CHICAGO -- Fitch Ratings has affirmed La Quinta Corp.'s issuer default rating (IDR) at 'BB-', its senior unsecured notes at 'BB-', and its preferred stock at 'B'. Additionally, Fitch has assigned a 'BB' rating to the senior secured credit facility. The Rating Outlook has been revised to Positive from Stable.
The one notch difference in the rating of the senior secured credit facility and the IDR is due to the guarantee provided to the credit lenders by La Quinta Corp.'s subsidiaries. Additionally, the credit facility has a stronger covenant package than any of the senior unsecured notes, which are currently rated 'BB-'.
La Quinta's ratings reflect the company's solid market position as a leading limited service lodging provider, its high quality asset portfolio, an improved credit profile, robust lodging fundamentals, and Fitch's expectation for a strong 2006. Also considered is management's strong track record of executing on operational goals. Management has delivered on its stated goals to divest the health care assets (completed fourth quarter 2002), launch a successful franchise program, upgrade assets to improve future performance, and expand its hotel system through strategic acquisitions. Rating concerns include expanded capital expenditures in the near term, acquisition risk, and pricing transparency due to proliferation of information on the internet and expansion of third party sellers.
La Quinta's credit profile has improved over the latest 12 months (LTM) due to stronger cash flow. As of June 30, 2005, LTM EBITDA/interest exceeded 3.0 times (x), lease adjusted debt/EBITDA was under 4.5x, and free cash flow (cash flow from operations less capital expenditures less dividends) was greater than $50 million. EBITDA during this period was $218 million, significantly greater than the same period one year earlier due to the acquisition of Marcus Corporation's limited service business ('Baymont'), the increased number of franchised hotels, and an improved lodging environment.
The lodging environment continues to improve as indicated by La Quinta's RevPAR, which advanced 8% in 2004 and is expected to rise by a similar percentage in 2005. Furthermore, the outlook for 2006 is optimistic due to expected GDP growth of more than 3%, which should lead to increased demand for hotels from business, group and leisure segments. Meanwhile, supply of new hotels is expected to be limited for the next several years with only 1%-2% of new supply per year. The combination of higher average daily rates and higher occupancy rates should contribute to year over year RevPAR growth in the upper single digits in 2006.
The Positive Outlook is based on the expectation that La Quinta will continue to benefit from the improving industry fundamentals, maintain a disciplined growth strategy, and gradually strengthen its balance sheet. In the third quarter, $116 million of debt was repaid, which should leave the company with about $809 million of total debt. The company has $20 million of debt maturing in 2006 and $210 million of debt due in 2007. Fitch expects a portion of the debt due in 2007 to be refinanced. Following the $165 million equity offering in May 2005, La Quinta's liquidity is strong with more than $296 million of cash on hand and $130 million of availability through its revolver as of June 30, 2005.
La Quinta Corporation is one of the largest owner/operators of limited-service hotels in the United States, with over 64,000 rooms system wide. At June 30, 2005, La Quinta owned 362 hotels and 45,194 rooms. It franchised or managed 230 hotels and 19,202 rooms. Franchise fee made up less than 5% of revenue
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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