La Quinta Inns, Inc.

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La Quinta Inns, Inc.

Weston Centre
112 East Pecan
P.O. Box 2636
San Antonio, Texas 78299-2636
U.S.A.
(210) 302-6000
Fax: (210) 302-6263

Public Company
Incorporated: 1968
Employees: 6,100
Sales: $272.85 million
Stock Exchanges: New York

SICs: 7011 Motor Inns; 8741 Hotel and Motel Management;
6794 Franchises Selling or Licensing

With more than 220 inns in 29 states, La Quinta Inns, Inc. is one of the largest owner-operated hotel chains in the United States. Its properties, which are located primarily in Florida, California, and particularly Texas, are targeted toward cost-conscious business travelers. The hotel chain expanded rapidly during the 1980s by utilizing a variety of unique financing techniques.

La Quinta, which means “the country place” in Spanish, got its start in 1968 during HemisFair, the San Antonio, Texas world’s fair. Across from the fairgrounds, entrepreneur Sam Barshop and his brother, Phil, built the first in what would become a successful chain of La Quinta Inns. After the fair, the Barshops used the hotel, as they would later describe the venture, to invent a new lodging industry niche: moderately priced accommodations that catered to the commercial business traveler.

By the time the Barshops built the first La Quinta Inn, they had racked up an impressive resume of experience in the real estate and lodging industries. Their family’s successful real estate business had provided them with an adept understanding of finance and property transactions. That knowledge would later surface in a variety of innovative financing strategies, which they would use to fund the La Quinta chain. Moreover, during the early 1960s, the brothers started building and leasing hotels that were licensed by the Ramada Inn chain. Through their company, Barshop Motel Enterprises, they also obtained exclusive franchise rights for Rodeway Inns of America in Texas, Oklahoma, Arkansas, and Kansas. In the mid-1960s, in fact, Sam and Phil Barshop made an unsuccessful bid to purchase the Rodeway chain.

Following their failed attempt to buy Rodeway, the Barshops opened La Quinta Inn. Recognizing the untapped potential of their new market niche, they began duplicating the La Quinta concept in neighboring areas. The Barshops used a variety of financing tools to pay for the construction of new hotels, including various partnership and joint-venture arrangements. They also expanded the chain by selectively licensing, or franchising, the La Quinta name and concept to unrelated third parties. By the late 1970s, La Quinta inns were springing up primarily across Texas, but also in a few other states. Phil Barshop left the company in 1977 to devote his attention to the family’s real estate business, although he remained on the board of directors until 1994.

Aside from the Barshops’ creative financing tactics, La Quinta’s unique recipe for attracting travelers to its hotels allowed the chain to prosper during the 1970s and 1980s. La Quinta Inns were designed for male business travelers, especially those employed in sales jobs. Rather than striving to entertain guests, as Sam Barshop believed many of his competitors were trying to do, La Quinta simply provided its patrons with clean, comfortable rooms at low prices. Visitors typically enjoyed comparatively large rooms with large beds and ample space to work. The Barshops were able to undercut competing hoteliers, such as Holiday Inn and Rodeway, by eschewing such amenities as swimming pools, elaborate lounges, and restaurants that were of negligible interest to bustling businessmen. By focusing on its core market, La Quinta was able to accrue a large base of repeat customers that sought out La Quinta Inns during their travels.

The Barshops augmented the unique features associated with their individual hotels with a savvy marketing and organizational strategy. La Quinta’s expansion came to be guided by the concepts of “clustering, adjacency, and filling in.” In other words, the Barshops tried to build name recognition and secure regional market share by locating numerous inns in the same metropolitan areas, putting the hotels within no more than 300 miles of existing properties and then opening inns in smaller cities near established La Quinta markets. The proximity of the La Quintas in each market allowed the hotels to achieve economies of scale by sharing maintenance and purchasing expenses. In addition, Sam Barshop cultivated a reliably group of managers for his properties, hiring mostly ex-military or retired couples to run the hotels.

During this time, franchising had become a popular method of financing the growth of hotel chains because there was often little or no capital investment required by the parent organization. Rather, the parent earned various license and management fees from its franchise in lieu of direct operating profits. However, Barshop was wary of franchising. “You can’ t control a franchise...,” he remarked in the May 14, 1990 issue of Hotel and Motel Management, noting that franchises were” not maintaining control; they’ re not maintaining consistency.” Reflecting his commitment to the stratagem of consistency through ownership of La Quinta properties, Barshop ended the company’s franchising program in 1977. Barshop focused on building and operating hotels that were owned entirely, or mostly, by La Quinta Motor Inns, Inc.

To fund expansion of the La Quinta chain during the late 1970s and early 1980s, Barshop drew on his real estate and finance background to establish innovative deals that brought investment capital into the organization. In addition to selling stock, he formed joint ventures with well established financial institutions, particularly insurance companies. For hotels that it did not own completely, La Quinta Motor Inns, Inc. would earn fees for developing and managing the properties. The company would also keep a portion of the profits reflective of its ownership share in the projects, with the remainder of the income going to its partner. La Quinta typically maintained 40 percent to 80 percent ownership in the projects, although it retained as little as one percent of some hotels.

Integral to Barshop’s financial strategy during the early 1980s was his use of a joint venture to fund the development of a new La Quinta Motor Inns, Inc. headquarters. Built in 1982 to house the hotelier’s burgeoning operations, La Quinta Plaza in San Antonio resulted from a joint venture between La Quinta and Israel Fogiel, a local developer. La Quinta eventually purchased Fogiel’s share of the complex during the mid-1980s, by which time it was involved in several deals with other investors. Importantly, by 1986 La Quinta had erected 40, or about one-quarter, of the hotels in its chain with the help of its most active partner, Prudential Insurance Company.

By 1986, La Quinta was operating 170 hotels, generating revenues of nearly $180 million and netting income of about $6 million. While most of its hotels were in Texas and Florida, the company had extended its reach into other regions of the South and Southwest as well. That year, however, Congress passed the Tax Reform Act (TRA), which essentially destroyed many of the valuable tax incentives apportioned to investors in commercial real estate projects and served to eventually diminish the liquidity and value of La Quinta’s existing properties. Despite the apparent setback, Barshop characteristically tried to turn the new law into an opportunity.

Observers viewed the TRA of 1986 as a death knell for the formerly red-hot limited partnership market, in which limited partnerships allowed numerous smaller investors to invest in large development projects through publicly traded shares. However, Barshop became one of the first developers to establish a master limited partnership (MLP) under the new laws. He created a company called La Quinta Motor Inns Limited Partnership, placed 31 of his properties into the MLP, and then sold shares in the partnership to investors. La Quinta continued to operate the properties to garner management fees from the MLP. The deal resulted in about $75 million in cash that Barshop could use to build new hotels.

Barshop continued to expand the La Quinta chain during 1986 and 1987, using capital raised through various means. In 1987, for example, he formed two joint ventures with investment partnerships managed by CIGNA Investments, Inc. Those two endeavors produced nine hotels and six restaurants. La Quinta owned only one percent of the properties but secured long-term contracts to manage the inns on a fee basis. Between 1986 and 1990, La Quinta added a total of about 30 new properties to its holdings, including the properties held by the limited partnership. Steady growth, however, belied serious problems that beset the lodging industry in the Southwest during the late 1980s and early 1990s.

By the end of the 1980s the U.S. economy had tailspinned into a recession, gutting market growth in the lodging industry. Hoteliers in the Southwest, in fact, had started suffering as early as 1988, and hotel and real estate industries across the United States were enduring the delayed effects of the TRA of 1986. Development of new hotels had virtually halted by the end of the decade as overbuilt markets scared away investors. While the average occupancy rate for hotels plummeted, many of La Quinta’s peers struggled to avoid bankruptcy. The downturn signaled an end of the rapid expansion achieved by Barshop during the 1980s. Development of new La Quinta Inns slowed dramatically in 1990 and even into the mid-1990s.

Nevertheless, La Quinta managed to weather the storm with relatively minor difficulties. Importantly, the recession boosted corporate interest in lower-priced hotels. In fact, in 1991, La Quinta posted the highest occupancy rate, 75.7 percent, of any Texas hotel chain in the business-traveler category. Furthermore, La Quinta managed to get a jump on many of its competitors during the slump by updating and renovating its properties. Using the cash he had generated at the start of the recession, originally earmarked for new developments, Barshop refurbished his hotels and boosted La Quinta’s share of a stagnating market. With characteristic optimism, Barshop used the recession as an opportunity to position La Quinta for growth in the 1990s. “I think the golden years of this company will be the 1990s,” he commented in Hotel and Motel Management magazine.

La Quinta bucked industry financial trends again in 1991 when it formed a new MLP, La Quinta Development Partners, L.P. The partnership, entered into with a Boston-based real estate firm, generated about $150 million in new working capital for the La Quinta organization. In addition, restructuring efforts initiated in the early 1990s were cutting La Quinta’s overhead and increasing its operating margins. However, during this time, problems surfaced that would soon result in the resignation of many of La Quinta’s executives and would later persuade Bar-shop to abandon the company he and his brother had founded.

In 1991, a group of shareholders based in Fort-Worth, lead by the Bass and Taylor families, attempted to gain control of the company. Rather than file for bankruptcy to avert the takeover, Barshop came to terms with the group. During the same period, a group of Connecticut investors filed suit against La Quinta Motor Inns Limited Partnership, alleging violations of securities law and mismanagement. Although Barshop denied the charges and fought the hostile takeover, the struggle resulted in the flight of several of his top managers, who were replaced by appointees of the Bass/Taylor Group. Barshop himself was forced out of his position as chief executive, although he retained his title of chairperson.

Gary L. Mead, a lodging industry veteran, assumed the presidency of La Quinta Motor Inns, Inc. in 1991. Although La Quinta’s new management team sustained the chain’s legacy of marketing toward business travelers, Mead instigated a reorganization of the company. Restructuring efforts were designed to transform La Quinta from an entrepreneurial-styled organization, which had served the company well during the 1970s and 1980s, into a more management-intensive, efficient corporate enterprise.

Under Mead’s direction, La Quinta consolidated most of the holdings under its diverse partnerships and joint ventures into a unified chain of inns operated and owned, in full or in part, by the renamed La Quinta Inns, Inc. Mead also implemented vast staff cuts and slashed La Quinta’s operating overhead—the company’s work force plummeted from 6,800 in 1991 to about 6,100 by the end of 1993. In addition, during 1993 and 1994, La Quinta conducted a $50 million image-enhancement program to give its hotels a fresher, more contemporary appearance. The company also adopted a more progressive logo.

Although La Quinta quelled development of new hotels during the early 1990s, it managed to increase the number of rooms owned and operated by La Quinta Motor Inns, Inc. by about 40 percent, to more than 23,000. That feat was accomplished by purchasing La Quinta hotels from the limited partnerships and by acquiring and converting nearly 15 new properties between 1991 and 1994. As lodging markets began to recover and La Quinta’s cost-cutting efforts began to pay off, the company started to prosper; after shouldering a net loss in 1992, La Quinta’s earnings increased by $20.3 million from record sales of $272 million in 1993. Sales early in 1994, moreover, suggested improved performance. As evidenced by its move to a new corporate headquarters building in 1993, La Quinta was poised for a new era of expansion during the remainder of the decade.