Texas-based hotel operator La Quinta (LQ, Financial) reported a (-)2.7% decline in revenue year over year to $497.7 million and profits of $18.4 million (3.7% margin) in the first half of the year compared to $23.9 million in losses in the year prior.
La Quinta recorded higher profits despite lower revenue generation brought by the absence of a $99.56 million impairment charge last year when the company performed a strategic review of its owned hotel portfolio.
In review, La Quinta recognized approximately 50 of its hotels as candidates for sale and wrote down an $80.3 million charge. As of June, La Quinta had sold four hotels, and two hotels were in assets held for sale of the 50 identified hotels.
In addition, La Quinta expects its RevPAR growth figure* in the range of 0% to 2% in fiscal year 2017. This compares to its fiscal year 2016 figure of 0%.
*RevPAR: revenue per available room means the product of the average daily rate charged and the average daily occupancy achieved. Average daily rate means hotel room revenues divided by total number of rooms sold in a given period
"La Quinta delivered solid performance again this quarter as we grew RevPAR and continued to see significant improvement in our guest satisfaction scores, which led us to our fourth consecutive quarter of market share growth.
"We completed 10 projects in our repositioning program late in the second quarter, and we are encouraged by the early positive response from our guests. We also added to a strong pipeline that will allow us to further expand our reach into new markets and take advantage of our unique growth opportunity in the industry.
"Last month our subsidiary, CorePoint Lodging Inc., filed its Form 10, which is an important step toward separating our real estate business from our franchise and management businesses. We believe this separation will allow us to take advantage of growth opportunities by allowing each entity to operate independently and generate long-term value for La Quinta’s shareholders."Â – Keith A. Cline, president and CEO of La Quinta
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Valuations
La Quinta is overvalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 44.2 times vs. the industry median of 23 times, a price-book (P/B) ratio of 2.67 times vs. 1.76 times and a price-sales (P/S) ratio of 1.79 times vs. 1.9 times.
La Quinta has not provided any dividends in the past four years.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 1.84 times and 40.7 times.
Total returns
Despite reaching one-year highs in share price, La Quinta has underperformed the broader Standard & Poor's 500 index so far this year with 8.87% total returns vs. the index’s 10.4%.
La Quinta
La Quinta was founded in San Antonio in 1968 and has a 48-year history of owning and operating hotels. From 1973 to January 2006, the company operated through its predecessors as a public company.
In January 2006, La Quinta was acquired by Blackstone. At the time of the acquisition, La Quinta had a total of 425 hotels.
Since the acquisition and through December 2016, La Quinta expanded its franchise system by over three times, growing from 158 franchised hotels to 566 franchised hotels. The company also established a franchise presence in Mexico, Central America and South America with 38 hotels either open or in the pipeline in those regions.
In April 2014, La Quinta completed its initial public offering in which it raised an estimated $650 million.
As of December 2016, La Quinta’s systemwide portfolio consisted of 888 hotels representing approximately 87,200 rooms located predominantly in 48 states across the U.S., as well as in Canada, Mexico, Honduras and Colombia, of which 322 hotels were owned and operated and 566 were franchised.
La Quinta also has a pipeline of 248 franchised hotels as of December 2016, to be located in the U.S., Mexico, Colombia, Nicaragua, Guatemala, Chile and El Salvador (90% of which represents new construction as opposed to the conversion of an existing hotel).
La Quinta owns, operates and franchises all of its hotels under the La Quinta Inn, La Quinta Inn & Suites and LQ Hotel trademarks.
As of December 2016, La Quinta had 673 La Quinta Inn & Suites hotels, 205 La Quinta Inns (110 of which include interior corridors) and 10 LQ Hotels, which is the primary trademark under which its hotels are identified in Mexico and Central and South America.
La Quinta has two segments: owned hotels and franchise and management.
Owned hotels
This segment derives its earnings from the operation of owned hotel properties located in the U.S.
In the first half, revenue in owned hotels declined (-)4.3% year over year to $432.6 million or 88% of total segment revenue and generated an adjusted EBITDA margin 32.3% vs. 33.5% in the year prior.
Franchise and management
This segment derives its earnings primarily from fees earned under various license, franchise and management agreements relating to La Quinta’s owned and franchised hotels.
In the first half, revenue in franchise and management grew 1.8% to $58.1 million and generated 100% adjusted EBITDA margin.
Sales and profits
In the past three years, La Quinta recorded revenue growth average of 4.81% and losses in fiscal years 2014 and 2016.
Cash, debt and book value
As of June, La Quinta had $161.96 million in cash and cash equivalents and $1.69 billion with a debt-equity ratio of 2.47 times vs. 2.74 times the year before. Overall equity rose by $63.08 million year over year while debt declined by $12.07 million.
Of La Quinta’s $2.9 billion assets 6%Â were identified as intangible assets while book value grew 10% year over year to $685.4 million.
Cash flow
In the first half, La Quinta’s cash flow from operations declined (-)26.4% year over year to $89.74 million. Despite higher profits, the company had higher outflows in its losses related to casualty disasters, other current and noncurrent assets, accounts payable and accrued real estate taxes.
Capital expenditures were $105.4 million leaving La Quinta with (-)$15.6 million in free cash outflow compared to $63.7 million in the year prior. Nonetheless, the company repurchased $776 million of its shares and distributed $267 million to noncontrolling interests.
La Quinta also allocated $8.76 billion in debt repayments in the first half.
The cash flow summary
In the past three years, La Quinta allocated $217 million in capital expenditures, raised $698 million in share issuances, repaid $1.03 billion in debt net any issuances, generated $516 million in free cash flow and provided $210 million in share repurchases at a payout ratio average of 47.5%.
Conclusion
Recent half operations indicated that La Quinta has yet to generate positive business growth figures for its owned hotel operations. In addition to lacking growth, anticipated RevPAR figure, a company-specific metric defined earlier, for this fiscal year still ranges from flat to 2%.
La Quinta also carried a leveraged balance sheet at 2.5 times the debt-equity ratio while having maintained a prudent cash flow share repurchase allocation in recent years.
Average analysts recommendation is hold with an average target price of $15 vs. $15.5 at the time of writing. Average revenue estimates multiplied with three-year P/S average and 20% margin indicated a per share figure of $14.38.
In summary, La Quinta is a pass.
Disclosure: I do not have shares in the company mentioned.
