may elect to exercise our termination rights, which would eliminate revenues from these hotels and cause us to incur expenses related to terminating these relationships. We may be unable to find suitable or offsetting replacements for any terminated relationships. These risks become more pronounced during economic downturns.

Contractual and other disagreements with franchisees could make us liable to them or result in litigation costs or other expenses.

Our franchise agreements require us and our franchisees to comply with operational and performance conditions that are subject to interpretation and could result in disagreements. At any given time, we may be in disputes with one or more of our franchisees. Any dispute we have with our franchisees could result in arbitration or litigation, which could be very expensive for us even if the outcome is ultimately in our favor. We cannot predict the outcome of any such arbitration or litigation, the effect of any adverse judgment against us or the amount of any settlement that we may enter into with any franchisee. An adverse result in any such proceeding could adversely impact our results of operations and prospects.

If our franchise agreements terminate prematurely or expire in accordance with their terms, our revenues could decrease and our costs could increase.

Our franchise agreements may be terminated, renegotiated or expire, but typically have an initial term of 20 years. These agreements also typically contain provisions permitting either party to terminate the franchise agreement after five, ten or fifteen years under certain circumstances.

 

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The continuation of a franchise agreement is subject to the franchisee adhering to certain standards and other applicable terms and conditions (including the obligation to pay certain fees to us). While our franchise agreements generally provide for liquidated damages to be paid to us by franchisees whose agreements have been terminated as the result of a violation of the provisions of the agreement, these damage amounts are typically less than the fees we would have received if the terminated franchisee fulfilled its contractual obligations.

Our franchise agreements also provide early termination rights to the franchisees upon the failure to meet a specified performance test, which is typically based on the hotel’s occupancy rates. Franchisees also may attempt to terminate franchise agreements with us prior to their scheduled expiration date. If that happens, we may have difficulty recovering any resulting damages from the owner or replacing the revenues lost as a result of the termination. In addition, if a franchisee files for bankruptcy, our franchise agreements may be terminable under applicable law.

If any of our franchise agreements are terminated or expire, we cannot assure you that we can obtain new or replacement franchise agreements at the same time that those other agreements are terminated or expire. As a result, we could lose the revenues we derive from that agreement or incur costs related to ending our relationship with the franchisee.

Deterioration in the general financial condition of our franchisees may adversely affect our results.

Our operating results are impacted by the ability of our franchisees to generate revenues at hotels they franchise from us. Our franchisees compete for guests with other hotels in their geographic markets. Some of their competitors may have substantially greater marketing and financial resources than our franchisees, and they may construct new hotels or improve their existing hotels, reduce their prices or expand and improve their marketing programs in ways that adversely affect our franchisees’ operating results and financial condition. In addition, the ability of our franchisees to compete for guests directly impacts the desirability of our brand to current and prospective franchisees.

These factors, among others, could adversely affect the operating results and financial condition of our franchisees. This could result in the financial failure of our owners and result in a termination of the franchisee for non-payment of franchise fees and/or declines in franchise fees and other revenues derived from our franchising business.

If our franchisees are unable to repay or refinance loans secured by the mortgaged hotels, our revenues, profits and capital resources could be reduced and our business could be harmed.

Many of the hotels owned by our franchisees are pledged as collateral for mortgage loans entered into when such hotels were purchased or refinanced by them. If our franchisees are unable to repay or refinance maturing indebtedness on favorable terms or at all, the lenders could declare a default, accelerate the related debt and repossess the hotel. Debt defaults could lead franchisees to sell the hotel on unfavorable terms or to convey the mortgaged hotels to the lender. Any such sale or conveyance could, in certain cases, result in the termination of our franchise agreements or eliminate any anticipated income and cash flows from such hotel, which could negatively affect our business and results of operations.

 

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We are exposed to the risks resulting from significant investments in owned real estate, which could increase our costs, reduce our profits and limit our ability to respond to market conditions.

Real estate ownership is subject to risks not applicable to franchised and managed hotels, including:

 

 

governmental regulations relating to real estate ownership or operations, including tax, environmental, zoning and eminent domain laws;

 

 

loss in value or functionality, or unanticipated liabilities, due to environmental conditions, governmental takings, uninsured casualties or restrictive changes in zoning and similar land use laws and regulations or in health, safety and environmental laws, rules and regulations and other governmental and regulatory action;

 

 

changes in tax laws and property taxes, even if the hotel level cash flows remain the same or decrease;

 

 

differences in potential civil liability between owners and operators for accidents or other occurrences on owned hotels;

 

 

the ongoing need for owner funded capital improvements and expenditures to maintain or upgrade hotels;

 

 

periodic total or partial closures due to renovations and hotel improvements;

 

 

risks associated with mortgage debt, including the possibility of default, fluctuating interest rate levels and uncertainties in the availability of replacement financing;

 

 

risks associated with the possibility that cost increases will outpace revenue increases and that in the event of an economic slowdown, the high proportion of fixed costs will make it difficult to reduce costs to the extent required to offset declining revenues;

 

 

acts of God, including earthquakes, hurricanes, floods, winter storms and other natural disasters (that may result in uninsured losses);

 

 

fluctuations in real estate values or potential impairments in the value of our assets; and

 

 

maintaining tenants for leased properties.

Additionally, real estate investments are relatively illiquid and, therefore, cannot be purchased or sold rapidly in response to changes in economic or other conditions. Buyers may not be identified quickly or be able to secure suitable financing to consummate a transaction or we may not be able to sell hotels on terms favorable to us. Furthermore, sales of certain appreciated hotels could generate material adverse tax consequences, which may affect our ability to sell hotels in response to market conditions and adversely affect our ability to generate cash flows.

Any of the forgoing risks could increase our costs, reduce our profits and limit our ability to respond to market conditions.

Changes in local market or neighborhood conditions may diminish the value of real property.

Hotels may be difficult to convert to other uses if changes in market conditions or in the area in which the hotel is located make hotel use unattractive for any reason. In such cases, large capital investments in real estate may prove difficult to recover. Hotels may be completely undamaged, but may lose significant value that cannot be recovered through insurance or operational changes because of disasters occurring nearby.

 

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The negative impact on profitability and cash flow generation from a decline in revenues is more pronounced in owned hotels because we, as the owner, bear the risk of their high fixed-cost structure. The need to maintain and renovate owned hotels can present challenges, especially when cash generated from operations has declined due to decreased revenues or increased costs, or when government regulations or other factors require expenditures on property improvements that cannot be recovered through rate increases. The effectiveness of any cost-cutting efforts is limited by the fixed-cost nature of our business. As a result, we may not be able to offset revenue reductions through cost cutting, which could further reduce our margins. Further, during times of economic distress, declining demand and declining earnings often result in declining asset values.

In an unfavorable market, we may not be able to sell hotels in the short term. Accordingly, we may not be able to adjust our portfolio promptly in response to economic or other conditions. Similarly, unfavorable markets may make it difficult to refinance mortgage debt as it comes due.

Failure to keep pace with developments in technology could adversely affect our operations or competitive position.

The hospitality industry demands the use of sophisticated technology and systems for hotel management, brand assurance and compliance, procurement, reservation systems, operation of our loyalty program, distribution of hotel resources to current and future guests and guest amenities. These technologies require refinements, including compliance with privacy regulations and requirements of third parties such as the payment card industry. The development and maintenance of these technologies may require significant capital. We cannot assure you that as various systems and technologies become outdated or new technology is required, we will be able to replace or introduce them as quickly as our competition or in a cost-effective and timely manner. We also cannot assure you that we will achieve the benefits we may have been anticipating from any new technology or system.

Failures in, material damage to, or interruptions in our information technology systems, software or websites, including as a result of cyber-attacks, and difficulties in updating our existing software or developing or implementing new software could have a material adverse effect on our business or results of operations.

We depend heavily upon our information technology systems in the conduct of our business. For example, we own, license or otherwise contract for sophisticated technology and systems for hotel management, procurement, reservations, phone switches and the operation of our Returns program. Those systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural and manmade disasters. In particular, from time to time we and third parties who serve us experience cyber-attacks, attempted breaches of our or their information technology systems and networks or similar events, which could result in a loss of sensitive business or customer information, systems interruption or the disruption of our operations.

Damage or interruption to our information systems may require a significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Any material interruptions or failures in our systems, including those that may result from our failure to adequately develop,

 

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implement and maintain a robust disaster recovery plan and backup systems could severely affect our ability to conduct normal business operations and, as a result, may have a material adverse effect on our business or results of operations.

We are vulnerable to various risks and uncertainties associated with our website, including changes in required technology interfaces, website downtime and other technical failures, costs and technical issues as we upgrade our website software, computer viruses, changes in applicable federal and state regulation, security breaches, legal claims related to our website operations and e-commerce fulfillment and other consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties could reduce website sales and have a material adverse effect on our business or results of operations.

Failure of third party technology providers or vendors to provide services and technology in a satisfactory manner could adversely affect our business.

We rely on third parties for the performance of a significant portion of our information technology functions worldwide and the provision of information technology and business process services. The success of our business depends in part on maintaining our relationships with these third parties and their continuing ability to perform these functions and services in a timely and satisfactory manner. If we experience a loss or disruption in the provision of any of these functions or services, or they are not performed in a satisfactory manner, we may have difficulty in finding alternate providers on terms favorable to us, in a timely manner or at all, and our business could be adversely affected.

We rely on certain software vendors to maintain and periodically upgrade many of our information technology systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner.

We may be exposed to risks and costs associated with protecting the integrity and security of our guests’ personal information.

We are subject to various risks associated with the collection, handling, storage and transmission of sensitive information, including risks related to compliance with U.S. and foreign data collection and privacy laws and other contractual obligations, as well as the risk that our systems collecting such information could be compromised. We collect and maintain information relating to our employees and guests for various business purposes, including managing our workforce and marketing and promotion purposes of our hotel business. Our various information technology systems enter, process, summarize and report such data, including credit card numbers and other personally identifiable information. A significant number of guest purchases are made using credit cards. Additionally, as of December 31, 2013, approximately 20.4% of our guest reservations are placed through our website, including through mobile devices and those reservations made via LQ Instant Hold. In order for our business to function successfully, we must be able to handle and transmit confidential information, including credit card information, securely.

Privacy regulation is an evolving area in which different jurisdictions may subject us to increasingly demanding or inconsistent compliance requirements. Compliance with applicable privacy laws, regulations and policies may increase our operating costs and/or adversely affect our ability to service hotel guests and market our products, hotels and services to hotel guests. In

 

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addition, our failure to comply with applicable privacy laws and regulations, with our own privacy policies or with third-party requirements (or in some circumstances non-compliance by third parties engaged by us), or a breach of security in which personal data are compromised, could result in fines, litigation, adverse reputation impacts, remedial and other expenses, criminal sanctions, or restrictions on the use or transfer of data, which could adversely affect our business. We cannot assure you that our business will always be conducted in compliance with these laws, regulations and policies.

Even if we are fully compliant with such legal standards, we may not be able to prevent security breaches involving guest transaction data and identity theft. In addition, efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error, or inadvertent releases of data all threaten our information systems and records. Our reliance on computer, Internet-based and mobile systems and communications and the frequency and sophistication of efforts by hackers to gain unauthorized access to such systems have increased in recent years. Any breach, theft, loss, or fraudulent use of guest, employee or Company data could cause consumers to lose confidence in the security of our website and choose not to purchase from us. If a computer hacker or other criminal is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and action for damage and could seriously disrupt our operations and harm our reputation, any of which could adversely affect our business.

Failure to comply with marketing and advertising laws, including with regard to direct marketing, could result in fines or place restrictions on our business.

We rely on a variety of direct marketing techniques, including telemarketing, email marketing and postal mailings. Any further restrictions in laws such as the Telephone Consumer Protection Act of 1991, the Telemarketing Sales Rule, CAN-SPAM Act of 2003, and various U.S. state laws, or new federal laws, regarding marketing and solicitation or international data protection laws that govern these activities could adversely affect current or planned marketing activities and could force further changes in our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies. We also obtain access to potential guests from travel service providers or other companies with whom we have substantial relationships. We market to some individuals on these lists directly or through other companies’ marketing materials. If access to these lists was prohibited or otherwise restricted, our ability to develop new guests, and introduce them to our hotels could be impaired.

The growth of internet reservation channels could adversely affect our business and profitability.

A significant percentage of hotel rooms for individual guests is booked through internet travel intermediaries. We contract with such intermediaries and pay them various commissions and transaction fees for sales of our rooms through their system. If such bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us or our franchisees. Moreover, hospitality intermediaries generally employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. Further, some of these internet travel intermediaries are attempting to commoditize hotel rooms by increasing the importance of price and general indicators of quality at the expense of brand identification. Consumers may develop brand loyalties to the intermediaries’ websites and reservations systems

 

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rather than to the La Quinta brand. If this happens, our business and profitability may be significantly harmed as shifting guest loyalties divert bookings away from our websites, or as the fees charged by third-party websites increase the overall cost of internet bookings for our hotels.

In addition, recent class action litigation against several online travel intermediaries and lodging companies challenges the legality under antitrust law of certain provisions in contracts with third party intermediaries. While the travel intermediaries and lodging companies are vigorously defending this litigation and believe the contract provisions are lawful, the courts will ultimately determine this issue and an adverse outcome could force hotel companies, including us, to alter their business arrangements with these third parties which could have a negative impact on our financial condition and results of operations.

Our reservation system is an important component of the La Quinta brand and a disruption to its functioning could have an adverse effect on our hotels.

We license software from unaffiliated third parties for the La Quinta hotels reservation system. Losing these licenses may adversely affect our ability to maintain a technically adequate reservations system, which, in the absence of suitable alternatives, would inhibit our ability to conduct our business (including our ability to attract and retain franchise arrangements) and, ultimately, diminish our ability to generate revenue.

We manage a reservation system that communicates reservations to our owned and franchised hotels that have been made by individuals directly, either online or by telephone to our call centers, or through intermediaries like travel agents, internet travel web sites and other distribution channels. The cost, speed, efficacy and efficiency of the reservation system, as well as protection of personal or confidential information of its users, are important aspects of the business and are major considerations of franchisees in choosing to affiliate with the La Quinta brand. Any degradation of, failure of adequate development relative to, or security breach of, our reservation system may adversely affect our business.

Our reservation system relies on data communications networks operated by unaffiliated third parties. Any significant interruption of the function of our reservation system (or significant parts of our reservation system) may adversely affect our business as well as our ability to generate revenues.

The cessation, reduction or taxation of program benefits of our Returns loyalty program could adversely affect the La Quinta brand and guest loyalty.

We manage the Returns program for the La Quinta brand. Our owned and franchised hotels contribute a percentage of the guest’s room rate per night to the program for each hotel stay of a Returns program member. We arrange with service providers such as airlines to exchange monetary value represented by points for program awards and we may charge a license fee to such service providers for use of the La Quinta brand trademarks. Returns program members accumulate points based on eligible stays and hotel charges and redeem the points for a range of benefits, including free rooms, airline miles and other items of value. The Returns program is an important aspect of our business and of the affiliation value for hotel owners under franchise agreements. Currently, the program benefits are not taxed as income to members. If the program awards and benefits are materially altered, curtailed or taxed and, as a result, a material number of Returns members choose to stay at non-La Quinta-branded hotels, our business could be adversely affected.

 

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Any failure to protect our trademarks and other intellectual property could reduce the value of our brand and harm our business.

The recognition and reputation of our brand are important to our success. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. From time to time, we apply to have certain trademarks registered; however, we cannot assure you that those trademark or other intellectual property registrations will be granted or that the steps we take to use, control or protect our trademarks or other intellectual property in the United States and other jurisdictions will always be adequate to prevent third parties, including former employees, from copying or using the trademarks or other intellectual property without authorization or in a manner where authorization may not be required. We may also fail to obtain and maintain trademark protection for our brand in all jurisdictions. For example, in certain jurisdictions, third parties have registered or otherwise have the right to use certain trademarks that are the same as or similar to our trademarks, which could prevent us from registering trademarks and opening hotels in that jurisdiction. In addition, “la quinta” is a commonly used term in Central and South America and, as such, we may face greater difficulty protecting our registered trademarks in those regions. Third parties may also challenge our rights to certain trademarks or oppose our trademark applications. Defending against any such proceedings may be costly, and if unsuccessful, could result in the loss of important intellectual property rights. Obtaining and maintaining trademark protection for multiple brands in multiple jurisdictions is also expensive, and we may therefore elect not to apply for or to maintain certain trademarks. See “Business—Our trademarks.”

Our intellectual property is also vulnerable to unauthorized copying or use in some jurisdictions outside the United States, where local law, or lax enforcement of law, may not adequately protect it. If our trademarks or other intellectual property are misappropriated, or otherwise used in a manner where authorization may not be required, the La Quinta brand, including its value and reputation, could be harmed.

We monitor the unauthorized copying or use of intellectual property in the United States and other countries in which we operate or plan to operate. However, it is difficult to protect against every possible unauthorized use of our trademarks or other intellectual property and there are times where we have resorted, and may in the future resort, to litigation to enforce our intellectual property rights. Litigation of this type could be costly, force us to divert our resources, lead to counterclaims or other claims against us or otherwise harm our business or reputation. In addition, we license certain of our trademarks to third parties. For example, we grant our franchisees a right to use certain of our trademarks in connection with their operation of the applicable hotel. If a franchisee or other licensee fails to maintain the quality of the goods and services used in connection with the licensed trademarks, our rights to, and the value of, our trademarks could potentially be harmed. Negative publicity relating to the franchisee or licensee could also be incorrectly associated with us, which could harm our business. Failure to maintain, control and protect our trademarks and other intellectual property would likely adversely affect the ability of our hotels to generate revenues or our ability to enter into new franchise agreements.

 

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Third-party claims that we infringe patent, trademark, copyright or other intellectual property rights or misappropriate trade secrets of others could subject us to damages and other costs and expenses.

Third parties may make claims against us for infringing their patent, trademark, copyright or other intellectual property rights or for misappropriating their trade secrets. Any such claims, even those without merit, could:

 

 

be expensive and time consuming to defend;

 

 

force us to stop using the intellectual property that is being challenged, or to stop providing products or services that use the challenged intellectual property;

 

 

force us to rebrand our services;

 

 

divert management’s attention and resources;

 

 

force us to enter into royalty, licensing, co-existence or other agreements to obtain the right to use a third party’s intellectual property;

 

 

limit the use or the scope of our intellectual property or other rights;

 

 

force us to pay significant damages; and

 

 

limit where we can open future hotels.

In addition, we may be required to indemnify franchisees for any losses they incur as a result of any such infringement claims. All necessary royalty, licensing or other agreements may not be available to us at all or on acceptable terms. Any costs, lost revenues, changes to our business or diversion of management attention related to intellectual property claims against us, whether successful or not, could adversely affect our business.

Because a component of our strategy is to continue to grow our franchise business internationally, the risks of doing business internationally could lower our revenues, increase our costs, reduce our profits or disrupt our business.

At December 31, 2013, seven of our 477 franchised hotels were located outside of the United States, which represents approximately 1.5% of our total franchised hotels. We expect to increase the number of franchised hotels located outside of the United States in the coming years, with approximately 9.6% of our pipeline relating to hotels located outside the United States. As a result, we are and will be, on an increasing basis, subject to the risks of doing business outside the United States, including:

 

 

recessionary trends or economic instability in international markets;

 

 

changes in foreign currency exchange rates or currency restructurings and hyperinflation or deflation in the countries in which we operate;

 

 

the imposition of restrictions on currency conversion or the transfer of funds or limitations on our ability to repatriate non-U.S. earnings in a tax effective manner;

 

 

the presence and acceptance of varying levels of business corruption in international markets;

 

 

the impact of various anti-corruption and other laws;

 

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the ability to comply with, or impact of complying with, complex and changing laws, regulations and policies of foreign governments that may affect investments or operations, including foreign ownership restrictions, import and export controls, tariffs, embargoes, licensing requirements and regulations, increases in taxes paid and other changes in applicable tax laws;

 

 

uncertainties as to local laws and enforcement of contract and intellectual property rights;

 

 

the difficulties involved in managing an organization doing business in many different countries;

 

 

rapid changes in governmental, economic and political policies, political or civil unrest, acts of terrorism or the threat of international boycotts or U.S. anti-boycott legislation;

 

 

increases in anti-American sentiment and the identification of the licensed brands as an American brand;

 

 

forced nationalization of franchised hotels by local, state or national governments;

 

 

the effect of disruptions caused by severe weather, natural disasters, outbreak of disease or other events that make travel to a particular region less attractive or more difficult; and

 

 

political and economic instability.

Any or all of these factors may adversely affect the income from and the market value of our hotels located in international markets. In addition, the economy of any region in which our hotels are located may be adversely affected to a greater degree than that of other areas of the country or the world by certain developments affecting industries concentrated in that region or country. A decline in the general economic condition in regions or countries in which our hotels are located could result in a decrease in hotel demand in the region, and the income from and market value of these hotels may be adversely affected. Over time, room rates in regions can fluctuate and have historically fluctuated widely. While these factors and the impact of these factors are difficult to predict, any one or more of them could lower our revenues, increase our costs, reduce our profits or disrupt our business, and as our international operations increase, these risks will become more pronounced.

A number of our owned hotels are subject to ground leases; if we are found to be in breach of a ground lease or are unable to renew a ground lease, we could be adversely affected.

Twenty of our owned hotels are either completely or partially on land subject to ground leases. If we are found to be in breach of a ground lease or ground sublease, such ground lease or sublease could be terminated. Assuming that we exercise all available options to extend the terms of our ground leases and ground subleases, all of our ground leases and ground subleases will expire between 2014 and 2102, with two expiring in the next three years. However, in certain cases, our ability to exercise such options is subject to the condition that we are not in default under the terms of the ground lease or ground sublease, as applicable, at the time that we exercise such options and/or the time such extension occurs, and we can provide no assurances that we will be able to exercise our options at such time. Furthermore, we can provide no assurances that we will be able to renew our ground leases and ground subleases upon expiration. If a ground lease or ground sublease expires or is terminated, we would be unable to derive income from such hotel, which could adversely affect us.

 

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If an appropriate opportunity becomes available, we may seek to expand through acquisitions of and investments in other businesses and hotels, or through alliances. We may also seek to divest some of our hotels and other assets. These acquisition and disposition activities may be unsuccessful or divert management’s attention.

We may consider strategic and complementary acquisitions of and investments in other hotel or hospitality brands, businesses, hotels or other assets. Furthermore, we may pursue these opportunities in alliance with existing or prospective owners of franchised hotels. In many cases, we will be competing for these opportunities with third parties that may have substantially greater financial resources than us. Acquisitions or investments in brands, businesses, hotels or assets as well as these alliances are subject to risks that could affect our business, including risks related to:

 

 

issuing shares of stock that could dilute the interests of our existing stockholders;

 

spending cash and incurring debt;

 

assuming contingent liabilities; or

 

creating additional expenses.

We cannot assure you that we will be able to identify opportunities or complete transactions on commercially reasonable terms or at all, or that we will actually realize any anticipated benefits from such acquisitions, investments or alliances. There may be high barriers to entry in certain key markets and scarcity of available development and investment opportunities in desirable locations. Similarly, we cannot assure you that we will be able to obtain financing for acquisitions or investments on attractive terms or at all, or that the ability to obtain financing will not be restricted by the terms of our indebtedness.

The success of any such acquisitions or investments also will depend, in part, on our ability to integrate the acquisition or investment with our existing operations. We may experience difficulty with integrating acquired businesses, hotels or other assets, including difficulties relating to:

 

 

coordinating sales, distribution, and marketing functions;

 

integrating technology information systems; and

 

preserving the important guest, labor and other relationships of the acquired assets.

Divestment of some of our hotels or assets may yield lower than expected returns. In some circumstances, sales of hotels or other assets may result in losses. Upon a sale of hotels or assets, we may become subject to contractual indemnity obligations, incur material losses, including impairment charges, or tax liabilities or, as a result of required debt repayment, face a shortage of liquidity. In addition, any acquisitions, investments, dispositions or alliances could demand significant attention from management that would otherwise be available for business operations, which could harm our business.

Governmental regulation may adversely affect the operation of our hotels.

The hotels that we operate are subject to extensive local, regional and national regulations and, on a periodic basis, must obtain various licenses and permits. The laws and regulations of states, counties, cities, provinces and other political subdivisions may also require certain registration, disclosure statements and other practices with respect to the franchising of hotels. Any failure to identify, obtain or maintain required licenses and permits could result in adverse consequences.

The hotel industry is subject to extensive federal, state and local governmental regulations in the United States and the other countries in which our franchised hotels operate, including those

 

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relating to building and zoning requirements and those relating to the preparation and sale of food. Hotels and their owners and operators are also subject to licensing and regulation by state and local departments relating to health, sanitation, fire and safety standards, and to laws governing their relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. In connection with the continued operation or remodeling of certain of our hotels, we or our franchisees may be required to expend funds to meet federal, state and local regulations. For example, we may incur significant costs complying with the Americans with Disabilities Act (“ADA”), which requires that all public accommodations meet certain federal requirements related to access and use by disabled persons. The regulations also mandate certain operational requirements that hotel operators must observe. If, pursuant to the ADA, we are required to make substantial alterations to, and capital expenditures for, our hotels, including removal of access barriers, it could increase our expenditures and, in turn, could reduce our earnings. Any failure to obtain or maintain any such licenses or any publicity resulting from actual or alleged violations of any such laws and regulations could result in injunctive relief, fines, damage awards or capital expenditures and could have an adverse effect on our results of operations. Moreover, new or revised laws and regulations or new interpretations of existing laws and regulations could affect the operation of our hotels or result in significant additional expense and operating restrictions on us and our franchisees.

In addition, we may be subject to certain laws and regulations that govern the offer and sale of franchises, including regulations promulgated by the Federal Trade Commission (the “FTC”). Many franchise laws impose substantive requirements on franchise agreements, including limitations on provisions concerning the termination or non-renewal of a franchise. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. Some franchise laws require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and our franchisees.

Failure to comply with laws and regulations applicable to our international operations may increase costs, reduce profits, limit growth or subject us to broader liability.

Our business operations in countries outside the United States are subject to a number of U.S. federal laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”) as well as trade sanctions administered by the Office of Foreign Assets Control (“OFAC”) and the Commerce Department. The FCPA is intended to prohibit bribery of foreign officials or parties and requires public companies in the United States to keep books and records that accurately and fairly reflect those companies’ transactions. OFAC and the Commerce Department administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals. Some of our business operations are also subject to the laws and regulations of non-U.S. jurisdictions, including anti-corruption legislation in the countries in which we conduct operations. If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm, incarceration of our employees or restrictions on our operation, ownership or franchising of hotels, including the termination of our franchise and ownership rights. These restrictions could increase our costs of operations, reduce our profits or cause us to forgo development opportunities that would otherwise support our growth.

In August 2012, Congress enacted the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”), which expands the scope of U.S. sanctions against Iran. More specifically, Section 219 of the ITRSHRA amended the Exchange Act to require companies subject to Securities and

 

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Exchange Commission, or SEC, reporting obligations under Section 13 of the Exchange Act to disclose in their periodic reports specified dealings or transactions involving Iran or other individuals and entities targeted by certain OFAC sanctions engaged in by the reporting company or any of its affiliates during the period covered by the relevant periodic report. In some cases, ITRSHRA requires companies to disclose these types of transactions even if they were permissible under U.S. law. These companies are required to separately file with the SEC a notice that such activities have been disclosed in the relevant periodic report, and the SEC is required to post this notice of disclosure on its website and send the report to the U.S. President and certain U.S. Congressional committees. The U.S. President thereafter is required to initiate an investigation and, within 180 days of initiating such an investigation, to determine whether sanctions should be imposed. Under ITRSHRA, we would be required to report if we or any of our “affiliates” knowingly engaged in certain specified activities during the period covered by the report. Because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us. Because we may be deemed to be a controlled affiliate of Blackstone, affiliates of Blackstone may also be considered our affiliates. Disclosure of such activity by us or our affiliates, even if such activity is not subject to sanctions under applicable law, and any sanctions actually imposed on us or our affiliates as a result of these activities, could harm our reputation and have a negative impact on our business.

Foreign or U.S. environmental laws and regulations may cause us to incur substantial costs or subject us to potential liabilities.

We are subject to certain compliance costs and potential liabilities under various foreign and U.S. federal, state and local environmental, health and safety laws and regulations. These laws and regulations govern actions including air emissions, the use, storage and disposal of hazardous and toxic substances, and wastewater disposal. Our failure to comply with such laws, including any required permits or licenses, could result in substantial fines or possible revocation of our authority to conduct some of our operations. We could also be liable under such laws for the costs of investigation, removal or remediation of hazardous or toxic substances at our currently or formerly owned, operated or franchised hotels or at third-party locations in connection with our waste disposal operations, regardless of whether or not we knew of, or caused, the presence or release of such substances. Some laws may regard us as having liability as an operator by virtue of how we may implement our franchise agreements, rendering us potentially responsible for addressing environmental or other conditions existing at our franchised hotels. In some cases, we may be entitled to indemnification from the party that caused the contamination, or pursuant to our franchise agreements, but there can be no assurance that we would be able to recover all or any costs we incur in addressing such problems. From time to time, we may be required to remediate such substances or remove, abate or manage asbestos, mold, radon gas, lead or other hazardous conditions at our hotels. The presence or release of such toxic or hazardous substances could result in third-party claims for personal injury, property or natural resource damages, business interruption or other losses. Such claims and the need to investigate, remediate, or otherwise address hazardous, toxic or unsafe conditions could adversely affect our operations, the value of any affected hotel, or our ability to sell, lease or assign our rights in any such hotel, or could otherwise harm our business or reputation. Environmental, health and safety requirements have also become increasingly stringent, and our costs may increase as a result. For example, Congress, the U.S. Environmental Protection Agency, or EPA, and some states are considering or have undertaken actions to regulate and reduce greenhouse gas emissions. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of our owned and franchised hotels

 

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or result in significant additional expense and operating restrictions on us and our franchisees. The potential for changes in the frequency, duration and severity of extreme weather events that may be a result of climate change could lead to significant property damage at our hotels and other assets, impact our ability to obtain insurance coverage in areas that are most vulnerable to such events, and have a negative effect on revenues.

Asbestos, lead-based paint, mold and other hotel related issues could expose us to substantial liability.

Certain U.S. and foreign laws impose liability for the release of asbestos containing materials into the air or require the removal or containment of asbestos containing materials, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to toxic or hazardous substances. Some of our owned hotels may have asbestos containing materials, and when these materials have been discovered, we have taken action as and when required by applicable law. Such laws require that, as owners or operators of buildings containing asbestos, we must (i) properly manage and maintain the asbestos, (ii) notify and train those who may come into contact with asbestos and (iii) undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. Such laws may impose fines and penalties on us if we fail to comply with these requirements and may allow third parties to seek recovery for personal injury associated with exposure to asbestos fibers, which could significantly increase our operating costs and reduce our earnings.

In addition, certain laws impose liability for lead based paint, and third parties may seek recovery from owners or operators of real properties for personal injury associated with lead based paint. Limits are placed on the amount of lead that may be present in public drinking water supplies, and third parties may seek recovery from owners or operators of real properties for injuries arising from exposure to high lead concentration.

Other materials used in the construction of our owned hotels that are currently thought to be safe may in the future be determined to be hazardous, and could expose us to substantial liability for damages, injuries, adverse health effects or removal and disposal costs. In addition, other building supplies thought to be appropriate for their use, while not toxic, have been discovered to be defective (such as fire-retardant plywood or polybutylene piping). Defects in such supplies have resulted in substantial costs on the part of the owners or operators of affected hotels to remove and replace the defective materials. Materials currently thought to be appropriate or safe may in the future prove to be defective, and could result in substantial costs or losses.

Problems associated with mold may pose risks to our hotels and also may be the basis for personal injury claims against us. There is no generally accepted standard for the assessment of mold. If left unchecked or inadequately addressed, the growth of mold could result in litigation and remediation expenses, or in a closure of some or all of a hotel, that could adversely affect revenues from an individual hotel. We have discovered that some of our owned hotels have problems with mold. The presence of mold at some of our owned hotels has required us to undertake a remediation program to remove the mold from the affected hotels. The cost of remediation to date has not been material. However, remediation costs may substantially increase if there is mold in our other hotels or if costs related to mold such as legal and insurance expense continue to increase rapidly, which could significantly increase our operating costs and reduce our earnings.

 

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Additionally, the U.S. Environmental Protection Agency has identified certain health risks associated with elevated radon gas in buildings, and has recommended that certain mitigating measures be considered. It is possible that other environmental conditions not currently known, or known but not currently thought to be dangerous, may in the future be determined to present a risk to health or safety, such as with respect to possible exposure to waterborne pathogens.

Franchisees are exposed to the same risks with respect to the hotels that they own and operate. Additionally, some laws may regard us as having liability as an operator by virtue of how we may implement our franchise agreements, rendering us potentially responsible for addressing environmental or other conditions existing at our franchised hotels. Our franchise agreements typically require our franchisees to assume and indemnify us against such liabilities, but there can be no assurance that governmental authorities will not look directly to us to address such matters or that we would be able to recover from our hotel owners any costs we incur in doing so.

For all of these reasons, the presence of, or potential for contamination by, such hazardous or toxic substances, or exposure to pathogens, at, on, under, adjacent to, emanating from, or in any of our hotels could materially adversely affect the operations, the value of such hotel or the ability to attract guests to such hotel, or could otherwise harm our business or reputation.

We are subject to risks from litigation filed by or against us.

Legal or governmental proceedings brought by or on behalf of franchisees, employees or guests may adversely affect our financial results. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal laws and regulations regarding workplace and employment matters, consumer protection claims and other commercial matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants through adverse judgments or settlement agreements. Similar lawsuits have been and may be instituted against us from time to time, and we may incur substantial damages and expenses resulting from lawsuits of this type, which could have a material adverse effect on our business. From time to time, we may also be engaged in lawsuits against franchisees. Similarly, we may from time to time institute legal proceedings on behalf of ourselves or others, the ultimate outcome of which could cause us to incur substantial damages and expenses, which could have a material adverse effect on our business.

The loss of senior executives or key field personnel, such as general managers, could significantly harm our business.

Our ability to maintain our competitive position depends to a large degree on the efforts and skills of our senior executives. On average, our management team members have 20 years of experience in lodging and lodging related industries or have other relevant experience; however, we cannot guarantee that these individuals will remain with us. Finding suitable replacements for senior executives could be difficult. We currently do not have a life insurance policy or key person insurance policy with respect to any of our senior executives. Losing the services of one or more of these senior executives could adversely affect strategic relationships, including relationships with franchisees and vendors, and limit our ability to execute our business strategies.

We also rely on the general managers at each of our owned hotels to manage daily operations and oversee the efforts of their team members. These general managers are trained professionals in the hospitality industry and have extensive experience in many markets worldwide. The failure to retain, train or successfully manage general managers for our owned hotels could negatively affect our operations.

 

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Labor shortages could restrict our ability to operate our hotels or grow our business or result in increased labor costs that could reduce our profits.

Our success depends in large part on our ability to attract, retain, train, manage and engage employees. If we are unable to attract, retain, train, manage and engage skilled employees, our ability to manage and staff the owned hotels adequately could be impaired, which could reduce guest satisfaction. In addition, the inability of our franchisees to attract, retain, train, manage and engage skilled employees for the franchised hotels could adversely affect our business. Staffing shortages also could hinder our ability to grow and expand our businesses. Because payroll costs are a major component of the operating expenses at our hotels, a shortage of skilled labor could also require higher wages that would increase labor costs, which could adversely affect our profits and the profits of our franchisees. In addition, increases in minimum wage rates could result in significantly increased costs and reduced profits for us and our franchisees.

Higher health care costs and labor costs could adversely affect our business.

With the passage in 2010 of the U.S. Patient Protection and Affordable Care Act (the “Act”), we are required to provide affordable coverage, as defined in the Act, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the Act. Many of these requirements will be phased in over a period of time, with the majority of the most impactful provisions affecting us presently anticipated to begin in 2015. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care and insurance costs could have an adverse effect on our business, financial condition and results of operations. In addition changes in federal or state workplace regulations could adversely affect our ability to meet our financial targets.

Attempts by labor organizations to organize groups of our employees or changes in labor laws could disrupt our operations, increase our labor costs or interfere with the ability of our management to focus on implementing our business strategies.

Although none of our employees are currently covered under collective bargaining agreements, we cannot guarantee that our employees will not elect to be represented by labor unions in the future. We may become subject to collective bargaining agreements, similar agreements or regulations enforced by governmental entities in the future. Changes in the federal regulatory scheme could make it easier for unions to organize groups of our employees. If relationships with our employees become adverse, our hotels could experience labor disruptions such as strikes, lockouts and public demonstrations. Additionally, if such changes take effect, our employees could be subject to organizational efforts, which could potentially lead to disruptions or require our management’s time to address unionization issues. Labor regulation could also lead to higher wage and benefit costs, changes in work rules that raise operating expenses and legal costs, and limit our ability to take cost saving measures during economic downturns. These or similar agreements, legislation or changes in regulations could disrupt our operations, hinder our ability to cross-train and cross-promote our employees due to prescribed work rules and job classifications, reduce our profitability or interfere with the ability of our management to focus on executing our business and operating strategies.

If the insurance that we or our franchisees carry does not sufficiently cover damage or other potential losses or liabilities to third parties involving our hotels, our profits could be reduced.

We carry, and we require our franchisees to carry, insurance from insurance carriers that we believe is adequate for foreseeable first and third party losses and with terms and conditions that we

 

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believe are reasonable and customary. Nevertheless, market forces beyond our control could limit the scope of the insurance coverage that we and our franchisees can obtain or restrict our or our franchisees’ ability to buy insurance coverage at reasonable rates. In the event of a substantial loss, the insurance coverage that we or our franchisees carry may not be sufficient to reimburse us in full for our losses or pay the full value of financial obligations, liabilities or the replacement cost of any lost investment or property loss, which could adversely affect our profits. In addition, risks that may fall outside the general coverage terms and limits of the policies and certain types of losses that are significantly uncertain, or generally of a catastrophic nature, such as hurricanes, earthquakes and floods or terrorist acts, may be uninsurable or not economically insurable. If such losses or events occur, they could cause substantial damage to our hotels or our franchised hotels or the surrounding area, without any insurance coverage. Further, we and our franchisees may not be able to obtain or renew insurance policies or, if we or our franchisees are able to obtain or renew our coverage, it may be at a significantly higher cost than the historic cost.

In addition, insurance coverage for our hotels and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial condition and results of operation may be adversely affected.

In some cases, these factors could result in certain losses being completely uninsured. As a result, we or our franchisees could lose some or all of the capital invested in a hotel, as well as the anticipated future revenues and profits from the hotel. We or our franchisees could suffer an uninsured or underinsured loss, and we may not have sufficient insurance to cover awards of damages resulting from claims made against us.

Terrorism insurance may not be available at all or at commercially reasonable rates.

Following the September 11, 2001 terrorist attacks in New York City and the Washington, D.C. area, Congress passed the Terrorism Risk Insurance Act of 2002, which established the Terrorism Insurance Program to provide insurance capacity for terrorist acts. On December 26, 2007, the Terrorism Insurance Program was extended by the Terrorism Risk Insurance Program Reauthorization Act of 2007 through December 31, 2014, or TRIPRA. We carry insurance from insurance carriers to respond to both first-party and third-party liability losses related to terrorism. We purchase our first-party property damage and business interruption insurance from a stand-alone market in place of and to supplement insurance from government run pools. If TRIPRA is not extended or renewed upon its expiration in 2014, premiums for terrorism insurance coverage will likely increase and/or the terms of such insurance may be materially amended to increase stated exclusions or to otherwise effectively decrease the scope of coverage available, perhaps to the point where it is effectively unavailable.

Terrorist attacks and military conflicts may adversely affect the hospitality industry.

The terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001 underscore the possibility that large public facilities or economically important assets could become the target of terrorist attacks in the future. The occurrence or the possibility of terrorist attacks or military conflicts could generally reduce travel to affected areas for tourism and business or adversely affect the willingness of guests to stay in or avail themselves of hotel services and result in higher costs for security and insurance premiums or diminish the availability

 

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of insurance coverage for losses related to terrorist attacks, all of which could adversely affect our financial condition and results of operations.

Changes to estimates or projections used to assess the fair value of our assets, or operating results that are lower than our current estimates at certain locations, may cause us to incur impairment charges that could adversely affect our results of operations.

Our total assets include intangible assets with an indefinite life, other intangible assets with finite useful lives, and substantial amounts of long-lived assets, principally property and equipment, including hotels. We analyze our assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that an asset might be impaired. Our evaluation of impairment requires us to make certain estimates and assumptions including projections of future results. After performing our evaluation for impairment, including an analysis to determine the recoverability of long-lived assets, we will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. In connection with the impairment test in 2012, we determined that property and equipment related to certain hotels were partially impaired primarily due to changes in market position, the economy, decreased overall travel demand and/or decrease in assumed holding period, and we recorded an impairment loss of approximately $51.5 million for the year ended December 31, 2012. For the year ended December 31, 2013, no impairment was recorded on our assets held for use. If the estimates or assumptions used in our evaluation of impairment change, we may be required to record additional impairment charges on certain of these assets. During times of economic distress, declining demand and declining earnings often result in declining asset values. If any impairment losses we recognize are significant, our financial condition and results of operations would be adversely affected.

Changes in federal, state, local or foreign tax law or interpretations of existing tax law, or adverse determinations by tax authorities, could increase our tax burden or otherwise adversely affect our financial condition, results of operations or cash flows.

We are subject to taxation at the federal, state and local levels in the U.S. and other countries and jurisdictions. Our future effective tax rate could be affected by changes in the composition of earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, changes in the valuation of our deferred tax assets and liabilities, or changes in determinations regarding the jurisdictions in which we are subject to tax. From time to time, the U.S. federal, state and local and foreign governments make substantive changes to tax rules and their application, which could result in materially higher taxes than would be incurred under existing tax law or interpretation and could adversely affect our profitability, financial condition, results of operations or cash flows. State and local tax authorities have also increased their efforts to increase revenues through changes in tax law and audits. Such changes and proposals, if enacted, could increase our future effective income tax rates. We are subject to ongoing and periodic tax audits and disputes in various jurisdictions. An unfavorable outcome from any tax audit could result in higher tax costs, penalties and interest, thereby adversely impacting our financial condition, results of operations or cash flows.

We are currently under audit by the Internal Revenue Service and may be required to pay additional taxes.

The Internal Revenue Service (the “IRS”) is currently auditing the tax returns of La Quinta Corporation, one of our REITs, and BRE/LQ Operating Lessee Inc., one of our taxable REIT

 

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subsidiaries, in each case for calendar years 2010 and 2011. On January 9, 2014, we received a draft notice of proposed adjustment from the IRS in the amount of $158 million of additional tax for calendar years 2010 and 2011 in which the IRS has preliminarily asserted that the rent charged for these periods under the lease of hotel properties from the REIT to the taxable REIT subsidiary exceeded an arm’s length rent. The rent payable under such lease is based on a transfer pricing study prepared by an expert firm, and we believe that all such rent has been on an arm’s length basis. If, however, the IRS were successful in showing the rent charged was higher than the rent determined under any reasonable method, an excise tax would be imposed on the REIT equal to 100% of the excess rent. Such adjustments could also give rise to additional state income taxes. The IRS has indicated that it intends to review similar issues with respect to subsequent taxable years of the REIT and taxable REIT subsidiary. The IRS may also raise other issues in the course of examining our tax returns that could result in additional proposed adjustments. We have reviewed the draft notice from the IRS, considered its content, and intend to seek additional input from the IRS. However, we continue to believe that the positions reported on our tax returns under audit by the IRS are, based on their technical merits, more likely than not to be sustained upon examination. Accordingly, as of December 31, 2013, we have not established any reserves related to this draft proposed adjustment or any other issues reflected on the returns under examination. If the IRS were successful in its challenges, we could owe additional taxes, interest and penalties, which could adversely affect our financial condition, results of operations and cash flow and the price of our common stock.

Although neither we nor our subsidiaries will be a REIT for United States federal income tax purposes following this offering, there can be no assurance that the IRS will not challenge the Existing Entities’ REIT status for previous years in which they elected REIT status. If the IRS were to successfully challenge the previous REIT status of any such entity, we may be required to pay additional taxes.

Certain of the Existing Entities elected to be treated as REITs for United States federal income tax purposes for taxable years ending on and prior to the date of this offering. Following consummation of this offering, neither we nor any of our subsidiaries will be REITs for United States federal income tax purposes. However, there can be no assurance that the IRS will not challenge the Existing Entities’ REIT qualification for previous years in which they elected REIT status. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) for which only a limited number of judicial or administrative interpretations exist. Although we believe that each of the Existing Entities that elected to be treated as a REIT met all of these requirements and qualified as a REIT in each of the years REIT status was elected, if the IRS were to successfully challenge the previous REIT status of any such entity, we could be liable for additional income taxes, interest and penalties, which could adversely affect our financial condition, results of operations and cash flow and the price of our common stock.

Changes to accounting rules or regulations may adversely affect our results of operations.

New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations or the questioning of current accounting practices may adversely affect our financial condition and results of operations. For example, in 2013, the Financial Accounting Standards Board (“FASB”) issued a revised exposure draft outlining proposed changes to current lease accounting in FASB Accounting Standards

 

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Codification (“Codification” or “ASC”) Topic 840, “Leases” and certain of our owned hotels are located on land that is leased from third parties. The proposed Accounting Standards Update, if ultimately adopted in its current form, could result in significant changes to current accounting, including the capitalization of leases on the balance sheet that currently are recorded off balance sheet as operating leases. While this change would not impact the cash flow related to our leased hotels and other leased assets, it could adversely impact our balance sheet and could therefore impact our ability to raise financing from banks or other sources.

Risks relating to our indebtedness

Our substantial indebtedness could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts and could expose us to interest rate risk to the extent of our variable debt and divert our cash flow from operations to make debt payments.

We have a significant amount of indebtedness. As of December 31, 2013, our total indebtedness was approximately $2.7 billion, or $2.1 billion on a pro forma basis after giving effect to this offering and the application of the use of proceeds. Our substantial debt could have important consequences, including:

 

 

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and pursue future business opportunities;

 

 

increasing our vulnerability to adverse economic, industry or competitive developments;

 

 

exposing us to increased interest expense, as our degree of leverage may cause the interest rates of any future indebtedness (whether fixed or floating rate interest) to be higher than they would be otherwise;

 

 

exposing us to the risk of increased interest rates because certain of our indebtedness is at variable rates of interest;

 

 

making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants, could result in an event of default that accelerates our obligation to repay indebtedness;

 

 

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

 

limiting our ability to obtain additional financing for working capital, capital expenditures, hotel development, satisfaction of debt service requirements, acquisitions and general corporate or other purposes; and

 

 

limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who may be better positioned to take advantage of opportunities that our leverage prevents us from exploiting.

 

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Furthermore, all of our debt currently matures in July 2014. We do not expect to have sufficient cash on hand to repay in full the balances expected to exist at that time. As such, we intend to enter into a new credit agreement as described under “Description of indebtedness—New senior secured credit facilities”. On February 21, 2014, we agreed with the joint lead arrangers on the terms of the credit agreement and the joint lead arrangers allocated participation in the senior secured credit facilities to the lenders. The closing of the senior secured credit facilities is subject to customary closing conditions and consummation of this offering.

In addition, we are a holding company and substantially all of our consolidated assets are owned by, and most of our business is conducted through, our subsidiaries. Revenues from these subsidiaries are our primary source of funds for debt payments and operating expenses. If our subsidiaries are restricted from making distributions to us, that may impair our ability to meet our debt service obligations or otherwise fund our operations. Moreover, there may be restrictions on payments by subsidiaries to their parent companies under applicable laws, including laws that require companies to maintain minimum amounts of capital and to make payments to stockholders only from profits. As a result, although a subsidiary of ours may have cash, we may not be able to obtain that cash to satisfy our obligation to service our outstanding debt or fund our operations.

Servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on many factors, some of which are not within our control.

Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. To a certain extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to generate sufficient cash flow to service our debt and meet our other commitments, we may need to restructure or refinance all or a portion of our debt, sell material assets or operations or raise additional debt or equity capital. We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms or at all, and these actions may not be sufficient to meet our capital requirements. In addition, the terms of our existing or future debt arrangements may restrict us from effecting any of these alternatives. Our failure to make the required interest and principal payments on our indebtedness would result in an event of default under the agreement governing such indebtedness, which may result in the acceleration of some or all of our outstanding indebtedness.

Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions, which could further exacerbate the risks to our financial condition described above.

We may be able to incur significant additional indebtedness in the future. Although the credit agreement governing the senior secured credit facilities will contain restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, these restrictions are subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt instruments. To the extent new debt is added to our current debt levels, the substantial leverage risks described in the preceding two risk factors would increase.

 

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The credit agreement governing the senior secured credit facilities will contain, and future debt agreements may contain, restrictions that may limit our flexibility in operating our business.

The credit agreement governing the senior secured credit facilities will contain operating covenants that limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, our ability to incur additional indebtedness and make guarantees, create liens on assets, enter into sale and leaseback transactions, engage in mergers and consolidations, sell assets, make fundamental changes, pay dividends and distributions or repurchase our capital stock, make investments, loans and advances, including acquisitions, engage in certain transactions with affiliates, make changes in the nature of our business and make prepayments of junior debt. In addition, under our senior secured credit facilities, if, on the last day of any period of four consecutive quarters on or after June 30, 2014, the aggregate principal amount of revolving credit loans, swing line loans and/or letters of credit (excluding up to $20 million of letters of credit and certain other letters of credit that have been cash collateralized or back-stopped) that are issued and/or outstanding is greater than 25% of the revolving credit facility, the credit agreement will require the borrower to maintain a consolidated first lien net leverage ratio not to exceed 8.0 to 1.0. Additionally, the documents governing our future indebtedness may place additional restrictions on us and may require us to meet certain financial ratios and tests. Our ability to comply with these and other provisions of our new credit agreement and future debt agreements is dependent on our future performance, which will be subject to many factors, some of which are beyond our control. The breach of any of these covenants or non-compliance with any of these financial ratios and tests could result in an event of default under the debt agreements, which, if not cured or waived, could result in acceleration of the related debt and the acceleration of debt under other instruments evidencing indebtedness that may contain cross-acceleration or cross-default provisions.

Risks related to this offering and ownership of our common stock

Our Sponsor controls us and its interests may conflict with ours or yours in the future.

Immediately following this offering, our Sponsor will beneficially own approximately 66.7% of our common stock, or 63.8% if the underwriters exercise in full their option to purchase additional shares. Moreover, under our amended and restated bylaws and the stockholders’ agreement with our Sponsor that will be in effect by the completion of this offering, we will agree to nominate to our board individuals designated by our Sponsor, whom we refer to as the “Sponsor Directors,” according to the following scale: (1) if our Sponsor continues to beneficially own at least 50% of our stock, the lowest whole number that is greater than 50% of the total number of directors comprising our board of directors; (2) if our Sponsor continues to beneficially own at least 40% (but less than 50%) of our stock, the lowest whole number that is at least 40% of the total number of directors comprising our board of directors; (3) if our Sponsor continues to beneficially own at least 30% (but less than 40%) of our stock, the lowest whole number that is at least 30% of the total number of directors comprising our board of directors; (4) if our Sponsor continues to beneficially own at least 20% (but less than 30%) of our stock, the lowest whole number that is at least 20% of the total number of directors comprising our board of directors; and (5) if our Sponsor continues to beneficially own at least 5% (but less than 20%) of our stock, the lowest whole number that is at least 10% of the total number of directors comprising our board of directors. Therefore, even when our Sponsor ceases to own shares of our stock representing a majority of the total voting power, our Sponsor will still be able to significantly

 

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influence the composition of our board of directors and the approval of actions requiring stockholder approval. Accordingly, for such period of time, our Sponsor will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as our Sponsor continues to own a significant percentage of our stock, our Sponsor will be able to cause or prevent a change of control of our Company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our Company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our Company and ultimately might affect the market price of our common stock.

Our Sponsor engages in a broad spectrum of activities, including investments in real estate generally and in the hospitality industry in particular. In the ordinary course of their business activities, our Sponsor may engage in activities where their interests conflict with our interests or those of our stockholders. For example, our Sponsor owns interests in Extended Stay America, Inc., Hilton Worldwide Holdings Inc. and G6 Hospitality, LLC, and certain other investments in the hotel industry that may compete directly or indirectly with us. As a result, they could have interests that could conflict with ours. Additionally, two of our directors sit on the board of directors of the companies listed above and our directors may in the future sit on other companies in the hospitality industry. Our amended and restated certificate of incorporation will provide that none of our Sponsor or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsor also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsor may have an interest in having the Company pursue acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment in the Company, even though such transactions might involve risks to you.

Upon the listing of our shares on the NYSE, we will be a “controlled company” within the meaning of such exchange’s rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. To the extent we rely on such exemptions, you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, our Sponsor will continue to control a majority of the combined voting power of all classes of our stock entitled to vote generally in the election of directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements. For example, controlled companies, within one year of the date of the listing of their common stock:

 

 

are not required to have a board that is composed of a majority of “independent directors,” as defined under the rules of such exchange;

 

 

are not required to have a compensation committee that is composed entirely of independent directors; and

 

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are not required to have a nominating and corporate governance committee that is composed entirely of independent directors.

Following this offering, we intend to utilize these exemptions. As a result, we do not expect a majority of the directors on our board will be independent upon the closing of this offering. In addition, although we will have a fully independent audit committee, we do not expect that our compensation and nominating and corporate governance committees will consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

We are an emerging growth company, and any decision on our part to comply with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we currently intend to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our registration statements, periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the completion of this offering. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering; (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this accommodation allowing for delayed adoption of new or revised accounting standards, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also will incur costs associated with the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, and related rules implemented by the SEC. The expenses incurred by public

 

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companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form 10-K, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm is not required to express an opinion as to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company,” as defined in the JOBS Act. At such time, however, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating.

The process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation is time-consuming, costly, and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an “emerging growth company,” investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

There may not be an active trading market for shares of our common stock, which may cause shares of our common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained which would make it difficult for you to sell your shares of common stock at an attractive price or at all. The initial public offering price per share of common stock will be determined by agreement among us and the representatives of the underwriters, and may not be indicative of the price at which shares of our common stock will trade in the public market after this offering.

 

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The market price of shares of our common stock may be volatile, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our common stock in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of shares of our common stock could decrease significantly. You may be unable to resell your shares of common stock at or above the initial public offering price.

In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.

We do not currently have a policy regarding payment of dividends. We will determine our initial dividend polity prior to consummation of this offering. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, level of indebtedness, capital requirements, restrictions in our debt agreements, other contractual restrictions and the terms of any preferred stock, our business prospects and other factors that our board of directors may deem relevant. For more information, see “Dividend policy.”

Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price per share of common stock will be substantially higher than our pro forma net tangible book value per share immediately after this offering. As a result, you will pay a price per share of common stock that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. In addition, you will pay more for your shares of common stock than the amounts paid by our existing owners. Assuming an offering price of $19.50 per share of common stock, which is the midpoint of the range on the front cover of this prospectus, you will incur immediate and substantial dilution in an amount of $15.09 per share of common stock. See “Dilution.”

 

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You may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise.

After this offering we will have approximately 1,877.4 million shares of common stock authorized but unissued under our amended and restated certificate of incorporation to become effective immediately prior to the consummation of this offering. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 13,000,000 shares for issuance under our 2014 Omnibus Incentive Plan, including             shares of common stock we intend to grant to our employees at the time of this offering. See “Management—Executive compensation—Omnibus incentive plan” and “Management—Executive compensation—Long-term incentive awards.” Any common stock that we issue, including under our 2014 Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

Future sales, or the perception of future sales, by us or our existing investors of additional shares of our common stock after this offering could cause the market price of our common stock to decline.

The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Upon completion of this offering we will have a total of 122,608,318 shares of our common stock outstanding (or 128,188,318 shares if the underwriters exercise in full their option to purchase additional shares). Of the outstanding shares, the 37,200,000 shares sold in this offering (or 42,780,000 shares if the underwriters exercise their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in “Shares eligible for future sale.”

The remaining outstanding 85,408,318 shares of common stock held by our Sponsor, certain of our directors and officers and other existing owners after this offering will be subject to certain restrictions on resale. We, our executive officers, directors and holders of certain of our outstanding shares of common stock immediately prior to this offering, including Blackstone, will sign lock-up agreements with the underwriters that will, subject to certain exceptions, restrict the sale of the shares of our common stock held by them for a period starting on the date of the prospectus and continuing for 180 days after the closing date of this offering. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC may, in their discretion and without notice, release all or any portion of the shares of common stock subject to lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

 

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Upon the expiration of the lock-up agreements described above, all of such 85,408,318 shares will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that our Sponsor will be considered an affiliate 180 days after this offering based on their expected share ownership (consisting of 81,815,724 shares), as well as their board nomination rights. Certain other of our shareholders may also be considered affiliates at that time. In addition, commencing 180 days following this offering, the holders of these shares of common stock will have the right, subject to certain exceptions and conditions, to require us to register their shares of common stock under the Securities Act, and they will have the right to participate in future registrations of securities by us. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares eligible for future sale.”

As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our shares of common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our 2014 Omnibus Incentive Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover 13,000,000 shares of our common stock.

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective immediately prior to the consummation of this offering, will contain provisions that may make the merger or acquisition of our Company more difficult without the approval of our board of directors. Among other things:

 

 

although we do not have a stockholder rights plan, and would either submit any such plan to stockholders for ratification or cause such plan to expire within a year, these provisions would allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

 

these provisions prohibit stockholder action by written consent from and after the date on which the parties to our stockholders’ agreement cease to beneficially own at least 40% of the total voting power of all then outstanding shares of our capital stock unless such action is recommended in advance by all directors then in office;

 

 

these provisions provide that the board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws and that our stockholders may only amend our

 

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amended and restated bylaws with the approval of 80% or more of all of the outstanding shares of our capital stock entitled to vote; and

 

 

these provisions establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our Company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

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Special note regarding forward-looking statements

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical facts included in this prospectus, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information referred to under “Prospectus summary,” “Risk factors,” “Dividend policy,” “Management’s discussion and analysis of financial condition and results of operations” and “Business” are forward-looking statements. When used in this prospectus, the words “estimates,” “expects,” “contemplates,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth above under “Risk factors,” and the following risks, uncertainties and factors:

 

 

business, financial, and operating risks inherent to the hospitality industry;

 

 

macroeconomic and other factors beyond our control can adversely which affect and reduce demand for hotel rooms;

 

 

contraction in the global economy or low levels of economic growth;

 

 

inability to compete effectively;

 

 

any deterioration in the quality or reputation of our brand;

 

 

inability to develop our pipeline;

 

 

the geographic concentration of our hotels;

 

 

delays or increased expense relating to our efforts to develop, redevelop or renovate our hotels;

 

 

inability by us or our franchisees to make necessary investments to maintain the quality and reputation of our brand;

 

 

inability to access capital necessary for growth;

 

 

seasonal and cyclical volatility in the hotel industry;

 

 

inability to maintain good relationships with our franchisees;

 

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inability to protect our brand standards;

 

 

risks resulting from significant investments in owned real estate;

 

 

failure to keep pace with developments in technology;

 

 

failures or interruptions in, material damage to, or difficulties in updating, our information technology systems, software or websites;

 

 

inability to protect our guests’ personal information;

 

 

failure to comply with marketing and advertising laws;

 

 

disruptions to our reservation system;

 

 

failure to protect our trademarks and other intellectual property;

 

 

risks of doing business internationally;

 

 

the loss of senior executives or key field personnel;

 

 

our substantial indebtedness; and

 

 

Blackstone’s control of us.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the sections entitled “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” in this prospectus. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this prospectus apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

 

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Our pre-IPO transactions and organizational structure

Our business is currently conducted, and our hotel properties are currently owned, through multiple entities (including the Predecessor Entities and entities that own the Previously Managed Portfolio, collectively, the “Existing Entities”). The Existing Entities are separately owned (directly and indirectly) by seventeen real estate investment fund entities and other entities affiliated with our Sponsor, principally including Blackstone Real Estate Partners IV L.P. and Blackstone Real Estate Partners V L.P. and their affiliates, and certain members of our management, whom we refer to collectively as our “existing owners.” Certain of the Existing Entities operated as REITs for U.S. federal income tax purposes, which reduced the amount of taxes we owed.

The Issuer is a newly formed entity, formed for the purpose of effecting the Pre-IPO Transactions (as defined below) and this offering, and has engaged in no business or activities other than in connection with the Pre-IPO Transactions and this offering.

In order to effectuate this offering, we expect to effect the following series of transactions to occur at various times prior to and/or concurrently with the closing of this offering, which will result in a reorganization of our business (the “Pre-IPO Transactions”):

 

 

each of Lodge S-Holdings Inc., Lodge Holdings Inc. and La Quinta Corporation, which are the REIT subsidiaries of the Existing Entities, will redeem its shares of capital stock from its third-party shareholders for cash in an aggregate amount estimated to be $4.6 million and convert into a limited liability company;

 

 

Holdco III will purchase the Previously Managed Portfolio for an estimated amount equal to $76.9 million in cash and 4,221,535 shares of common stock of the Issuer, in each case, assuming an initial public offering price of $19.50 per share, which is the mid-point of the range set forth on the cover page of this prospectus;

 

 

the equity interests in the Holdcos held by the existing owners will be exchanged by the existing owners for an aggregate of 81,186,783 shares of common stock of the Issuer, assuming an initial public offering price of $19.50 per share, which is the mid-point of the range set forth on the cover page of this prospectus (see “Security ownership of certain beneficial owners and management” for share ownership of Blackstone and certain members of our management following this exchange);

 

 

LQ Management L.L.C. will be sold to our wholly-owned subsidiary, La Quinta Intermediate Holdings L.L.C., for cash; and

 

 

certain other transactions as described in the footnotes to “Unaudited pro forma condensed combined financial information” will occur.

 

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The following is a simplified depiction of our Company following the Pre-IPO Transactions:

 

LOGO

 

(1)   See “Security ownership of certain beneficial owners and management” for share ownership of Sponsor and certain members of our management following the Pre-IPO Transactions.

 

(2)   Ownership percentages assume an initial public offering price of $19.50 per share, which is the mid-point of the range set forth on the cover page of this prospectus.

The purpose of the Pre-IPO Transactions is to enable us to complete a public offering of all of the business previously conducted by the Existing Entities.

Except where otherwise expressly indicated or the context otherwise requires, this prospectus reflects the completion of the Pre-IPO Transactions. See “Basis of presentation.”

 

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Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $677.8 million (or approximately $781.2 million if the underwriters fully exercise their option to purchase additional shares of common stock), in each case assuming an initial public offering price of $19.50 per share, which is the mid-point of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial public offering price per share, which is the mid-point of the range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by $18.5 million. A $1.00 increase (decrease) in the assumed initial public offering price of $19.50 per share, based on the mid-point of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $35.3 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering, together with the net proceeds from the senior secured term loan facility and available cash, to repay approximately $1.9 billion of borrowings outstanding under Holdco I’s mortgage loan agreement (the “Mortgage Loan”), approximately $570.1 million of borrowings outstanding under Holdco I’s unsecured mezzanine loans (the “Mezzanine Loans”) and approximately $208.9 million of borrowings outstanding under Holdco III’s mortgage loan agreement (the “Holdco III Mortgage Loan”). Any remaining net proceeds from this offering will be used for general corporate purposes.

Each of the Mortgage Loan, the Holdco III Mortgage Loan and the Mezzanine Loans matures in July 2014. Interest for portions of the Mortgage Loan are subject to a LIBOR floor of 1.0%, plus interest rate spreads ranging from 0.55% to 6.803%, resulting in a weighted average spread of 2.892% as of December 31, 2013. Interest for the Mezzanine Loans is subject to a LIBOR floor of 1.0%, plus interest rate spreads ranging from 9.0% to 13.9%, resulting in a weighted average spread of 11.59% as of December 31, 2013. The Holdco III Mortgage Loan bears interest at LIBOR with a floor of 1.0% plus a spread of 4.5%. For a description of these facilities, see “Description of indebtedness—Existing indebtedness.”

 

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Dividend policy

We have no current plans to pay dividends on our common stock. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. Because we are a holding company, and have no direct operations, we will only be able to pay dividends from funds we receive from our subsidiaries.

For a description of distributions made by the Predecessor Entities on their equity interests in 2013 and 2012, see our consolidated financial statements and accompanying footnotes included elsewhere in this prospectus.

 

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Capitalization

The following tables set forth our cash and cash equivalents, restricted cash and cash equivalents and capitalization as of December 31, 2013:

 

 

on a historical basis for the Predecessor Entities;

 

 

on a pro forma basis to give effect to (1) the Pre-IPO Transactions, including the acquisition of the Previously Managed Portfolio and (2) the income tax impact of the Predecessor Entities and the Previously Managed Portfolio being owned by a “C” corporation; and

 

 

on a pro forma as adjusted basis to further give effect to (1) the refinancing of our existing indebtedness, (2) the consummation of this offering, including the sale by us of approximately 37,200,000 shares of common stock in this offering, and (3) the application of the estimated net proceeds from the offering, as described in “Use of proceeds,” based on an assumed initial public offering price of $19.50 per share, which is the mid-point of the range set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

The information below is illustrative only and our capitalization following the offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

Cash and cash equivalents and restricted cash and cash equivalents are not components of our total capitalization. You should read these tables in conjunction with the information contained in “Use of proceeds,” “Unaudited pro forma condensed combined financial information,” “Selected financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and “Description of indebtedness,” as well as the combined financial statements and the notes thereto included elsewhere in this prospectus.

 

      As of December 31, 2013  
(amounts in thousands, except shares and per share data)    Historical     Pro forma(1)     Pro forma
as further
adjusted(1)
 

 

   

 

 

 

Cash and cash equivalents

   $ 33,412        NM(2)      $ 94,366 (3) 

Restricted cash(4)

     104,026        104,028        6,900   
  

 

 

   

 

 

 

Total

   $ 137,438        NM(2)      $ 101,266   

Total debt

   $ 2,720,286      $ 2,708,286      $ 2,100,000   

Stockholders’ equity:

      

Common stock, par value $0.01 per share; 1,000 shares authorized and 100 shares issued and outstanding on a historical basis; and 2,000,000,000 shares authorized and 122,608,318 issued and outstanding on a pro forma as further adjusted basis

     —          —          1,226   

Additional paid in capital

     —          —          736,311   

Retained earnings

     —          —          —     

Total stockholders’ equity

     319,096        67,886        737,537   

Non-controlling interests

     (13,843     (13,843     2,822   

Total equity

     305,253        54,043        740,359   

Total capitalization

   $ 3,025,539      $ 2,762,329      $ 2,840,359   

 

   

 

 

 

 

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(1)   To the extent we change the number of shares of common stock sold by us in this offering from the shares we expect to sell or we change the initial public offering price from the assumed initial offering price of $19.50 per share, which is the mid-point of the range set forth on the cover page of this prospectus, or any combination of these events occurs, the net proceeds to us from this offering and each of total stockholders’ equity and total capitalization may increase or decrease. A $1.00 increase (decrease) in the assumed initial public offering price per share of common stock, assuming no change in the number of shares of common stock to be sold, would increase (decrease) the net proceeds that we receive in this offering and each of total stockholders’ equity and total capitalization by approximately $35.3 million. An increase (decrease) of 1,000,000 shares in the expected number of shares to be sold in the offering, assuming no change in the assumed initial offering price per share, would increase (decrease) our net proceeds from this offering and our total stockholders’ equity and total capitalization by approximately $18.5 million. In addition, the number of shares of common stock in the table above does not include the shares of common stock reserved for future issuance under our 2014 Omnibus Incentive Plan. See “Management—Executive compensation—Omnibus incentive plan.”

 

(2)   Information regarding cash and cash equivalents pro forma for the Pre-IPO Transactions, but without giving effect to this offering and the financing transactions, is not meaningful as the Pre-IPO Transactions will occur if, and only if, this offering and the financing transactions are completed.

 

(3)   Does not reflect changes relating to additional monthly interest required to be paid on certain of our existing debt for the period from closing of this offering through May 8, 2014, which accrues at a rate of approximately $12.0 million per month.

 

(4)   The majority of our restricted cash balances relates to prefunded cash reserves for our existing debt and cash collateral for our self-insurance programs. The prefunded cash reserves are required under the terms of the agreements related to our mortgage loans.

 

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Dilution

If you invest in our common stock in this offering, your ownership interest in us will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of common stock after this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the net tangible book value per share attributable to the shares of common stock held by the existing owners.

Our pro forma net tangible book deficit as of December 31, 2013 was approximately $132.3 million, or $1.55 per share of our common stock (after giving effect to the adjustments presented in “Unaudited pro forma condensed combined financial information“ based on 85,408,318 shares outstanding but before giving effect to this offering). We calculate net tangible book deficit per share by taking the amount of our total tangible assets, reduced by the amount of our total liabilities, and then dividing that amount by the total number of shares of common stock outstanding (after giving effect to the adjustments presented in “Unaudited pro forma condensed combined financial information“ but before giving effect to this offering).

After giving effect to our sale of the shares in this offering at an assumed initial public offering price of $19.50 per share, the mid-point of the range described on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value as of December 31, 2013 (based on 122,608,318 shares outstanding) would have been $540.7 million, or $4.41 per share of common stock. This represents an immediate increase in net tangible book value of $5.96 per share of common stock to our existing owners and an immediate and substantial dilution in net tangible book value of $15.09 per share of common stock to investors in this offering at the assumed initial public offering price.

The following table illustrates this dilution on a per share of common stock basis assuming the underwriters do not exercise their option to purchase additional shares of common stock:

 

Assumed initial public offering price per share of common stock

           $ 19.50   

Pro forma net tangible book deficit per share of common stock as of December 31, 2013 before the change attributable to investors in this offering(1)

   $ (1.55 )  

Increase in net tangible book value per share of common stock attributable to investors in this offering

   $ 5.96    
  

 

 

 

Pro forma net tangible book value per share of common stock after the offering

     $ 4.41   
  

 

 

 

Dilution per share of common stock to investors in this offering

     $ 15.09   

 

 

 

(1)   Pro forma net tangible book deficit per share is based on the pro forma book value of the Predecessor Entities as of December 31, 2013 divided by the number of shares expected to be issued in the adjustments presented in “Unaudited pro forma condensed combined financial information“ but before giving effect to this offering.

A $1.00 increase in the assumed initial public offering price of $19.50 per share of our common stock would increase our pro forma net tangible book value after giving to the offering by $35.3 million, or by $0.29 per share of our common stock, assuming the number of shares offered by us remains the same and after deducting the underwriting discount and the estimated offering expenses payable by us. A $1.00 decrease in the assumed initial public offering price per share would result in equal changes in the opposite direction.

 

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The following table summarizes, on the pro forma basis described above as of December 31, 2013, the total number of shares of common stock purchased from us, the total net cash consideration paid to us, and the average price per share paid by existing owners and by new investors. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing owners paid. The table below assumes an initial public offering price of $19.50 per share, the midpoint of the range set forth on the cover of this prospectus, for shares purchased in this offering and excludes underwriting discounts and commissions and estimated offering expenses payable by us:

 

      Shares of common
stock
purchased
     Total
consideration
    

Average
price per
share of
common

stock

 
(amounts in thousands, except per share
amounts)
   Number      Percent      Amount     Percent     

 

 

Existing owners

     85,408         69.7%       $ 384,320 (1)      34.6%       $ 4.50   

Investors in this offering

     37,200         30.3%       $ 725,400        65.4%       $ 19.50  
  

 

 

    

Total

     122,608         100.0%       $ 1,109,720        100.0%      

 

    
(1)   Reflects all cash distributions and includes consideration of $82.3 million relating to 4,221,535 shares valued at $19.50 per share, the midpoint of the range set forth on the cover of this prospectus, issued to acquire the Previously Managed Portfolio in connection with the Pre-IPO Transactions. For a description of distributions made by the Predecessor Entities on their equity interests in 2013 and 2012, see our consolidated financial statements and accompanying footnotes included elsewhere in this prospectus.

Each $1.00 increase in the assumed offering price of $19.50 per share would increase total consideration paid by investors in this offering and total consideration paid by all stockholders by $35.3 million, assuming the number of shares offered by us remains the same and after deducting the underwriting discount and the estimated offering expenses payable by us. A $1.00 decrease in the assumed initial public offering price per share would result in equal changes in the opposite direction.

The table above does not give effect to the shares of common stock reserved for future issuance under the 2014 Omnibus Incentive Plan. See “Management—Executive compensation—Omnibus incentive plan.”

The dilution information above is for illustration purposes only. Our net tangible book deficit following the consummation of this offering is subject to adjustment based on the actual initial public offering price of our shares and other terms of this offering determined at pricing.

 

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Unaudited pro forma condensed combined

financial information

The following unaudited pro forma condensed combined financial information has been prepared to reflect (1) the acquisition of the Previously Managed Portfolio (the “WIH La Quinta Inn Hotels”) by the Predecessor Entities and the sale of four hotels which were classified as held for sale as of December 31, 2013, (2) the income tax impact of the Predecessor Entities and the WIH La Quinta Inn Hotels being owned by a “C” corporation, (3) the intended refinancing of our current debt facilities and (4) the issuance of 37,200,000 shares of our common stock offered by us in this offering and the application of the estimated net proceeds thereof (as described in “Use of proceeds”), in each case, at an assumed initial public offering price of $19.50 per share, which is the midpoint of the range set forth on the cover of this prospectus. The unaudited pro forma financial information is presented as if this offering and the Pre-IPO Transactions (including the acquisition of the WIH La Quinta Inn Hotels) all had occurred on December 31, 2013 for the purposes of the unaudited pro forma condensed combined balance sheet and on January 1, 2013 for the purposes of the unaudited pro forma condensed combined statement of operations. The unaudited pro forma condensed combined financial information excludes the Hotels Designated for Sale.

The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The notes to the unaudited pro forma condensed combined financial statements provide a detailed discussion of how such adjustments were derived and presented in the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined financial information should be read in conjunction with “Our Pre-IPO transaction and organizational structure,” “Description of indebtedness,” “Capitalization,” “Use of proceeds,” “Selected financial and other data,” “Management’s discussion and analysis of financial condition and results of operations,” and our combined financial statements and related notes thereto and the combined financial statements of WIH La Quinta Inn Hotels and related notes thereto included elsewhere in this prospectus.

The unaudited pro forma condensed combined financial information has been prepared for illustrative purposes only is not necessarily indicative of our financial position or results of operations had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such unaudited pro forma financial information necessarily indicative of the results to be expected for any future period. A number of factors may affect our results. See “Risk factors” and “Special note regarding forward-looking statements.”

 

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of December 31, 2013

(dollars in thousands)

 

     Predecessor
Entities
    WIH
La Quinta
Inn Hotels
    Acquisition /
Disposition
Adjustments
    Income
Taxes
    Debt
Refinancing
    Equity
Offering
    Pro forma  
   

Assets

             

Current Assets:

             

Cash and cash equivalents

  $ 33,412      $ 42      $
(76,875
)(c) 
  $      $
121,041
(j) 
  $      $ 94,366   
       
(4,668
)(h) 
      21,414 (p)     

Restricted cash

    97,126        2                      (97,128 )(k)               

Accounts receivable, net of allowance for doubtful accounts

    32,678        936                                    33,614   

Receivables from affiliates

    11,181               (10,905 )(f)                           276   

Assets held for sale

    7,332               (7,332 )(h)                             

Deferred tax assets

                         15,656 (i)                    15,656   

Other current assets

    17,087        733                             (4,757 )(q)      13,063   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Current Assets

    198,816        1,713        (99,780 )      15,656        45,327        (4,757 )      156,975   

Property and equipment, net of accumulated depreciation

    2,761,457        86,195        70,119 (a)                           2,917,771   

Goodwill

                  18,793 (c)                           18,793   

Intangible assets, net of accumulated amortization

    179,486               1,360 (b)                           180,846   

Deferred costs, net of accumulated amortization

    10,153                             31,877 (l)             42,030   

Restricted cash

    6,900                                           6,900   

Deferred tax assets

    3,008                      (3,008 )(i)                      

Other non-current assets

    10,014        101                                    10,115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Current Assets

    2,971,018        86,296        90,272        (3,008 )      31,877               3,176,455   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 3,169,834      $ 88,009      $ (9,508 )    $ 12,648      $ 77,204      $ (4,757 )    $ 3,333,430   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Invested Equity

             

Liabilities

             

Current portion of long-term debt

  $ 2,720,286      $ 61,103      $ (61,103 )(c)    $      $ (2,030,504 )(l)    $ (677,782   $ 21,000   
        (12,000 )(h)        21,000 (l)     

Accounts payable

    30,490                                           30,490   

Accrued expenses and other liabilities

    53,571        2,873                      (5,583 )(l)             50,861   

Accrued payroll and employee benefits

    26,302                                           26,302   

Accrued real estate taxes

    19,577                                           19,577   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Current Liabilities

    2,850,226        63,976        (73,103 )             (2,015,087 )      (677,782 )      148,230   

Long-term debt

                                2,079,000 (l)             2,079,000   

Other long-term liabilities

    13,947               5,308 (b)                           19,255   

Deferred tax liabilities

    408                      346,178 (i)                    346,586   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    2,864,581        63,976        (67,795 )      346,178        63,913        (677,782 )      2,593,071   

Invested Equity/Stockholders’ Equity

             

Members’ equity

    319,096        24,033       
(24,033
)(e) 
    (333,530 )(i)      21,414 (p)      (89,300 )(s)        
        82,320 (c)         

Common stock

                                       1,213 (r)      1,213   
              13 (t)      13   

Additional paid-in capital

                                       (4,757 )(q)      (4,757
              651,050 (r)      651,050   
              89,300 (s)      89,300   
              (16,665 )(u)      (16,665
              25,506 (t)      25,506   

Accumulated deficit

                                (8,123 )(m)             (8,123

Accumulated other comprehensive loss

                                                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

La Quinta Holdings Inc. Equity

                                (8,123 )      745,660        737,537   

Noncontrolling interests

    (13,843                                 16,665 (u)      2,822   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total invested equity/stockholder’s equity

    305,253        24,033        58,287        (333,530 )      13,291        673,025        740,359   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and invested equity

  $ 3,169,834      $ 88,009      $ (9,508 )    $ 12,648      $ 77,204      $ (4,757 )    $ 3,333,430   
   

See notes to unaudited pro forma condensed combined financial information

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2013

(dollars in thousands, except share and per share data)

 

     Predecessor
Entities
   

WIH
La Quinta
Inn Hotels

    Acquisition /
Disposition
Adjustments
    Income
Taxes
    Debt
Refinancing
    Equity
Offering
    Pro forma  
   

Revenue

             

Room revenue

  $ 757,699      $ 38,316      $      $      $      $      $ 796,015   

Franchise and other fee-based revenues

    79,180               (2,284 )(d)                           76,896   

Other hotel revenues

    17,949        455        (362 )(d)                           18,042   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    854,828        38,771        (2,646 )                           890,953   

Brand marketing fund revenues from franchise properties

    19,065               (958 )(d)                           18,107   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

    873,893        38,771        (3,604 )                           909,060   

Operating Expenses

             

Direct lodging expenses

    344,515        8,548        (575 )(d)                           352,488   

Depreciation and amortization

    164,077        4,685        2,071 (a)                           170,602   
        (231 )(b)         

General and administrative expenses

    74,794        14,253        (128 )(d)                           88,919   

Other lodging and operating expenses

    56,068        282        (80 )(d)                           56,270   

Marketing, promotional and other advertising expenses

    59,193                                           59,193   

Management and other fees

           1,863        (1,863 )(d)                             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    698,647        29,631        (806 )                           727,472   

Brand marketing fund expenses from franchise properties

    19,065               (958 )(d)                           18,107   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

    717,712        29,631        (1,764 )                           745,579   

Loss on sale or retirement of assets

           (322                                 (322
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

    156,181        8,818        (1,840 )                           163,159   

Other Income (Expenses)

             

Interest expense, net

    (148,615     (1,663                   60,909 (n)             (89,369

Other income (loss)

    1,048                                           1,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income (Expenses)

    (147,567 )      (1,663 )                    60,909               (88,321 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from Continuing Operations Before Income Taxes

    8,614        7,155        (1,840 )             60,909               74,838   

Income tax (expense)/ benefit

    (3,598            736 (g)      (2,710 )(i)      (24,364 )(o)             (29,936
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from Continuing Operations

    5,016        7,155        (1,104 )      (2,710 )      36,545               44,902   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss)

  $ 5,016      $ 7,155      $ (1,104 )    $ (2,710 )    $ 36,545      $      $ 44,902   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Income) loss from noncontrolling interests in continuing operations

    1,455                                    (1,852 )(u)      (397
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (income) loss attributable to noncontrolling interests

  $ 1,455      $      $      $      $      $ (1,852 )    $ (397 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to the Company

             

Income (loss) from continuing operations

    6,471        7,155        (1,104     (2,710     36,545        (1,852 )(u)      44,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

  $ 6,471      $ 7,155      $ (1,104 )    $ (2,710 )    $ 36,545      $ (1,852 )    $ 44,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per Share:

             

Net Income per share:

             

Basic

              $ 0.37   

Diluted

              $ 0.36   

Weighted average shares outstanding:

             

Basic

                120,645,306 (v) 

Diluted

                122,608,318 (v) 
   

See notes to unaudited pro forma condensed combined financial information

 

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NOTE 1: BASIS OF PRESENTATION

The unaudited pro forma financial information is based on our historical condensed combined financial statements, which are included elsewhere in this prospectus, and has been prepared to reflect the acquisition of the WIH La Quinta Inn Hotels by the Predecessor Entities and the sale of four hotels which were classified as held for sale as of December 31, 2013, the income tax impact of the Predecessor Entities and the WIH La Quinta Inn Hotels being owned by a “C” corporation for tax purposes, the intended refinancing of our current debt facilities and this offering.

The unaudited pro forma condensed combined balance sheet as of December 31, 2013 is presented on a pro forma adjusted basis to give effect to the acquisition of the WIH La Quinta Inn Hotels by the Predecessor Entities and the sale of four hotels which were classified as held for sale as of December 31, 2013, the income tax impact of the Predecessor Entities and the WIH La Quinta Inn Hotels being owned by a “C” corporation, the intended refinancing of our current debt facilities and this offering as if they were completed as of December 31, 2013. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2013 is presented on a pro forma adjusted basis to give effect to the acquisition of the WIH La Quinta Inn Hotels by the Predecessor Entities, the income tax impact of the Predecessor Entities and the WIH La Quinta Inn Hotels being owned by a “C” corporation, the intended refinancing of our current debt facilities and this offering as if they were completed as of January 1, 2013.

The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. These adjustments are included only to the extent they are directly attributable to the acquisition of the WIH La Quinta Inn Hotels by the Predecessor Entities and the sale of four hotels which were classified as held for sale as of December 31, 2013, the income tax impact of the Predecessor Entities and the WIH La Quinta Inn Hotels being owned by a “C” corporation, the intended refinancing of our current debt and this offering and the appropriate information is known and factually supportable. We continue to evaluate the accounting impact of the acquisition of the WIH La Quinta Inn Hotels by the Predecessor Entities, the income tax impact of the Predecessor Entities and the WIH La Quinta Inn Hotels being owned by a “C” corporation, the intended refinancing of our current debt and this offering and believe that (1) we will close or expect to close on the acquisition of the WIH La Quinta Inn Hotels prior to or concurrently with the consummation of this offering and (2) concurrently with the consummation of this offering, the existing long-term debt will be repaid as a part of the debt financing transactions. Accordingly, the pro forma financial information reflects all of the repaid debt being accounted for as an extinguishment of debt.

Pro forma adjustments reflected in the unaudited pro forma condensed combined statements of operations are expected to have a continuing effect on us. As a result, the unaudited pro forma condensed combined statements of operations exclude the initial income tax impact of the Predecessor Entities and WIH La Quinta Hotels being owned by a “C” corporation, gains and losses related to the debt financing transactions, and the impact of the issuance of the restricted stock related to long-term incentives that will not have a continuing effect on us, although these items are reflected in the unaudited pro forma condensed combined balance sheet.

 

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NOTE 2. ACQUISITION OF PREVIOUSLY MANAGED PORTFOLIO AND DISPOSITION OF HOTELS DESIGNATED FOR SALE

Prior to or concurrently with the consummation of this offering, we expect to acquire the WIH La Quinta Inn Hotels. The WIH La Quinta Inn Hotels consists of 14 La Quinta branded hotels, owned by affiliates of the Blackstone Group L.P. The 14 hotels currently have franchise and management agreements with the Predecessor Entities. All transactions between the Predecessor Entities and WIH La Quinta Inn Hotels have been eliminated in the accompanying pro forma condensed combined financial statements and footnotes.

The WIH La Quinta Inn Hotels will be accounted for using the acquisition method of accounting in accordance with ASC 805, “Business Combinations”, which requires recognition and measurement of all identifiable assets acquired and liabilities assumed at their full fair value as of the date control is obtained. The pro forma condensed combined financial statements reflect the following preliminary acquisition method adjustments to tangible assets and other identifiable intangible assets, which were based upon a valuation performed with the assistance of a third party valuation specialist as well as management estimates, utilizing a combination of the income, market, and cost approaches to valuation.

The income approach is a valuation technique that provides an estimation of the fair value of an asset based on market participant expectations about the cash flows that an asset would generate over its remaining useful life, and converting these estimated future cash flows to a single present amount. The overall value for the WIH La Quinta Inn Hotels was primarily derived using the income approach, utilizing 2014 forecasted operating results as a baseline and applying a discount rate of 10.5 percent and terminal capitalization rate of 8.0 percent.

The market approach is a valuation technique that provides an estimation of fair value of an asset by using one or more methods that compare and correlate the subject to similar assets that have been sold. The cost approach is a valuation technique that uses the concept of replacement cost as an indicator of fair value. The estimated fair values of the tangible assets and other identifiable intangible assets related to the WIH La Quinta Inn Hotels were derived utilizing the market and cost approaches.

We believe that the key assumptions utilized within these valuation techniques are appropriate in the circumstances based on our knowledge of the operations of the WIH La Quinta Inn Hotels gained through our day to day management of the hotels, as well as our overall industry experience. The final acquisition method adjustments may result in a different allocation for tangible and other identifiable intangible assets from that presented in these pro forma condensed combined financial statements, in part due to the fact that the actual purchase price is dependent upon, and a portion of the consideration paid will take the form of, shares of our common stock, the exact value of which will not be determined until the completion of this offering.

We intend to acquire the WIH La Quinta Inn Hotels for an estimated net purchase price of approximately $170.1 million. Total estimated net consideration paid will be $159.2 million, which equals the total purchase price of $170.1 million less $10.9 million owed by the parent of the WIH La Quinta Inn Hotels to the Predecessor Entities. The total estimated net consideration paid will take the form of $76.9 million of cash and $82.3 million of equity consideration, which we expect to take the form of La Quinta Holdings Inc. (“Holdings”) common stock prior to or concurrently with the consummation of this offering. Goodwill of $18.8 million is expected to be recognized as a result of this acquisition.

 

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The acquisition of the WIH La Quinta Inn Hotels contemplates the following assets as if they were acquired on December 31, 2013:

 

Description    Fair Value  

 

 
     (in thousands)  

Total estimated consideration transferred(1)

   $ 170,100   

Estimated fair value of assets acquired and liabilities assumed:

  

Property and equipment

     156,314   

Intangible assets (“Favorable leasehold interests”)

     1,360   

Other long-term liabilities (“Unfavorable leasehold interests”)

     (5,308
  

 

 

 

Total assets subject to depreciation and amortization

     152,366   

Other operating assets(2)

     1,814   

Other operating liabilities(3)

     (2,873
  

 

 

 

Total

   $ 151,307   

Goodwill

     18,793   

 

 

 

(1)   Total estimated net consideration paid will be $159.2 million, which equals total purchase price of $170.1 million less $10.9 million owed by the parent of the WIH La Quinta Inn Hotels to the Predecessor Entities which will be extinguished at the time of the acquisition.

 

(2)   Other operating assets consist primarily of accounts receivable, other current assets and other non-current assets as of December 31, 2013.

 

(3)   Other operating liabilities consist of accrued expense and other liabilities as of December 31, 2013.

The unaudited pro forma condensed combined balance sheet also includes the sale of four hotels which were classified as held for sale as of December 31, 2013, and which were subsequently sold, as if this sale occurred on December 31, 2013. In accordance with the terms of our existing loan agreement, all proceeds associated with the sale of these hotels and an additional $4.7 million in cash have been used to make principal payments on our long-term debt in order to release these properties from the collateral for our long-term debt.

NOTE 3. INCOME TAXES

In connection with consummating this offering, the Predecessor Entities and the WIH La Quinta Inn Hotels will be owned by a “C” corporation and will become subject to additional entity-level taxes that will be reflected in our financial statements.

NOTE 4. DEBT FINANCING TRANSACTIONS

Prior to or concurrently with the consummation this offering, we expect to enter into a new $2.1 billion senior secured term loan B facility (the “Term Facility”) and a new $250.0 million senior secured revolving credit facility (the “Revolving Facility”). The net proceeds from the Term Facility, together with the net proceeds from this offering, will be used to repay our Holdco I Mortgage Loan, Holdco III Mortgage Loan and Mezzanine Loans, which have an outstanding balance of $1.9 billion, $208.9 million and $570.1 million, respectively, as of December 31, 2013. We may draw upon the Revolving Facility at closing of the offering or soon thereafter to fund our working capital needs.

NOTE 5. COMMON STOCK OFFERING

We estimate that the gross proceeds provided by this offering will be approximately $725.4 million and that proceeds to us, net of underwriting discounts and estimated offering expenses,

 

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will be approximately $677.8 million. Net proceeds of this offering, available cash from debt financing transactions, and other available cash will be used to repay approximately $2.7 billion of our outstanding indebtedness and pay a portion of the purchase price for the acquisition of the WIH La Quinta Inn Hotels. Any remaining balance will be used for our general corporate purposes.

NOTE 6. PRO FORMA ADJUSTMENTS

Adjustments included under the heading “Pro Forma Adjustments— Acquisition of WIH La Quinta Inn Hotels” represent the following:

The pro forma adjustments shown below for the WIH La Quinta Inn Hotels are based on our preliminary estimates and are subject to change based on the final determination of the fair value of assets and liabilities acquired.

 

a.   Represents the pro forma impact of the fair value adjustment to property and equipment, and the associated change to depreciation expense, recorded as a result of the acquisition of WIH La Quinta Inn Hotels. The amounts assigned to property and equipment, the estimated useful lives, and the estimated depreciation expense related to the property and equipment acquired are as follows (in thousands):

 

      Estimated
fair value
    Estimated
Useful Life
     Year Ended
December 31,
2013
Depreciation
Expense
 

 

 

Land

   $ 28,176                  

Building and improvements

     101,620        10-40 years         2,540   

Furniture, fixtures, equipment and other

     26,518        6 years         4,215   
  

 

 

      

 

 

 

Total

     156,314           6,755   

Less: Historical WIH PP&E and related depreciation expense

     (86,195        (4,685
  

 

 

      

 

 

 

Total pro forma adjustments

   $ 70,119         $ 2,071   

 

 

Acquired property and equipment are being depreciated on a straight-line method over the estimated remaining useful life.

 

b.   Represents the pro forma impact of the fair value of the recognized favorable and unfavorable leasehold interests, including ground leases, that are being acquired, and the related amortization expense. The fair value of favorable leasehold interests is $1.4 million and the fair value of unfavorable leasehold interests is $5.3 million. The pro forma impact of the favorable and unfavorable leasehold interests to amortization expense for the year ended December 31, 2013 included in the pro forma statement of operations was a reduction of depreciation and amortization of $0.2 million. The acquired favorable leasehold interests and unfavorable leasehold interests are being amortized using the effective interest method over the remaining lease terms of nine years and twelve to sixty-seven years, respectively.

 

c.  

Assumes total estimated net consideration paid of $159.2 million, which equals total purchase price of $170.1 million less $10.9 million owed by the parent of the WIH La Quinta

 

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Inn Hotels to the Predecessor Entities. The total estimated net consideration paid will take the form of $76.9 million of cash and $82.3 million of equity consideration, which we expect to take the form of Holdings common stock at the time of this offering. The number of shares of Holdings’ common stock and price per share will preliminarily be determined based on the mid-point of the range described on the cover of this prospectus. The final number of shares and price per share for the equity component of the purchase price will be based on the initial offering price per share offered to the public, and the total purchase price will be adjusted to maintain a constant relative value of the WIH La Quinta Inn Hotels as compared to the value of the Issuer utilizing such initial offering price. Any adjustment will be settled by increasing or decreasing the number of shares given as purchase price consideration. Goodwill has preliminarily been determined to be $18.8 million as a result of this acquisition. The current portion of long-term debt of WIH La Quinta Inn Hotels of $61.1 million will not be assumed at acquisition.

 

d.   Represents eliminations that would have occurred between the Predecessor Entities and the WIH La Quinta Inn Hotels as if the acquisition had taken place on January 1, 2013. Pursuant to hotel management agreements (“LQM Management Agreements”), LQM provides management services to the WIH La Quinta Inn Hotels, including supervision, direction, operation, management and promotion. Under the terms of the LQM Management Agreements, LQM is entitled to receive from hotels it manages a management fee of 1.67% of gross operating revenue, as well as reimbursement for certain shared group costs. Management fees earned by LQM from the WIH La Quinta Inn Hotels, for the years ended December 31, 2013, were approximately $0.6 million.

In addition, in accordance with the LQM Management Agreements, LQM also provides certain group services for WIH La Quinta Inn Hotels including group and administrative services, information systems support, training, and other field services and is reimbursed for the cost of providing these services. During 2013, LQM earned from WIH La Quinta Inn Hotels approximately $2.0 million of group services reimbursements.

LQM maintains the Brand Marketing Fund (“BMF”) on behalf of all La Quinta branded hotel properties from which national marketing and advertising campaign expenses are paid. Each La Quinta branded hotel is charged a percentage of its room revenue from which the expenses of the fund are covered. During 2013, LQM collected BMF fees from the WIH La Quinta Inn Hotels totaling $1.0 million.

 

e.   Represents the elimination of WIH La Quinta Inn Hotels’ historical equity.

 

f.   Represents the extinguishment of $10.9 million of receivable from affiliate balance owed by the parent of the WIH La Quinta Inn Hotels to the Predecessor Entities.

 

g.   Represents the income tax effect related to the acquisition pro forma adjustments using an estimated blended statutory U.S. federal and state income tax rate of 40%.

 

h.   Represents the sale of four hotels which were classified as held for sale as of December 31, 2013, which were subsequently sold for cash consideration of $7.3 million as if this sale occurred on December 31, 2013. In accordance with the terms of our existing loan agreement, all proceeds associated with the sale of these hotels and an additional $4.7 million in cash have been used to make principal payments on our long-term debt in order to release these properties from collateralization.

 

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Adjustments included under the heading “Pro Forma Adjustments—Income Taxes” represent the following:

 

i.   Represents the impact of the Predecessor Entities and the WIH La Quinta Inn Hotels being owned by a “C” corporation. Prior to the completion of this offering, we have operated primarily as limited liability companies treated as partnerships for U.S. federal income tax purposes, REIT entities, and taxable entities. As a result, we were not subject to U.S. federal and most state income taxes for our limited liability companies and our REIT entities. Our partnership and REIT status will terminate in connection with this offering and we will become subject to additional entity-level taxes. The adjustments to deferred tax assets and liabilities in the unaudited pro forma condensed combined balance sheet were computed as if our “C” corporation status was in effect as of December 31, 2013. These balance sheet adjustments reflect the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and the estimated blended statutory U.S. federal and state income tax rate of 40%. More specifically, the adjustment amount is primarily driven by (1) the recognition of additional deferred tax liabilities totaling approximately $477 million which are primarily related to differences between the book and tax basis for our fixed and intangible assets and related depreciation and (2) the recognition of additional deferred tax assets totaling approximately $143 million which are primarily related to the expected realization of federal net operating loss carryforwards.

Below is a table of our deferred tax assets and liabilities underlying the unaudited pro forma adjustments.

 

(in thousands)    Current     Non-current     Total  

Deferred Tax Liabilities

      

Fixed Assets

   $      $ 396,238      $ 396,238   

Trademark

            63,504        63,504   

Cancellation of Debt Income

     3,227        11,948        15,175   

Other

            2,449        2,449   
  

 

 

   

 

 

   

 

 

 
   $ 3,227      $ 474,139      $ 477,366   
  

 

 

   

 

 

   

 

 

 

Deferred Tax Assets

      

Net Operating Losses

          $ 115,526      $ 115,526   

Insurance Accruals

   $ 12,350               12,350   

Tax Credits

            7,030        7,030   

Other

     7,883        14,117        22,000   
  

 

 

   

 

 

   

 

 

 
   $ 20,233      $ 136,673      $ 156,906   

Valuation Allowance

     (1,350     (9,120     (10,470
  

 

 

   

 

 

   

 

 

 
   $ 18,883      $ 127,553      $ 146,436   
  

 

 

   

 

 

   

 

 

 
      

Net Deferred Tax Asset (Liability)

   $ 15,656      ($ 346,586   ($ 330,930

Less:

      

Deferred Tax Asset-Historical

            (3,008     (3,008

Deferred Tax Liability-Historical

            408        408   
  

 

 

   

 

 

   

 

 

 

Pro Forma Tax Adjustment

   $ 15,656      ($ 349,186 )(1)    ($ 333,530

 

 
  (1)   Amount is comprised of a reduction of the historical non-current deferred tax asset of $3.0 million and an increase to the historical non-current deferred tax liability of $346.2 million.

 

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The net operating losses above include $10.47 million of net operating losses attributable to a separate return group entity which is subject to limitation on the use of such losses under the consolidated return income tax regulations. The valuation allowance of $10.47 million is attributable to those specific net operating losses.

In addition, the pro forma provision for income taxes reflects combined federal and state income taxes on a pro forma basis, as if the Company has been treated as a “C” corporation in 2013, using an estimated blended statutory U.S. federal and state income tax rate of 40%.

Adjustments included under the heading “Pro Forma Adjustments—Debt financing Transaction” represent the following:

 

j.   To adjust cash for transactions discussed below as follows:

 

      ($ in thousands)  

 

 

Cash received from Term Facility issuance

   $ 2,100,000   

Cash received from release of restricted cash related to existing debt

     97,128   

Cash paid to repay debt principal and interest(1)

     (2,036,087

Cash paid for debt issuance costs related to Term Facility

     (40,000
  

 

 

 

Net adjustment to cash

   $ 121,041   

 

 

 

(1)   The debt repayment balance includes the $2.7 billion of existing debt, offset by $677.8 million repayment of debt using the net proceeds from the equity offering and by $12.0 million repayment of debt in connection with the sale of the four hotels.

 

k.   Represents the release of restricted cash related to the existing debt upon the full repayment of debt principal and interest.

 

l.   To adjust for the completion of the debt financing transaction and repayment of our existing debt:

 

      ($ in thousands)  

 

 

Issuance of Term Facility(1)

   $ 2,100,000   

Repayment of existing debt:

  

Holdco I Mortgage Loan(2)

     (1,251,456

Holdco III Mortgage Loan

     (208,909

Holdco I Mezzanine Loans

     (570,139
  

 

 

 

Total repayment of existing debt

     (2,030,504
  

 

 

 

Net adjustment to refinancing

   $ 69,496   

 

 

 

(1)   The new Term Facility includes the current portion of long-term debt of $21.0 million, which represents a mandatory payment of quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount. In addition, the provisions of the new Term Facility may require mandatory prepayments of the principal which is contingent upon certain business events, such as cash flows exceeding certain annual thresholds calculated in accordance with the credit agreement, non-ordinary course asset sales and incurrence of additional debt. Such potential prepayments of the principal are not included in the current portion of long term-debt as they are not factually supportable and cannot be estimated.

 

(2)   The debt repayment balance includes $1.9 billion of Holdco I Mortgage Loan outstanding as of December 31, 2013, offset by $677.8 million repayment of debt using the net proceeds from the equity offering and $12.0 million repayment of debt in connection with the sale of the four hotels. Refer to adjustment (r) for equity offering related adjustment and adjustment (h) for sale of four hotels adjustment.

 

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The debt financing transactions also reflect:

 

 

the write-off of debt issuance costs of $8.1 million related to the existing debt payoff and the addition of debt issuance costs of $40.0 million related to the new debt issued. The net increase to the debt issuance costs, which are classified as deferred costs, net of accumulated amortization, in our unaudited pro forma combined balance sheet was $31.9 million; and

 

 

the payment of current accrued interest of $5.6 million related to the existing debt payoff, which was reflected in accrued expenses and other liabilities in our unaudited pro forma combined balance sheet. This payment is not considered to have a continuing effect on us and, therefore, it is not reflected in our unaudited pro forma combined statements of operations.

 

m.   To adjust accumulated deficit for the $8.1 million of unamortized debt issuance costs related to the existing loans that does not have a continuing effect on us.

 

n.   To adjust interest expense for the new Term Facility and repayment of the existing indebtedness discussed above for the year ended December 31, 2013, as follows:

 

      ($ in thousands)  

 

 

Issuance of Term Facility:

  

Interest expense(1)(2)

   $ 83,990   

Amortization expense of debt issuance costs

     5,379   
  

 

 

 
     89,369   
  

 

 

 

Repayment of existing debt:

  

Interest expense

     (140,123

Amortization expense of debt issuance costs

     (10,155
  

 

 

 
     (150,278
  

 

 

 

Net adjustment to interest expense

   $ (60,909

 

 

 

(1)   Includes commitment fees on the unused Revolving Facility commitments.

 

(2)   A 0.125 percent change to interest rates on our variable rate debt would result in an increase in interest expense of approximately $2.6 million for the year ended December 31, 2013.

 

o.   Represents the estimated income tax effect related to the pro forma expense items noted above in adjustment (n) using an estimated blended statutory U.S. federal and state tax rate of 40%.

 

p.   Represents a capital contribution of $21.4 million which will be paid in cash by Blackstone in connection with the debt refinancing.

Adjustments included under the heading “Pro Forma Adjustments—Equity Offering” represent the following:

 

q.   To reclassify the transaction costs related to the offering, which were originally capitalized as deferred costs in our historical condensed combined balance sheet into additional paid-in capital as a reduction against offering proceeds.

 

r.  

Represents the net proceeds received from this offering of $677.8 million after deducting estimated underwriting discounts and commissions of $36.3 million, or five percent of gross proceeds from this offering, and estimated offering expenses and other costs payable by us

 

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of $11.3 million for legal, accounting, consulting, and other costs related to the offering. We intend to use proceeds from this offering, proceeds from the debt refinancing, and available cash as noted above to repay $2.7 billion of our existing debt.

 

s.   As a result of the public offering, the members’ equity of the Predecessor Entities will be reclassified to additional paid-in-capital to reflect the establishment of Holding’s equity.

 

t.   Certain members of our management and others associated with Blackstone are eligible to receive long-term incentives evidenced by units (the “Units”) in LQ Services L.L.C., which indirectly holds interests in the Predecessor Entities, which units are intended to be treated as “profits interests” for U.S. tax purposes. In connection with this offering, the Units that are outstanding at the time of the offering will be converted into restricted stock of Holdings of equivalent economic value, which will ultimately be determined at the effective date of this offering.

On or about the consummation of this offering (the “effective date”), we expect to record incremental compensation expense of approximately $29 million, related to these awards and additional stock awards to be made under our equity incentive plan at the time of this offering. The adjustment is reflected in our unaudited pro forma condensed combined balance sheet as an increase to common stock and additional paid-in capital, and a decrease to accumulated retained earnings.

Further, we do not anticipate that there will be a material, recurring effect on the amount of future compensation expense as a result of the terms of the awards which solely vest upon achieving the service conditions, including the additional compensation expense of approximately $30 million that we expect to record from the effective date through the first anniversary of that date, and the additional compensation expense of approximately $2 million that we expect to record each year after the first anniversary of the effective date of this offering and continuing through the seventh anniversary of that date. Accordingly, we have made no adjustment to our unaudited pro forma condensed combined statements of operations for any incremental compensation expense resulting from the issuance of these awards or additional stock awards to be made under our equity incentive plan at the time of this offering.

See “Management—Executive compensation—Long-term incentive awards” for a further discussion of the long-term incentive awards.

 

u.   In connection with the Pre-IPO Transactions, the Predecessor Entities will acquire LQ Management L.L.C. (LQM). The members’ equity/deficit of LQM has previously been included within noncontrolling interests in the financial statements of the Predecessor Entities. As a result of the acquisition of LQM by the Predecessor Entities, members’ equity/deficit and income/loss related to LQM will be shown as items attributable to the company rather than noncontrolling interests.

 

v.   Unaudited pro forma weighted average shares outstanding is calculated assuming all shares of common stock or other equity based awards issued by us in the initial public offering were outstanding for the entire period, and the proceeds from the sale of such shares, which will be used to repay indebtedness, is also reflected in our unaudited pro forma condensed consolidated statements of operations.

 

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Selected financial and other data

Our historical financial statements were prepared by combining the financial results of the entities expected to be owned by the Company at the completion of this offering, including those entities under common control and their consolidated subsidiaries, which corresponds to the results of operations for the Company on a prospective basis after giving effect to the consummation of the Pre-IPO Transactions and this offering. The table below does not include the acquisition of the Previously Managed Portfolio as such hotels are not under common control prior to their acquisition by the Company in connection with the Pre-IPO Transactions. Further, the information provided below (other than the information relating to discontinued operations) does not include the Hotels Designated for Sale and the Baymont Hotels.

We derived the selected statement of operations data for the years ended December 31, 2013, 2012 and 2011 and the selected balance sheet data as of December 31, 2013 and 2012 from the audited combined financial statements of the Predecessor Entities included elsewhere in this prospectus. We derived the selected statement of operations data for the years ended December 31, 2010 and 2009 and the selected balance sheet data as of December 31, 2011, 2010 and 2009 from the audited combined financial statements of the Predecessor Entities which are not included in this prospectus. Historical results are not necessarily indicative of the results expected for any future period.

 

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You should read the selected condensed combined financial data below together with the combined financial statements including the related notes thereto appearing elsewhere in this prospectus, as well as “Management’s discussion and analysis of financial condition and results of operations” and “Description of indebtedness,” and the other financial information included elsewhere in this prospectus.

 

     Years ended December 31,  
(in thousands)   2013     2012     2011     2010     2009  

 

 

Statement of Operations Data:

         

Revenues:

         

Room revenues

  $ 757,699      $ 714,143      $ 660,816      $ 623,720      $ 610,395   

Franchising and other fee-based revenues

    79,180        69,206        59,314        52,074        40,716   

Other hotel revenues

    17,949        17,506        16,229        16,821        16,743   
 

 

 

 
    854,828        800,855        736,359        692,615        667,854   

Brand marketing fund revenues from franchised and managed properties

    19,065        17,157        15,182        13,238        11,790   
 

 

 

 

Total revenues

    873,893        818,012        751,541        705,853        679,644   
 

 

 

 

Operating Expenses:

         

Direct lodging expenses

    344,515        334,394        330,205        305,856        302,742   

Depreciation and amortization

    164,077        155,879        149,356        141,708        135,303   

General and administrative expenses

    74,794        74,111        61,578        63,828        56,449   

Other lodging and operating expenses

    56,068        58,266        47,791        49,623        56,190   

Marketing, promotional and other advertising expenses

    59,193        48,610        45,580        42,516        36,179   
 

 

 

 
    698,647        671,260        634,510        603,531        586,863   
 

 

 

 

Brand marketing fund expenses from franchised and managed properties

    19,065        17,157        15,182        13,238        11,790   

Total operating expenses

    717,712        688,417        649,692        616,769        598,653   

Operating Income

    156,181        129,595        101,849        89,084        80,991   

Other Income (Expenses):

         

Interest expense, net

    (148,615     (103,124     (51,611     (50,469     (54,961

Other income (loss)

    1,048        (7,440     (662     1,483        2,115   

Gain on extinguishment of debt, net

           1,192        11,451        40,494          
 

 

 

 

Total other income (expenses)

    (147,567     (109,372     (40,822     (8,492     (52,846
 

 

 

 

Income from continuing operations before income taxes

    8,614        20,223        61,027        80,592        28,145   

Income tax expense

    (3,598     (3,135     (2,332     (2,459     1,634   
 

 

 

 

Income from continuing operations, net of tax

    5,016        17,088        58,695        78,133        29,779   

Gain (loss) on discontinued operations, net of tax

    (2,495     (52,852     244        (12,150     2,145   
 

 

 

 

Net Income (Loss)

  $ 2,521      $ (35,764   $ 58,939      $ 65,983      $ 31,924   

Net Loss Attributable to Noncontrolling Interests

    1,455        4,810        4,574        2,845        5,219   
 

 

 

 

Net Income (Loss) Attributable to the Company

  $ 3,976      $ (30,954   $ 63,513      $ 68,828      $ 37,143   

 

 

 

     As of December 31,  
(in thousands)   2013     2012     2011     2010     2009  

 

 

Selected Balance Sheet Data:

         

Cash and cash equivalents

    33,412        40,813        90,857        41,139        41,163   

Restricted cash

    104,026        113,407        60,745        61,243        44,705   

Total assets

    3,169,834        3,356,320        3,484,232        3,494,905        3,569,298   

Total debt(1)

    2,720,286        2,899,965        3,158,409        3,320,829        3,406,709   

Total equity (deficit)

    305,253        303,385        183,095        39,597        36,278   

 

 

 

(1)   Includes current portion

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion should be read together with “Our pre-IPO transactions and organizational structure,” “Selected financial and other data,” “Unaudited pro forma financial information,” and the historical combined financial statements and the notes thereto of the Company included elsewhere in this prospectus.

The information in this “Management’s discussion and analysis of the financial condition and results of operations” reflects the combined financial results of the entities expected to be owned by the Company at the completion of this offering and previously under common control (Lodge Holdco I LLC, Lodge Holdco II LLC and Lodge Holdco III LLC, collectively, the “Holdcos”) and their consolidated subsidiaries, which corresponds to the results of operations for the Company on a prospective basis after giving effect to the consummation of the Pre-IPO Transactions and this offering. The information in this section does not include the acquisition of the Previously Managed Portfolio as such hotels are not under common control prior to their acquisition by the Company in connection with the Pre-IPO Transactions. Since 2006, LQ Management L.L.C., an eligible independent contractor (within the meaning of Section 856(d)(9) of the Internal Revenue Code) that is consolidated for financial reporting purposes by the Holdcos, has managed the Previously Managed Portfolio under a management agreement with the owner of the Previously Managed Portfolio, an affiliate. Further, the discussion (other than the discussion of discontinued operations) in this section does not include the 11 Baymont-branded hotels (the “Baymont Hotels”) and the 29 La Quinta-branded hotels that were sold prior to December 31, 2013, or the 4 La Quinta-branded hotels designated as held for sale as of December 31, 2013 (the “Hotels Designated for Sale”). Sales of these four hotels closed subsequent to December 31,2013.

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk factors” section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Risk factors” and “Special note regarding forward-looking statements.”

Overview

Our business

We are a leading owner, operator and franchisor of select-service hotels primarily serving the midscale and upper-midscale segments under the La Quinta brand. According to data provided by STR, La Quinta is the fastest growing principal select-service hotel brand in the United States primarily serving these segments in terms of percentage growth of number of hotels over the last ten years ended December 31, 2013, significantly outpacing the percentage growth of our main STR competitive set in percentage terms. Our system-wide portfolio, as of December 31, 2013 (other than our discontinued operations) consisted of 830 hotels representing approximately 83,000 rooms located predominantly across 46 U.S. states, as well as in Canada and Mexico, of which 339 hotels were owned and operated and 491 were franchised or managed. We also have a pipeline of 187 franchised hotels in the United States, Mexico, Canada, Colombia and Honduras. We primarily derive our revenues from owned hotel operations and fees generated from franchised hotels.

 

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All of our long-lived assets are located in the United States and, in 2013, we derived over 99% of our revenue from within the United States.

Segments

Our operating segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by our chief operating decision maker to assess performance and make decisions regarding the allocation of resources. Our chief operating decision maker is our Chief Executive Officer. We define our reportable segments as follows:

 

 

Owned hotels—This segment derives its earnings from the operation of owned hotel properties located in the United States.

 

 

Franchise and management—This segment derives its earnings primarily from fees earned under various license, franchise and management agreements relating to our owned, franchised and managed hotels. These agreements provide for us to earn compensation for the licensing of our brand to franchisees, for providing certain services (including hotel management services) and for providing access to certain shared services and marketing programs such as reservations, La Quinta Returns, and property management systems. Other than with respect to the Previously Managed Portfolio, which is reflected as managed hotels in this “Management’s discussion and analysis of the financial condition and results of operations” section, we do not currently generate, and did not generate over the periods presented, any revenue from the management of hotel operations for third parties. This segment includes intercompany fees, which are charged to our owned portfolio to reflect that certain functions, such as licensing and management, are included in the franchise and management segment. We have historically charged aggregate fees of 2.0% (0.33% license fee for trademark rights and 1.67% management fee for management services) to our owned hotels (as well as having certain cost reimbursement arrangements). Upon effectiveness of the IPO, we intend to enter into a new franchise agreement, which will cover certain services as well as trademark rights, and a new management agreement and will terminate the existing agreements. Under the two new agreements, the intercompany fees will be 7.0% (4.5% franchise fee and 2.5% management fee) for our owned hotels. We set the franchise fee on a basis that reflects the services and rights covered by the new franchise agreement and because, as a public company with two segments that may be valued differently by investors, we believe it is meaningful to investors to show a franchise fee on our owned portfolio that is consistent with the franchise fee we charge our franchisees. We set the management fee on a basis that reflects current market rates for select service hotels and the current composition of our owned portfolio.

Our segment information also reflects corporate and other which includes revenues generated by and related to and operating expenses incurred in connection with the overall support and brand management of our owned, managed and franchised hotels and operations.

We have a business model that involves both ownership of properties and franchising of third-party owned properties. This provides us with a diversified revenue and income streams that balance both the advantages and risks associated with these lines of business.

As an owner of hotels, we can capture the full benefit of increases in operating profits during periods of increasing demand or ADR. The cost structure of our typical hotel is more fixed than variable, so as demand and ADR increase over time, the pace of increase in operating profits typically is higher than the pace of increase of revenues. Hotel ownership is, however, more

 

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capital intensive than franchising hotels to third-party owners, as we are responsible for the costs and capital expenditures for our owned hotels. The profits realized by us in our Owned Hotels segment are generally more significantly affected by economic downturns and declines in revenues than the results of our Franchise and Management segment. See also “—Key components and factors affecting our results of operations—Expenses” and “Risk factors—Risks related to our business and industry.”

As a franchisor of hotels, growth in the number of franchised hotels and earnings from franchises typically results in higher overall returns on invested capital because the capital required to build and maintain franchised hotels is typically provided by the owner of the respective property with minimal or no capital required by us, as franchisor. During periods of increasing demand, we do not, however, share in most of the benefits of increases in profits from franchised hotels because franchisees do not pay us fees based on profits. A principal component of our current growth strategy is to focus our expansion on our franchise business.

For purposes of this “Management’s discussion and analysis of financial condition and results of operations,” the following table sets forth the number of net owned, franchised and managed hotels as of December 31, 2013, 2012 and 2011.

 

      As of December 31,  
     2013      2012      2011  

 

  

 

 

    

 

 

    

 

 

 

Owned Hotels:

        

Owned Hotels

     343         372         372   

Discontinued Operations

     4         33         33   

Net Owned Hotels

     339         339         339   

Franchised/Managed Hotels:

        

Franchised Hotels

     477         449         430   

Managed Hotels

     14         14         14   

Total Franchised/Managed Hotels

     491         463         444   

Total Net Owned and Franchised/Managed Hotels

     830         802         783   

 

 

Seasonality

The hotel industry is seasonal in nature. Generally, our revenues are greater in the second and third quarters than in the first and fourth quarters. The timing of holidays can also impact our quarterly results. The periods during which our properties experience higher revenues vary from property to property and depend principally upon location. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margins and net earnings. Additionally, our first quarter results may be further adversely affected by the timing of certain of our marketing production expenditures. Further, the timing of opening of newly constructed or franchised hotels and the timing of any hotel acquisitions or dispositions may cause a variation of revenue and earnings from quarter to quarter.

Inflation

We do not believe that inflation had a material effect on our business during the years ended December 31, 2013, 2012 and 2011. Although we believe that increases in the rate of inflation will generally result in comparable increases in hotel room rates, severe inflation could contribute to a slowing of the U.S. economy. Such a slowdown could result in a reduction in room rates and occupancy levels, negatively impacting our revenues and net income.

 

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Key components and factors affecting our results of operations

Revenues

We primarily derive our revenues from the following sources:

 

 

Room revenues.    Represents revenues derived from hotel operations which are almost exclusively driven by room rentals. Our Owned Hotels revenue is primarily derived from three categories of guests: leisure, corporate and group.

 

 

Franchise fees.    Represents revenues derived from franchise fees received in connection with the franchising of our brand, and other revenue generated by the incidental support of hotel operations for franchised hotels. Franchise fees consist of an initial application fee upon the entry of a new hotel into the system and a monthly royalty fee, generally calculated as a percentage of gross room revenue. As new franchised hotels are established in our franchise system, we expect the franchise fees received from such hotels to increase over time as they establish their presence in the marketplace and stabilize their operations.

 

 

Management fees.    Represents revenues derived from management fees received in connection with the management of day-to-day hotel operations, and other revenue generated by the incidental support of hotel operations for these properties. Management fees are generally calculated as a percentage of gross room revenue. Following consummation of the Pre-IPO Transactions and this offering, we do not expect to have any management fees.

 

 

Other hotel revenues.    Other hotel revenues include revenues generated by the incidental support of hotel operations for owned hotels, including charges to guests for vending commissions, meeting and banquet room revenue, laundry services, and other rental income from operating leases associated with leasing space for restaurants, billboards and cell towers.

 

 

Brand marketing fund revenues from franchised and managed properties.    These revenues represent the fees collected from our franchised and managed hotels related to our BMF, which is calculated as a percentage of gross room revenues. The corresponding expenses are presented as other expenses from franchised and managed properties in our combined statements of operations, resulting in no impact to operating income or net income.

Consumer demand for our services is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and adverse political conditions can lower the revenues and profitability of our owned hotels and the amount of franchise fee revenues we are able to generate from our franchised hotels. As a result, changes in consumer demand and general business cycles can subject, and have subjected, our revenues to significant volatility. See “Risk factors—Risks related to our business and industry” and “Industry.”

In addition to general economic conditions, our guest satisfaction scores, the location of our hotels, the expenditures that we and our franchisees incur to improve our hotels, our loyalty program and the quality of our service impact our ADR, occupancy rates, RevPAR and RevPAR Index performance (each of which is described below under “—Key indicators of financial condition and operating performance”). Changes in ADR, occupancy, RevPAR and RevPAR Index performance significantly impact our revenues.

 

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Expenses

We primarily incur the following expenses:

 

 

Direct lodging expenses and other lodging and operating expenses.    Direct lodging and Other lodging and operating expenses reflect the operating expenses of our owned hotels, including both direct and indirect hotel operating expenses. Direct lodging expenses include items such as compensation costs for hotel level management, housekeeping, laundry and front desk staff, supply costs for guest room amenities and laundry, repairs and maintenance, utilities, sales and local marketing, bad debt expenses related to direct-bill corporate customers, and online and offline travel agency commissions. Other lodging and operating expenses include indirect property operating expenses, primarily property taxes and insurance.

 

 

Depreciation and amortization.    These are non-cash expenses that primarily consist of depreciation of fixed assets such as buildings, furniture, fixtures and equipment at our owned hotels, as well as certain corporate assets. Amortization expense primarily consists of amortization of intangibles related to our franchise business and other leasehold interests, which are amortized over their estimated useful lives.

 

 

General and administrative expenses.    General and administrative expenses consist primarily of compensation expense for our corporate staff and personnel supporting our business segments, professional fees (including consulting, audit and legal fees), travel and entertainment expenses, contractual performance obligations and office administrative and related expenses.

 

 

Impairment losses.    We hold amortizing and non-amortizing intangible assets and long-lived assets. We evaluate these assets for impairment as further discussed in “—Critical accounting policies and estimates.” These evaluations have, in the past, resulted in impairment losses for certain of these assets based on the specific facts and circumstances surrounding those assets and our estimates of the fair value of those assets. Based on economic conditions or other factors at a hotel-specific or system-wide level, we may be required to take additional impairment losses to reflect further declines in our asset and/or investment values.

 

 

Brand marketing fund expenses from franchised and managed properties.    These expenses represent the expenditure of BMF fees collected from our franchised and managed hotels for marketing and other support of the La Quinta brand. The corresponding revenues are presented as other revenues from franchised and managed properties in our combined statements of operations, resulting in no impact to operating income or net income.

 

 

Marketing, promotional and other advertising expenses.    These expenses include advertising costs associated with general promotion of the La Quinta brand and specific advertising and marketing support for our operation and for the operations of our franchisees, which are in addition to the expenditure of BMF fees collected from franchised and managed properties for the same purpose.

Fluctuations in operating expenses at our owned hotels can be related to various factors, including changes in occupancy rates, which directly impact certain variable expenses including labor, supplies, utilities and other operating expenses. However, certain of our expenses are relatively fixed, including rent, property taxes, liability insurance and, to a certain extent, payroll. As market conditions dictate, we take steps to reduce both our variable and fixed costs to levels we feel are appropriate to maximize profitability and respond to market conditions without

 

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jeopardizing the overall guest experience or the value of our hotels or brand. In addition, changes in depreciation expenses may be impacted by renovations of existing hotels or the disposition of existing hotels through sale or closure. For other factors affecting our costs and expenses, see “Risk factors—Risks related to our business and industry.”

Key indicators of financial condition and operating performance

We use a variety of financial and other information in monitoring the financial condition and operating performance of our business. Some of this information is financial information that is prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, while other information may be financial in nature and may not be prepared in accordance with GAAP. Our management also uses other information that may not be financial in nature, including statistical information and comparative data that are commonly used within the lodging industry to evaluate hotel financial and operating performance. Our management uses this information to measure the performance of hotel properties and/or our business as a whole. Historical information is periodically compared to our internal budgets, as well as against industry-wide information. We use this information for planning and monitoring our business, as well as in determining management and employee compensation.

Average daily rate (“ADR”) represents hotel room revenues divided by total number of rooms sold in a given period. ADR measures the average room price attained by a hotel or group of hotels, and ADR trends provide useful information concerning pricing policies and the nature of the guest base of a hotel or group of hotels. Changes in room rates have an impact on overall revenues and profitability.

Occupancy represents the total number of rooms sold in a given period divided by the total number of rooms available at a hotel or group of hotels. Occupancy measures the utilization of our hotels’ available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR levels as demand for hotel rooms increases or decreases.

Revenue per available room (“RevPAR”) is defined as the product of the ADR charged and the average daily occupancy achieved. RevPAR does not include other ancillary, non-room revenues, such as food and beverage revenues or parking, telephone or other guest service revenues generated by a hotel, which are not significant for the Company.

RevPAR changes that are driven predominately by occupancy have different implications for overall revenue levels and incremental hotel operating profit than changes driven predominately by ADR. For example, increases in occupancy at a hotel would lead to increases in room revenues, as well as incremental operating costs (including, but not limited to, housekeeping services, utilities and room amenity costs). RevPAR increases due to higher ADR, however, would generally not result in additional operating costs, with the exception of those charged or incurred as a percentage of revenue, such as credit card fees. As a result, changes in RevPAR driven by increases or decreases in ADR generally have a greater effect on operating profitability than changes in RevPAR driven by occupancy levels. Due to seasonality in our business, we review RevPAR by comparing current periods to budget and period-over-period.

RevPAR Index measures a hotel’s or group of hotels’ fair market share of a competitive set’s revenue per available room. RevPAR Index is stated as a percentage and is calculated for each hotel by comparing the hotel’s RevPAR to the aggregate RevPAR of a group of competing hotels

 

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generally in the same market. RevPAR Index is a weighted average of the individual property results. We subscribe to STR who collects and compiles the data used to calculate RevPAR Index, and STR may calculate ADR and RevPAR differently than we and our competitors do. The owner of each La Quinta hotel exercises its discretion in identifying the competitive set of properties for such hotel, considering, subject to STR’s guidelines, such factors as physical proximity, competition for similar customers, services and amenities, quality and average daily rate. We initially review the competitive set makeup of each new hotel that enters our system and review the continuing appropriateness of each hotel’s competitive set on an ongoing basis. Accordingly, while the hotel brands included in the competitive set for any individual La Quinta hotel depend heavily on market-specific conditions, the competitive sets for La Quinta hotels most often include one or more of Comfort, Holiday Inn Express and Hampton. Management uses RevPAR Index and changes in RevPAR Index, particularly year-over-year percentage changes, to evaluate the performance of individual or groups of hotels relative to other competing hotels.

Comparable hotels are defined as hotels that: (i) were active and operating in our system for at least one full calendar year as of the end of the applicable period and were active and operating as of January 1st of the previous year; and (ii) have not sustained substantial property damage, business interruption or for which comparable results are not available. Management uses comparable hotels as the basis upon which to evaluate ADR, occupancy and RevPAR on a system-wide basis and for each of our reportable segments. We report variances in ADR, occupancy and RevPAR between periods for the set of comparable hotels existing at the reporting date versus the results of same set of hotels in the prior period.

Of the 830, 802 and 783 hotels in our system (excluding our assets held for sale or otherwise sold) as of December 31, 2013, 2012, and 2011, respectively, 771, 756 and 719 have been classified as comparable hotels for the years ended December 31, 2013, 2012, and 2011, respectively.

EBITDA and Adjusted EBITDA.    Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is a commonly used measure in many industries. We adjust EBITDA when evaluating our performance because we believe that the adjustment for certain items, such as restructuring and acquisition transaction expenses, impairment charges related to long-lived assets, non-cash equity-based compensation, discontinued operations, and other items not indicative of ongoing operating performance, provides useful supplemental information to management and investors regarding our ongoing operating performance. We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors, lenders and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

EBITDA and Adjusted EBITDA are not recognized terms under GAAP, have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP. Some of these limitations are:

 

 

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

 

EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

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EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;

 

 

EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

 

EBITDA and Adjusted EBITDA do not reflect the impact on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

 

 

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

 

 

other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

Results of operations

Our business has steadily improved in recent years following declines during the economic downturn, resulting in an increase in RevPAR on a year-over-year basis each year since 2011. We have experienced occupancy increases in our business and we have been able to increase ADR in our markets where demand has outpaced supply.

The following table presents hotel operating statistics for our system-wide (owned, franchised and managed) comparable hotels for the applicable periods(1):

 

      Year ended
December 31,
2013
     Variance
2013 vs.
2012
     Year ended
December 31,
2012
     Variance
2012 vs.
2011
     Year ended
December 31,
2011
 

 

 

Occupancy

     64.8%         143 bps         63.5%         191 bps         61.9%   

ADR

   $ 79.11         4.2%       $ 75.66         4.6%       $ 72.14   

RevPAR

   $ 51.26         6.6%       $ 48.05         7.8%       $ 44.67   

 

 

 

(1)   See definition of comparable hotels in “—Key indicators of financial condition and operating performance—Comparable hotels.”

In addition, the following table presents RevPAR Index for our system-wide (owned, franchised and managed) hotels for the applicable periods: