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La Quinta IPO Is a Work In Progress For Blackstone

Updated from 10:57 a.m. ET to include refinancing efforts.

NEW YORK (TheStreet) - Blackstone Group (BX - Get Report), fresh off of the bonanza initial public offering of Hilton Worldwide (HLT - Get Report), is trying its hand again in the IPO of La Quinta Holdings, a more down-market hotel chain that the private equity giant appears to believe can continue to close a pricing gap become midscale hotel operators like Best Western and Ramada.

La Quinta's IPO will contrast to the Hilton offering, as Hilton Worldwide was expressed to investors as having transitioned to one of fastest growing hotel operators in the industry under Blackstone's roof. By contrast, language in La Quinta's IPO filing indicates the company may be more of a work in progress.

If Blackstone chooses to pursue an IPO over a possible sale of the company, as Reuters reported was being contemplated, it would signal the PE giant is willing to continue to invest in a turnaround of La Quinta and the prospect that its brand ascends in the midscale hotel segment. IPO filings by Blackstone owned hotel chains appear to be presented in a manner that gives a clear picture of what went on at a company during the PE firm's ownership.

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In the case of Hilton, Blackstone executed a plan of franchised hotel growth and construction that increased the company's margins and cash flow. With Blackstone as its owner, roughly 99% of Hilton's new hotels and hotels under construction were franchised, freeing the company to grow its room count the most of any major hotel chain in the wake of the crisis without burdensome initial capital costs.

La Quinta, in some respects is a similar story.

Prior to Blackstone's 2006 buyout of La Quinta, the company had 158 franchised hotels and 425 hotels in total. As of the third-quarter, La Quinta now has 466 franchised hotels, more than tripling during Blackstone's holding. Overall, La Quinta now has 836 total hotels, almost doubling between 2006 and Sept. 30, 2013.

Clearly, Blackstone is a believer in the franchised hotel growth model. Other Blackstone-owed hotel chains like Brixmor Property Group (BRX) and Extended Stay America have recently gone public or are in the process of conducting an offering.

La Quinta's S-1, however, exhibits some differences in strategy than Hilton Worldwide. Blackstone appears to have invested relatively heavily in refreshing La Quinta's portfolio of 370-owned hotels, which remains about 45% of the company's total hotel count.

From 2007 through the third-quarter, Blackstone invested $301 million in what it calls "repositioning capital" -- improving pricing power, occupancy and revenue per available room (RevPAR) for La Quinta's owned hotels. That meant spending $145 million for accelerated improvements of owned hotels, $38 million for technology infrastructure and additional funds spent on modernizing hotel rooms with flat panel televisions, pillow-top mattresses, in-room offices, high speed internet access, coffee makers, and better shower heads.

The company also spent $75 million to upgrade 128 hotels it converted to La Quinta brands and $42 million to develop a flagship hotel in downtown Chicago. Recurring capital expenditures such as repairs and maintenance, and cyclical renovations were $427 million between 2007 and 2013.

La Quinta says in its IPO filing the company's operating performance has improved significantly over the past three years, with average day rates (ADR) rising to $75.21 at the end of 2012, up from $69.38 in 2010. Revenue per available room also rose, rising 16.5% to $47.17 from $40.49 in the same time period.

Still, La Quinta is a work in progress and a turnaround in Blackstone's hands that's survived recent years with little margin for error. Earnings before interest, taxes, depreciation and amortization (EBITDA) in 2012 were $243 million, a drop from previous years. Meanwhile, the company had a net loss in 2012, and its earnings in the first nine months of 2013 are far lower than the previous year, as La Quinta works to manage an over 60% increase to its interest expense.

La Quinta appears to convey in its S-1 that a turnaround is still in progress.

"There remains a meaningful [average daily rate] differential between us and the hotels in our main STR competitive sets, which we believe we can continue to decrease over time," the filing states. "We estimate that in 2012, each $1 increase in ADR across our owned portfolio would have increased our Adjusted EBITDA for our owned hotels by approximately $11 million, assuming all other variables remain constant."

La Quinta also concedes that 2013 adjusted EBITDA is below comparable 2008 metrics, a figure the company believes "represents significant capacity for future organic growth." The S-1 filing goes on to say La Quinta is roughly half the size of competitors, indicating it believes future growth lies ahead.

The company has a pipeline of 175 franchised hotels, 80% of which are new constructions, it believes "remains meaningful opportunity for continued growth in the United States" and especially in the Northeast and Northwest. Furthermore, the company believes its franchised business model can succeed in Mexico, Central America and South America where 22 hotels are either open or in the pipeline.

La Quinta's balance sheet is only in the early stages of a turnaround, something that may be a major aspect of the company's IPO.

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