Blackstone Said to Seek IPO of La Quinta Instead of Sale

Blackstone Group LP plans to file for an initial public offering of its La Quinta Inns & Suites hotel chain rather than sell the company on the private market, according to people with knowledge of the firm’s thinking.

Blackstone, which had started a sales process for La Quinta and received initial bids last month, is betting it can get higher returns through an IPO, said the people, who asked not to be identified because the plans are private. A 20 percent gain in Extended Stay America Inc., co-owned by Blackstone, since its Nov. 12 share sale helped sway the decision, they said.

Blackstone, the world’s largest alternative-asset manager, is taking some of its biggest real estate holdings public as U.S. stocks rise to records and hotel occupancies climb. La Quinta, valued at about $4.5 billion, would be the New York-based company’s third lodging IPO. In addition to Extended Stay, Hilton Worldwide Holdings Inc. is poised for a $2.25 billion offering next month that would set a record for the industry.

“It’s an advantageous point in the hotel cycle,” said Drew Babin, senior lodging analyst at CBRE Clarion Securities, a Radnor, Pennsylvania-based firm that manages about $20 billion. “Supply growth is limited and we expect three more years” of above-average gains in rates and occupancy.

Peter Rose, a spokesman for Blackstone, declined to comment on the IPO plans.

Year’s End

La Quinta, based in Irving, Texas, may file for the stock offering before the end of the year, said the people with knowledge of its plans. Blackstone hired JPMorgan Chase & Co. and Morgan Stanley earlier this year to explore a sale or IPO of the company, and received first-round offers in early October.

Companies have raised $69 billion in IPOs in the U.S. this year, according to data compiled by Bloomberg. That’s the most since 2007, the data show. The Bloomberg IPO Index, which measures the performance of U.S. stocks in their first publicly traded year, has gained 45 percent in 2013.

Hotel stocks have been outperforming the rest of the market. Marriott International Inc., the largest publicly traded chain, gained 35 percent in the 12 months through last week; Starwood Hotels & Resorts Worldwide Inc. jumped 41 percent; and Wyndham Worldwide Corp. surged 43 percent. The Standard & Poor’s 500 Index has rallied 30 percent to a record.

La Quinta operates more than 800 mid-price, limited-service hotels with about 80,000 rooms in the U.S., Canada and Mexico, according to its website. Select-service hotels offer limited food and beverage and other services.

Fewer Costs

“Room rates are similar to full-service hotels, but you don’t have to have all the costly bells and whistles,” said John Murray, president of Hospitality Properties Trust, which owns about 291 hotels under brands such as Hyatt Place, Courtyard and Candlewood Suites that are managed by operators including Marriott.

Murray declined to comment on whether his company made a bid for La Quinta. Hospitality Properties, based in Newton, Massachusetts, last year formed an alliance with Wyndham, which is trying to expand its portfolio of managed hotels.

Wyndham and Choice Hotels International Inc. were among the companies that had expressed interest in buying La Quinta, as had private-equity firms, people familiar with the auction process have said. It couldn’t be determined whether they had submitted offers.

Scott Carman, a spokesman for Rockville, Maryland-based Choice Hotels, and Margo Happer, a spokeswoman for Wyndham in Parsippany, New Jersey, declined to comment.

Hotel Brands

Blackstone acquired La Quinta in January 2006 for about $3 billion. The company at the time owned and operated about 360 hotels and franchised more than 240 others under its namesake brand, Baymont Inn & Suites, Woodfield Suites and Budgetel. Blackstone sold the Baymont brand to Wyndham’s predecessor company and consolidated properties under the La Quinta name.

Blackstone also folded other purchases into La Quinta and invested more than $600 million in improvements. Last year, the firm won a two-year extension to July 2014 on $2.65 billion of La Quinta loans as part of a debt restructuring.

Blackstone named three directors to La Quinta’s board in August, including Henry Cisneros, former secretary of the Department of Housing and Urban Development. Boards often add outside members before IPOs to meet exchange listing rules requiring public companies to have independent directors.

Better Margins

Lower development and operating costs give select-service hotels higher profit margins than luxury chains, making them attractive to investors, said Patrick Scholes, an analyst at SunTrust Robinson Humphrey Inc. in New York.

“There are only so many Four Seasons you can build, but La Quintas you can build almost indefinitely,” he said. “There is tremendous demand with these types of businesses.”

Revenue per available room, an industry measure of average daily room rates and occupancy, in the midscale category rose 4 percent to $44.23 from January through October compared with a year earlier. For luxury hotels, there was a 7.6 percent increase to $218.24, according to STR, a Hendersonville, Tennessee-based lodging-research firm.

Midscale chains fared the best during the credit crisis and subsequent recession, according to STR. Revpar for the sector fell 1.5 percent in 2008 and and 15 percent in 2009, the smallest declines among six lodging categories. Luxury hotels performed the worst, with revpar decreasing 5.2 percent in 2008 and 24 percent in 2009.

There probably will be enough investor demand to accommodate three hotel IPOs from Blackstone, said Babin of CBRE Clarion. La Quinta’s business is a different part of the industry from Extended Stay, which caters to long-stay travelers, and Hilton, which owns brands ranging from Embassy Suites to Waldorf Astoria.

“Market demand is clearly absorbing Extended Stay, and early indications on Hilton paint a similar picture,” Babin said. As long as the IPOs are “reasonable,” there are “sufficient funds available to absorb them as generalist investors rotate away from yield investments with less-compelling growth stories,” he said.

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