"We will not be testing an unknown structure, but instead a proven structure," Francis W. "Butch" Cash, La Quinta president and CEO, said in yesterday's conference call. La Quinta's usual spokesman, Temple Weiss, manager of investor relations, was traveling and unavailable for comment following the conference call.
In connection with the restructuring, La Quinta will take a one-time $400-million, non-cash charge. A stockholders meeting to vote on the proposal will be set for Q1 2002. The restructuring, however, carries the support of its largest shareholder, the Bass Family of Ft. Worth, which owns 10% of the REIT.
"This restructuring is about La Quinta's future," Cash explained. In a year to 18 months, La Quinta's non-qualifying revenue generators will exceed the mandated 5% parameters and thus make it ineligible for REIT standing.
In addition to protecting the REIT status, the restructuring will facilitate growth via franchises, acquisitions and joint venture partnerships in new and existing markets, La Quinta officials said. It was emphasized there will be no loss to shareholders nor will there be a change in their tax basis as a result of the dissolution of the "grandfathered" paired share structuring in favor of a tax-free merger of La Quinta Properties Inc. the REIT and La Quinta Corp. Legislation has choked "grandfathered" paired share growth while offering distinct advantages to a C Corp-REIT subsidiary structure.
The deal calls for 38% of the REIT's interest in the brand to be sold tax free to the C Corp., which will be the majority stockholder of the REIT subsidiary. The end result is less income for the REIT and protection for its status.
La Quinta stock will be divvied into C Corp-owned class A and shareholder-owned Class B. In response to a participant's question, David L. Rhea, executive vice president, CFO and treasurer, said "you own both companies now and you own both companies in the restructuring." The key point being that shareholders' interests in the companies' overall value is static but their principal value will now rest in the C Corp instead of the REIT.
Class B dividends will not be paid until after net operating losses have been utilized. Together, there is a $250 million NOL. If common stock dividends are declared, class B shareholders will get a preferential dividend of about 10 cents per share annually, payable quarterly in 2005. While shareholders might wince about that, the bottom line is there won't be any dividend if the REIT status is lost, said Rhea. Also coming is an ESOP and stock repurchase of up to $20 million.
For the past year, the management team has worked hard to slash debt, sell health-care assets and position the REIT for growth. The result is La Quinta debt is below the $1-billion mark for the first time in years. That coupled with a $225-million revolving line of credit puts $2.4 billion into a growth coffer, some of which will be used to acquire regional chains. "The hotel industry clearly is going to consolidate over time and we think we're well positioned to be a consolidator," Rhea said.
Cash told the participants that no takeover talks have begun. It's going to be a well thought-out leverage of the mid-scale price range. "We won't dilute the $2.4 billion invested in La Quinta for quick growth," Cash emphasized. "The money's not burning a hole in our pocket. We're not going to do something just to use our capital."
In a preliminary third quarter assessment, Cash said La Quinta's RevPAR is down about 8% in comparison to 10% to 15% industrywide. EDITDA projections are calling for a range of 8% to 12%. A full Q3 earnings report will be released Nov. 8.
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