La Quinta solo + CorePoint Lodging = $2.4 billion

In November La Quinta Holdings (LQ),  trading at $17.05 for a market cap $2 billion, announced  plans to separate its real estate business—to be named CorePoint Lodging Inc.—from its franchise and management businesses to create two distinct, publicly traded companies. La Quinta Holdings has hotels throughout the United States, Canada and Mexico. La Quinta has more than 880 hotels, which encompass some 87,000 guest rooms. Most of the chain’s hotels operate in the limited service, midscale segment. It targets a mix of corporate and leisure travelers on a budget. Backed by investment firm The Blackstone Group, the company went public in 2014.

La Quinta is on track to complete the taxable spin-off of CorePoint Lodging, the company’s owned real estate business in the first quarter of 2018. Post separation, La Quinta will focus on the asset-light franchise and management businesses, which offer strong visibility through the expected long-term franchise and management contract agreements with CorePoint. After the separation, CorePoint could operate as a tax-efficient real estate investment trust (REIT) with a robust portfolio of owned hotel properties. We believe both companies could be attractive targets for any industry player seeking consolidation.

Following the transaction, La Quinta plans to actively capitalize on the embedded growth opportunity of a large and growing pipeline; strong interest from developers in expanding the La Quinta brand into the more than 30% of U.S. markets where the brand is not yet represented and a scalable property management platform, according to the LQ.

CorePoint Lodging will have a portfolio consisting of 316 hotels, excluding three hotels held for sale, with approximately 40,500 rooms located in key U.S. locations. The company stands to benefit from the continuation of a longstanding and mutually beneficial relationship with La Quinta. As a standalone public company, CorePoint’s total adjusted EBITDA (Earnings before interest, taxes, depreciation and amortization) for the full year 2017 is estimated to be between $200 million and $215 million. It plans to grow its portfolio primarily within the midscale and upper-midscale select-service lodging segments.

Sum of the Parts Valuation
We sum the two units to arrive at an estimated target price of $2.4 billion or $21 per share for La Quinta consolidated (see “Inside the numbers,” above). This suggests 23% upside from current levels (see “Sum greater than whole,” above). We value “new” La Quinta at $1.1 billion or $10 per LQ share, we value CorePoint Lodging at $1.26 billion or $11 per LQ share (see “Combined value,” above).