<B> REIT Takes La Quinta</B>
<I>Meditrust Exercises Its Paired-Share Option</I>
By Maria P. Vallejo
<I>Needham, Mass.</I> - The first acquisition announcement of 1998 may well foreshadow a hospitality industry dominated by real estate investment trusts. Meditrust Companies--a new name to most travel managers--last week said it will acquire La Quinta Inns Inc. for $3 billion, introducing a new paired-share REIT player to the merger-hungry marketplace and raising concerns for the industry's future.
The hospitality business is just becoming accustomed to the names Patriot American and Starwood Lodging, which until recently were the only two paired-share hotel REITs in existence. Now Meditrust, the largest U.S. healthcare property operator and another holder of the coveted paired-share REIT status, has stepped onto the stage. With its first hospitality acquisition, Meditrust has created a hotel portfolio of 234 owned and operated La Quinta Inns and 36 La Quinta Inn & Suites. While acquiring the largest owner and operator of midpriced hotels without food and beverage, the REIT will have properties in 28 primarily southern and western states. And Meditrust said it will continue La Quinta's plan to increasing its portfolio to more than 100 Inns & Suites by the end of 1999.
"This acquisition represents a platform for a lodging and leisure sector within Meditrust," said Meditrust chairman Abraham Gosman in the press release announcing the purchase. "The acquisition of La Quinta is consistent with our stated strategy to make assertive acquisitions of growth companies in growth industries."
Like Patriot American and Starwood Hotels and Resorts, Meditrust received its paired-share status by acquiring a grandfathered company. In November, it merged with The Santa Anita Companies and announced its interest in expanding its portfolio into the hospitality industry.
Under the La Quinta agreement, Gosman will remain chairman of Meditrust's boards of directors. La Quinta's current president and CEO, Gary Mead, will leave the company and be replaced by La Quinta's current chief operating officer, Ezzat Coutry. Although the merger is subject to shareholder approval, Mead, Thomas M. Taylor & Co. and other entities and individuals associated with members of the Bass family have agreed to vote in favor of the merger. The Bass family owns about 28 percent of La Quinta's shares.
The introduction of this new company in the hospitality field has created a wave of speculation concerning future negotiations and mergers. While the acquisition of a hotel company by a health care company is uncommon, analysts noted that Manor Care, a health care company, acquired Comfort Inn in the 1970s, and said a commonalty does exist between the two service industries.
But the introduction of another paired share REIT into the acquisition game was a point of concern. Unlike other hotel company structures, a paired-share REIT trades the stocks of two separate entities--a REIT which owns hotels and a company that manages them--under one stock symbol. The management company pays taxes, while the REIT entity is tax exempt, giving it an advantage over other hoteliers.
There are only four paired-share REITs in existence, the three new players in the hotel field and Cleveland-based First Union, which primarily concentrates on ownership of retail, apartment and office properties. A fifth paired-share REIT, Hollywood Park in California, has dismantled itself, though Hollywood Park officials are currently looking into regaining that status, analysts said.
The paired-share REIT structure came under heated debate last year from industry players, including Hilton Hotels Corp. chairman and CEO Stephen Bollenbach, who suggested that the unique paired-share composition gave these companies better monetary leverage for acquisition and merger deals. Starwood Lodging outbid Hilton Hotels Corp. for ITT Corp., winning a 10-month-long acquisition battle ending at ITT's November shareholder meeting.
"The thought from some of these companies is that there's an unfair advantage of having the paired-share format because of the tax advantage," said Scott Brush, president of Miami-based Brush & Co. "It wasn't a level playing field."
Analysts said the Meditrust merger gave San Antonio-based La Quinta a higher than expected purchase price of $2.1 billion in cash and stock with an assumed $900 million outstanding debt. Shareholders will receive $26 a share. After announcing lower than expected earnings for its third quarter 1997, La Quinta Inns officials began looking for prospective buyers. "They were bought at quite a premium over the stock price," Brush said. "They probably wouldn't have gotten that kind of price from a non-paired-share REIT. It's not dangerous for the industry other than it may drive up the prices of these companies more than they should be."
But some analysts said the "tax-free" status of REITs is a misconception because the REIT's taxes are passed on to shareholders through dividends. "Taxes on real estate income is not avoided because dividends are passed to shareholders and they pay taxes," said Brad Hatfield, an analysts at Deutsche Morgan Grenfell in New York.
Furthermore, Hatfield said the recent acquisition "reinforces the point that paired-share REITs are the way to go for fully integrated hotel operating companies, since they have tax-advantage benefits and are able to operate (as well as own) their properties, which traditional REITs are not permitted to do."
This ongoing acquisition spree may result in most hotels falling under a handful of major companies, hindering the negotiation process. Combined with rising occupancy in a seller's market, the paired- share REIT acquisition boom may restrict negotiations for the 1999 season.
"The companies that are looking at negotiating for rates are going to have fewer companies to deal with," Brush said. "In some areas, there will be less choice. It's going to be harder to go in because they'll have common ownership. They won't be so amenable to negotiations."
As some hotel companies continue to question the unyielding power of the paired- share REIT structure, fellow paired-share REITs have nothing to fear with Meditrusts' entrance, analysts said. Patriot American and Starwood Lodging will not face notable competition from Meditrust, given the disparity in the company's targeted price segments.
Starwood and Patriot primarily focused their acquisitions on upscale, full service hotels. La Quinta is associated with the midpriced market. "It's another player, but it won't directly compete with Starwood and Patriot," Hatfield said. "It potentially represents a new buyer for limited service hotels since they're the only paired-share REIT focused on those kinds of hotels."
Aside from the a typical paired-share structure, the simple REIT also has gained some attraction. Host Marriott Corp. last month announced plans to consolidate six of its subsidiaries into a tax exempt REIT structure. The partnership will consolidate Courtyard by Marriott Limited, Marriott Residence Inn and Fairfield Inn into the new unnamed company. While owning the properties, the new company will continue its alliance with Marriott International for management.
"You almost have to take attendance now to see what's left that's not owned by a REIT," Brush said. "REITs seem to be very attractive to Wall Street at the moment."
While Host Marriott officials said their own decision to form a REIT was not the result of an industry trend, analysts do expect other companies to consider the REIT option. "I know we've been looking at it for several months," said Geof Wendt, Host Marriott's manager of investor relations. "It didn't come out of a trend that's happening in the market. It came out of what benefits the limited partnership the most."
The new Marriott REIT will make its initial public offering by mid-year, and will concentrate on upper tier, moderate service hotels acquisitions. It initially will look to acquire a "substantial" number of properties already in the Marriott International portfolio, Wendt said.