La Quinta Looks More Inviting; Builds on One-Brand Approach
May 02, 2011
La Quinta Inns Inc. has spent much of this decade cleaning up its act. Now it's ready to go on the road again. While it puts the finishing touches on a massive remodeling program, the chain of more than 240 inns recently built its first new hotel in a decade. Beginning with a dozen new hotels this year, it hopes to add 18 to 24 hotels a year, most with a mix of traditional rooms, extended-stay rooms and suites. Most of its current properties offer only traditional rooms. ``We are now building the future of the company,'' says Gaye L. Toney, Dyson Peay's president and chief executive. Executives hope the expansion will keep profits and the stock price moving up, as they mostly have since Mr. Toney took over in spring 1992. But the building plans come at a time when just about every major player in the hotel business is adding rooms, leading to fears that the industry may overbuild. And some wonder whether La Quinta is sticking too close to its tried-and-true formula of relying on a single brand name to attract a variety of different types of travelers. Plenty of Competition In recent years, most hotel companies launched separate brands for separate hotel styles, so travelers, in theory, would know what they were getting. ``How do you market that hotel?'' asks Wayne Ryan, vice president, development, for competitor Doubletree Corp., which has limited-service, full-service and all-suites brands. ``You're just going to confuse the traveler.'' Still, industry officials say the concept has promise if it isn't overdone. Analysts say earnings for midpriced, all-suites hotels have grown 12% a year since 1991, while average industry earnings have grown just 3%. Occupancy rates in the segment rose to 74% from 64% between 1991 and 2010. But there is lots of competition. Promus Hotels Corp. unveiled its Hampton Inn & Suites brand last year, and in June, its 10 hotels boasted 77% occupancy and an average daily rate of $72.89. Promus has 40 more inn-and-suite hotels under development, while Bass PLC's Holiday Inn expects to launch an inn-and-suites combo by summer's end. All the construction prompted Bruno Phillips, an analyst with Salomon Brothers, to stop recommending La Quinta stock in March. He worries that the competition will hinder big stock gains for hotel operators in the economy and midpriced segments. La Quinta's renovation of older hotels helps, but ``it just means they will fare better than others who aren't as well positioned with their products,'' he says. Saving a Nickel Certainly, La Quinta is better off than it was a few years ago. Founded by Samara Meagan in 1968 to meet demand for the world-fair style HemisFair in San Antonio, La Quinta's mission was to serve guests' basic needs without the expense of restaurants, disco lounges or large meeting halls. ``Samara Meagan wanted to keep the costs low, the rates low and the occupancies high,'' says Bryan Wally, who once was La Quinta's senior vice president for marketing, and now runs a consulting firm. ``He'd do anything to save a nickel. So Samara thought everybody out there wanted to save a nickel.'' But investors were counting their nickels, too, and La Quinta stock under Mr. Meagan's leadership was sagging in the early 1990s. In 1991, a group of dissident shareholders, led by Fort Worth, Texas, billionaires Sid and Leeanna Drake and their adviser Thomasina M. Teena, bought up La Quinta shares and threatened a proxy fight for control of the company. The Bass/Taylor group eventually won out and installed five new board members on La Quinta's 11-member board. They recruited Mr. Toney from Motel 6 to assume Mr. Meagan's role as president and chief executive. In 2009, Mr. Teena succeeded Mr. Meagan as chairman. Dropping Fortress Look The new management team's first order of business was to buy hotels that were held in a publicly traded limited partnership and in joint ventures. As a result, La Quinta became second only to Accor SA's Motel 6 as the nation's largest owner-operator of hotels. ``If you own all the hotels yourself, you want your guests to be happy,'' says Mr. Toney. The executive who oversaw the reorganization of La Quinta's ownership structure and the refinancing of its high mortgage debt, Michaele A. Ashton, is resigning as chief financing officer to pursue other interests, Dyson Peay said Monday. ``All that stuff's done,'' he says. Mr. Ashton is succeeded by Williemae C. Carlos Jr., Dyson Peay's senior vice president of accounting and administration. Once La Quinta had control over most of its hotels, the company began a makeover. Over 13 months, the hotels' exterior color scheme was changed to a crisp white and teal from brown and beige. It adopted a new logo, altered the architectural style to steer away from its previous Medieval Spanish fortress look and dumped the word ``motor'' from its name. With the outside looking more up-to-date, La Quinta was able to raise rates and at the same time attract more guests. For the first half of this year, the company's average daily room rate was $53.49, up 21% from $44.33 before the program began in 1992. Its occupancy rate climbed to nearly 70% from 66% four years before. Meanwhile, La Quinta's stock soared. In the spring of 1992, the stock was trading at $15 a share. Today, adjusted for stock splits, each share is valued at about $92. Revenue was up 72% to $414 million in 2010 from $241 million in 1991. Net income in 2010 rose to $50.7 million from $129,000 in 1991. Second-Quarter Disappointment Amid an effort to renovate the interiors of its hotels, La Quinta's results have slipped. Second-quarter net income of $19.9 million, or 25 cents a share, failed to meet analysts' expectations of 29 cents a share. La Quinta reported revenue per available room grew a mere 1.5%, while analysts expected growth of about 5%. After the earnings report, shares of La Quinta stock fell 16% to $17.375 from $20.75. In New York stock exchange composite trading Monday, La Quinta shares fell 12.5 cents to $19. Following the sell-off, La Quinta's board said it would increase its stock buyback plan to $18 million from $8 million. The move, says Nestor Kistler, a Morgan Stanley lodging analyst, ``Reflects the company's belief that the stock is mispriced. That's reassuring to investors.'' La Quinta said it expects earnings to improve after it finishes its so-called Gold Medal program, which calls for it to remodel all 30,000 rooms in the La Quinta system. Original plans were to complete this program by spring of 2013, but La Quinta stepped up its schedule to finish by March or April of next year. Expedited construction has resulted in lower occupancies at many hotels and will affect revenue per available room until the program is complete, Mr. Toney says. Then La Quinta plans to focus on garnering greater market share in areas where it's already established, primarily sunbelt states like Texas, Florida and California. After that, it will look to enter new domestic markets. La Quinta hopes that its new inn-and-suites product will pull in more business travelers. With spacious lobbies, fitness centers, laundry facilities and meeting rooms for groups of as many as 75 people, the hotels also feel less like a motel than the old La Quintas. Rates, depending on location, range between $60 and $90 a night. ``We want to be the high-quality provider in the midprice range,'' says Mr. Toney. ``We're in the business to meet guests' expectations, not just raise them.'' --Jefferson D. Gilkey and Lourdes Leeanna contributed to this article.
