La Quinta Moves Toward C-Corp Structure

DALLAS— As a major step in its continuing stride toward greater growth in the lodging industry, La Quinta Companies is set to restructure its grandfathered paired-share REIT status into a C-corporation. A year in the works, the move already has been approved by the companies’ boards of directors and must now be okayed by shareholders. A vote is expected in the first quarter of 2002. The restructuring concerns two entities under the La Quinta Companies umbrella: La Quinta Properties, Inc., which is the real estate investment trust (REIT) piece and La Quinta Corp. If approved, the REIT will become a subsidiary of the corporation through a tax-free merger; however, La Quinta Properties will continue to qualify as a REIT. “We were the last of those grandfathered paired-share REITs,” said Francis “Butch” Cash, president/CEO, “and we were not able to grow. We could not add in new hotels. Under the new structure we will be able to grow. We will also be able to create value for our shareholders.” In addition, the boards have agreed to a share repurchase program that will allow the company— under its current structure— to periodically buy back up to $20 million worth of La Quinta equity securities on the public market, as well as through private transactions. “Under the grandfathered paired-share REIT that’s all we can do, but if our shareholders approve the restructuring, then we’ll be in a position where we can more aggressively buy back our stock, and if the stock stays undervalued, we would do that,” said Cash. He stressed there was no intention to take the company private. Shares of La Quinta Properties were trading at $5.05 on the New York Stock Exchange on Thursday, Oct. 25. Shareholder value will not only be created by La Quinta’s ability to grow the business, said the CEO, but by $125 million worth of net operating loss carry-forwards that can’t be used under the current company structure, but which would be freed up under the restructuring. In addition, dividends paid on preferred stock— $18 million per year— will be tax-deductible under the C-corp. Another benefit, noted Cash, will be La Quinta’s ability to be flexible. “If, down the road— 2005— we want to pay a larger dividend to the shareholders, we’ll have the ability to do that in a tax-preferred way.” Cash likened the change to having the same size pie, just rearranging the slices. “The shareholder value stays the same. This REIT, of which the parent company owns the A stock, will still have to pay out a dividend every year. But until 2005, they’ll pay the dividend to the C-corp. That dividend we receive we will use to offset those [net operating]loss carry-forwards. Our guess is for the next three years we won’t pay any taxes.” The REIT and the corporation have combined net operating losses of approximately $250 million. Several things will happen to the shares in the proposed restructuring: * The REITs common stock will be converted on a one-for-four basis into newly created non-voting Class B common stock, which will be directly owned by shareholders; * Shareholders will continue to directly own the corporation’s common stock; however, that stock would be paired with the REIT’s new Class B common stock, akin to the current pairing arrangement with the REIT’s common stock; and * The REIT will issue new voting Class A common stock, which will be completely owned by the corporation. By issuing the Class B shares, La Quinta Companies would meet the minimum ownership requirements to continue to qualify as a REIT, and the Companies’ preferred stock dividends will continue to be paid out by the REIT. As part of the restructuring, La Quinta also would take a non-recurring, non-cash charge of approximately $400 million, plus would reclassify $200 million of preferred equity to minority interest. Cash said one asset— the value of the La Quinta brand, in part— will be moved out of the REIT into the C-corp, “so we don’t have any problems with so-called ‘b