NOTE 13. 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 Executive Officer, who is our chief operating decision maker, to assess performance and make decisions regarding the allocation of resources. Our operating and reportable segments are defined 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 revenues earned under various franchise and management agreements relating to our owned and franchise hotels, which provide for us to earn compensation for the licensing of our brand to franchisees, as well as for services rendered, such as hotel management and providing access to certain shared services and marketing programs such as reservations, Returns, and property management systems.

Corporate and other includes revenues generated and operating expenses incurred in connection with the overall support and brand management of our owned, managed, and franchised hotels and operations.

The performance of our operating segments is evaluated primarily based upon Adjusted EBITDA. We define Adjusted EBITDA as our net (loss) income (exclusive of non-controlling interests) before interest expense, income tax expense (benefit), and depreciation and amortization, further adjusted to exclude certain items, including, but not limited to: gains, losses, and expenses in connection with: (i) asset dispositions; (ii) debt modifications/retirements; (iii) non-cash impairment charges; (iv) discontinued operations; (v) equity based compensation and (vi) other items.

The table below shows summarized consolidated financial information by segment for the three months ended March 31, 2017 and 2016:

	For the three months ended March 31,
	2017			2016

Revenues
Owned Hotels	$	205,635		$	215,555
Franchise and management ⁽¹⁾		26,714			26,220
Segment revenues		232,349			241,775
Other fee-based revenues from franchise properties		5,754			5,275
Corporate and other ⁽²⁾		28,783			29,123
Intersegment elimination ⁽³⁾		(32,614	)		(34,402	)
Total revenues	$	234,272		$	241,771
Adjusted EBITDA
Owned Hotels		58,721			68,253
Franchise and management		26,714			26,220
Segment Adjusted EBITDA		85,435			94,473
Corporate and other		(13,485	)		(10,176	)
Adjusted EBITDA	$	71,950		$	84,297

(1)

This segment includes intercompany fees which are charged to our owned hotels to reflect that certain functions, such as licensing and management, are included in the franchise and management segment. We charge a franchise fee of 4.5% of gross room revenues and a management fee of 2.5% of gross operating revenue for our owned hotels. These fees are charged to Owned Hotels and are eliminated in the accompanying condensed consolidated financial statements.

(2)

Includes revenues related to our brand management programs and other cost reimbursements. The portions of these fees that are charged to our owned hotels totaled $16.7 million and $17.6 million for the three month periods ended March 31, 2017 and 2016, respectively. This includes a reservation fee of 2.0% of gross room revenues, which is reflected in corporate and other. These fees are charged to owned hotels and are eliminated in the accompanying condensed consolidated financial statements.

(3)

Includes management, license, franchise, BMF, Returns, reservation fees and other cost reimbursements totaling $32.6 million and $34.4 million for the three month periods ended March 31, 2017 and 2016, respectively. These fees are charged to owned hotels and are eliminated in the accompanying condensed consolidated financial statements.

The table below provides a reconciliation of Adjusted EBITDA to EBITDA and EBITDA to net income (loss) attributable to La Quinta Holdings’ stockholders for the three month periods ended March 31, 2017 and 2016. Adjusted EBITDA and EBITDA should not be considered an alternative to net income (loss) or other measures of financial performance or liquidity derived in accordance with GAAP:

	For the three months ended March 31,
	2017			2016
	(in thousands)
Adjusted EBITDA	$	71,950		$	84,297
Impairment loss		—			(83,343	)
Loss on sale		(138	)		—
Gain related to casualty disasters		1,928			669
Equity based compensation		(3,943	)		(2,490	)
Amortization of software service agreements		(2,359	)		(2,147	)
Other losses, net ⁽¹⁾		(7,105	)		(2,940	)
EBITDA		60,333			(5,954	)
Interest expense		(20,108	)		(20,364	)
Income tax (expense) benefit		(2,290	)		26,119
Depreciation and amortization		(36,257	)		(38,525	)
Noncontrolling interests		(89	)		(51	)
Net income (loss) attributable to La Quinta Holdings’ stockholders	$	1,589		$	(38,775	)

⁽¹⁾

Other losses, net consists of net loss attributable to the BMF (which, over time, runs at a break-even level, but may reflect a profit or loss from period to period), IRS legal defense costs, costs associated with pursuing the possibility of separating our real estate business from our franchise and management businesses and litigation reserve adjustments.

The following table presents assets for our reportable segments, reconciled to consolidated amounts as of March 31, 2017 and December 31, 2016:

	March 31, 2017		December 31, 2016
	(in thousands)
Total Assets
Owned Hotels	$	2,489,136	$	2,499,770
Franchise and management		198,522		198,832
Total segments assets		2,687,658		2,698,602
Corporate and other		200,596		193,921
Total	$	2,888,254	$	2,892,523

The following table presents capital expenditures for our reportable segments, reconciled to our consolidated amounts for the three months ended March 31, 2017 and 2016:

	For the three months ended March 31,
	2017		2016
Capital Expenditures
Owned Hotels	$	41,432	$	22,519
Franchise and management		—		—
Total segment capital expenditures		41,432		22,519
Corporate and other		4,746	$	2,483
Total	$	46,178	$	25,002

************