NOTE 17. 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, franchised, and managed 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, which should not be considered an alternative to net income (loss) or other measures of financial performance or liquidity derived in accordance with GAAP. We define Adjusted EBITDA as our net (loss) income (exclusive of noncontrolling 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 years ended December 31,
	2017			2016			2015
	(in thousands)
Revenues
Owned Hotels	$	842,950		$	879,653		$	911,491
Franchise and management ⁽¹⁾		118,516			116,806			114,610
Segment revenues		961,466			996,459			1,026,101
Other fee-based revenues from franchise properties		27,511			25,150			23,204
Corporate and other ⁽²⁾		124,970			124,757			126,469
Intersegment elimination ⁽³⁾		(133,317	)		(140,112	)		(145,800	)
Total revenues	$	980,630		$	1,006,254		$	1,029,974
Adjusted EBITDA
Owned Hotels		250,344			279,536			314,278
Franchise and management		118,516			116,806			114,610
Segment Adjusted EBITDA		368,860			396,342			428,888
Corporate and other		(41,988	)		(35,964	)		(34,846	)
Adjusted EBITDA	$	326,872		$	360,378		$	394,042

⁽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 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, which totaled $68.2 million, $71.5 million and $75.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, are eliminated in the accompanying consolidated financial statements. The franchise agreement we entered into with our owned hotels upon effectiveness of the IPO also includes a reservation fee of 2.0% of gross room revenues, which is reflected in corporate and other.

⁽³⁾

Includes management, license, franchise, BMF, Returns and other cost reimbursements totaling $133.3 million, $140.1 million and $145.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. These fees are charged to owned hotels and are eliminated in the accompanying consolidated financial statements.

The table below provides a reconciliation of net income (loss) attributable to La Quinta Holdings’ stockholders to EBITDA and EBITDA to Adjusted EBITDA for the years ended December 31, 2017, 2016 and 2015:

	For the years ended December 31,
	2017			2016			2015
	(in thousands)
Net income (loss) attributable to La Quinta Holdings' stockholders	$	151,965		$	(1,288	)	$	26,365
Interest expense		82,608			81,666			86,614
Income tax (benefit) expense		(111,556	)		493			22,487
Depreciation and amortization		149,951			147,996			167,920
Noncontrolling interests		162			185			347
EBITDA	$	273,130		$	229,052		$	303,733
Fixed asset impairment loss		1,178			104,258			50,121
(Gain) loss on sales		(3,665	)		(4,908	)		4,088
Loss on retirement of assets		2,485			—			445
Loss related to casualty disasters		1,557			3,051			1,824
Equity-based compensation		13,338			14,153			18,814
Amortization of software service agreements		9,514			9,050			8,343
Severance charges ⁽¹⁾		—			—			11,021
Retention plan⁽²⁾		11,384			—			—
Reorganization costs⁽²⁾		15,209			—			—
Other losses (gains), net ⁽³⁾		2,742			5,722			(4,347	)
Adjusted EBITDA	$	326,872		$	360,378		$	394,042

⁽¹⁾	Includes cash and non-cash charges relating to the departure of the Company’s former President and Chief Executive Officer.

⁽²⁾	Includes cash and non-cash costs associated with the Spin and Merger.

⁽³⁾	Other gains (losses), net primarily consists of net income (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 and litigation reserve adjustments.

The following table presents assets for our reportable segments, reconciled to consolidated amounts as of December 31, 2017, 2016 and 2015:

	2017		2016		2015
	(in thousands)
Total Assets
Owned Hotels	$	2,550,064	$	2,499,770	$	2,682,394
Franchise and management		201,548		198,832		192,284
Total segments assets		2,751,612		2,698,602		2,874,678
Corporate and other		201,484		193,921		111,166
Total	$	2,953,096	$	2,892,523	$	2,985,844

The following table presents capital expenditures for our reportable segments, reconciled to our consolidated amounts:

	For the years ended December 31,
	2017		2016		2015
	(in thousands)
Owned Hotels	$	194,892	$	123,996	$	82,139
Franchise and management		—		—		—
Total segment capital expenditures		194,892		123,996		82,139
Corporate and other		22,588		19,756		9,831
Total	$	217,480	$	143,752	$	91,970