La Quinta Jumpstarts Hotel Development Push in CBDs

DALLAS-In a move that caught analysts slightly off guard, La Quinta Corp. has revealed the next step in its growth strategy: the CBDs, most often relying on adaptive reuse development to plant its limited-service flag. The first projects will roll out in Chicago and Denver.

The property acquisitions have yet to close so the addresses are being kept under wraps. The Dallas-based hotelier is planning to acquire a third CBD site for the 2006 start of the program, which has been on the drawing board at least a year. The third city isn’t being identified as yet. La Quinta execs are looking at the nation’s Top 25 CBDs, recognizing that the development cost per key will exceed $100,000, but the difference in the daily room rates of its traditional suburban product and a CBD room will offset higher delivery costs.

Tom Ward, La Quinta’s investor relations director, tells GlobeSt.com that both Chicago and Denver will be adaptive reuse, hinting they will most likely office buildings. “When you go into a CBD area, there’s not a lot of green space, particularly not in the Top 25,” he says. La Quinta has earmarked $80 million of its $150-million cap-ex plan in 2006 for the CBD projects, finishing redevelopment of its Arlington, TX hotel and starting the makeover of the Cherry Creek, CO property.

“We have a great presence in the suburban and highway interchange markets,” Ward says. “The executive team is always looking at ways to grow shareholder value so where next but the CBDs.” The idea is fueled, in part, by the hotelier’s Manhattan hotel, which has racked up the highest RevPAR in the entire portfolio, according to Ward.

Francis W. Cash, La Quinta’s chairman and CEO, reiterated in the third-quarter earnings call that deals for sites will only be done if it makes economic sense. “We are not going to do a deal just to make a deal,” he stresses, as he has done so often in the past.

Essentially, Cash and David Rea, La Quinta’s president and COO, say they tired of looking for joint venture partners to roll out the CBD program. “We decided to move ahead on our own and that’s what we’re currently doing,” Rea told stockholders and analysts.

The hotelier is looking at buying vacant office buildings and warehouses in CBDs and near airports. “They pencil out and we’re prepared to underwrite them,” Rea says. The team also isn’t ruling out ground-up construction where land is available.

On the fiscal side of the call, La Quinta, one of the hardest hit hoteliers from Hurricanes Katrina and Wilma, still ended the quarter on a relatively positive note, with revenue, RevPAR and adjusted EBITDA both significantly higher than last year. “We were having a very, very good quarter prior to the hurricanes,” Cash says.

Hurricane Katrina damaged 22 hotels; Wilma has put 13 out of service due to varying degrees of damage. In addition, 11 franchise hotels sustained damage, of which five were under construction. In the New Orleans area, eight hotels were damaged and two won’t be coming back on line. The destroyed properties are the 106-room La Quinta in Crowder, LA, which was already tagged for sale, and the 130-room hotel in Bullard, both properties along Interstate 10 service roads. In all, La Quinta properties along the Gulf Coast and Florida amassed $30 million to $40 million of damage from this year’s hurricane season. But, Cash says, most of the cost is recoverable from insurance policies.

The hotelier’s Q3 net income reflects a $2-million charge due to the hurricanes. Meanwhile, Gulf Coast, Texas and Florida properties that were unscathed had increased occupancies, resulting in a $5-million increase in revenue, the hotelier reports. Executives expect operations should return to normal levels by mid-November.