Attached files

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EX-99.1 - EX-99.1 - La Quinta Holdings Inc.lq-ex991_451.htm
EX-32.2 - EX-32.2 - La Quinta Holdings Inc.lq-ex322_409.htm
EX-32.1 - EX-32.1 - La Quinta Holdings Inc.lq-ex321_408.htm
EX-31.2 - EX-31.2 - La Quinta Holdings Inc.lq-ex312_410.htm
EX-31.1 - EX-31.1 - La Quinta Holdings Inc.lq-ex311_411.htm
EX-23.1 - EX-23.1 - La Quinta Holdings Inc.lq-ex231_407.htm
EX-21.1 - EX-21.1 - La Quinta Holdings Inc.lq-ex211_406.htm
EX-10.19 - EX-10.19 - La Quinta Holdings Inc.lq-ex1019_452.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-36412

 

La Quinta Holdings Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware

 

99-1032961

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

909 Hidden Ridge, Suite 600

Irving, Texas 75038

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (214) 492-6600

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of each class)

 

(Name of each exchange on which registered)

Common Stock, $0.01 par value per share

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes       No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes       No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

As of June 30, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $916.3 million (based upon the closing sale price of the common stock on that date on the New York Stock Exchange).

The number of shares of common stock outstanding on February 24, 2017 was 117,039,146.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from the registrant’s definitive proxy statement relating to its 2017 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year.

 

 


LA QUINTA HOLDINGS INC.

FORM 10-K

YEAR ENDED DECEMBER 31, 2016

 

 

    

 

Page No.

 

 

 

 

 

 

    

Forward-Looking Statements

 

1

 

 

 

    

Basis of Presentation in this Annual Report on Form 10-K

 

2

 

 

 

    

Terms Used in this Annual Report on Form 10-K

 

3

 

 

 

    

Market and Industry Data

 

3

 

 

PART I

 

 

 

 

 

Item 1.

    

Business

 

4

 

 

Item 1A.

    

Risk Factors

 

16

 

 

Item 1B.

    

Unresolved Staff Comments

 

40

 

 

Item 2.

    

Properties

 

40

 

 

Item 3.

    

Legal Proceedings

 

42

 

 

Item 4.

    

Mine Safety Disclosures

 

42

 

 

 

 

 

PART II

 

 

 

 

 

 

Item 5.

    

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

43

 

 

Item 6.

    

Selected Financial Data

 

44

 

 

Item 7.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

47

 

 

Item 7A.

    

Quantitative and Qualitative Disclosures About Market Risk

 

72

 

 

Item 8.

    

Financial Statements and Supplementary Data

 

74

 

 

Item 9.

    

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

114

 

 

Item 9A.

    

Controls and Procedures

 

114

 

 

Item 9B.

    

Other Information

 

116

 

 

PART III

 

 

 

 

 

 

 

 

 

Item 10.

    

Directors, Executive Officers and Corporate Governance

 

117

 

 

Item 11.

    

Executive Compensation

 

117

 

 

Item 12.

    

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

117

 

 

Item 13.

    

Certain Relationships and Related Transactions and Director Independence

 

117

 

 

Item 14.

    

Principal Accountant Fees and Services

 

117

 

 

PART IV

 

 

 

 

 

 

 

 

 

Item 15.

    

Exhibits and Financial Statement Schedules

 

118

 

 

Item 16.

    

Form 10-K Summary

 

119

 

 

 

 

 

 

    

Signatures

 

120

 

 

 


 

Forward-Looking Statements

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical facts included in this Annual Report on Form 10-K, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position and our business outlook, business trends and other information referred to in this Annual Report on Form 10-K are forward-looking statements. When used in this Annual Report on Form 10-K, the words “estimates,” “expects,” “contemplates,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Annual Report on Form 10-K. Such risks, uncertainties and other important factors include, among others, the following risks, uncertainties and factors:

 

business, financial, and operating risks inherent to the hospitality industry;

 

macroeconomic and other factors beyond our control can adversely affect and reduce demand for hotel rooms;

 

contraction in the global economy or low levels of economic growth;

 

inability to compete effectively;

 

any deterioration in the quality or reputation of our brand;

 

inability to develop our pipeline;

 

the geographic concentration of our hotels;

 

delays or increased expense relating to our efforts to develop, redevelop, sell or renovate our hotels;

 

inability by us or our franchisees to make necessary investments to maintain the quality and reputation of our brand;

 

inability to access capital necessary for growth;

 

seasonal and cyclical volatility in the hotel industry;

 

inability to maintain good relationships with our franchisees;

 

inability to protect our brand standards;

 

risks resulting from significant investments in owned real estate;

 

failure to keep pace with developments in technology;

 

failures or interruptions in, material damage to, or difficulties in updating, our information technology systems, software or websites;

 

inability to protect our guests’ personal information;

 

failure to comply with marketing and advertising laws;

 

disruptions to our reservation system;

 

failure to protect our trademarks and other intellectual property;

 

risks of doing business internationally;

 

the loss of senior executives or key field personnel;

 

the results of the audit by the Internal Revenue Service;

 

our substantial indebtedness;

 

risks related to pursuing the separation of our businesses; and

 

Blackstone’s significant influence over us.

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There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the sections entitled “Part I—Item 1A. Risk Factors” and “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. You should evaluate all forward-looking statements made in this Annual Report on Form 10-K in the context of these risks and uncertainties.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this Annual Report on Form 10-K apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Annual Report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

 

Basis of Presentation in this Annual Report on Form 10-K

 

On April 14, 2014, we completed our initial public offering (the “IPO”), in which we issued and sold approximately 44.0 million shares of common stock of La Quinta Holdings Inc. Our business prior to the IPO was conducted, and our hotel properties were owned, through multiple entities (including the entities owned by the Company at the completion of the IPO and previously under common control or otherwise consolidated for financial reporting purposes and their consolidated subsidiaries (the “Predecessor Entities”) and the entities that owned the 14 La Quinta hotels managed by the Predecessor Entities (the “Previously Managed Portfolio”), collectively, the “Existing Entities”). Prior to the IPO, certain of our Existing Entities operated as real estate investment trusts (“REITs”) for U.S. federal income tax purposes.

To effectuate the IPO, we effected a series of transactions that resulted in a reorganization of our business (the “Pre-IPO Transactions”). Specifically, among other transactions, one of the Predecessor Entities purchased the Previously Managed Portfolio and we purchased the management company for the Predecessor Entities and the equity interests in the Predecessor Entities held by the pre-IPO owners were exchanged by the pre-IPO owners for shares of common stock of the Registrant. Additionally, all of the shares of capital stock held by third-party stockholders of the Existing Entities that were REITs were redeemed for cash and the REITs were converted into limited liability companies. Following the IPO, neither we nor any of our subsidiaries were operated as a REIT, and we are taxed as a “C” corporation at the federal and state level. See “Part I—Item 1. Business—Corporate History and Structure.”

Unless otherwise indicated or the context otherwise requires, all information in this Annual Report on Form 10-K reflects the consummation of the Pre-IPO Transactions and references in this Annual Report on Form 10-K to “we,” “our,” “us” and the “Company” refer to La Quinta Holdings Inc. and its consolidated subsidiaries, and references to “La Quinta Holdings Inc.” and the “Registrant” refer only to La Quinta Holdings Inc. exclusive of its subsidiaries.

As of December 31, 2013, four of our La Quinta-branded hotels were designated as assets held for sale and the results of their operations together with the operations of the 29 hotels sold during 2013, have been classified as discontinued operations (collectively, the “Hotels Designated for Sale”). Sales of these four hotels closed in February 2014.

Presentation of historical non-financial data.  Unless otherwise indicated or the context otherwise requires, operating and other non-financial data, including number of hotels and related data, disclosed in the sections of this Annual Report on Form 10-K other than the Financial Statement Sections (as defined below):

 

reflects the combined and consolidated business and operations of the Predecessor Entities; and

 

treats the Previously Managed Portfolio as owned hotels, which were acquired by the Predecessor Entities at the time of the IPO.

Presentation of combined financial information and certain other non-financial data. Unless otherwise indicated, or the context otherwise requires, for periods prior to the completion of the IPO, (i) the historical financial data in this Annual Report on Form 10-K and (ii) the operating and other non-financial data, including number of hotels and related data, disclosed in “Part II—Item 6. Selected Financial Data” and “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (collectively, the “Financial Statement Sections”):

 

reflects the combined and consolidated business and operations of the Predecessor Entities (including the management company, which was consolidated for financial reporting purposes); and

 

treats the Previously Managed Portfolio as franchised and managed hotels.

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Terms Used in this Annual Report on Form 10-K

The following are definitions of certain terms used in this Annual Report on Form 10-K:

 

“ADR” or “average daily rate” means hotel room revenues divided by total number of rooms sold in a given period;

 

“Blackstone” means The Blackstone Group L.P. and its affiliates;

 

“Comfort” refers to Comfort Inns and Comfort Suites collectively;

 

“comparable hotels” means hotels that: were active and operating in our system for at least one full calendar year as of the end of the applicable period and were active and operating as of January 1st of the previous year, except for (i) hotels that sustained substantial property damage or other business interruption, (ii) owned hotels that become subject to a purchase and sale agreement, or (iii) hotels in which comparable results are otherwise not available. Management uses comparable hotels as the basis upon which to evaluate ADR, occupancy, RevPAR and RevPAR Index on a system-wide basis and for each of our reportable segments;

 

“franchised hotels” refers to La Quinta-branded hotels which are owned and operated by third party franchisees under franchise agreements with us;

 

“Hampton” refers to Hampton Inns and Hampton Inn & Suites collectively;

 

“main STR competitive set” refers to Comfort, Holiday Inn Express, and/or Hampton, the brands most often included in our STR competitive sets;

 

“occupancy” means the total number of rooms sold in a given period divided by the total number of rooms available at a hotel or group of hotels;

 

“owned hotels” and “owned portfolio” refer to our hotels located on properties in which we have an ownership interest or leasehold interest;

 

“pipeline” means our portfolio of future La Quinta-branded hotels, each of which is represented by an executed franchise agreement;

 

“pre-IPO owners” refers to Blackstone and the members of our management and consultants that owned, directly or indirectly, interests in the Predecessor Entities;

 

“RevPAR” or “revenue per available room” means the product of the ADR charged and the average daily occupancy achieved;

 

“RevPAR Index” measures a hotel’s fair market share of its competitive set’s revenue per available room. See “Market and Industry Data”;

 

“system-wide” refers collectively to our owned, franchised and managed hotel portfolios; and

 

“team members” refers to our employees at our owned hotels and the employees of our franchisees at our franchised hotels.

Market and Industry Data

Within this Annual Report on Form 10-K, we reference information and statistics regarding the hotel industry and various segments within such industry. We have obtained this information and statistics from various independent third-party sources, including independent industry publications, reports by market research firms and other independent sources. Smith Travel Research (“STR”) is the primary source for third-party market data and industry statistics. STR does not guarantee the performance of any company about which it collects and provides data. Nothing in the STR data should be construed as advice. Some data and other information are also based on our good faith estimates, which are derived from our review of internal surveys and independent sources. We believe that these external sources and estimates are reliable, but have not independently verified them.

RevPAR Index, which measures a hotel’s fair market share of its competitive set’s revenue per available room, is stated as a percentage and is calculated for a hotel by comparing the hotel’s RevPAR to the aggregate RevPAR of a group of competing hotels generally in the same market (referred to as a “competitive set”); and when presented for a group of hotels is a weighted average of the individual hotel results. The manager for each of our owned hotels and each franchisee exercises discretion, subject to (i) adherence to certain guidelines published by STR and described below and (ii) review by La Quinta management to ensure system-wide consistency, in identifying the competitive set of properties for each such hotel. They consider such factors as physical proximity, competition for similar customers, services and amenities, quality and average daily rate, with location being the most significant factor. Competitive set makeup is initially determined when a new hotel enters our system and is reviewed for continuing appropriateness as non-La Quinta hotels enter and leave our markets. Each La Quinta hotel’s competitive set complies with the

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following four STR published guidelines, each of which places limitations on properties that may be included in a competitive set: (1) each competitive set must include a minimum of three participating properties, in addition to the subject property; (2) no single property or brand can account for more than 40% of the total participating room supply of a competitive set, excluding the rooms of the subject property; (3) no single company can account for more than 60% of the total participating room supply of a competitive set, excluding the rooms of the subject property; and (4) each competitive set must include a minimum of two companies other than that of the subject property. We may include certain competitors in a hotel property’s competitive set and those competitors may or may not include our hotel in their competitive set. We provide, for each La Quinta hotel, our proposed competitive set to STR for publication. STR confirms that each proposed competitive set complies with their published guidelines and then uses that information, along with ADR and RevPAR for each such hotel (which ADR and RevPAR may be calculated differently than we or our competitors do for internal purposes) to calculate RevPAR Index. STR calculates RevPAR Index for the current period and prior periods based on the competitive sets existing as of the date of the STR report for the current period of such report. Accordingly, our future filings may disclose historical RevPAR Index for prior periods that differ from those disclosed in this Annual Report on Form 10-K.

 

 

PART I

Item 1.

Business

Overview

Our system-wide portfolio, as of December 31, 2016, consisted of 888 hotels representing approximately 87,200 rooms located predominantly in 48 states across the U.S., as well as in Canada, Mexico, Honduras and Colombia, of which 322 hotels were owned and operated and 566 were franchised. We also have a pipeline of 248 franchised hotels as of December 31, 2016, to be located in the United States, Mexico, Colombia, Nicaragua, Guatemala, Chile and El Salvador (90% of which represents new construction as opposed to the conversion of an existing hotel).

As illustrated by the following table, from 2006 to December 31, 2016, we have grown our total number of owned and franchised hotels worldwide from 569 properties to 888 properties.

 

 

 

(1)

Information as of last day of each fiscal year presented. Certain of our owned hotels were previously operated by us as non-La Quinta hotels and are not included in this table until such time as they were converted to La Quinta-branded hotels. From the Acquisition (defined below) through December 31, 2016 and primarily in 2006, we converted 128 such hotels.

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La Quinta was founded in San Antonio, Texas in 1968 and has a 48-year history of owning and operating hotels. From 1973 to January 2006, we operated through our predecessors as a public company. In January 2006, we were acquired by Blackstone (the “Acquisition”). At the time of the Acquisition, we had a total of 425 hotels, of which 267 were owned hotels and 158 were franchised hotels. Since the Acquisition and through December 31, 2016, we expanded our franchise system by over three times, growing from 158 franchised hotels to 566 franchised hotels. We also established a franchise presence in Mexico, Central America and South America, with 38 hotels either open or in the pipeline in those regions.

Our brand and hotels

We operate our business across two segments: owned hotels and franchise and management. These segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by our CEO, who is our chief operating decision maker, to assess performance and make decisions regarding the allocation of resources. For more information regarding our segments, see “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 18: “Segments” in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The table below sets forth the number of hotels and rooms as of December 31, 2016:

 

 

 

Owned

 

 

Franchised

 

 

Total

 

 

 

# of hotels

 

 

# of rooms

 

 

# of hotels

 

 

# of rooms

 

 

# of hotels

 

 

# of rooms

 

Texas

 

 

70

 

 

 

9,441

 

 

159

 

 

 

11,746

 

 

229

 

 

 

21,187

 

Florida

 

 

50

 

 

 

6,125

 

 

 

23

 

 

 

2,062

 

 

 

73

 

 

 

8,187

 

California

 

 

21

 

 

 

3,127

 

 

 

36

 

 

 

3,179

 

 

 

57

 

 

 

6,306

 

Georgia

 

 

14

 

 

 

1,696

 

 

 

24

 

 

 

1,866

 

 

 

38

 

 

 

3,562

 

Louisiana

 

 

13

 

 

 

1,796

 

 

 

17

 

 

 

1,103

 

 

 

30

 

 

 

2,899

 

Colorado

 

 

15

 

 

 

1,894

 

 

 

13

 

 

 

1,134

 

 

 

28

 

 

 

3,028

 

Tennessee

 

 

8

 

 

 

988

 

 

 

19

 

 

 

1,495

 

 

 

27

 

 

 

2,483

 

Oklahoma

 

 

2

 

 

 

236

 

 

 

23

 

 

 

1,695

 

 

 

25

 

 

 

1,931

 

Illinois

 

 

8

 

 

 

1,097

 

 

 

10

 

 

 

876

 

 

 

18

 

 

 

1,973

 

New Mexico

 

 

8

 

 

 

914

 

 

 

11

 

 

 

758

 

 

 

19

 

 

 

1,672

 

Other states

 

 

113

 

 

 

13,922

 

 

 

219

 

 

 

18,676

 

 

 

332

 

 

 

32,598

 

United States Total

 

 

322

 

 

 

41,236

 

 

 

554

 

 

 

44,590

 

 

 

876

 

 

 

85,826

 

Mexico

 

 

 

 

 

 

 

 

8

 

 

 

1,132

 

 

 

8

 

 

 

1,132

 

Canada

 

 

 

 

 

 

 

 

2

 

 

 

133

 

 

 

2

 

 

 

133

 

Honduras

 

 

 

 

 

 

 

 

1

 

 

 

110

 

 

 

1

 

 

 

110

 

Colombia

 

 

 

 

 

 

 

 

1

 

 

 

82

 

 

 

1

 

 

 

82

 

Total

 

 

322

 

 

 

41,236

 

 

 

566

 

 

 

46,047

 

 

 

888

 

 

 

87,283

 

We own our owned hotels through wholly owned subsidiaries except for one hotel, which is owned by a joint venture in which we own a controlling interest. Generally, our owned hotels include the land, related easements and rights, buildings, improvements, furniture, fixtures and equipment, though certain of our owned hotels are located on land leased by us pursuant to ground leases with third parties.

We own, operate and franchise all of our hotels under the La Quinta Inn, La Quinta Inn & Suites and LQ Hotel trademarks. As of December 31, 2016, the hotels in our system consisted of 673 La Quinta Inn & Suites hotels, which include guest suites and are generally our newer hotels with interior corridors, 205 La Quinta Inns, 110 of which include interior corridors and 10 LQ Hotels, which is the primary trademark under which our hotels are identified in Mexico and Central and South America. When STR’s price points by segment are applied to each of our hotels, approximately 31% would be considered upper-midscale, approximately 51% would be considered midscale, approximately 8% would be considered economy (principally our owned hotels) and the balance would be considered in the segments above upper-midscale. We are focused on providing clean and comfortable guest rooms at affordable prices in convenient locations. Our hotels typically include common areas with amenities such as a great room (including breakfast seating area, lobby with seating area and business center), swimming pool and vending areas, and typically offer a complimentary breakfast. Our guest mix includes both business and leisure travelers. As of December 31, 2016, the hotels in our owned portfolio have an average age of 28 years, and the hotels in our franchise portfolio have an average age of 14 years, with over 30% being in our system less than five years.

Current designs for new La Quinta hotels are typically four story structures and approximately 56,900 square feet with approximately 85 to 120 interior corridor guest rooms. International La Quinta hotels generally also include expanded breakfast offerings, full-service restaurants and between 85 and 165 rooms. Certain of our owned hotels are larger than our typical design. For

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example, our hotel in downtown Chicago, which was converted from office space to a La Quinta-branded hotel in 2009, is approximately 141,000 square feet with 241 guest rooms. All new franchised hotels are La Quinta Inn & Suites in the U.S., and Canada. Franchised hotels in Mexico, Central and South America, use the “LQ Hotel” as the primary mark.  

At both our La Quinta Inn & Suites and La Quinta Inn hotels in the U.S. and Canada, our guests typically have convenient access to food service at nearby freestanding restaurants, which include many national chains. We own approximately 60 buildings that are adjacent to some of our owned hotels, which we generally lease to third party restaurant operators.

We regularly repair and maintain our owned hotels, and annually review each hotel to assess the need for renovations based on asset condition.  Maintenance and renovation capital expenditures are comprised of repair and maintenance in ordinary course operations, customary cycle renovations and ongoing maintenance of our technology infrastructure in order to keep it current. Customary cycle renovations can range from design renovations to full renovations and can include, among other things, replacement of mattresses, seating, fixtures or carpet, repainting, window treatments and improvements in the common areas. We maintain a variety of designs and décor scheme options for our rooms and select the room scheme for a given hotel’s cycle renovation based on market factors and our review of the optimal return for the capital invested.

On an ongoing basis, we evaluate additional capital projects such as accelerating renovation cycles for our owned hotels as well as investing in technology innovation that enhances our guest experience, and we will invest in those projects that we believe will provide an appropriate return on capital invested and increase RevPAR Index. In 2016, we undertook a review of our owned hotel portfolio to identify properties that, with the appropriate scope of capital investment and renovation, have the opportunity to re-position upwards within a market, capturing occupancy and additional rate while being measured against new, higher-quality competitive sets. Renovations of approximately 50 properties identified in this review commenced in the fourth quarter of 2016.  For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations―Key components and factors affecting our results of operations―Revenues.”

In addition, our franchise agreements allow us to require franchised hotels to replace furnishings every five to seven years and require upgrades to meet then-current brand standards at any time, but under these agreements, we may not require substantial upgrading or remodeling more often than once every five years.

We continually evaluate our owned hotel portfolio and, from time to time, we may sell certain hotels or groups of hotels that we determine are not consistent with our overall brand experience. In 2016, as part of a strategic review of our owned hotel portfolio, we identified approximately 50 hotels as candidates for sale and entered into agreements to sell six of those hotels, three of which were sold during 2016. Also in 2016 we entered into agreements to sell five additional owned hotels, three of which were sold during 2016 and two of which were sold subsequent to 2016 year-end. In 2015, we conducted a review of our portfolio of owned hotels and subsequently entered into a definitive purchase and sale agreement for 24 of our owned hotels, 11 of which were sold in the fourth quarter of 2015 and the remaining 13 were sold throughout 2016.  

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The following table summarizes our key operating statistics for our owned, franchised and managed hotels for the past five years (1):

 

 

 

As of and for the year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

Number of Hotels in Operation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Owned Hotels(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

La Quinta Inn & Suites (interior corridor)

 

 

180

 

 

 

183

 

 

 

184

 

 

 

184

 

 

 

185

 

La Quinta Inn & Suites (exterior corridor)

 

 

3

 

 

 

3

 

 

 

3

 

 

 

3

 

 

 

3

 

La Quinta Inns (interior corridor)

 

 

46

 

 

 

51

 

 

 

56

 

 

 

56

 

 

 

56

 

La Quinta Inns (exterior corridor)

 

 

93

 

 

 

104

 

 

 

110

 

 

 

114

 

 

 

142

 

Total Owned

 

 

322

 

 

 

341

 

 

 

353

 

 

 

357

 

 

 

386

 

Franchised/Managed Hotels

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

La Quinta Inn & Suites (interior corridor)

 

 

486

 

 

 

459

 

 

 

417

 

 

 

373

 

 

 

349

 

La Quinta Inn & Suites (exterior corridor)

 

 

4

 

 

 

3

 

 

 

3

 

 

 

5

 

 

 

3

 

La Quinta Inns (interior corridor)

 

 

64

 

 

 

77

 

 

 

84

 

 

 

89

 

 

 

92

 

La Quinta Inns (exterior corridor)

 

 

2

 

 

 

4

 

 

 

10

 

 

 

10

 

 

 

5

 

LQ Hotel (interior corridor) (2)

 

 

10

 

 

 

2

 

 

 

 

 

 

 

 

 

 

Total Franchised/Managed

 

 

566

 

 

 

545

 

 

 

514

 

 

 

477

 

 

 

449

 

Total

 

 

888

 

 

 

886

 

 

 

867

 

 

 

834

 

 

 

835

 

Occupancy Percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Owned Hotels

 

 

65.5

%

 

 

67.0

%

 

 

66.5

%

 

 

64.4

%

 

 

62.7

%

Franchised/Managed Hotels

 

 

67.7

%

 

 

68.2

%

 

 

67.3

%

 

 

64.3

%

 

 

62.8

%

Total

 

 

66.5

%

 

 

67.5

%

 

 

66.8

%

 

 

64.4

%

 

 

62.7

%

Average Daily Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Owned Hotels

 

$

84.68

 

 

$

82.05

 

 

$

78.81

 

 

$

75.09

 

 

$

70.55

 

Franchised/Managed Hotels

 

$

92.99

 

 

$

91.08

 

 

$

88.33

 

 

$

84.96

 

 

$

81.80

 

Total

 

$

88.73

 

 

$

86.21

 

 

$

83.02

 

 

$

79.46

 

 

$

75.21

 

RevPAR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Owned Hotels

 

$

55.44

 

 

$

54.95

 

 

$

52.40

 

 

$

48.36

 

 

$

44.21

 

Franchised/Managed Hotels

 

$

62.92

 

 

$

62.15

 

 

$

59.41

 

 

$

54.61

 

 

$

51.37

 

Total

 

$

59.03

 

 

$

58.23

 

 

$

55.48

 

 

$

51.14

 

 

$

47.17

 

 

(1)

This table treats the Previously Managed Portfolio as “Company Owned Hotels.” See “Basis of Presentation in this Annual Report on Form 10-K.”

 

(2)

During the second quarter of 2016, we converted all Mexico locations to the “LQ Hotel” trademark as the primary hotel identifier, with the “La Quinta” tag line.

In addition, we have an active advisory Brand Council that includes both Company and franchisee representation and meets three to four times a year to discuss ways to strengthen our brand. Franchise representatives are elected from their geographical areas. Through the Brand Council, we often test new concepts at both owned and franchised hotels.

Our owned hotel operations

Centralized corporate services for our owned hotels include marketing, global and regional sales, revenue management, accounting, finance, treasury, tax, information systems, construction and design, purchasing, legal, risk management, human resources and training.  During 2016, we reorganized our Owned Hotels leadership to include new levels of field leadership support to provide additional operational leadership to our general managers.  These regional and district managers are responsible for the oversight of day-to-day owned hotel operations, on-site guest experience, and certain regional and local financial and other operational metrics for their assigned hotels and areas.

Each owned hotel is operated as an individual profit center, generally with an on-site general manager who oversees all day-to-day operations. Our general managers focus their attention on delivering our “Here For You” guest experience, maintaining clean and comfortable guest rooms and achieving profitable operations. Their responsibilities also include recruiting, training and supervising the hotel’s staff. A typical owned hotel has approximately 20 to 25 employees, including the general manager, housekeepers, laundry attendants, maintenance staff, front desk guest service representatives and a night auditor. We also utilize assistant managers to support the general managers at certain hotels, which provides a pool of experienced candidates to fill open general manager positions as needed.

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Our general managers receive a comprehensive five-week training program through LQUniversity, our nationally recognized training and development program. Our team of trainers has both training and operational experience. LQUniversity offers comprehensive training solutions to enable our owned hotels to operate more successfully and deliver on our “Here For You” guest experience. Many of these same programs are made available to franchisees.

We use target-driven operational budgets, prepared by our general managers, that are deployed after review with our senior management. Under the direction of our revenue management team, the hotel general managers, field leadership team and senior management continually review our room rates and price rooms into the demand curve based on the prevailing market conditions at each owned hotel. Each general manager can earn financial incentives based upon achieving favorable results in comparison to revenue and profit targets and upon achieving targeted goals in their RevPAR Index and Net Promoter scores for their respective hotel. Our Net Promoter score, which measures a guest’s intent to recommend our brand, is calculated through guest satisfaction surveys that are conducted by an independent market research company. These surveys provide guest feedback on each of our hotels. Financial incentives reward our general managers for improvements in Net Promoter scores which are indicative of guest satisfaction levels. From time to time, we may adjust the labor model at specific hotels in order to help ensure consistent delivery of our guest experience. We believe this operating model and incentive program increase our general managers’ focus on operating efficient, well-maintained and profitable hotels and on delivering a “Here For You” guest experience.  

Our franchising operations

Our franchising activities include franchising both newly constructed hotels and existing hotels converted to meet our brand standards. La Quinta Inn & Suites represents the current standard for La Quinta in the United States and Canada and has largely been the exclusive focus of franchise growth since 2007. Franchised hotels in Mexico, Central, and South America utilize the LQ Hotel primary trademark.  As of December 31, 2016, there were 566 open and operating franchised La Quinta lodging facilities in the United States, Canada, Mexico, Honduras and Colombia and a pipeline of 248 locations, each represented by an executed franchise agreement. Twenty-eight of these properties are to be located in Mexico, Colombia, Nicaragua, Guatemala, Chile and El Salvador. The remaining properties are to be located throughout the United States, with 69 in Texas, 16 in Florida, 15 in California, 14 in New York, and the remaining 106 properties dispersed among 29 other states.

Franchising sales

We believe that hotel owners and operators choose to become a franchisee of a lodging brand based primarily on the perceived value and quality of that brand and the franchisor’s services, and the extent to which affiliation with that franchisor may increase the franchisee’s profitability. Because a significant portion of the costs of owning and operating a hotel are generally fixed, increases in revenues generated by affiliation with a franchise lodging chain can improve a hotel’s financial performance. We offer our franchisees our strong brand awareness supported by well-developed infrastructure that includes reservation, national advertising, training and systems-related services.

Franchising agreements and fees

A prospective franchisee is required to pay us a nonrefundable application fee of $5,000 when an application is made for a La Quinta franchise. We evaluate franchise applicants on the basis of their hotel operating experience and ability, financial resources strength and credit history, among other factors. Our current form of franchise agreement provides that approved franchise applicants will pay us an initial fee of $55,000, against which the application fee is credited, for up to 100 authorized guest rooms, plus $550 per guest room over 100. Historically, we have modified this initial fee to adapt to differing circumstances, such as the size and type of hotel facility, the location of the hotel site, and the experience and creditworthiness of the applicant. During our fiscal year ended December 31, 2016, franchisees were charged initial fees up to $59,400.  For certain of these agreements, the Company determined that the circumstances warranted waiving the initial fee in its entirety. Additionally, a franchisee may expand the number of guest rooms in a hotel with our approval, which generally requires payment of the then-standard per room initial fee per guest room. A franchisee may also transfer ownership of a hotel with our approval, which may require payment of a transfer fee.

Approved franchise applicants are granted rights (subject to the terms of their franchise agreement) to operate their hotels under our trademarks and system, to obtain reservations through our central reservation system and to use our hotel designs, operating systems and procedures, among other rights. Our franchise agreements generally restrict our ability to open a new owned or franchised hotel in a limited area near the franchised hotel, which can range from several city blocks in an urban area to several square miles in less populated areas.

Our franchise agreements for existing franchised hotels in the United States generally require a franchisee to pay a royalty fee of 4.0% of gross room revenues (as defined in the franchise agreement) during the first two years of operating under our brand and 4.5% of gross room revenues for all periods thereafter. Our current form of franchise agreement for newly franchised hotels in the United States requires a franchisee to pay a royalty fee of 4.5% of gross room revenues during the first two years of operating under our brand

8


and 5.0% of gross room revenues for all periods thereafter. After the first two years, a U. S. franchisee can receive a rebate of 0.5% of gross room revenues if, in any calendar year, the franchised hotel achieves superior results in guest satisfaction as measured and defined by results of surveys conducted by an independent market research firm. However, our current form of franchise agreement for newly franchised hotels outside of the United States does not include a royalty fee ramp up or rebates for guest satisfaction results. In addition to royalty fees, a franchisee generally pays, as a percentage of gross room revenues, a marketing fee of 2.5% for brand advertising and other promotional efforts and a reservation fee of 2.0% to support the cost of reservation services provided to the hotels. Franchisees also pay us other fees, such as fees to participate in our online LQConnect intranet, computer related fees, attend training programs and participate in our La Quinta Returns program. We also provide franchisees the option to purchase revenue management services for their hotel, at fees ranging from $800 to $5,000 per month depending on the size of the hotel and services provided.

Our franchise agreements generally have an initial term of 20 years, and, as of December 31, 2016, the average remaining term of our existing franchise contracts for open locations was approximately 14 years. We, and the franchisee, generally have a right to terminate the agreement on the tenth and fifteenth anniversary of the opening date of the franchised hotel and, if the hotel was converted from a competing brand, additionally on the fifth such anniversary. The franchisee may also terminate the agreement if the hotel is not meeting predetermined occupancy levels, which may, under certain circumstances, require payment of specified termination fees to us. Additionally, we have the right to terminate a franchise agreement if a franchisee fails to meet our quality standards or fulfill other contractual obligations, which may, under certain circumstances, require payment by the franchisee of specified liquidated damages to us. Since the inception of our franchising program, excluding temporary franchised locations, we have retained approximately 82% of our franchise properties and the majority of the terminations were initiated by us. During the fiscal year ended December 31, 2016, 25 franchise agreements for open locations terminated. Seventeen of these terminations were initiated by us, seven were initiated by the franchisee, and one expired by its terms. In addition, we had four temporary franchise agreements that terminated. The temporary franchise agreements were provided to owners of disposition properties (who were given the option to continue using the La Quinta brand while they transitioned to a new brand) which expired by their terms or were mutually terminated.

Franchising operations support

As of December 31, 2016, the average size of our franchised hotels is approximately 81 rooms. Before a franchised hotel opens, we inspect the hotel to confirm that it meets our quality specifications. Once a franchised hotel opens, we strive to provide continued sales support and operational assistance. Each franchised hotel must adhere to rigorous brand standards of design, maintenance and guest service and is inspected periodically by a franchise service director to assure that the franchised hotel adheres to our brand standards. Competition for franchise agreements, however, may require us to reduce the level of hotel improvements required for a particular hotel.

Financial assistance and incentives to new franchisees

We do not presently have a company-funded financial assistance program for franchisees. However, on occasion we have provided, and at our discretion may occasionally provide in the future, franchisees with various forms of financial incentives or assistance upon varying terms, depending upon a number of factors. These factors include: the number of hotels involved and their locations, the number of rooms involved, relevant market conditions and other factors that may warrant providing financial incentives or assistance.

Our pipeline

As of December 31, 2016, we had a pipeline of 248 future franchised hotels, representing approximately 23,100 rooms. Each hotel in our pipeline is represented by an executed 20-year franchise agreement. Ninety percent of our pipeline represents new construction and the remaining 10% represents the conversion of an existing hotel into a La Quinta-branded hotel. As of December 31, 2016, approximately 29% of the new construction and conversion of hotels in our pipeline had commenced. However, based on historical experience, while converted hotels in our pipeline can generally become operational between 12 to 18 months from the date of execution of the franchise agreement, and newly constructed hotels in our pipeline can generally become operational between 36 to 48 months from the date of execution of the franchise agreement, openings may be delayed, or abandoned, due to economic conditions, weather, construction and permit delays and other factors. Moreover, the commitments of owners and developers with whom we have agreements are subject to numerous conditions, and the eventual development and construction of our pipeline not currently under construction is subject to numerous risks, including, in certain cases, the ability of the franchisee to obtain governmental and regulatory approvals and adequate financing.

Additionally, because revenues from franchised hotels are principally derived from franchise fees rather than room rentals, as we grow our system by increasing the number of franchised hotels, our revenues and expenses will increase at a significantly slower rate than if we were growing our system through an increase in number of owned hotels.

9


As of December 31, 2014, 2015 and 2016 our pipeline numbered 207, 228 and 248 future franchised hotels, respectively. The size of our pipeline is a function of both the number of new agreements signed and the pace of opening hotels in the pipeline and, accordingly, will fluctuate over time. Moreover, we periodically evaluate our pipeline to determine whether to terminate any contracts and/or seek new franchisees in any particular locations. We opened 23% of the hotels in our pipeline as of the end of 2014 in 2015 and 18% of the hotels in our pipeline as of the end of 2015 in 2016.

Our mission

We are guided by two primary goals that we believe contribute to a high level of employee and guest engagement:

1. Live our core values, which are defined by our people:

 

People : People are the heart of everything we do. Make coming to work the best part of their day. Treat everyone with respect.

 

Passion : Approach each work day with a sense of ownership and personal pride. Always do “whatever it takes.”

 

Integrity : Always do the right thing, even when no one is watching.

 

Excellence : Do ordinary things extraordinarily well. Good is not good enough; strive for the best in all you do.

 

Unique : La Quinta is big but acts small. We are not afraid to be different.

2. Delight our guests with an experience that makes them feel:

 

Assured : Secure, confident they made the right choice with La Quinta.

 

Settled in : Comfortable, relaxed in their surroundings.

 

Optimistic : Ready to take on the new day—whatever it holds.

Our two goals can be summarized using a single phrase—“Here For You.” It is not a program or a slogan, but a way of life at La Quinta that is built upon the purpose and core values that guide us. Our values are delivered by people who have a unique passion to enhance our guests’ experience and create enduring relationships by striving for excellence and serving with integrity every day. “Here For You” creates meaningful and differentiated experiences that are uniquely La Quinta and provides us with a powerful business advantage. “Here For You” provides valuable insight into not only what motivates our team members and drives them to perform and innovate; it also helps to inform our strategies through a better understanding of guest preferences which drives business results.

Our marketing operation

Brand marketing . We implement a brand marketing strategy by using consumer insight studies and guest feedback. Our strategy to reach and influence our marketplace is shaped by our goals to:

 

drive brand awareness and perception that will generate first-time and repeat bookings and loyalty;

 

focus communications and media on the most relevant guest segment to increase revenue and penetration over our competitive market segment;

 

deliver on our distinctive positioning via break-through advertising;

 

create brand differentiation through guest insight and innovation; and

 

support and evolve our “Here For You” guest experience.

The La Quinta brand is promoted through national, regional and local marketing. We advertise our brand on television through national cable and spot TV as well as national network radio, on the web through online advertising, social media, search marketing and email campaigns and in print through newspapers and magazines. We also conduct direct marketing to potential and former guests, including La Quinta Returns members. Our marketing is primarily supported through fee contributions, calculated as a percentage of gross room revenues, from our owned and franchised hotels to our marketing programs, including La Quinta Returns and the Brand Marketing Fund (“BMF”).

Our international marketing efforts are intended to reinforce general brand awareness while targeting local market needs. With eight hotels opened in Mexico, a portion of the fees paid to the BMF by Mexico franchisees will be devoted to a Mexico marketing program.

10


We have also launched a system-wide military initiative that supports hiring of military veterans, community outreach, franchise growth, sourcing and La Quinta Returns loyalty program tiers geared towards the military community.

La Quinta Returns.  As of December 31, 2016, we had over 13 million members in our La Quinta Returns loyalty program, approximately three million of which we consider active members (which generally refers to our loyalty program members who earn or redeem La Quinta Returns points within the previous 18 months). We believe our loyalty program is favored by our members because of:

 

rapid accumulation of rewards, including free nights at La Quinta locations, free nights at thousands of resort properties worldwide, airline miles and credits, magazine subscriptions, and gift cards from national restaurant chains and retailers;

 

rapid achievement of Gold and Elite status, after as few as 10 nights in a calendar year;

 

instant Gold status for military personnel and their families and for our La Quinta Returns Visa Card Holders; and

 

ability for Visa Card Holders to redeem their La Quinta Returns points anytime using their mobile phones for everyday purchases at over one million U.S. retail locations, including places like grocery stores, restaurants and coffee shops.

Our Returns program helps expedite the reservation and check-in process and improves administrative efficiency of our reservation agents and front desk staff by providing a personal profile of each Returns member. This profile includes information such as email and mailing address and preferred method of payment that we use to market directly to Returns members.

Our sales operation

Sales.  As of December 31, 2016, we employed a direct sales force consisting of approximately 70 professionals. The direct sales force consists of approximately 35 global sales managers, funded by the BMF, who call on Fortune 500 companies and mid-tier businesses to increase our corporate travel base. For the year ended December 31, 2016, corporate accounts, including government and military accounts, generated approximately 24% of system-wide consumed room revenues. These accounts typically have a significant number of travelers in the regions in which we operate and need a high volume of room-nights. Global sales managers also seek to increase room sales through inclusion in approved or preferred lodging lists of corporate travel managers and travel agencies operating on a national basis. We also maintain and continue to seek alliances with national travel and consumer organizations, such as AAA and AARP, and offer special rates or promotions to such organizations’ guests. In addition to the global effort, approximately 32 of our sales managers, funded by our owned hotels, are based in our regional markets. These regional sales managers call on local businesses, governmental agencies, hospitals and other organizations that can generate room-nights for our hotels.

The following graph reflects the percentage of comparable system-wide consumed room revenues that is attributable to each of our internal and external distribution channels in 2016.

 

11


Property direct and call center.  Property direct reservations are made by guests calling the property directly or “walking in” to the property without a previously made reservation. Our call center consists of our own central reservation system, as well as toll-free numbers to accept reservations. Our reservation system provides reservation agents with information about hotel locations, available rooms and prices in order to assist guests in reserving rooms. Our reservations agents are trained in telephone sales techniques. Through our computer network, we continually update the number of rooms sold at each hotel to maximize the sale of available rooms through either the individual hotel or the reservation center.

LQ internet & mobile (LQ.com).  We provide guests with the ability to shop and reserve rooms on the Internet through our brand website, www.LQ.com, and through mobile via the La Quinta app and the LQ Instant Hold platform. The LQ Instant Hold feature (patent pending) permits our guests to use a mobile application to hold a room for up to four hours from any smart device by just entering a phone number. Our website and app provide guests with real-time information through hotel micro-sites that contain Trip Advisor scores, location, descriptions, amenities, special promotions, rates and availability for each La Quinta hotel. Hotel photographs are prominently displayed on the hotel information pages along with dynamic maps and driving directions, information on nearby attractions and local weather information. Multiple search options are offered, including searches by city, attraction, zip code and trip routing from origin or destination.  Guests who book through www.LQ.com and our mobile site can also take advantage of our innovative and industry-leading Ready For YouTM option and receive a notice on their smart devices that their room is ready for check in.

Online travel agency and global distribution systems.  In addition to our proprietary brand website, we distribute our lodging product via third party travel websites. We market our reservation services to both online and offline travel agents and corporate travel planners who may make reservations through global airline reservation distribution systems. We also have specialized reservation agents for large group sales, motor coach sales and special service bookings.

Our information systems

We have created an innovative technology deployment methodology that has enabled a collaborative environment where cross departmental business partners work very closely and effectively with technology teams and third parties to innovate, design and deploy technology-enabled improvements.

We employ an appropriate blend of in-house development of technology solutions and third-party best of breed software-as-a-service providers. We have also moved away from deployment of technology hosted at hotels and moved key systems such as hotel management systems, phone switches, back office, financials and HR functions to Cloud based environments, resulting in efficient and scalable IT operating and maintenance costs.

Our trademarks

All of the intellectual property used for La Quinta hotels is owned by La Quinta Worldwide, LLC, a wholly owned subsidiary of the Registrant. “La Quinta,” “LQ,” “Returns,” “LQ Hotel” and the sunburst Q symbol are our primary trademarks. Our primary trademarks and many secondary marks are registered in various combinations of word and logo marks with the U.S. Patent and Trademark Office (“USPTO”) and the trademark offices of various other countries for hotel and motel services and other trademark classes. In the United States, certain of our marks are subject to an agreement with the owner of a resort known as “La Quinta Resort & Club,” located in La Quinta, California. The agreement, among other things, geographically divides use of the trademark “La Quinta,” granting the resort owner the exclusive right to use the mark “La Quinta” in connection with facilities located within a 37 mile radius of the La Quinta Resort & Club, subject to certain exceptions, and the right to open three more facilities using certain of our marks, subject to certain exceptions, conditions and restrictions. As between the resort owner and us and our affiliates, we and our affiliates have the right to use the trademark in all other areas. The agreement is perpetual in duration.

Certain pending applications by us for registrations of variations of our primary marks, including certain logo forms, have been suspended by the USPTO pending resolution of litigation and related USPTO proceedings brought by us against the owners of a chain of hotels in Mexico called “Quinta Real.” After a trial on the merits in a federal court in Tucson in 2012, Quinta Real was generally prohibited from using the Quinta name to expand into the United States. The decision was appealed to the 9th Circuit U.S. Court of Appeals. In August 2014, the 9th Circuit U.S. Court of Appeals affirmed the finding of trademark infringement; however, the Court concluded that the district court did not provide a sufficient analysis balancing the equities in its decision to grant a permanent injunction and, therefore, remanded the case to district court for further analysis on that issue. The district court accepted additional evidence and legal arguments from the parties and in 2015 once again entered a permanent injunction in favor of La Quinta. Quinta Real appealed that decision. All briefs in the second appeal were filed and the 9th Circuit scheduled oral arguments in the case.  Rather than proceed to oral argument, Quinta Real has dismissed its appeal and we have mutually dismissed the USPTO proceedings.   The injunction has become permanent and we expect that the pending applications will ultimately proceed to registration.

We consider all of these trademarks and the associated name recognition to be important to our business.

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Our employees

As a service-oriented business, our employees are important to our success. Recruiting for general managers and corporate office employees is coordinated through our corporate human resources department. All owned hotel employees, including hourly employees, receive training through LQUniversity when hired as well as ongoing training to improve their skills. Our online training system provides consistent and effective orientation, training and testing across our brand. Prior to assuming responsibility for a hotel, our general managers participate in a three-week training program that emphasizes operations, hospitality, rate management, legal and risk management issues, interviewing, employee relations, training and budgeting. Within 120 days of hire, new managers also attend a one-week training program which is conducted at the Company’s headquarters which is focused on reinforcing the core competencies of the position as well as delivering excellence in product and service quality.

We provide all of our full-time employees and their families, including hourly hotel employees, the opportunity to participate in a benefits package, which includes health, dental and vision coverage. We believe these benefits provide a competitive advantage in recruiting hourly hotel employees, as compared to competing select-service hotels. Our full-time employees are also able to earn financial incentives based on achieving targeted goals, such as RevPAR Index, profitability, Net Promoter scores and personal and departmental development goals. In addition, recognition programs have been established to acknowledge our employees’ outstanding service and achievement. We believe our scale and size also provide career opportunities for our employees to advance within the organization.

As of December 31, 2016, we employed 7,333 employees. Of these employees, 6,504 were full-time and 829 were part-time. Four hundred fifteen were employed as corporate associates and 6,918 were employed at our hotels. Our employees are not currently represented by labor unions, and we have never experienced an organized work stoppage. We believe that ongoing labor relations with our employees are good.

Competition

As of December 31, 2016 the U.S. hotel sector comprised approximately 54,580 hotels with approximately 5.1 million rooms. Of these rooms, approximately 70% were affiliated with a brand. The hotel industry is highly fragmented, with no one entity controlling a majority of hotel rooms in the U.S.

La Quinta is a select-service hotel brand that competes primarily against other select-service hotels in both the upper-midscale and the midscale segments, and we consider our main STR competitive set to be Comfort, Holiday Inn Express and Hampton. However, our owned and franchised hotels generally operate in markets that contain numerous competitors, including a wide range of lodging facilities offering full-service, select-service and all-suite lodging options. Hotels in other market segments, such as full-service hotels, may lower their rates to a level comparable to those of select-service hotels such as ours that, in turn, may further increase competitive pressure in our markets. Our owned and franchised hotels generally compete for guests on the basis of room rates, quality of accommodations, name recognition, service levels, convenience of locations and reward program offerings.  We have also seen the emergence of a sharing economy with the increasing availability of online short term rentals.  Additionally, an increasing supply of hotel rooms in La Quinta’s market segment, and consolidations in the lodging industry generally, have resulted in the creation of several large, multi-branded hotel chains with diversified operations and greater marketing and financial resources than we have, which has increased competition for guests in the markets in which our owned and franchised hotels operate.

We compete for franchise agreements based primarily on brand name recognition and reputation, the room rate that can be realized, royalty fees charged and other contract terms. Some of our competitors may have substantially greater marketing and financial resources, greater brand distribution and awareness and/or greater financial incentives than we do. Other competitive factors for franchise agreements include relationships with hotel owners and investors, including institutional owners of multiple hotels, availability and affordability of financing, marketing support, reservation and e-commerce system capacity and efficiency and the ability to make investments that may be necessary to obtain franchise agreements. The terms of our franchise agreements for each of our franchised hotels are also influenced by contract terms offered by our competitors, among other things. As a result, the terms of new franchise agreements in the future may not be as favorable as our existing franchise agreements. For example, competition may require us to reduce or change fee structures, make greater use of key money or provide other financial incentives such as loans and guarantees to franchisees and/or reduce the level of hotel improvements required to conform to brand standards. In addition, if the availability of suitable locations for new hotels decreases, planning or other local regulations change or the availability or affordability of financing is limited, the supply of suitable hotels for franchising could be diminished. Additionally, an excess supply of hotel rooms or unfavorable borrowing conditions may discourage potential franchisees from expanding or constructing new hotels, thereby limiting a source of growth of the franchise fees received by us. Our franchise agreements generally restrict our ability to open a new owned or franchised hotel in a limited area near the franchised hotel, which can range from several city blocks in an urban area to several square miles in less populated areas. If the hotels that we franchise perform less successfully than those of our competitors, if we are unable to offer terms as favorable as those offered by our competitors, or if the availability of suitable hotels is limited, our ability to compete effectively for new franchise agreements could be reduced.

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We believe we compete effectively, and our competitive position is protected due to our strong brand, owner, operator and franchisor business model and experienced management team.

Seasonality and cyclicality

The hotel industry is seasonal in nature. Generally, our revenues are greater in the second and third quarters than in the first and fourth quarters. The timing of holidays can also impact our quarterly results. The periods during which our properties experience higher revenues vary from property to property and depend principally upon location. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margins and net earnings. Additionally, our first or second quarter results may be further adversely affected by the timing of certain of our marketing production expenditures. Further, the timing of opening of newly constructed or franchised hotels and the timing of any hotel acquisitions or dispositions may cause a variation of revenue and earnings from quarter to quarter.

Environmental matters

We are subject to certain requirements and potential liabilities under various foreign, federal, state and local environmental, health and safety laws and regulations, and incur costs in complying with such requirements. These laws and regulations govern actions including air emissions, the use, storage and disposal of hazardous and toxic substances, and wastewater disposal. In addition to investigation and remediation liabilities that could arise under such laws, we may also face personal injury, property damage or other claims by third parties concerning environmental compliance or contamination. We use and store hazardous and toxic substances, such as cleaning materials, pool chemicals, heating oil and fuel for back-up generators at some of our facilities, and we generate certain wastes in connection with our operations. Some of our hotels include older buildings, and some may have, or may historically have had, dry-cleaning facilities and underground storage tanks for heating oil and back-up generators. We have from time to time been responsible for investigating and remediating contamination at some of our facilities, such as contamination that has been discovered when we have removed underground storage tanks, and we could be held responsible for any contamination resulting from the disposal of wastes that we generate, including at locations where such wastes have been sent for disposal. Some laws may regard us as having liability as an operator by virtue of how we may implement our franchise agreements, rendering us potentially responsible for addressing environmental or other conditions existing at our franchised hotels. In some cases, we may be entitled to indemnification from the party that caused the contamination, or pursuant to our franchise agreements, but there can be no assurance that we would be able to recover all or any costs we incur in addressing such problems. From time to time, we may be required to manage, abate, remove or contain mold, lead, asbestos-containing materials, radon gas or other hazardous conditions found in or on our hotels. We are required to have operations and maintenance plans that seek to identify and remediate these conditions as appropriate. Although we have incurred, and expect that we will continue to incur, costs relating to the investigation, identification and remediation of hazardous materials known or discovered to exist at our hotels, those costs have not had, and are not expected to have, a material adverse effect on our financial condition, results of operations or cash flow.

Regulation

The hotel industry is subject to extensive federal, state and local governmental regulations in the United States and the other countries in which our owned and franchised hotels operate, including those relating to building and zoning requirements and those relating to the preparation and sale of food. Hotels and their owners and operators are also subject to licensing and regulation by state and local departments relating to health, sanitation, fire and safety standards, and to laws governing their relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. In connection with the continued operation or remodeling of certain of our hotels, we or our franchisees may be required to expend funds to meet federal, state and local regulations. Any failure to obtain or maintain any such licenses or any publicity resulting from actual or alleged violations of any such laws and regulations could have an adverse effect on our results of operations. Our franchisees are responsible for compliance with all laws and government regulations applicable to the hotels they own and operate. We believe that our businesses are conducted in substantial compliance with applicable laws and regulations.

The Federal Trade Commission (the “FTC”), various states and certain foreign jurisdictions (including Canada and Mexico) regulate the sale of franchises. The FTC and the foreign jurisdictions require franchisors to make extensive disclosure to prospective franchisees but do not require registration of the franchise offer. A number of U.S. states in which we offer franchises require both registration and disclosure in connection with franchise offers and sales. In addition, several states have “franchise relationship laws” that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our franchising operations have not been materially adversely affected by such regulations, we cannot predict the effect of future regulation or legislation.

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Insurance

We maintain insurance coverage for general liability, property, including business interruption, terrorism, workers’ compensation and other risks with respect to our business for all of our owned hotels. Our insurance provides coverage related to claims arising out of the operations of our hotels. Most of our insurance policies are written with self-insured retentions or deductibles that are common in the insurance market for similar risks. These policies provide coverage for claim amounts that exceed our self-insured retentions or deductibles, subject to the terms and limits of the policies.

For our franchised locations, our franchise agreements require the properties to be insured at coverage levels generally consistent with the coverage levels under our insurance programs, including liability, property coverage, business interruption coverage and workers’ compensation insurance. In addition, our franchise agreements typically include provisions requiring the owner of the property to indemnify us against losses arising from the design, development and operation of their hotels.

Corporate History and Structure

La Quinta Holdings Inc. was incorporated in Delaware on December 9, 2013. Through our predecessors, La Quinta was founded in San Antonio, Texas in 1968. From 1973 to January 2006, we operated as a public company. In January 2006, we were acquired by Blackstone. We completed our initial public offering in April 2014 and our common stock is listed on the New York Stock Exchange under the symbol “LQ”. Our principal executive offices are located at 909 Hidden Ridge, Suite 600, Irving, Texas 75038, and our telephone number is (214) 492-6600.

The simplified chart below summarizes our corporate structure.

 

(1)

All Existing Entities other than the Previously Managed Portfolio constituted the Predecessor Entities.

Where You Can Find More Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website at http://www.lq.com as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also read and copy any filed document at the SEC’s public reference room in Washington, D.C. at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about public reference rooms. We will provide, without charge, to each person upon written or oral request of such person, a copy of this Annual Report on Form 10-K, including the financial statements and financial statement schedules included therein. You should direct requests for those documents to:

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La Quinta Holdings Inc.

909 Hidden Ridge, Suite 600

Irving, Texas 75038

Attn: Investor Relations

Tel.: (214) 492-6600

Email: investor.relations@laquinta.com

We maintain an internet site at http://www.lq.com. From time to time, we may use our website as a distribution channel of material company information. Financial and other important information regarding us is routinely accessible through and posted on our website at www.lq.com/investorrelations. In addition, you may automatically receive email alerts and other information about us when you enroll your email address by visiting the Email Notification section at www.lq.com/investorrelations. Our website and the information contained on or connected to that site are not incorporated into this Annual Report on Form 10-K.

 

 

Item 1A.

Risk Factors

In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our company and our business. Any of the following risks could materially and adversely affect our business, financial condition and results of operations. Unless the context otherwise requires, references in this “Risk Factors” section to “our hotels,” “our rooms” and similar phrases refer to hotels that we own or franchise.

Risks related to our business and industry

We are subject to the business, financial and operating risks inherent to the hospitality industry, any of which could reduce profits and limit opportunities for growth.

Our business is subject to a number of business, financial and operating risks inherent to the hospitality industry, including:

 

changes in operating costs, including energy, food, compensation, benefits, insurance and unanticipated costs resulting from force majeure events;

 

increases in costs due to inflation or other factors that may not be fully offset by price and fee increases in our business;

 

changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs;

 

the costs and administrative burdens associated with complying with applicable laws and regulations;

 

the costs or desirability of complying with local practices and customs;

 

significant increases in cost for health care coverage for employees and potential government regulation with respect to health coverage, such as costs associated with the compliance of the requirements of the Patient Protection and Affordable Care Act;

 

shortages of labor or labor disruptions;

 

the availability and cost of capital necessary for us and our franchisees to fund investments, capital expenditures and service debt obligations;

 

delays in or cancellations of planned or future development or renovation projects;

 

the quality of services provided by franchisees;

 

the financial condition of franchisees;

 

relationships with franchisees, including the risk that our franchise agreements may be terminated early;

 

changes in desirability of particular geographic locations and shortages of desirable locations for development;

 

changes in lodging preferences and travel patterns of our guests and geographic concentration of our operations and guests;

 

changes in the supply and demand for hotel services;

 

foreign tax treaties, or lack thereof, with the United States;

 

foreign exchange rate fluctuations or restructurings;

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decreased business travel as a result of improvements to the alternatives to in-person meetings, including virtual meetings hosted on-line or over private teleconferencing networks; and

 

the ability of third-party internet and other travel intermediaries to attract and retain guests.

Any of these factors could limit or reduce the prices we and our franchisees are able to charge for rooms. These factors can also increase costs or affect the ability to develop new hotels or maintain and operate existing hotels. As a result, any of these factors can reduce our profits and limit opportunities for growth.

Macroeconomic and other factors beyond our control can adversely affect and reduce demand for rooms at hotels that we own or franchise.

Macroeconomic and other factors beyond our control can reduce demand for rooms at hotels that we own or franchise. These factors include, but are not limited to:

 

changes in general economic conditions, including the severity and duration of any downturn in the U.S. or global economy and financial markets;

 

war, political conditions or civil unrest, violence or terrorist activities or threats and heightened travel security measures instituted in response to these events;

 

outbreaks of pandemic or contagious diseases, such as Zika virus, measles, Ebola, legionella bacteria, avian flu, severe acute respiratory syndrome (SARS) and H1N1 (swine flu);

 

natural or man-made disasters, such as earthquakes, tsunamis, tornadoes, hurricanes, typhoons, floods, oil spills and nuclear incidents;

 

decreased corporate or government travel-related budgets and spending and cancellations, deferrals or renegotiations of group business;

 

low consumer confidence, high levels of unemployment or depressed real estate prices;

 

the financial condition and general business condition of the airline, automotive and other transportation-related industries and its impact on travel;

 

decreased airline capacities and routes;

 

travel-related accidents;

 

oil prices and travel costs;

 

statements, actions or interventions by governmental officials related to travel and corporate travel-related activities and the resulting negative public perception of such travel and activities;

 

governmental action and legislation, as well as political debate, conflicts and compromises related to such actions, to the extent that they negatively impact the financial markets and consumer confidence and spending or adversely impact the U.S. economy or international travel;

 

climate change and resource scarcity, such as water and energy scarcity;

 

domestic and international political and geo-political conditions; and

 

cyclical over-building in the hotel and lodging industries.

These factors, and the reputational repercussions of these factors, can adversely affect, and from time to time have adversely affected, individual hotels, particular regions and our business, financial condition and results of operations as a whole. Any one or more of these factors could limit or reduce the demand, or the rates that we are able to charge, for rooms. Declines in ADR and occupancy relating to declines in consumer demand will lower RevPAR and may adversely affect our business, financial condition and results of operations. In addition, these factors could increase our operating costs or affect our ability to develop or franchise new hotels or to maintain and operate our existing hotels.

Contraction in the global economy or low levels of economic growth could adversely affect our revenues and profitability as well as limit or slow our future growth.

Consumer demand for our rooms is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Decreased demand can be especially pronounced during periods of economic contraction or

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low levels of economic growth, and the recovery period in our industry may lag overall economic improvement. Declines in consumer demand due to adverse general economic conditions could negatively impact our business by decreasing the revenues and profitability of our owned hotels and limiting the amount of franchising fee revenues we are able to generate from our franchised hotels. For example, for the year ended December 31, 2009, our revenues declined approximately $136 million, or 17%, from revenues of $816 million for the year December 31, 2008, and our Adjusted EBITDA declined approximately 30%. In addition, many of the expenses associated with our business, including personnel costs, interest, rent, property taxes, insurance and utilities, are relatively fixed. During a period of overall economic weakness, if we are unable to meaningfully decrease these costs as demand for our hotels decreases, our business operations and financial performance may be adversely affected.

Varying economic conditions in different regions of the world make it difficult to predict future profitability levels. Moreover, if economic weakness in the markets in which we operate were to occur, it could have an adverse impact on our revenues and negatively affect our profitability.

In addition to general economic conditions, new hotel room supply is an important factor that can affect the hospitality industry’s performance and overbuilding has the potential to further exacerbate the negative impact of an economic downturn. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. A reduction or slowdown in growth of lodging demand or increased growth in lodging supply could result in returns that are substantially below expectations or result in losses, which could materially and adversely affect our revenues and profitability as well as limit or slow future growth.

Our hotels are geographically concentrated, which exposes our business to the effects of regional events and occurrences.

We have a concentration of hotels in Texas, Florida and California. Specifically, as of December 31, 2016, approximately 41% of rooms in our system were located in Texas, Florida and California with approximately 24% of rooms in our system located in Texas. In addition, as of December 31, 2016, approximately 28% of our pipeline properties are to be located in Texas. The concentration of hotels in one region or a limited number of markets may expose us to risks of adverse economic developments that are greater than if our portfolio were more geographically diverse. These economic developments include regional economic downturns, significant increases in the number of our competitors’ hotels in these markets and potentially higher local property, sales and income taxes in the geographic markets in which we are concentrated. Given our concentration of hotels in Texas, the downturn in the oil and gas industry has significantly affected demand in certain markets in Texas such as Houston and South and West Texas, materially adversely affecting our business in those markets, and a further decline could further adversely affect our business in those markets. In addition, our hotels are subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, earthquakes and tornados, which have in the past caused damage such as flooding and other damage to our hotels in specific geographic locations, including in the Texas, Florida and California markets. Depending on the severity of these acts of nature, the damage to our hotels could require us to close all or substantially all of our hotels in one or more markets for a period of time while the necessary repairs and renovations, as applicable, are undertaken. Additionally, we cannot assure you that the amount of our hurricane, windstorm, earthquake, flood or other casualty insurance we maintain would entirely cover damages caused by any such event.

As a result of our geographic concentration of hotels, we will face a greater risk of a negative impact on our revenues in the event these areas are more severely impacted by adverse economic and competitive conditions and extreme weather than other areas in the United States.

Because we operate in a highly competitive industry, our revenues or profits could be harmed if we are unable to compete effectively.

Competition for hotel guests

The segments of the hotel industry in which we operate are subject to intense competition. La Quinta is a select-service hotel brand that competes primarily against other select-service hotels in both the upper-midscale and the midscale segments. However, our owned and franchised hotels generally operate in segments that contain numerous competitors, including a wide range of lodging facilities offering full-service, select-service and all-suite lodging options. Hotels in other market segments, such as full-service hotels, may lower their rates to a level comparable to those of select-service hotels such as ours that, in turn, may further increase competitive pressure in our segments. Our owned and franchised hotels generally compete for guests on the basis of room rates, quality of accommodations, name recognition, service levels, convenience of locations and reward program offerings. We have also seen the emergence of a sharing economy with the increasing availability of online short term rentals. Additionally, an increasing supply of hotel rooms in La Quinta’s market segments, and consolidations in the lodging industry generally, have resulted in the creation of several large, multi-branded hotel chains with diversified operations and greater marketing and financial resources than we have, which has increased competition for guests in the segments in which our owned and franchised hotels operate. If we are unable to compete successfully for hotel guests, our revenues or profits may decline.

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Competition for franchise agreements

A primary component of our growth strategy entails increasing our system-wide portfolio of franchised hotels and further growing our franchise fee-based business. We compete for franchise agreements based primarily on brand name recognition and reputation, the room rate that can be realized, royalty fees charged and other contract terms. Some of our competitors may have substantially greater marketing and financial resources, greater brand distribution and awareness and/or offer greater financial incentives than we do. Other competitive factors for franchise agreements include relationships with hotel owners and investors, including institutional owners of multiple hotels, availability and affordability of financing, marketing support, reservation and e-commerce system capacity and efficiency and the ability to make investments that may be necessary to obtain franchise agreements. The terms of our franchise agreements for each of our franchised hotels are also influenced by contract terms offered by our competitors, among other things. As a result, the terms of new franchise agreements in the future may not be as favorable as our current franchise agreements. For example, competition may require us to reduce or change fee structures, make greater use of key money or provide other financial incentives such as loans and guarantees to franchisees and/or reduce the level of hotel improvements required to conform to brand standards. In addition, if the availability of suitable locations for new hotels decreases, planning or other local regulations change or the availability or affordability of financing is limited, the supply of suitable hotels for franchising could be diminished. Additionally, an excess supply of hotel rooms or unfavorable borrowing conditions may discourage potential franchisees from expanding or constructing new hotels, thereby limiting a source of growth of the franchise fees received by us. Our franchise agreements generally restrict our ability to open a new owned or franchised hotel in a limited area near the franchised hotel, which can range from several city blocks in an urban area to several square miles in less populated areas. We may be prohibited from franchising or owning hotels in areas where opportunities exist due to these restrictions. If the hotels that we franchise perform less successfully than those of our competitors, if we are unable to offer terms as favorable as those offered by our competitors, or if the availability of suitable hotels is limited, our ability to compete effectively for new franchise agreements could be reduced. If we are unable to compete successfully for franchisees, our revenues or profits may decline.

Any deterioration in the quality or reputation of our brand could have an adverse impact on our reputation, business, financial condition or results of operations.

Our brand and our reputation are among our most important assets. The success of our hotel business and our ability to attract and retain guests and franchise partners depends on brand recognition and reputation, including the consistency of our brand experience amongst our portfolio of hotels. Such dependence makes our hotel business susceptible to reputational damage and to competition from other hotel management and franchise companies. Additionally, for our franchised hotels, the continued success of a hotel owner’s business and its ability to make payments to us for our services may directly depend on the strength and reputation of our franchised hotels and our brand. We cannot assure you that the prior performance of our owned or franchised hotels will be indicative of future results or that competition from other brands will not adversely affect our market position or financial performance.

In addition, the brand recognition and support that provide much of the basis for the successful operation of our owned hotels and our franchise business can also mean that changes or problems with La Quinta (e.g., changes in ownership or management or management practices, or acts or omissions that adversely affect our business), or within our hotel business or at other locations (e.g., crime, scandal, litigation, negative publicity, catastrophic fires or similar events or accidents and injuries or other harm to our guests or our team members) can have a substantial negative impact on the operations of otherwise successful individual locations, and can cause a loss of consumer confidence in La Quinta and other hotels in our segment. Adverse incidents have occurred in the past and may occur in the future. The considerable expansion in the use of social media over recent years has compounded the potential scope of the negative publicity that could be generated by such incidents. We could also face legal claims and adverse publicity from a variety of events or conditions, many of which are beyond our control. If the reputation or perceived quality of our brand declines, our reputation, business, financial condition or results of operations could be adversely affected.

Some of our existing development pipeline may not be developed into La Quinta hotels, which could adversely affect our growth prospects.

As of December 31, 2016, we had a total of 248 franchised hotels in our pipeline, each of which is represented by an executed 20-year franchise agreement. Approximately 90% of the pipeline represents new construction, rather than the conversion of an existing hotel, and, as of December 31, 2016, approximately 29% of the conversions and new construction has commenced. The commitments of owners and developers with whom we have agreements are subject to numerous conditions, and the eventual development and construction of our pipeline not currently under construction is subject to numerous risks, including, in certain cases, the ability of the franchisee to obtain governmental and regulatory approvals and adequate financing. As a result, we cannot assure you that our entire pipeline will develop into new hotels. Any of these risks could have an adverse impact on the growth of our business and future operating results.

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Our efforts to renovate, redevelop or develop our hotels could be delayed or become more expensive, which could reduce profits or impair our ability to compete effectively.

We must maintain and renovate our hotels to remain competitive, maintain the value and brand standards of these hotels and comply with applicable laws and regulations. From time to time, we evaluate our hotels to determine whether additional capital expenditures are required and will provide an acceptable return on investment. For example, in 2016 we undertook a review of our owned hotel portfolio to identify properties that, with the appropriate scope of capital investment and renovation, we believe have the opportunity to re-position within a market, capturing occupancy and additional rate while being measured against new, higher-quality competitive sets. As a result of this review, we identified approximately 50 owned hotels on which we expect to make additional capital expenditures and we may identify additional hotels as part of our on-going review.  

Our strategy includes maintenance and renovation of our hotels and may include redevelopment, development and conversion of hotels, which is subject to a number of risks, including:

 

the inability to obtain financing upon favorable terms or at all;

 

construction delays or cost overruns (including labor and materials) that may increase project costs;

 

lack of availability of rooms for revenue-generating activities during construction, modernization or renovation projects;

 

changes in economic conditions that may result in weakened or lack of demand for improvements that we make or negative project returns for improvements that we make;

 

the inability to find appropriate, strategically located hotels at commercially reasonable prices;

 

obtaining zoning, occupancy, and other required permits or authorizations;

 

governmental restrictions on the size or kind of development;

 

force majeure events, including earthquakes, tornadoes, hurricanes, floods or tsunamis, or acts of terrorism; and

 

design defects that could increase costs.

Furthermore, we generally rely heavily on local contractors, who may be inadequately capitalized or understaffed. The inability or failure of one or more local contractors to perform its obligations may result in construction or remodeling delays, increased costs and loss of revenues. As a result, we may not increase our revenues or generate expected profits and cash flows from the renovation, redevelopment or development of hotels.

If we are not able to begin operating hotels under renovation or development as scheduled, or if renovation investments adversely affect or fail to improve performance, our ability to compete effectively could be diminished and revenues could be reduced. Further, due to the lengthy development cycle, adverse economic conditions may alter or impede our development plans, thereby resulting in incremental costs to us or potential impairment charges. If the cost of funding these renovations or developments exceeds budgeted amounts, profits could be reduced. Moreover, during the early stages of operations, charges related to interest expense and depreciation may substantially detract from, or even outweigh, the profitability of certain new hotel investments.

The hospitality industry is subject to seasonal and cyclical volatility, which may contribute to fluctuations in our financial condition and results of operations.

The hospitality industry is seasonal in nature. The periods during which our hotels experience higher revenues vary from hotel to hotel, depending principally upon location. Generally, our hotel revenues are greater in the second and third quarters than in the first and fourth quarters. The timing of holidays can also impact our quarterly results. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margins and net earnings. Additionally, our quarterly results may be further affected by the timing of certain of our marketing production expenditures. In addition, the opening of newly constructed or franchised hotels and the timing of any hotel acquisitions or dispositions may cause a variation of revenue from quarter to quarter. The seasonality and cyclicality of our industry may contribute to fluctuations in our financial condition and results of operations.

Our business is capital intensive and our failure or the failure of our franchisees to make necessary investments could adversely affect the quality and reputation of our brand.

The hotels in our owned portfolio have an average age of 28 years, and the hotels in our franchise portfolio have an average age of 14 years. For our owned and franchised hotels to remain attractive and competitive, we and the owners of our franchised hotels have to make periodic investments to keep the hotels well maintained, modernized and refurbished. This creates an ongoing need for capital. We and the owners of our franchised hotels may be unable to access capital or unwilling to spend available capital when necessary, even if required by the terms of our franchise agreements. To the extent that owners of franchised hotels and we cannot

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fund expenditures from cash generated by the operation of the hotels, funds must be borrowed or otherwise obtained, which may be difficult to obtain. Failure to make the investments necessary to maintain or improve hotels, act in accordance with applicable brand standards or project a consistent brand image could adversely affect the quality and reputation of our brand.

If our franchisees are unable to access the capital necessary to implement plans for growth, including our existing pipeline, our revenues may be reduced and our ability to compete effectively may be diminished.

Our franchisees depend on capital to buy and develop new franchised hotels, and our franchisees may be unable to access capital as expected. The availability of funds for development depends in large measure on capital markets and liquidity factors. Instability in the worldwide financial markets and the contraction of available liquidity may constrain the capital markets for hotel and real estate investments. As a result, while lenders have shown willingness to work with borrowers to extend relief in the short to medium term, many current and prospective hotel owners may struggle to find new hotel financing on commercially viable terms. The inability of our existing or future franchisees’ to obtain adequate funding could result in the decrease, delay or stoppage of development of new franchised hotels, including our existing pipeline.

If we are unable to maintain good relationships with our franchisees, revenues could decrease and we may be unable to expand our presence.

As of December 31, 2016, approximately 64% of our hotels were operated as franchised hotels. Our franchisees pay us a franchise fee and certain other fees pursuant to our franchise agreements. The viability of the franchising business depends on our ability to establish and maintain good relationships with our franchisees. Franchisees are focused on maximizing the value of their investment and working with a franchisor that can help them be successful in the ownership of their respective hotel investments. The value of our brand and the rapport that we maintain with our franchisees affect renewals of existing agreements and are important factors for potential franchisees considering doing business with us. Our relationships with franchisees generate additional hotel development opportunities that support growth. If we are unable to maintain good relationships with franchisees, we may be unable to renew existing franchise agreements or expand relationships with them. Additionally, opportunities for developing new relationships with additional franchisees may be adversely affected. This, in turn, could have an adverse effect on our results of operations and our ability to execute our growth strategy.

Franchise agreement standards are important to protecting our brand reputation and perception, and if our franchisees fail to make investments necessary to maintain or improve their hotels, guest preference for the La Quinta brand and reputation could suffer or the franchise agreements with those parties could terminate.

Substantially all of our franchise agreements require our franchisees to comply with standards that are essential to maintaining brand integrity and reputation and protecting the quality guests ascribe to the La Quinta brand. We depend on our franchisees to comply with these requirements by maintaining and improving hotels through investments, including investments in furniture, fixtures, equipment, amenities, personnel and branding elements.

Franchisees may be unable to access capital or unwilling to spend available capital when necessary, even if required by the terms of their agreements with us. If our franchisees fail to make investments necessary to maintain or improve the hotels that we franchise, guest preference for our brand and our reputation could suffer. Moreover, our franchisees may be unwilling or unable to incur the cost of complying with brand standards as brand standards may evolve from time to time. In addition, if our franchisees breach the terms of their agreements with us, we may elect to exercise our termination rights, which would eliminate revenues from these hotels and cause us to incur expenses related to terminating these relationships. We may be unable to find suitable or offsetting replacements for any terminated relationships. These risks become more pronounced during economic downturns.

Contractual and other disagreements with franchisees could make us liable to them or result in litigation costs or other expenses.

Our franchise agreements require us and our franchisees to comply with operational and performance conditions that are subject to interpretation and could result in disagreements. At any given time, we may be in disputes with one or more of our franchisees. Any dispute we have with our franchisees could result in arbitration or litigation, which could be very expensive for us even if the outcome is ultimately in our favor. We cannot predict the outcome of any such arbitration or litigation, the effect of any adverse judgment against us or the amount of any settlement that we may enter into with any franchisee. An adverse result in any such proceeding could adversely impact our results of operations and prospects.

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If our franchise agreements terminate prematurely or expire in accordance with their terms, our revenues could decrease and our costs could increase.

Our franchise agreements may be terminated, renegotiated or expire, but typically have an initial term of 20 years. The continuation of a franchise agreement is subject to the franchisee adhering to certain standards and other applicable terms and conditions (including the obligation to pay certain fees to us). While our franchise agreements generally provide for liquidated damages to be paid to us by franchisees whose agreements have been terminated as the result of a violation of the provisions of the agreement, these damage amounts are typically less than the fees we would have received if the terminated franchisee fulfilled its contractual obligations.

Our franchise agreements also typically contain provisions permitting either party to terminate the franchise agreement after five, ten or fifteen years under certain circumstances without payment of damages. These agreements also provide early termination rights to the franchisees upon the failure to meet a specified performance test, which is typically based on the hotel’s occupancy rates. Franchisees also may attempt to terminate franchise agreements with us prior to their scheduled expiration date. If that happens, we may have difficulty recovering any resulting damages from the owner or replacing the revenues lost as a result of the termination. In addition, if a franchisee files for bankruptcy or goes into receivership, our franchise agreements may be terminable under applicable law.

If any of our franchise agreements are terminated or expire, we cannot assure you that we can obtain new or replacement franchise agreements at the same time that those other agreements are terminated or expire. As a result, we could lose the revenues we derive from that agreement or incur costs related to ending our relationship with the franchisee.

Deterioration in the general financial condition of our franchisees may adversely affect our results.

Our operating results are impacted by the ability of our franchisees to generate revenues at hotels they franchise from us. Our franchisees compete for guests with other hotels in their geographic markets. Some of their competitors may have substantially greater marketing and financial resources than our franchisees, and they may construct new hotels or improve their existing hotels, reduce their prices or expand and improve their marketing programs in ways that adversely affect our franchisees’ operating results and financial condition. In addition, the ability of our franchisees to compete for guests directly impacts the desirability of our brand to current and prospective franchisees.

These factors, among others, could adversely affect the operating results and financial condition of our franchisees. This could result in the financial failure of our franchise owners and result in a termination of the franchisee for non-payment of franchise fees and/or declines in franchise fees and other revenues derived from our franchising business.

If our franchisees are unable to repay or refinance loans secured by the mortgaged hotels, our revenues, profits and capital resources could be reduced and our business could be harmed.

Many of the hotels owned by our franchisees are pledged as collateral for mortgage loans entered into when such hotels were purchased or refinanced by them. If our franchisees are unable to repay or refinance maturing indebtedness on favorable terms or at all, the lenders could declare a default, accelerate the related debt and repossess the hotel. Debt defaults could lead franchisees to sell the hotel on unfavorable terms or to convey the mortgaged hotels to the lender. Any such sale or conveyance could, in certain cases, result in the termination of our franchise agreements or eliminate any anticipated income and cash flows from such hotel, which could negatively affect our business and results of operations.

We are exposed to the risks resulting from significant investments in owned real estate, which could increase our costs, reduce our profits and limit our ability to respond to market conditions.

Real estate ownership is subject to risks not applicable to franchised and managed hotels, including:

 

governmental regulations relating to real estate ownership or operations, including tax, environmental, zoning and eminent domain laws;

 

loss in value or functionality, or unanticipated liabilities, due to environmental conditions, governmental takings, uninsured casualties or restrictive changes in zoning and similar land use laws and regulations or in health, safety and environmental laws, rules and regulations and other governmental and regulatory action;

 

changes in tax laws and property taxes, even if the hotel level cash flows remain the same or decrease;

 

increased potential civil liability for accidents or other occurrences on owned hotels;

 

the ongoing need for owner funded capital improvements and expenditures to maintain or upgrade hotels;

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periodic total or partial closures due to renovations and hotel improvements;

 

risks associated with mortgage debt, including the possibility of default, fluctuating interest rate levels and uncertainties in the availability of replacement financing;

 

risks associated with the possibility that cost increases will outpace revenue increases and that in the event of an economic slowdown, the high proportion of fixed costs will make it difficult to reduce costs to the extent required to offset declining revenues;

 

acts of God, including earthquakes, hurricanes, floods, winter storms and other natural disasters (that may result in uninsured losses);

 

fluctuations in real estate values or potential impairments in the value of our assets;

 

maintaining tenants for leased properties; and

 

contingent liabilities that exist after we have exited a property.

Additionally, real estate investments are relatively illiquid and, therefore, cannot be purchased or sold rapidly in response to changes in economic or other conditions. Buyers may not be identified quickly or be able to secure suitable financing to consummate a transaction or we may not be able to sell hotels on terms favorable to us. Furthermore, sales of certain appreciated hotels could generate material adverse tax consequences, which may affect our ability to sell hotels in response to market conditions and adversely affect our ability to generate cash flows.

Any of the forgoing risks could increase our costs, reduce our profits and limit our ability to respond to market conditions.

Changes in local market or neighborhood conditions may diminish the value of real property.

Hotels may be difficult to convert to other uses if changes in market conditions or in the area in which the hotel is located make hotel use unattractive for any reason. In such cases, large capital investments in real estate may prove difficult to recover. Hotels may be completely undamaged, but may lose significant value that cannot be recovered through insurance or operational changes because of disasters occurring nearby.

The negative impact on profitability and cash flow generation from a decline in revenues is more pronounced in owned hotels because we, as the owner, bear the risk of their high fixed-cost structure. The need to maintain and renovate owned hotels can present challenges, especially when cash generated from operations has declined due to decreased revenues or increased costs, or when government regulations or other factors require expenditures on property improvements that cannot be recovered through rate increases. The effectiveness of any cost-cutting efforts is limited by the fixed-cost nature of our business. As a result, we may not be able to offset revenue reductions through cost cutting, which could further reduce our margins. Further, during times of economic distress, declining demand and declining earnings often result in declining asset values.

In an unfavorable market, we may not be able to sell hotels in the short term. Accordingly, we may not be able to adjust our portfolio promptly in response to economic or other conditions. Similarly, unfavorable markets may make it difficult to refinance mortgage debt as it comes due.

Failure to keep pace with developments in technology could adversely affect our operations or competitive position.

The hospitality industry demands the use of sophisticated technology and systems for hotel management, brand assurance and compliance, procurement, reservation systems, operation of our loyalty program, distribution of hotel resources to current and future guests and guest amenities. These technologies require refinements, including compliance with privacy regulations and requirements of third parties such as the payment card industry. The development and maintenance of these technologies may require significant capital. We cannot assure you that as various systems and technologies become outdated or new technology is required, we will be able to replace or introduce them as quickly as our competition or in a cost-effective and timely manner. We also cannot assure you that we will achieve the benefits we may have been anticipating from any new technology or system.

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Failures in, material damage to, or interruptions in our information technology systems, software or websites, including as a result of cyber-attacks, and difficulties in updating our existing software or developing or implementing new software could have a material adverse effect on our business or results of operations.

We depend heavily upon our information technology systems in the conduct of our business. For example, we own, license or otherwise contract for sophisticated technology and systems for hotel management, procurement, reservations, phone switches and the operation of our Returns program. Those systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural and manmade disasters. In particular, from time to time we and third parties who serve us experience cyber-attacks, attempted breaches of our or their information technology systems and networks or similar events, which could result in a loss of sensitive business or customer information, systems interruption or the disruption of our operations. The techniques that are used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and may be difficult to detect for long periods of time, and accordingly we may be unable to anticipate and prevent all data security incidents. We may be required to expend capital and other resources to protect against such security breaches or cyber-attacks or to alleviate problems caused by such breaches or attacks. While we maintain cyber liability insurance that provides liability and insurance coverages, subject to limitations and conditions of the policies, our insurance may not be sufficient to protect against all losses or costs related to any future breaches of our systems.

Damage or interruption to our information systems may require a significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Any material interruptions or failures in our systems, including those that may result from our failure to adequately develop, implement and maintain a robust disaster recovery plan and backup systems could severely affect our ability to conduct normal business operations and, as a result, may have a material adverse effect on our business or results of operations.

We are vulnerable to various risks and uncertainties associated with our website, including changes in required technology interfaces, website downtime and other technical failures, costs and technical issues as we upgrade our website software, computer viruses, changes in applicable federal and state regulation, security breaches, legal claims related to our website operations and e-commerce fulfillment and other consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties could reduce website sales and have a material adverse effect on our business or results of operations.

Failure of third party technology providers or vendors to provide services and technology in a satisfactory manner could adversely affect our business.

We rely on third parties for the performance of a significant portion of our information technology functions worldwide and the provision of information technology and business process services. The success of our business depends in part on maintaining our relationships with these third parties and their continuing ability to perform these functions and services in a timely and satisfactory manner. If we experience a loss or disruption in the provision of any of these functions or services, or they are not performed in a satisfactory manner, we may have difficulty in finding alternate providers on terms favorable to us, in a timely manner or at all, and our business could be adversely affected.

We rely on certain software vendors to maintain and periodically upgrade many of our information technology systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner.

We may be exposed to risks and costs associated with protecting the integrity and security of our guests’ personal information.

We are subject to various risks associated with the collection, handling, storage and transmission of sensitive information, including risks related to compliance with U.S. and foreign data collection and privacy laws and other contractual obligations, as well as the risk that our systems collecting such information could be compromised. We collect and maintain information relating to our employees and guests for various business purposes, including managing our workforce and marketing and promotion purposes of our hotel business. Our various information technology systems enter, process, summarize and report such data, including credit card numbers and other personally identifiable information. A significant number of guest purchases are made using credit cards. Additionally, as of December 31, 2016, approximately 18.8% of our guest reservations are placed through our website, including through mobile devices and those reservations made via LQ Instant Hold. In order for our business to function successfully, we must be able to handle and transmit confidential information, including credit card information, securely.

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Privacy regulation is an evolving area in which different jurisdictions may subject us to increasingly demanding or inconsistent compliance requirements. Compliance with applicable privacy laws, regulations and policies may increase our operating costs and/or adversely affect our ability to service hotel guests and market our products, hotels and services to hotel guests. In addition, our failure to comply with applicable privacy laws and regulations, with our own privacy policies or with third-party requirements (or in some circumstances non-compliance by third parties engaged by us), or a breach of security in which personal data are compromised, could result in fines, litigation, adverse reputation impacts, remedial and other expenses, criminal sanctions, or restrictions on the use or transfer of data, which could adversely affect our business. We cannot assure you that our business will always be conducted in compliance with these laws, regulations and policies.

Even if we are fully compliant with such legal standards, we may not be able to prevent security breaches involving guest transaction data and identity theft. In addition, efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error, or inadvertent releases of data all threaten our information systems and records. Our reliance on computer, Internet-based and mobile systems and communications and the frequency and sophistication of efforts by hackers to gain unauthorized access to such systems have increased in recent years. Any breach, theft, loss, or fraudulent use of guest, employee or Company data could cause consumers to lose confidence in the security of our website and choose not to purchase from us. If a computer hacker or other criminal is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and action for damage and could seriously disrupt our operations and harm our reputation, any of which could adversely affect our business.

Failure to comply with marketing and advertising laws, including with regard to direct marketing, could result in fines or place restrictions on our business.

We rely on a variety of direct marketing techniques, including telemarketing, email and social media marketing and postal mailings. Any further restrictions in laws and court or agency interpretation of such laws, such as the Telephone Consumer Protection Act of 1991, the Telemarketing Sales Rule, CAN-SPAM Act of 2003, and various U.S. state laws, or new federal laws, regarding marketing and solicitation or international data protection laws that govern these activities could adversely affect current or planned marketing activities and could force further changes in our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies. We also obtain access to potential guests from travel service providers or other companies with whom we have substantial relationships. We market to some individuals on these lists directly or through other companies’ marketing materials. If access to these lists was prohibited or otherwise restricted, our ability to develop new guests, and introduce them to our hotels could be impaired.

The growth of internet reservation channels could adversely affect our business and profitability.

A significant percentage of hotel rooms for individual guests is booked through internet travel intermediaries. We contract with such intermediaries and pay them various commissions and transaction fees for sales of our rooms through their system. Search engines and peer-to-peer inventory sources also provide online travel sources that compete with our business. Recently, bookings through internet travel intermediaries have been increasing. In 2015, such bookings represented 18.3% of our total bookings. In 2016, such bookings represented 21.0% of our total bookings. As such bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us or our franchisees. These hospitality intermediaries also may reduce these bookings by de-ranking our hotels in search results on their platforms, and other online providers may divert business away from our hotels. Although our agreements with many hospitality intermediaries limit transaction fees for our hotels, there can be no assurance that we will be able to renegotiate these agreements upon their expiration with terms as favorable as the provisions that existed before the expiration, replacement or renegotiation. Moreover, hospitality intermediaries generally employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. Further, some of these internet travel intermediaries are attempting to commoditize hotel rooms by increasing the importance of price and general indicators of quality at the expense of brand identification.

Consumers may develop brand loyalties to the intermediaries’ websites and reservations systems rather than to the La Quinta brand. If this happens, our business and profitability may be significantly harmed as shifting guest loyalties divert bookings away from our websites, or as the fees charged by third-party websites increase the overall cost of internet bookings for our hotels. Consolidation of internet travel intermediaries, and the entry of major internet companies into the internet travel bookings business, also could divert bookings away from our website and increase our hotels’ cost of sales.

In addition, recent class action litigation against several online travel intermediaries and lodging companies challenges the legality under antitrust law of certain provisions in contracts with third party intermediaries. While the travel intermediaries and lodging companies are vigorously defending this litigation and believe the contract provisions are lawful, the courts will ultimately determine this issue and an adverse outcome could force hotel companies, including us, to alter their business arrangements with these third parties which could have a negative impact on our financial condition and results of operations.

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Our reservation system is an important component of the La Quinta brand and a disruption to its functioning could have an adverse effect on our hotels.

We license software from unaffiliated third parties for the La Quinta hotels reservation system. Losing these licenses may adversely affect our ability to maintain a technically adequate reservations system, which, in the absence of suitable alternatives, would inhibit our ability to conduct our business (including our ability to attract and retain franchise arrangements) and, ultimately, diminish our ability to generate revenue.

We manage a reservation system that communicates reservations to our owned and franchised hotels that have been made by individuals directly, either online or by telephone to our call centers or through devices via our mobile applications, or through intermediaries like travel agents, internet travel web sites and other distribution channels. The cost, speed, efficacy and efficiency of the reservation system, as well as protection of personal or confidential information of its users, are important aspects of the business and are major considerations of franchisees in choosing to affiliate with the La Quinta brand. Any degradation of, failure of adequate development relative to, or security breach of, our reservation system may adversely affect our business.

Our reservation system relies on data communications networks operated by unaffiliated third parties. Any significant interruption of the function of our reservation system (or significant parts of our reservation system) may adversely affect our business as well as our ability to generate revenues.

The cessation, reduction or taxation of program benefits of our Returns loyalty program could adversely affect the La Quinta brand and guest loyalty.

We manage the Returns program for the La Quinta brand. Our owned and franchised hotels contribute a percentage of the guest’s room rate per night to the program for each hotel stay of a Returns program member. We arrange with service providers such as airlines to exchange monetary value represented by points for program awards and we may charge a license fee to such service providers for use of the La Quinta brand trademarks. Returns program members accumulate points based on eligible stays and hotel charges and redeem the points for a range of benefits, including free rooms, airline miles and other items of value. The Returns program is an important aspect of our business and of the affiliation value for hotel owners under franchise agreements. Currently, the program benefits are not taxed as income to members. If the program awards and benefits are materially altered, curtailed or taxed and, as a result, a material number of Returns members choose to stay at non-La Quinta-branded hotels, our business could be adversely affected.

Any failure to protect our trademarks and other intellectual property could reduce the value of our brand and harm our business.

The recognition and reputation of our brand are important to our success. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. From time to time, we apply to have certain trademarks registered; however, we cannot assure you that those trademark or other intellectual property registrations will be granted or that the steps we take to use, control or protect our trademarks or other intellectual property in the United States and other jurisdictions will always be adequate to prevent third parties, including former employees, from copying or using the trademarks or other intellectual property without authorization or in a manner where authorization may not be required. We may also fail to obtain and maintain trademark protection for our brand in all jurisdictions. For example, in certain jurisdictions, third parties have registered or otherwise have the right to use certain trademarks that are the same as or similar to our trademarks, which could prevent us from registering trademarks and opening hotels in that jurisdiction. In addition, “la quinta” is a commonly used term in Central and South America and, as such, we may face greater difficulty protecting our “La Quinta” registered trademarks in those regions. Third parties in those countries may also challenge our rights to certain trademarks or oppose our trademark applications. Defending against any such proceedings may be costly, and if unsuccessful, could result in the loss of important intellectual property rights. Obtaining and maintaining trademark protection for multiple brands in multiple jurisdictions is also expensive, and we may therefore elect not to apply for or to maintain certain trademarks. See “Item 1. Business—Our trademarks.”

Our intellectual property is also vulnerable to unauthorized copying or use in some jurisdictions outside the United States, where local law, or lax enforcement of law, may not adequately protect it. If our trademarks or other intellectual property are misappropriated, or otherwise used in a manner where authorization may not be required, the La Quinta brand, including its value and reputation, could be harmed.

We monitor the unauthorized copying or use of intellectual property in the United States and other countries in which we operate or plan to operate. However, it is difficult to protect against every possible unauthorized use of our trademarks or other intellectual property and there are times where we have resorted, and may in the future resort, to litigation to enforce our intellectual property rights. Litigation of this type could be costly, force us to divert our resources, lead to counterclaims or other claims against us or otherwise harm our business or reputation. In addition, we license certain of our trademarks to third parties. For example, we grant

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our franchisees a right to use certain of our trademarks in connection with their operation of the applicable hotel. If a franchisee or other licensee fails to maintain the quality of the goods and services used in connection with the licensed trademarks, our rights to, and the value of, our trademarks could potentially be harmed. Negative publicity relating to the franchisee or licensee could also be incorrectly associated with us, which could harm our business. Failure to maintain, control and protect our trademarks and other intellectual property would likely adversely affect the ability of our hotels to generate revenues or our ability to enter into new franchise agreements.

Third-party claims that we infringe patent, trademark, copyright or other intellectual property rights or misappropriate trade secrets of others could subject us to damages and other costs and expenses.

Third parties may make claims against us for infringing their patent, trademark, copyright or other intellectual property rights or for misappropriating their trade secrets. We have been and are currently party to such claims and may receive additional claims in the future. Any such claims, even those without merit, could:

 

be expensive and time consuming to defend;

 

force us to stop using the intellectual property that is being challenged, or to stop providing products or services that use the challenged intellectual property;

 

force us to redesign or rebrand our services;

 

divert management’s attention and resources;

 

force us to enter into royalty, licensing, co-existence or other agreements to obtain the right to use a third party’s intellectual property;

 

limit the use or the scope of our intellectual property or other rights;

 

force us to pay significant damages; and

 

limit where we can open future hotels.

In addition, we may be required to indemnify franchisees for any losses they incur as a result of any such infringement claims. All necessary royalty, licensing or other agreements may not be available to us at all or on acceptable terms. Any costs, lost revenues, changes to our business or diversion of management attention related to intellectual property claims against us, whether successful or not, could adversely affect our business.

Because a component of our strategy is to continue to grow our franchise business internationally, the risks of doing business internationally could lower our revenues, increase our costs, reduce our profits or disrupt our business.

At December 31, 2016, 12 of our 566 franchised hotels were located outside of the United States, which represented approximately 2% of our total franchised hotels. As part of our strategic plan, we plan to increase the number of franchised hotels located outside of the United States in the coming years, with approximately 11% of our pipeline relating to hotels located outside the United States. As a result, we are and will be, on an increasing basis, subject to the risks of doing business outside the United States, including:

 

recessionary trends or economic instability in international markets;

 

changes in foreign currency exchange rates or currency restructurings and hyperinflation or deflation in the countries in which we operate;

 

the imposition of restrictions on currency conversion or the transfer of funds or limitations on our ability to repatriate non-U.S. earnings in a tax effective manner;

 

the presence and acceptance of varying levels of business corruption in international markets;

 

the impact of various anti-corruption and other laws;

 

the ability to comply with, or impact of complying with, complex and changing laws, regulations and policies of foreign governments that may affect investments or operations, including foreign ownership restrictions, import and export controls, tariffs, embargoes, licensing requirements and regulations, increases in taxes paid and other changes in applicable tax laws;

 

uncertainties as to local laws and enforcement of contract and intellectual property rights;

 

the difficulties involved in managing an organization doing business in many different countries;

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rapid changes in governmental, economic and political policies, political or civil unrest, acts of terrorism or the threat of international boycotts or U.S. anti-boycott legislation;

 

increases in anti-American sentiment and the identification of the licensed brands as American brands;

 

forced nationalization of franchised hotels by local, state or national governments;

 

the effect of disruptions caused by severe weather, natural disasters, outbreak of disease or other events that make travel to a particular region less attractive or more difficult; and

 

political and economic instability.

Any or all of these factors may adversely affect the income from and the market value of our hotels located in international markets. In addition, the economy of any region in which our hotels are located may be adversely affected to a greater degree than that of other areas of the country or the world by certain developments affecting industries concentrated in that region or country. A decline in the general economic condition in regions or countries in which our hotels are located could result in a decrease in hotel demand in the region, and the income from and market value of these hotels may be adversely affected. Over time, room rates in regions can fluctuate and have historically fluctuated widely. While these factors and the impact of these factors are difficult to predict, any one or more of them could lower our revenues, increase our costs, reduce our profits or disrupt our business, and as our international operations increase, these risks will become more pronounced.

A number of our owned hotels are subject to ground leases; if we are found to be in breach of a ground lease or are unable to renew a ground lease, we could be adversely affected.

Eighteen of our owned hotels are either completely or partially on land subject to ground leases. If we are found to be in breach of a ground lease or ground sublease, such ground lease or sublease could be terminated. Assuming that we exercise all available options to extend the terms of our ground leases and ground subleases, all of our ground leases and ground subleases will expire between 2017 and 2102, one of which will expire in 2017. However, in certain cases, our ability to exercise such options is subject to the condition that we are not in default under the terms of the ground lease or ground sublease, as applicable, at the time that we exercise such options and/or the time such extension occurs, and we can provide no assurances that we will be able to exercise our options at such time. Furthermore, we can provide no assurances that we will be able to renew our ground leases and ground subleases upon expiration or at satisfactory economic terms. If a ground lease or ground sublease expires or is terminated, we would be unable to derive income from such hotel, which could adversely affect us.

If an appropriate opportunity becomes available, we may seek to expand through acquisitions of and investments in other businesses and hotels, or through alliances. We have also divested some of our owned portfolio and may also seek to divest additional owned hotels. These acquisition and disposition activities may be unsuccessful or divert management’s attention.

We may consider strategic and complementary acquisitions of and investments in other hotel or hospitality brands, businesses, hotels or other assets. Furthermore, we may pursue these opportunities in alliance with existing or prospective owners of franchised hotels. In many cases, we will be competing for these opportunities with third parties that may have substantially greater financial resources than us. Acquisitions or investments in brands, businesses, hotels or assets as well as these alliances are subject to risks that could affect our business, including risks related to:

 

issuing shares of stock that could dilute the interests of our existing stockholders;

 

spending cash and incurring debt;

 

assuming contingent liabilities; or

 

creating additional expenses.

We cannot assure you that we will be able to identify opportunities or complete transactions on commercially reasonable terms or at all, or that we will actually realize any anticipated benefits from such acquisitions, investments or alliances. There may be high barriers to entry in certain key markets and scarcity of available development and investment opportunities in desirable locations. Similarly, we cannot assure you that we will be able to obtain financing for acquisitions or investments on attractive terms or at all, or that the ability to obtain financing will not be restricted by the terms of our indebtedness.

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The success of any such acquisitions or investments also will depend, in part, on our ability to integrate the acquisition or investment with our existing operations. We may experience difficulty with integrating acquired businesses, hotels or other assets, including difficulties relating to:

 

coordinating sales, distribution, and marketing functions;

 

integrating technology information systems; and

 

preserving the important guest, labor and other relationships of the acquired assets.

During 2016, we sold 19 hotels.  Divestment of these hotels and future divestments of hotels will impact our revenue and EBITDA. In some circumstances, sales of hotels may result in losses. Upon a sale of hotels, we may become subject to contractual indemnity obligations, incur material losses, including impairment charges, or tax liabilities or, as a result of required debt repayment, face a shortage of liquidity.

In addition, any acquisitions, investments, dispositions or alliances could demand significant attention from management that would otherwise be available for business operations, which could harm our business.

Governmental regulation may adversely affect the operation of our hotels.

The hotels that we and our franchisees operate are subject to extensive local, regional and national regulations and, on a periodic basis, must obtain various licenses and permits. The laws and regulations of states, counties, cities, provinces and other political subdivisions may also require certain registration, disclosure statements and other practices with respect to the franchising of hotels. Any failure to identify, obtain or maintain required licenses and permits could result in adverse consequences.

The hotel industry is subject to extensive federal, state and local governmental regulations in the United States and the other countries in which our franchised hotels operate, including those relating to building and zoning requirements and those relating to the preparation and sale of food. Hotels and their owners and operators are also subject to licensing and regulation by state and local departments relating to health, sanitation, fire and safety standards, and to laws governing their relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. In connection with the continued operation or remodeling of certain of our hotels, we or our franchisees may be required to expend funds to meet federal, state and local regulations. For example, we may incur significant costs complying with the Americans with Disabilities Act (“ADA”), which requires that all public accommodations meet certain federal requirements related to access and use by disabled persons. The regulations also mandate certain operational requirements that hotel operators must observe. If, pursuant to the ADA, we are required to make substantial alterations to, and capital expenditures for, our hotels, including removal of access barriers, it could increase our expenditures and, in turn, could reduce our earnings. Any failure to obtain or maintain any such licenses or any publicity resulting from actual or alleged violations of any such laws and regulations could result in injunctive relief, fines, damage awards or capital expenditures and could have an adverse effect on our results of operations. Moreover, new or revised laws and regulations or new interpretations of existing laws and regulations could affect the operation of our hotels or result in significant additional expense and operating restrictions on us and our franchisees.

In addition, we may be subject to certain laws and regulations that govern the offer and sale of franchises, including regulations promulgated by the Federal Trade Commission (the “FTC”). Many franchise laws impose substantive requirements on franchise agreements, including limitations on provisions concerning the termination or non-renewal of a franchise. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. Some franchise laws require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and our franchisees.

Failure to comply with laws and regulations applicable to our international operations may increase costs, reduce profits, limit growth or subject us to broader liability.

Our business operations in countries outside the United States are subject to a number of U.S. federal laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”) as well as trade sanctions administered by the Office of Foreign Assets Control (“OFAC”) and the Commerce Department. The FCPA is intended to prohibit bribery of foreign officials or parties and requires us to keep books and records that accurately and fairly reflect our transactions. OFAC and the Commerce Department administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals. Some of our business operations are also subject to the laws and regulations of non-U.S. jurisdictions, including anti-corruption legislation in the countries in which we conduct operations. If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm, incarceration of our employees or restrictions on our operation, ownership or franchising of hotels, including the termination of our franchise and ownership rights. In addition, in certain circumstances, the actions of parties affiliated with us (including our owners, joint venture

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partners, employees and agents) may expose us to liability under the FCPA, U.S. sanctions or other laws. These restrictions could increase our costs of operations, reduce our profits or cause us to forgo development opportunities that would otherwise support our growth.

In August 2012, Congress enacted the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”), which expands the scope of U.S. sanctions against Iran and Syria. More specifically, Section 219 of the ITRSHRA amended the Exchange Act to require companies subject to SEC reporting obligations under Section 13 of the Exchange Act to disclose in their periodic reports specified dealings or transactions involving Iran or other individuals and entities targeted by certain OFAC sanctions engaged in by the reporting company or any of its affiliates. These companies are required to separately file with the SEC a notice that such activities have been disclosed in the relevant periodic report, and the SEC is required to post this notice of disclosure on its website and send the report to the U.S. President and certain U.S. Congressional committees. The U.S. President thereafter is required to initiate an investigation and, within 180 days of initiating such an investigation with respect to certain disclosed activities, to determine whether sanctions should be imposed.

Under ITRSHRA, we are required to report if we or any of our “affiliates” knowingly engaged in certain specified activities during the period covered by one of our Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q. In addition, because the SEC defines the term “affiliate” broadly, we may be deemed to be a controlled affiliate of Blackstone, affiliates of Blackstone may also be considered our affiliates. Other affiliates of Blackstone have in the past and may in the future be required to make disclosures pursuant to ITRSHRA, including the activities discussed in the disclosures included on Exhibit 99.1 to this Annual Report on Form 10-K, which disclosures are hereby incorporated by reference herein. Disclosure of such activities by us or our affiliates, even if such activities are not subject to sanctions under applicable law, and any sanctions imposed on us or our affiliates as a result of these activities, could harm our reputation and have a negative effect on our business.

Foreign or U.S. environmental laws and regulations may cause us to incur substantial costs or subject us to potential liabilities.

We are subject to certain compliance costs and potential liabilities under various foreign and U.S. federal, state and local environmental, health and safety laws and regulations. These laws and regulations govern actions including air emissions, the use, storage and disposal of hazardous and toxic substances, and wastewater disposal. Our failure to comply with such laws, including any required permits or licenses, could result in substantial fines or possible revocation of our authority to conduct some of our operations. We could also be liable under such laws for the costs of investigation, removal or remediation of hazardous or toxic substances at our currently or formerly owned, operated or franchised hotels or at third-party locations in connection with our waste disposal operations, regardless of whether or not we knew of, or caused, the presence or release of such substances. Some laws may regard us as having liability as an operator by virtue of how we may implement our franchise agreements, rendering us potentially responsible for addressing environmental or other conditions existing at our franchised hotels. In some cases, we may be entitled to indemnification from the party that caused the contamination, or pursuant to our franchise agreements, but there can be no assurance that we would be able to recover all or any costs we incur in addressing such problems. From time to time, we may be required to remediate such substances or remove, abate or manage asbestos, mold, radon gas, lead or other hazardous conditions at our hotels. The presence or release of such toxic or hazardous substances could result in third-party claims for personal injury, property or natural resource damages, business interruption or other losses. Such claims and the need to investigate, remediate, or otherwise address hazardous, toxic or unsafe conditions could adversely affect our operations, the value of any affected hotel, or our ability to sell, lease or assign our rights in any such hotel, or could otherwise harm our business or reputation. Environmental, health and safety requirements have also become increasingly stringent, and our costs may increase as a result. For example, Congress, the U.S. Environmental Protection Agency (“EPA”), and some states are considering or have undertaken actions to regulate and reduce greenhouse gas emissions. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of our owned and franchised hotels or result in significant additional expense and operating restrictions on us and our franchisees.

Asbestos, lead-based paint, mold and other hotel related issues could expose us to substantial liability.

Certain U.S. and foreign laws impose liability for the release of asbestos containing materials into the air or require the removal or containment of asbestos containing materials, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to toxic or hazardous substances. Some of our owned hotels may have asbestos containing materials, and if such materials are discovered, we are required to take action as and when required by applicable law. Such laws require that, as owners or operators of buildings containing asbestos, we must (i) properly manage and maintain the asbestos, (ii) notify and train certain employees regarding the presence of asbestos and the related hazards and (iii) undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. Such laws may impose fines and penalties on us if we fail to comply with these requirements and may allow third parties to seek recovery for personal injury associated with exposure to asbestos fibers, which could significantly increase our operating costs and reduce our earnings.

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In addition, certain laws impose liability for lead based paint, and third parties may seek recovery from owners or operators of real properties for personal injury associated with lead based paint. Limits are placed on the amount of lead that may be present in public drinking water supplies, and third parties may seek recovery from owners or operators of real properties for injuries arising from exposure to high lead concentration.

Other materials used in the construction of our owned hotels that are currently thought to be safe may in the future be determined to be hazardous, and could expose us to substantial liability for damages, injuries, adverse health effects or removal and disposal costs. In addition, other building supplies thought to be appropriate for their use, while not toxic, have been discovered to be defective (such as fire-retardant plywood or polybutylene piping). Defects in such supplies have resulted in substantial costs on the part of the owners or operators of affected hotels to remove and replace the defective materials. Materials currently thought to be appropriate or safe may in the future prove to be defective, and could result in substantial costs or losses.

Problems associated with mold may pose risks to our hotels and also may be the basis for personal injury claims against us. There is no generally accepted standard for the assessment of mold. If left unchecked or inadequately addressed, the growth of mold could result in litigation and remediation expenses, or in a closure of some or all of a hotel, that could adversely affect revenues from an individual hotel. We have discovered that some of our owned hotels have problems with mold. The presence of mold at some of our owned hotels has required us to undertake a remediation program to remove the mold from the affected hotels. The cost of remediation to date has not been material. However, remediation costs may substantially increase if there is mold in our other hotels or if costs related to mold such as legal and insurance expense continue to increase rapidly, which could significantly increase our operating costs and reduce our earnings.

Additionally, the EPA has identified certain health risks associated with elevated radon gas in buildings, and has recommended that certain mitigating measures be considered. It is possible that other environmental conditions not currently known, or known but not currently thought to be dangerous, may in the future be determined to present a risk to health or safety, such as with respect to possible exposure to waterborne pathogens.

Franchisees are exposed to the same risks with respect to the hotels that they own and operate. Additionally, some laws may regard us as having liability as an operator by virtue of how we may implement our franchise agreements, rendering us potentially responsible for addressing environmental or other conditions existing at our franchised hotels. Our franchise agreements typically require our franchisees to assume and indemnify us against such liabilities, but there can be no assurance that governmental authorities will not look directly to us to address such matters or that we would be able to recover from our hotel owners any costs we incur in doing so.

For all of these reasons, the presence of, or potential for contamination by, such hazardous or toxic substances, or exposure to pathogens, at, on, under, adjacent to, emanating from, or in any of our hotels could materially adversely affect the operations, the value of such hotel or the ability to attract guests to such hotel, or could otherwise harm our business or reputation.

We are subject to risks from litigation filed by or against us.

In the normal course of our business, we are often involved in various legal proceedings. We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of these legal proceedings. Additionally, legal or governmental proceedings brought by or on behalf of franchisees, employees, stockholders or guests may adversely affect our financial results. On April 25, 2016, a purported stockholder class action lawsuit, captioned Beisel v. La Quinta Holdings Inc. et al., was filed in the U.S. District Court for the Southern District of New York against us, certain of our current and former officers and certain current and former members of our board of directors on behalf of purchasers of our common stock pursuant to our March 24, 2015 secondary public offering (the “March Secondary Offering”) and on behalf of purchasers of the Company’s common stock from November 19, 2014 through October 29, 2015 (the “Class Period”).  The lawsuit alleges, among other things, that, in violation of the federal securities laws, the registration statement and prospectus filed in connection with the March Secondary Offering contained materially false and misleading information or omissions and that the Company as well as certain current and former officers made false and misleading statements in earnings releases and to analysts during the Class Period. The plaintiff seeks unspecified compensatory damages and other relief. In addition, in recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal laws and regulations regarding workplace and employment matters, consumer protection claims and other commercial matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants through adverse judgments or settlement agreements. Similar lawsuits have been and may be instituted against us from time to time, and we may incur substantial damages and expenses resulting from lawsuits of this type, which could have a material adverse effect on our business. From time to time, we may also be engaged in lawsuits against franchisees. Similarly, we may from time to time institute legal proceedings on behalf of ourselves or others. The ultimate outcome of any such lawsuits or legal proceedings could cause us to incur substantial damages and expenses, which could have a material adverse effect on our business.

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The loss of senior executives or key field personnel, such as general managers, could significantly harm our business.

 

Our ability to maintain our competitive position depends to a large degree on the efforts and skills of our senior executives. On average, our executive management team members have 18 years of experience in lodging and lodging related industries or have other relevant experience; however, we cannot guarantee that these individuals will remain with us. Finding suitable replacements for senior executives could be difficult. We currently do not have a life insurance policy or key person insurance policy with respect to any of our senior executives. Any failure of our management to work together to effectively manage our operations, any departures of senior executives, our inability to hire other key management, and any failure to effectively integrate new management into our controls, systems and procedures may adversely affect our business, results of operations and financial condition.

We also rely on the general managers at each of our owned hotels to manage daily operations and oversee the efforts of their team members. These general managers are trained professionals in the hospitality industry and have extensive experience in many markets worldwide. The failure to retain, train or successfully manage general managers for our owned hotels could negatively affect our operations.

Labor shortages and increase in minimum wage rates could restrict our ability to operate our hotels or grow our business or result in increased labor costs that could reduce our profits.

Our success depends in large part on our ability to attract, retain, train, manage and engage employees. If we are unable to attract, retain, train, manage and engage skilled employees, our ability to manage and staff the owned hotels adequately could be impaired, which could reduce guest satisfaction. In addition, the inability of our franchisees to attract, retain, train, manage and engage skilled employees for the franchised hotels could adversely affect our business. Staffing shortages also could hinder our ability to grow and expand our businesses. Because payroll costs are a major component of the operating expenses at our hotels, a shortage of skilled labor could also require higher wages that would increase labor costs, which could adversely affect our profits and the profits of our franchisees. In addition, increases in minimum wage rates could result in significantly increased costs and reduced profits for us and our franchisees.

Higher health care costs could adversely affect our business.

With the passage in 2010 of the U.S. Patient Protection and Affordable Care Act (the “Act”), we are required to provide affordable coverage, as defined in the Act, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the Act. Many of these requirements are being phased in over a period of time. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care and insurance costs could have an adverse effect on our business, financial condition and results of operations.

Attempts by labor organizations to organize groups of our employees or changes in labor laws could disrupt our operations, increase our labor costs or interfere with the ability of our management to focus on implementing our business strategies.

Although none of our employees are currently covered under collective bargaining agreements, we cannot guarantee that our employees will not elect to be represented by labor unions in the future. We may become subject to collective bargaining agreements, similar agreements or regulations enforced by governmental entities in the future. Changes in the federal regulatory scheme could make it easier for unions to organize groups of our employees. If relationships with our employees become adverse, our hotels could experience labor disruptions such as strikes, lockouts and public demonstrations. Additionally, if such changes take effect, our employees could be subject to organizational efforts, which could potentially lead to disruptions or require our management’s time to address unionization issues. If a portion of our workforce were to become unionized, it may also hinder our ability to resolve employment matters and disputes directly with our employees.

 

Labor regulation could also lead to higher wage and benefit costs, changes in work rules that raise operating expenses and legal costs, and limit our ability to take cost saving measures during economic downturns. In addition, the National Labor Relations Board has revised its standard for joint employee relationships, which could increase our risk of being considered a joint employer with our franchisees. Consequently, we may be held liable along with our franchisees for labor, minimum wage, wage and hour, union-organizing and other employment related violations committed by any of our franchisees against its employees.

These or similar agreements, legislation or changes in regulations could disrupt our operations, hinder our ability to cross-train and cross-promote our employees due to prescribed work rules and job classifications, reduce our profitability or interfere with the ability of our management to focus on executing our business and operating strategies.

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If the insurance that we or our franchisees carry does not sufficiently cover damage or other potential losses or liabilities to third parties involving our hotels, our profits could be reduced.

We carry, and we require our franchisees to carry, insurance from insurance carriers that we believe is adequate for foreseeable first and third party losses and with terms and conditions that we believe are reasonable and customary. Nevertheless, market forces beyond our control could limit the scope of the insurance coverage that we and our franchisees can obtain or restrict our or our franchisees’ ability to buy insurance coverage at reasonable rates. In the event of a substantial loss, the insurance coverage that we or our franchisees carry may not be sufficient to reimburse us in full for our losses or pay the full value of financial obligations, liabilities or the replacement cost of any lost investment or property loss, which could adversely affect our profits. In addition, risks that may fall outside the general coverage terms and limits of the policies and certain types of losses that are significantly uncertain, or generally of a catastrophic nature, such as hurricanes, earthquakes and floods or terrorist acts, may be uninsurable or not economically insurable. If such losses or events occur, they could cause substantial damage to our hotels or our franchised hotels or the surrounding area, without any insurance coverage. Further, we and our franchisees may not be able to obtain or renew insurance policies or, if we or our franchisees are able to obtain or renew our coverage, it may be at a significantly higher cost than the historic cost.

In addition, insurance coverage for our hotels and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial condition and results of operation may be adversely affected.

In some cases, these factors could result in certain losses being completely uninsured. As a result, we or our franchisees could lose some or all of the capital invested in a hotel, as well as the anticipated future revenues and profits from the hotel. We or our franchisees could suffer an uninsured or underinsured loss, and we may not have sufficient insurance to cover awards of damages resulting from claims made against us.

Terrorism insurance may not be available at commercially reasonable rates or at all.

Following the September 11, 2001 terrorist attacks in New York City and the Washington, D.C. area, Congress passed the Terrorism Risk Insurance Act of 2002, which established the Terrorism Risk Insurance Program (the “Program”) to provide insurance capacity for terrorist acts. The Program expired at the end of 2014 but was reauthorized, with some adjustments to its provisions, in January 2015 for six years through December 31, 2020. We carry, and we require our franchisees to carry, insurance from insurance carriers to respond to both first-party and third-party liability losses related to terrorism. We purchase our first-party property damage and business interruption insurance from a stand-alone market in place of and to supplement insurance from government run pools. If the Program is not extended or renewed upon its expiration in 2020, or if there are changes to the Program that would negatively affect insurance carriers, premiums for terrorism insurance coverage will likely increase and/or the terms of such insurance may be materially amended to increase stated exclusions or to otherwise effectively decrease the scope of coverage available, perhaps to the point where it is effectively unavailable.

Terrorist attacks and military conflicts may adversely affect the hospitality industry.

The September 11, 2001 terrorist attacks in New York City and the Washington, D.C. area and the November 13, 2015 terrorist attacks in Paris, France underscore the possibility that large public facilities or economically important assets could become the target of terrorist attacks in the future. The occurrence or the possibility of terrorist attacks or military conflicts could, among other things, generally reduce travel to affected areas for tourism and business or adversely affect the willingness of guests to stay in or avail themselves of hotel services and result in higher costs for security and insurance premiums or diminish the availability of insurance coverage for losses related to terrorist attacks, all of which could adversely affect our financial condition and results of operations.

Changes to estimates or projections used to assess the fair value of our assets, or operating results that are lower than our current estimates at certain locations, may cause us to incur impairment charges that could adversely affect our results of operations.

Our total assets include intangible assets with an indefinite life, other intangible assets with finite useful lives, and substantial amounts of long-lived assets, principally property and equipment, including hotels. We analyze our assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that an asset might be impaired. Our evaluation of impairment requires us to make certain estimates and assumptions including projections of future results. After performing our evaluation for impairment, including an analysis to determine the recoverability of long-lived assets, we will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. Decisions to divest hotels could result in the requirement to record an impairment charge due to, among other factors, a decrease in the assumed holding period for the hotel.  For example, during 2016, as part of the strategic review of our owned hotel portfolio, we identified approximately 50 hotels as candidates for sale in the near term. After considering the shortened holding period and probability of selling these hotels, we determined that the estimated cash flows were less than the carrying value of certain hotels and therefore we reduced the carrying values to their estimated

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fair value. This resulted in an impairment charge of approximately $80.4 million. Also during 2016, we entered into agreements to sell 11 of our owned hotels and recorded an impairment charge of $19.3 million to adjust the value of these assets to their fair value, less transaction costs. We also recorded $1.1 million of additional impairment for hotels included in assets held for sale and recorded impairment charges of $3.5 million related to two owned hotels for which we determined that the carrying amount would not be recoverable due to changes in market and economic conditions. Further divestitures could result in additional impairment charges.  In addition, if the estimates or assumptions used in our evaluation of impairment change, we may be required to record additional impairment charges on certain of our assets. During times of economic distress, declining demand and declining earnings often result in declining asset values. If any impairment losses we recognize are significant, our financial condition and results of operations would be adversely affected.

Changes in federal, state, local or foreign tax law or interpretations of existing tax law, or adverse determinations by tax authorities, could increase our tax burden or otherwise adversely affect our financial condition, results of operations or cash flows.

We are subject to taxation at the federal, state and local levels in the U.S. and other countries and jurisdictions. Our future effective tax rate could be affected by changes in the composition of earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, changes in the valuation of our deferred tax assets and liabilities, or changes in determinations regarding the jurisdictions in which we are subject to tax. From time to time, the U.S. federal, state and local and foreign governments make substantive changes to tax rules and their application, which could result in materially higher taxes than would be incurred under existing tax law or interpretation and could adversely affect our profitability, financial condition, results of operations or cash flows. State and local tax authorities have also increased their efforts to increase revenues through changes in tax law and audits. Such changes and proposals, if enacted, could increase our future effective income tax rates. We are subject to ongoing and periodic tax audits and disputes in various jurisdictions. An unfavorable outcome from any tax audit could result in higher tax costs, penalties and interest, thereby adversely impacting our financial condition, results of operations or cash flows.

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We are currently under audit by the Internal Revenue Service and may be required to pay additional taxes.

The Internal Revenue Service (the “IRS”) is currently auditing the tax returns of La Quinta Corporation, one of our former REITs prior to the Pre-IPO Transactions, and BRE/LQ Operating Lessee Inc., one of our former taxable REIT subsidiaries prior to the Pre-IPO Transactions, in each case for the tax years ended December 31, 2010, 2011, 2012 and 2013. With respect to the audits of the 2010 and 2011 tax returns, we received a draft notice of proposed adjustment from the IRS on January 9, 2014, and the notice of proposed adjustment was issued to us on June 2, 2014. We submitted a timely response to the notice of proposed adjustment and, on July 7, 2014, we received an IRS 30-Day Letter proposing to impose a 100% tax on the REIT totaling $158 million for the periods under audit in which the IRS has asserted that the rent charged for these periods under the lease of hotel properties from the REIT to the taxable REIT subsidiary exceeded an arm’s length rent. In addition, the IRS proposed to eliminate $89 million of net operating loss carryforwards for the taxable REIT subsidiary for the tax years 2006 through 2009; however, in an IRS rebuttal received on September 26, 2014, the IRS conceded its proposed adjustment on this point was incorrect. We disagree with the IRS’ position with respect to rents charged by the REIT to its taxable REIT subsidiary and have appealed the proposed tax and adjustments to the IRS Appeals Office. In determining amounts payable by our taxable REIT subsidiary under the lease, we engaged a third party to prepare a transfer pricing study contemporaneous with the lease which concluded that the lease terms were consistent with an arm’s length rent as required by relevant provisions of the Internal Revenue Code of 1986 (the “Internal Revenue Code”) and applicable Treasury Regulations. Attorneys and others representing the Company conducted preliminary discussions regarding the appeal with the IRS Appeals Office team on March 31, 2015 and April 1, 2015. In response to a supplemental analysis submitted by the IRS economist to IRS Appeals and provided to us on August 18, 2015, we submitted responses dated September 3, 2015 and October 1, 2015. Our most recent meeting with the IRS Appeals Office team occurred on January 25, 2017. Our discussions with IRS Appeals are ongoing. We believe the IRS transfer pricing methodologies applied in the audits contain flaws and that the IRS proposed tax and adjustments are inconsistent with the U.S. federal tax laws related to REITs. We have concluded that the positions reported on our tax returns under audit by the IRS are, based on their technical merits, more-likely-than-not to be sustained upon examination. Accordingly, as of December 31, 2016, we have not established any reserves related to this proposed adjustment or any other issues reflected on the returns under examination. If, however, we are unsuccessful in challenging the IRS, an excise tax would be imposed on the REIT equal to 100% of the excess rent and we could owe additional income taxes, interest and penalties, which could adversely affect our financial condition, results of operations and cash flow and the price of our common stock. Such adjustments could also give rise to additional state income taxes.

On November 25, 2014, we were notified that the IRS intended to examine the tax returns of the same entities subject to the 2010 and 2011 audit in each case for the tax years ended December 31, 2012 and 2013.  We have received several draft notices of proposed adjustment proposing a transfer-pricing related assessment of approximately $18 million for 2013 and adjustments to our net operating losses for the years 2006 through 2009.  Based on our analysis of these draft notices, we believe the IRS transfer pricing methodologies and NOL disallowances applied in the 2012-2013 audit contain the same flaws present in the 2010-2011 audit and that the IRS proposed tax and adjustments are inconsistent with U.S. transfer pricing principles and the U.S. federal tax laws related to REITs.  We have concluded that the positions reported on our tax returns under audit by the IRS are, based on their technical merits, more-likely-than-not to be sustained upon examination. Accordingly, as of December 31, 2016, we have not established any reserves related to this proposed adjustment or any other issues reflected on the returns under examination

 

On November 1, 2016, the Internal Revenue Service notified the Company that it intends to audit the return of one of its subsidiaries, Lodge Holdco II L.L.C., for the short taxable year ended April 13, 2014.  The audit is in its early stages and no issues have been communicated to us at this point.  As Lodge Holdco II L.L.C. was treated as a partnership for the taxable year ended April 13, 2014, any tax resulting from this examination would be assessed at the partner level rather than against the Company. Accordingly, no provision has been recorded for this examination.

If the IRS were successful in its challenges relating to our 2010-2013 tax years, we could owe additional income taxes, interest and penalties, which could adversely affect our financial condition, results of operations and cash flow and the price of our common stock.

Although neither we nor any of our subsidiaries has been a REIT for United States federal income tax purposes following the IPO, there can be no assurance that the IRS will not challenge the Existing Entities’ REIT status for previous years in which they elected REIT status. If the IRS were to successfully challenge the previous REIT status of any such entity, we may be required to pay additional taxes.

Certain of the Existing Entities elected to be treated as REITs for United States federal income tax purposes for taxable years ended on and prior to the date of the IPO. Following consummation of the IPO, neither we nor any of our subsidiaries has been a REIT for United States federal income tax purposes. However, there can be no assurance that the IRS will not challenge the Existing Entities’ REIT qualification for previous years in which they elected REIT status. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which only a limited number of judicial or administrative

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interpretations exist. Although we believe that each of the Existing Entities that elected to be treated as a REIT met all of these requirements and qualified as a REIT in each of the years REIT status was elected, if the IRS were to successfully challenge the previous REIT status of any such entity, we could be liable for additional income taxes, interest and penalties, which could adversely affect our financial condition, results of operations and cash flow and the price of our common stock.

 

Changes to accounting rules or regulations may adversely affect our results of operations.

 

New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may require retrospective application and affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations may adversely affect our financial condition and results of operations. See Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of accounting standards issued but not yet adopted.

 

Risks related to pursuing the separation of our businesses

 

Executing on a strategy of a separating our real estate business from our franchise and management business, which could include a spin-off of our owned real estate assets, is contingent upon the satisfaction of a number of conditions, may require significant time and attention of our management, and may have a material adverse effect on us whether or not the strategy is completed.

 

On January 18, 2017, we announced a plan to pursue a separation into two stand-alone publicly traded companies of our real estate business, consisting primarily of our owned hotels located in the U.S. (the "real estate business”), and our franchise and management businesses. The separation could include spinning off our real estate business as a separate company.  The proposed separation is subject to customary conditions, including, but not limited to, effectiveness of appropriate filings with the SEC and final approval by our board of directors. In addition, ability to execute the transaction as intended, unanticipated developments or changes in the macroeconomic environment, U.S. tax policy, credit markets and equity markets, as well as other market conditions, may affect the execution of our separation strategy. For these and other reasons, we may not complete the separation as expected or at all.

 

Whether or not we complete the separation, our ongoing businesses may be adversely affected and we may be subject to certain risks and consequences as a result of pursuing the separation, including, among others, the following:

    

 

 

execution of the proposed separation will require significant time and attention from management, which may distract them from the operation of our business and the execution of other initiatives that may have been beneficial to us;

 

 

 

our employees may be distracted due to uncertainty about their future roles with each of the separate companies pending the completion of the separation;

 

 

 

we will be required to pay significant costs and expenses relating to the separation, such as legal, accounting and other professional fees, whether or not the separation is completed; and

 

 

 

we may experience negative reactions from the financial markets if we fail to complete the separation.

 

Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows or the price of our common stock.

 

We may be unable to achieve some or all of the benefits that we expect to achieve from the separation.

 

Although we believe that separating our real estate business from our franchise and management businesses will provide financial, operational, managerial and other benefits to us and our stockholders, the separation may not provide results on the scope or scale we anticipate, and we may not realize any or all of the intended benefits. For example, if the statutory and regulatory requirements relating to REITs are not met in 2018, the benefits of separating our real estate business from our franchise and management businesses or spinning off our owned real estate assets may be reduced or may be unavailable to us and our stockholders. In addition, we will incur one-time costs and ongoing costs in connection with, or as a result of, the separation, including costs of operating as independent, publicly-traded companies that the real estate business will no longer be able to share. Those costs may exceed our estimates or could negate some of the benefits we expect to realize. If we do not realize the intended benefits of the separation or if our costs exceed our estimates, the Company or the stand-alone real estate business could suffer a material adverse effect on their business, financial condition, results of operations and cash flows.

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If the proposed separation is completed, the trading price of our common stock will decline.

 

We expect the trading price of our common stock immediately following any separation transaction, which will only represent the value of the remaining business or businesses, to be lower than immediately prior to any separation because the trading price for our common stock would no longer reflect the value of the separated business or businesses.

 

Following the separation, the aggregate value of your common stock of the Company and any stand-alone business that may be spun off may be less than the aggregate value at which the Company's common stock might have traded prior to any spin-off.

 

The common stock of the Company and any stand-alone business that may be spun off that you may hold following the separation may collectively trade at an aggregate value less than the value at which the Company's common stock might have traded had the separation not occurred due to, among other factors, the expected or actual future performance of either the Company or any businesses that are spun off as separate, independent companies and the future stockholder base and market for the Company's common stock and the shares of any businesses that are spun off.

 

The proposed separation could result in substantial tax liability to our stockholders.

 

If the separation is completed as a taxable transaction as presently contemplated, each holder of our common stock who receives shares of the new spin-off company would generally be treated as receiving a taxable distribution of property in an amount equal to the fair market value of the shares received.

Risks relating to our indebtedness

Our substantial indebtedness could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts and could expose us to interest rate risk to the extent of our variable debt and divert our cash flow from operations to make debt payments.

We have a significant amount of indebtedness. As of December 31, 2016, our total indebtedness was approximately $1.7 billion. Our substantial debt could have important consequences, including:

 

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and pursue future business opportunities;

 

increasing our vulnerability to adverse economic, industry or competitive developments;

 

exposing us to increased interest expense, as our degree of leverage may cause the interest rates of any future indebtedness (whether fixed or floating rate interest) to be higher than they would be otherwise;

 

exposing us to the risk of increased interest rates because certain of our indebtedness is at variable rates of interest;

 

making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants, could result in an event of default that accelerates our obligation to repay indebtedness;

 

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

limiting our ability to obtain additional financing for working capital, capital expenditures, hotel development, satisfaction of debt service requirements, acquisitions and general corporate or other purposes; and

 

limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who may be better positioned to take advantage of opportunities that our leverage prevents us from exploiting.

In addition, we are a holding company and substantially all of our consolidated assets are owned by, and most of our business is conducted through, our subsidiaries. Revenues from these subsidiaries are our primary source of funds for debt payments and operating expenses. If our subsidiaries are restricted from making distributions to us, that may impair our ability to meet our debt service obligations or otherwise fund our operations. Moreover, there may be restrictions on payments by subsidiaries to their parent companies under applicable laws, including laws that require companies to maintain minimum amounts of capital and to make

37


payments to stockholders only from profits. As a result, although a subsidiary of ours may have cash, we may not be able to obtain that cash to satisfy our obligation to service our outstanding debt or fund our operations.

Servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on many factors, some of which are not within our control.

Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. To a certain extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to generate sufficient cash flow to service our debt and meet our other commitments, we may need to restructure or refinance all or a portion of our debt, sell material assets or operations or raise additional debt or equity capital. We may not be able to affect any of these actions on a timely basis, on commercially reasonable terms or at all, and these actions may not be sufficient to meet our capital requirements. In addition, the terms of our existing or future debt arrangements may restrict us from affecting any of these alternatives. Our failure to make the required interest and principal payments on our indebtedness would result in an event of default under the agreement governing such indebtedness, which may result in the acceleration of some or all of our outstanding indebtedness.

Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions, which could further exacerbate the risks to our financial condition described above.

We may be able to incur significant additional indebtedness in the future. Although the credit agreement governing the senior secured credit facilities will contain restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, these restrictions are subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt instruments. To the extent new debt is added to our current debt levels, the substantial leverage risks described in the preceding two risk factors would increase.

The credit agreement governing the senior secured credit facilities contains, and future debt agreements may contain, restrictions that may limit our flexibility in operating our business.

The credit agreement governing the senior secured credit facilities contains operating covenants that limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, our ability to incur additional indebtedness and make guarantees, create liens on assets, enter into sale and leaseback transactions, engage in mergers and consolidations, sell assets, make fundamental changes, pay dividends and distributions or repurchase our capital stock, make investments, loans and advances, including acquisitions, engage in certain transactions with affiliates, make changes in the nature of our business and make prepayments of junior debt. In addition, under our senior secured credit facilities, if, on the last day of any period of four consecutive quarters, the aggregate principal amount of revolving credit loans, swing line loans and/or letters of credit (excluding up to $20 million of letters of credit and certain other letters of credit that have been cash collateralized or back-stopped) that are issued and/or outstanding is greater than 25% of the revolving credit facility, the credit agreement requires the borrower to maintain a consolidated first lien net leverage ratio not to exceed 8.0 to 1.0. Additionally, the documents governing our future indebtedness may place additional restrictions on us and may require us to meet certain financial ratios and tests. Our ability to comply with these and other provisions of our new credit agreement and future debt agreements is dependent on our future performance, which will be subject to many factors, some of which are beyond our control. The breach of any of these covenants or non-compliance with any of these financial ratios and tests could result in an event of default under the debt agreements, which, if not cured or waived, could result in acceleration of the related debt and the acceleration of debt under other instruments evidencing indebtedness that may contain cross-acceleration or cross-default provisions.

Risks related to ownership of our common stock

Blackstone may exercise significant influence over us and its interests may conflict with ours or yours in the future.

As of February 24, 2017, Blackstone beneficially owned approximately 30.1% of our common stock. Moreover, under our amended and restated bylaws and the stockholders’ agreement with Blackstone, we have agreed to nominate to our board individuals designated by Blackstone, whom we refer to as the “Sponsor Directors,” according to the following scale: (1) if  Blackstone continues to beneficially own at least 30% (but less than 40%) of our stock, the lowest whole number that is at least 30% of the total number of directors comprising our board of directors; (2) if Blackstone continues to beneficially own at least 20% (but less than 30%) of our stock, the lowest whole number that is at least 20% of the total number of directors comprising our board of directors; and (3) if Blackstone continues to beneficially own at least 5% (but less than 20%) of our stock, the lowest whole number that is at least 10% of the total number of directors comprising our board of directors. We have three directors on our board that are current employees of Blackstone and one director on our board that is a retired employee of Blackstone. Although Blackstone does not own shares of our stock representing a majority of our total voting power, Blackstone is able to significantly influence the composition of our board of

38


directors and the approval of actions requiring stockholder approval. Accordingly, Blackstone has and will continue to have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. For example, for so long as Blackstone continues to own a significant percentage of our stock, Blackstone may be able to influence whether or not a change of control of our Company or a change in the composition of our board of directors occurs. In addition, Blackstone may be engaged from time to time in discussions relating to dispositions of its holdings of our common stock, which could include the sale of a significant percentage to a single buyer. If such significant sale were to occur, the buyer could have influence over the management of our company, including through board representation. Any such concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our Company and ultimately might affect the market price of our common stock.

Blackstone engages in a broad spectrum of activities, including investments in real estate generally and in the hospitality industry in particular. In the ordinary course of their business activities, Blackstone may engage in activities where their interests conflict with our interests or those of our stockholders. For example, Blackstone owns interests in Extended Stay America, Inc., Hilton Worldwide Holdings Inc., Park Hotels & Resorts Inc., Hilton Grand Vacations Inc. and G6 Hospitality, LLC, and certain other investments in the hotel industry that may compete directly or indirectly with us. As a result, they could have interests that could conflict with ours. Additionally, some of our directors are, and our directors may in the future be, engaged in the hospitality industry. Our amended and restated certificate of incorporation provides that none of Blackstone or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates has any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Blackstone also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, Blackstone may have an interest in having the Company pursue acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment in the Company, even though such transactions might involve risks to you.

Because we have no current plans to pay cash dividends on our common stock, you may not receive any return on your investment unless you sell your common stock for a price greater than that which you paid for it.

We have no current plans to pay any cash dividends. The declaration, amount and payment of any future dividends on shares of common stock will be at the sole discretion of our board of directors. Our board of directors may take into account, among other things, our financial condition, results of operations, level of indebtedness, capital requirements, restrictions in our debt agreements, other contractual restrictions and the terms of any preferred stock, our business prospects and other factors that our board of directors may deem relevant.

Future issuances of common stock by us, and the resale of shares held by Blackstone, could cause the market price of our common stock to decline.

We have approximately 1,868,000,000 shares of common stock authorized but unissued under our amended and restated certificate of incorporation. We are authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise.

In the future, we may issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding shares of common stock. Any issuance of additional securities, including in connection with investments or acquisitions, may result in dilution to our existing stockholders.

In addition, the sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. Pursuant to a registration rights agreement, we have granted our Sponsor the right to cause us, in certain instances, at our expense, to file registration statements under the Securities Act covering resales of our common stock held by them. These shares represented approximately 30.1% of our outstanding common stock as of February 24, 2017. These shares also may be sold pursuant to Rule 144 under the Securities Act, subject to volume, manner of sale and other limitations under Rule 144. As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our stock could decline if the holders of restricted shares sell them or are perceived by the market as intending to sell them.

We have reserved a total of 13,000,000 shares for issuance under our 2014 Omnibus Incentive Plan. As of February 24, 2017, 11.4 million shares of common stock remain available for future awards. We have filed a registration statement on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our 2014 Omnibus Incentive Plan. Accordingly, shares registered under such registration statement will be available for sale in the open market.

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In addition, our board and stockholders have approved the adoption of our 2015 Employee Stock Purchase Plan (the “ESPP”), and we have reserved a total of 2,600,000 shares for issuance thereunder. We have filed a registration statement on Form S-8 under the Securities Act to register such shares and any shares purchased under our ESPP will be available for sale in the open market.

Any common stock that we issue, including under our 2014 Omnibus Incentive Plan, ESPP or other equity incentive plans that we may adopt in the future, would dilute your ownership interest in us.

As restrictions on resale end, the market price of our shares of common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the merger or acquisition of our Company more difficult without the approval of our board of directors. Among other things:

 

although we do not have a stockholder rights plan, and would either submit any such plan to stockholders for ratification or cause such plan to expire within a year, these provisions would allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

these provisions prohibit stockholder action by written consent from and after the date on which the parties to our stockholders’ agreement cease to beneficially own at least 40% of the total voting power of all then outstanding shares of our capital stock unless such action is recommended in advance by all directors then in office, the parties to our stockholders’ agreement beneficially own less than 40% of our outstanding common stock and, accordingly, stockholder action is not permitted by written consent;

 

these provisions provide that the board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws and that our stockholders may only amend our amended and restated bylaws with the approval of 80% or more of all of the outstanding shares of our capital stock entitled to vote; and

 

these provisions establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our Company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

 

Item 1B.

Unresolved Staff Comments

None.

 

 

Item 2.

Properties

As of December 31, 2016, we owned 322 hotels, representing 41,236 rooms. Five of 322 hotels are held for sale as of December 31, 2016. Eighteen of our owned hotels are either completely or partially on land subject to ground leases. All of the remaining hotel properties and grounds are fully owned (except for a La Quinta Inn in New Orleans, Louisiana, which is owned by a joint venture in which we have a controlling interest).

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Owned Hotels

 

State

 

Hotels

 

 

Number of Rooms

 

Texas

 

 

70

 

 

 

9,441

 

Florida

 

 

50

 

 

 

6,125

 

California

 

 

21

 

 

 

3,127

 

Colorado

 

 

15

 

 

 

1,894

 

Louisiana

 

 

13

 

 

 

1,796

 

Georgia

 

 

14

 

 

 

1,696

 

Arizona

 

 

11

 

 

 

1,421

 

North Carolina

 

 

10

 

 

 

1,297

 

Wisconsin

 

 

13

 

 

 

1,262

 

Illinois

 

 

8

 

 

 

1,097

 

Tennessee

 

 

8

 

 

 

988

 

Ohio

 

 

9

 

 

 

962

 

New Mexico

 

 

8

 

 

 

914

 

Alabama

 

 

6

 

 

 

737

 

South Carolina

 

 

5

 

 

 

675

 

New York

 

 

5

 

 

 

605