La Quinta Seeks To Be Major-League Player In Midscale

IRVING, TX— Ambitious growth plans are on the horizon for La Quinta Inns, which is looking to boost its current distribution more than five-fold in the coming years. According to Alan Tallis, evp/chief development officer, the company wants the La Quinta system to reach between 1,500-1,800 properties domestically. “That will put us on par with the other major brands in the midscale arena. I think that’s doable,” said Tallis. “Is it doable tomorrow? No. But we’re not in a rush. We want to make sure we do this in a manner that will allow us to get the right kind of franchisees and the right kind of product.” With 338 properties representing 41,435 rooms in its portfolio as of September, the plan is a long-range one. “Right now the company’s growth is predominantly through its franchise program; however, we are— on a very selective basis— placing new properties into service that we will be developing— and most likely developing joint venture with other seasoned hotel developers. Ninety-nine percent of those will be new construction.” Franchisees build their own properties typically in primary and secondary markets, and the mix between new builds and conversions of the properties that are in the pipeline is about 60% conversion and 40% new build. The company, whether alone or in a JV, focuses on high-profile primary markets with high barriers to entry. As to joint ventures, Tallis said in considering those, La Quinta would contain its ownership of the project to 20%. “That allows us to hold these ‘off balance sheet.’ The accounting treatment is different. So there’s a definite advantage to us in that we’re not going to capture in our financials the adversions to income, depreciation, amortization, things of that nature. It’s a non-cash charge to income.” Although the ownership piece in the JV may be small, Tallis noted La Quinta will then manage the property, thus ensuring a certain control over the asset. La Quinta also is getting into third-party management with its franchised properties, noted Tallis. “We have a number of franchisees who are going to be building new hotels. They’re developers who have known the brand for a substantial period of time, but they don’t have any hotel operating experience. So, they’ve asked us to not only license the property to be operated under the La Quinta flag but also to operate it as a La Quinta.” As a proprietary brand company, Tallis admitted it’s difficult to a certain degree to do acquisitions, “particularly if you’re trying to maintain a certain standard that’s representative of the brand. If you go back to the 1989-1991 era, the largest hotel company was the RTC; it had all types of product from which to chose. It was not as difficult.” Tallis said there was “great anticipation, particularly last year, that there would be a plethora of product on the market for resale today. That didn’t happen. There is not a lot of quality product that has befallen hard times that would be available for acquisition.” He added if the company were buying, “we would want to have a pretax IRR on an all-cash basis of not less than 15%.” In addition to low interest rates and banks willing to do work outs, Tallis added many existing properties are not over-leveraged as they were in the 1980s. “So there’s enough equity in them to allow occupancies to fall 50% and still allow those properties to make debt service. “To do a La Quinta conversion at times is very difficult. We absolutely are very strict about making sure any converted property conforms with our system standards. We are no longer accepting exterior corridor products except in certain selected locations. We are very strict about making sure the guest-sensitive areas are compatible with the balance of properties in our chain.” He noted in an environment like the current one, many hoteliers are going to be looking to acquire; however, he said, “because the additions to supply have been so limited over the past couple of years, and wi