La Quinta Holdings Inc., the mid-priced hotel chain backed by Blackstone Group LP (BX), fell in in its trading debut after the company raised a lower than expected $650 million in its initial public offering.
La Quinta slipped 1.7% to $16.71 at 9:47 a.m. in New York today, after selling 38.25 million shares for $17 each. The Irving, Texas-based company had offered 37.2 million shares for $18 to $21 apiece.
The lodging chain’s IPO follows a stock-market slump that knocked more than 7% off the Bloomberg U.S. Lodging Index in just three days this month. The lodging index, and broader Standard & Poor’s 500 Index, have regained some ground in the last two trading days.
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At $17 a share, La Quinta would have a market value of $2.1 billion, based on the original terms of the offering. That’s 47 times last year’s earnings of $44.5 million, and compares with an average price-to-earnings multiple of about 29 for seven U.S. lodging companies including Hyatt Hotels Corp. and Choice Hotels International Inc., data compiled by Bloomberg show.
Blackstone has taken three lodging companies public in the past six months including La Quinta, as real estate values rise and hotel shares climb. The firm’s Hilton Worldwide Holdings Inc. (HLT) and Extended Stay America Inc., co-owned with Centerbridge Partners LP and Paulson & Co., have both risen since their initial public offerings.
The decline in the U.S. jobless rate, growth in salaries and increase in business travel have helped fuel a hotel-industry recovery since the recession ended in late 2009, said Jan Freitag, senior vice president at STR Inc., a lodging-research firm based in Hendersonville, Tennessee.
“We sold more rooms than ever before in 2013,” Freitag said in a telephone interview. “We’re seeing demand holding up pretty well. Unemployment is coming down slowly, personal income is going up and debt-service ratios for private consumers are at an all-time low. A lot of people had to cut back and now might be the time for travel again.”
U.S. hotels sold a record 1.11 billion room nights last year, up from 1.08 billion in 2012 and 940.5 million in 2009, the recession low, according to STR. By 2011, room sales had surpassed the pre-crisis high of 1.03 billion nights, in 2007.
La Quinta operates and franchises more than 800 hotels in the U.S., Canada and Mexico, according to its website. Proceeds from the IPO will be used to repay debt, the prospectus shows.
“Limited-scale, mid-price properties are probably in the sweet spot in attracting middle-income America from the leisure standpoint” and business travel, Freitag said.
Revenue per available room, an industry measure of room rates and occupancy, rose 6.6% in the U.S. in the two months ended February, after gaining 5.4% for all of last year, according to STR. Revpar for mid-price hotels such as La Quinta’s was up 6.5% this year through February, following a 4.1% increase last year, according to STR.
While occupancy growth drove gains in revpar coming out of the recession, higher room prices has also contributed in the past two years, Freitag said.
Blackstone acquired La Quinta in January 2006 for about $3 billion. The New York-based buyout firm explored a sale of the company before opting instead for an IPO, people with knowledge of the matter said in November.
La Quinta planned to sell 30% of its shares in the IPO, according to its prospectus. Blackstone will beneficially own about 67% of the common stock after the share sale, the March filing shows. Even at the lower offering price, Blackstone will roughly triple its investment in the company, according to a person familiar with the pricing details who asked not to be identified because the information is private.
Christine Anderson, a spokeswoman for Blackstone, declined to comment on La Quinta’s IPO yesterday.
JPMorgan Chase & Co. and Morgan Stanley managed the sale.