UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2018

☐	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

90-1032961

(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)

(214) 492-6600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

		Emerging growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The registrant had outstanding 117,246,097 shares of Common Stock, par value $0.01 per share as of May 3, 2018.

LA QUINTA HOLDINGS INC.

FORM 10-Q TABLE OF CONTENTS

FOR THE PERIOD ENDED MARCH 31, 2018

		Page No.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		3

PART I.	FINANCIAL INFORMATION	5

Item 1.	Condensed Consolidated Financial Statements of La Quinta Holdings Inc. (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41

PART II.	OTHER INFORMATION	42

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Quarterly Report on Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends and other information, may be forward-looking statements. Words such as “estimates,” “expects,” “contemplates,” “will,” “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 Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission (the “SEC”), as such risk factors may be updated from time to time in our periodic filings with the SEC, and are accessible on the SEC’s website at www.sec.gov, and also include the following:

•

risks related to the pending Spin (as defined herein) and the merger of our management and franchising business with Wyndham Worldwide Corporation (“Wyndham Worldwide”);

•

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 audits by the Internal Revenue Service;

•

our substantial indebtedness; and

•

Blackstone’s significant influence over us.

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. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

All references to “we”, “us”, “our”, the “Company” or “La Quinta” in this Quarterly Report on Form 10-Q mean La Quinta Holdings Inc. and its subsidiaries, unless the context otherwise requires.

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

La Quinta Holdings Inc.

Condensed Consolidated Balance Sheets (Unaudited)

As of March 31, 2018 and December 31, 2017

	March 31, 2018			December 31, 2017
	(in thousands, except share data)
ASSETS
Current Assets:
Cash and cash equivalents	$	113,486		$	140,849
Accounts receivable, net of allowance for doubtful accounts of $4,169 and $4,296		74,368			66,183
Assets held for sale		4,787			8,706
Other current assets		14,198			12,015
Total Current Assets		206,839			227,753
Property and equipment, net of accumulated depreciation		2,511,783			2,506,523
Intangible assets, net of accumulated amortization		175,755			175,982
Other non-current assets		52,902			42,838
Total Non-Current Assets		2,740,440			2,725,343
Total Assets	$	2,947,279		$	2,953,096
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt	$	17,514		$	17,514
Accounts payable		65,895			48,757
Accrued expenses and other liabilities		64,126			59,587
Accrued payroll and employee benefits		42,832			52,113
Accrued real estate taxes		13,543			20,782
Total Current Liabilities		203,910			198,753
Long-term debt		1,667,476			1,670,447
Other long-term liabilities		44,036			21,833
Deferred tax liabilities		227,314			233,765
Total Liabilities		2,142,736			2,124,798
Commitments and Contingencies
Equity:
Preferred Stock, $0.01 par value; 100,000,000 shares authorized and none outstanding as of March 31, 2018 and December 31, 2017		—			—
Common Stock, $0.01 par value; 2,000,000,000 shares authorized at March 31, 2018 and December 31, 2017, 132,475,086 shares issued and 117,342,020 shares outstanding as of March 31, 2018 and 132,478,073 shares issued and 117,345,996 shares outstanding as of December 31, 2017		1,325			1,325
Additional paid-in-capital		1,184,701			1,181,639
Accumulated deficit		(173,886	)		(144,041	)
Treasury stock at cost, 15,133,066 shares at March 31, 2018 and 15,132,077 shares at December 31, 2017		(212,479	)		(212,461	)
Accumulated other comprehensive income (loss)		2,308			(760	)
Noncontrolling interests		2,574			2,596
Total Equity		804,543			828,298
Total Liabilities and Equity	$	2,947,279		$	2,953,096

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

La Quinta Holdings Inc.

Condensed Consolidated Statements of Operations (Unaudited)

For the Three Months Ended March 31, 2018 and 2017


	Three Months Ended
	March 31, 2018			March 31, 2017
	(in thousands, except per share data)
REVENUES:
Room revenues	$	191,708		$	199,744
Franchise and other fee-based revenues		25,896			23,978
Other hotel revenues		4,779			4,796
		222,383			228,518
Brand marketing fund revenues from franchised properties		6,397			5,754
Total Revenues		228,780			234,272
OPERATING EXPENSES:
Direct lodging expenses		103,875			100,334
Depreciation and amortization		39,702			36,040
General and administrative expenses		41,835			35,438
Other lodging and operating expenses		15,323			14,060
Marketing, promotional and other advertising expenses		17,804			18,536
(Gain) loss on sales		(498	)		138
		218,041			204,546
Brand marketing fund expenses from franchised properties		6,397			5,754
Total Operating Expenses		224,438			210,300
Operating Income		4,342			23,972
OTHER INCOME (EXPENSES):
Interest expense, net		(21,456	)		(19,980	)
Other income (expense)		119			(24	)
Total Other Expenses, net		(21,337	)		(20,004	)
(Loss) Income Before Income Taxes		(16,995	)		3,968
Income tax benefit (expense)		1,927			(2,290	)
NET (LOSS) INCOME		(15,068	)		1,678
Less: net income attributable to noncontrolling interest		(71	)		(89	)
Net (Loss) Income attributable to La Quinta Holdings’ stockholders	$	(15,139	)	$	1,589
Earnings (loss) per share:
Basic and diluted	$	(0.13	)	$	0.01

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

La Quinta Holdings Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

	Three Months Ended
	March 31, 2018			March 31, 2017
	(in thousands)
NET (LOSS) INCOME	$	(15,068	)	$	1,678
Cash flow hedge adjustment, net of tax		3,068			1,778
COMPREHENSIVE NET (LOSS) INCOME		(12,000	)		3,456
Comprehensive net income attributable to noncontrolling interests		(71	)		(89	)
Comprehensive net (loss) income attributable to La Quinta Holdings’ Stockholders	$	(12,071	)	$	3,367

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

La Quinta Holdings Inc.

Condensed Consolidated Statements of Equity (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

		Equity Attributable to La Quinta Holdings Inc. Stockholders
		Common Stock					Treasury Stock			Additional Paid in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total Equity
		Shares			Amount
	(in thousands, except share data)
Balance as of January 1, 2017			116,790,470		$	1,318	$	(209,523	)	$	1,165,651	$	(296,006	)	$	(6,372	)	$	2,769		$	657,837
Net income			—			—		—			—		1,589			—			89			1,678
Distributions			—			—		—			—		—			—			(117	)		(117	)
Equity-based compensation			705,409			7		—			3,932		—			—			—			3,939
Repurchase of common stock			(7,095	)		—		(16	)		—		—			—			—			(16	)
Cash flow hedge adjustment			—			—		—			—		—			1,778			—			1,778
Balance as of March 31, 2017			117,488,784		$	1,325	$	(209,539	)	$	1,169,583	$	(294,417	)	$	(4,594	)	$	2,741		$	665,099

Balance as of January 1, 2018			117,345,996		$	1,325	$	(212,461	)	$	1,181,639	$	(144,041	)	$	(760	)	$	2,596		$	828,298
Cumulative-effect adjustment for the adoption of ASU 2014-09			—			—		—			—		(14,869	)		—			—			(14,869	)
Cumulative-effect adjustment for the adoption of ASU 2018-02													163									163
Net (loss) income			—			—		—			—		(15,139	)		—			71			(15,068	)
Distributions			—			—		—			—		—			—			(93	)		(93	)
Equity-based compensation			405			—		—			3,062		—			—			—			3,062
Repurchase of common stock			(4,381	)		—		(18	)		—		—			—			—			(18	)
Cash flow hedge adjustment			—			—		—			—		—			3,068			—			3,068
Balance as of March 31, 2018			117,342,020		$	1,325		(212,479	)	$	1,184,701	$	(173,886	)	$	2,308		$	2,574		$	804,543

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

La Quinta Holdings Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

	March 31, 2018			March 31, 2017
	(in thousands)
Cash flows from operating activities:
Net (loss) income	$	(15,068	)	$	1,678
Adjustment to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		39,668			36,004
Amortization of other non-current assets		475			76
Amortization of intangible assets		139			167
Gain related to casualty disasters		(928	)		(1,928	)
Amortization of leasehold interests		(105	)		(131	)
Amortization of deferred costs		1,488			1,471
(Gain) loss on sale or retirement of assets		(498	)		138
Equity-based compensation		3,062			3,939
Deferred taxes		(2,424	)		2,651
Provision for doubtful accounts		316			603
Changes in assets and liabilities:
Accounts receivable		(1,555	)		214
Other current assets		(2,183	)		(3,183	)
Other non-current assets		(867	)		(562	)
Accounts payable		2,318			(6,925	)
Accrued payroll and employee benefits		(9,281	)		(5,562	)
Accrued real estate taxes		(7,239	)		(8,423	)
Accrued expenses and other liabilities		1,676			3,445
Other long-term liabilities		(144	)		1,349
Net cash provided by operating activities		8,850			25,021
Cash flows from investing activities:
Capital expenditures		(40,171	)		(46,178	)
Insurance proceeds on casualty disasters		4,000			4,557
Proceeds from sale of assets		4,447			22,011
Net cash used in investing activities		(31,724	)		(19,610	)
Cash flows from financing activities:
Repayment of long-term debt		(4,378	)		(4,379	)
Purchase of treasury stock		(18	)		(16	)
Distributions to noncontrolling interests		(93	)		(117	)
Net cash used in financing activities		(4,489	)		(4,512	)
(Decrease) increase in cash and cash equivalents		(27,363	)		899
Cash and cash equivalents at the beginning of the period		140,849			160,596
Cash and cash equivalents at the end of the period	$	113,486		$	161,495
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period	$	19,745		$	19,713
Income taxes paid during the period, net of refunds	$	102		$	261
SUPPLEMENTAL NON-CASH DISCLOSURE:
Capital expenditures included in accounts payable	$	14,791		$	11,758
Cash flow hedge adjustment, net of tax	$	3,068		$	1,778
Receivable for capital assets damaged by casualty disasters	$	5,754		$	2,725

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

La Quinta Holdings Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of and for the three months ended March 31, 2018

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

Effective April 14, 2014 (the “IPO Effective Date”), La Quinta Holdings Inc. (“Holdings”) completed its initial public offering (“IPO”) in which Holdings issued and sold 44.0 million shares of its common stock. Holdings was incorporated in the state of Delaware on December 9, 2013. Holdings may also be referred to herein as “La Quinta”, “we”, “us”, “our”, or the “Company”.

We own and operate hotels, some of which are subject to a land lease, located in the United States (“U.S.”) under the La Quinta brand. We also franchise hotels under the La Quinta brand, with franchised hotels currently operating in the U.S., Canada, Mexico, Honduras, Colombia and Chile. All new franchised hotels are La Quinta Inn & Suites in the U.S. and Canada and LQ Hotel in Mexico and in Central and South America. As of March 31, 2018 and 2017, total owned and franchised hotels, and the approximate number of associated rooms, were as follows:

	March 31, 2018				March 31, 2017
	# of hotels		# of rooms		# of hotels		# of rooms
Owned ⁽¹⁾		315		40,300		318		40,700
Joint Venture		1		200		1		200
Franchised		591		48,300		570		46,500
Totals		907		88,800		889		87,400

⁽¹⁾ As of March 31, 2018 and 2017, owned hotels includes two and three hotels, respectively, which met the criteria to be classified as assets held for sale.

Spin of CorePoint Lodging and Merger Agreement with Wyndham Worldwide

On January 17, 2018, La Quinta Holdings Inc. and Wyndham Worldwide Corporation, a Delaware corporation (“Wyndham Worldwide”) entered into a definitive agreement (the “Merger Agreement”) under which Wyndham Worldwide will acquire our hotel franchise and hotel management business for $1.95 billion in cash (the “Merger”). The acquisition is expected to close in the second quarter of 2018. In connection with the Merger Agreement, on January 17, 2018, we entered into a Separation and Distribution Agreement (the “Separation Agreement”), pursuant to which, on the terms and subject to the conditions set forth in the Separation Agreement, immediately prior to the Merger with Wyndham Worldwide, we will, among other things, (i) effect a reclassification and combination of our common stock whereby each share of our common stock will be reclassified and combined into one half of a share of our common stock (par value $0.02) (the “Reverse Stock Split”), (ii) convey our owned real estate assets and certain related assets and liabilities to CorePoint Lodging Inc. (“CorePoint Lodging”) and, (iii) thereafter, distribute (the “Spin”) to our common stockholders all of the issued and outstanding shares of common stock of CorePoint Lodging, which will become a separate publicly traded company. Under the terms of the Merger Agreement, our stockholders will receive $16.80 per share in cash (after giving effect to the Reverse Stock Split), and Wyndham Worldwide will repay approximately $715 million of our debt net of cash and set aside a reserve of $240 million for estimated taxes expected to be incurred in connection with the Spin. Immediately following the Spin, in accordance with and subject to the terms of the Merger Agreement, a wholly-owned subsidiary of Wyndham Worldwide will merge with and into Holdings, with Holdings continuing as the surviving company and as a wholly-owned indirect subsidiary of Wyndham Worldwide, and our common stock will be delisted from the New York Stock Exchange.

The boards of directors of each of Wyndham Worldwide and La Quinta have approved the Merger Agreement. Our stockholders approved the Merger Agreement at a special meeting of stockholders on April 26, 2018. The Merger is subject to the completion of the Reverse Stock Split and the Spin and certain other customary conditions.

Financing in connection with the Spin and Merger

In connection with the transactions contemplated by the Merger Agreement and the Separation Agreement, including the Merger and Spin, CorePoint Lodging will make a cash payment to La Quinta of approximately $984 million subject to certain adjustments based on the actual amount of net indebtedness of La Quinta (as of immediately prior to the effective time of the Spin) and certain accrued but unpaid expenses incurred in connection with the Spin and the Merger, immediately prior to and as a condition of the Spin. The consummation of the Merger is subject to the consummation of the Spin.

committed to provide a secured mortgage and, in certain circumstances mezzanine credit facility, in an aggregate principal amount of $1.035 billion and a $50 million secured revolving credit facility. The ultimate funding by JPMorgan Chase Bank under the Commitment Letter is subject to certain customary conditions, including, but not limited to, receipt of financial information, delivery of customary documentation relating to CorePoint Lodging and its subsidiaries and consummation of the Spin and the Merger.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes required by GAAP for complete annual financial statements. Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with Holdings’ consolidated financial statements and notes thereto for the years ended December 31, 2017, 2016 and 2015, which are included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2018. All intercompany transactions have been eliminated. In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING STANDARDS

Revenue Recognition — Revenues primarily consist of room rentals, franchise fees and other hotel revenues. We defer the revenue from franchisees at the time the franchise agreement is signed and recognize the revenue in the period beginning with the hotel opening and through the initial term of the franchise contract.

Room revenues are derived from room rentals at our owned hotels. We recognize room revenue on a daily basis based on an agreed-upon daily rate after the guest has stayed at one of our hotels. Customer incentive discounts, cash rebates, and refunds are recognized as a reduction of room revenues. A portion of room revenues related to loyalty program members is deferred upon receipt and recognized when the performance obligation is satisfied. Occupancy, hotel, and sales taxes collected from customers and remitted to the taxing authorities are excluded from revenues in the accompanying condensed consolidated statements of operations.

Included in franchise and other fee-based revenues are franchise fee revenues, which primarily consist of revenues from franchisees for application and initial fees, transfer fees, royalty, reservations, and training, as well as fees related to our guest loyalty program (“Returns”). We recognize franchise fee revenue on a gross basis because we (1) are the primary obligor in these arrangements, (2) have latitude in establishing rates, (3) perform the services delivered, (4) have some discretion over supplier selection, and (5) determine the specification of services delivered. The different types of franchise fee revenues are described as follows:

•

Upon execution of a franchise agreement, a franchisee is required to pay us an initial fee. We recognize the initial fee as revenue in the period beginning with the hotel opening and through the initial term of the franchise contract.

•

For franchise agreements entered into prior to April 1, 2013, we collect a monthly royalty fee from franchisees generally equal to 4.0% of their room revenues until the franchisee has operated as a La Quinta hotel for twenty-four consecutive months. For U.S. franchise agreements entered into on or after April 1, 2013, the Company collects a monthly royalty fee equal to 4.5% of gross room revenues until the franchisee has operated as a La Quinta for twenty-four consecutive months. Beginning in the twenty-fifth month of operation, the franchisee monthly royalty fee increases by 0.5%. In these cases, the franchisee has the opportunity to earn the additional 0.5% back via rebate by achieving certain defined customer satisfaction results. Royalty fees are recognized on a gross basis in the accompanying condensed consolidated statements of operations. Any rebates of royalty fees are recognized as a reduction of revenue. Pursuant to the franchise agreements with the owned hotels and franchise agreements entered into with franchisees outside of the U.S. on or after April 1, 2013, the Company generally collects a monthly royalty fee equal to 4.5% of gross room revenues throughout the term and does not offer a rebate.

•

We receive reservation and technology fees in connection with franchising our La Quinta brand. Such fees are recognized based on a percentage of the franchisee’s eligible hotel room revenues or room count. We also perform certain other services for franchisees such as training and revenue management. Revenue for these services is recognized at the time the services are performed.

•

We receive fees from franchisees related to our Returns loyalty program. These fees are deferred until the performance obligation to the Returns member is satisfied.

Other hotel revenues include revenues generated by the incidental support of hotel operations for owned hotels and other rental income. We record rental income from operating leases associated with leasing space for restaurants, billboards, and cell towers. Rental income is recognized on a straight-line basis over the life of the respective lease agreement.

Brand marketing fund revenues from franchise properties represent fees collected from franchised hotels related to maintaining our Brand Marketing Fund (“BMF”). We maintain the BMF on behalf of all La Quinta branded hotel properties, including our owned hotels, from which national marketing and advertising campaign expenses are paid. Each La Quinta branded hotel is charged a percentage of its room revenue from which the expenses of the fund are covered. The corresponding expenditures of the BMF fees collected from franchised and managed hotels are presented as brand marketing fund expenses from franchised hotels in our condensed consolidated statements of operations, resulting in no net impact to operating income or net (loss) income.

Lodging operations are particularly sensitive to adverse economic and competitive conditions and trends, which could adversely affect the Company’s business, financial condition, and results of operations.

Customer loyalty program— We administer Returns, which allows members to earn points based on certain dollars spent. Members may redeem points earned for free night certificates, gift cards, airline miles, and a variety of other awards. We account for the economic impact of points earned by accruing an estimate of the performance obligation for unredeemed points as deferred revenue. We estimate the value of the future performance obligation based upon historical experience, including an estimate of “breakage” for points that will never be redeemed. The estimate is based on a calculation that includes assumptions for the redemption rate, redemption type (whether for a free night certificate or other award), rate of redemption at Company-owned hotels versus franchised hotels and the number of points required per stay. The expenses of the Returns program are charged to marketing, promotional and other advertising expenses in the accompanying condensed consolidated statements of operations.

As of March 31, 2018 and December 31, 2017, the total liability for Returns points was approximately $29.6 million and $18.9 million, respectively, of which $10.1 million and $6.5 million are included in accrued expenses and other liabilities, representing the estimated points expected to be redeemed in the next year. The remainder is included within other long-term liabilities in the accompanying consolidated balance sheets.

Actual financial results of the Returns program may vary from our estimate due primarily to variances from assumptions used in the calculation of the obligation for future redemptions and changes in member behavior. These variances are accounted for as changes in estimates and are recorded as a component of revenue as they become known.

Assets held for sale—Long-lived assets are classified as held for sale when all of the following criteria are met:

•	Management, having the authority to approve the action, commits to a plan to sell the asset and does not expect significant changes to the plan or that the plan will be withdrawn;

•	The asset is available for immediate sale in its present condition, and management is actively seeking a buyer;

•	The asset is being actively marketed, at a price reasonable in relation to the current value; and

•	The sale of the asset is probable within one year.

When we identify a long-lived asset as held for sale, depreciation of the asset is discontinued and the carrying value is reduced, if necessary, to the estimated sales price less costs to sell by recording a charge to current earnings. All assets held for sale are monitored through the date of sale for potential adjustments based on offers we are willing to take under serious consideration and continued review of facts and circumstances. Losses on sales are recorded to the extent that the amounts ultimately received for the sale of assets are less than the adjusted book values of the assets. Gains on sales are recognized at the time the assets are sold, provided there is reasonable assurance the sales price will be collected and any future activities to be performed by the Company relating to the assets sold are expected to be insignificant.

Derivative Instruments — We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for trading or speculative purposes.

We record all derivatives at fair value. On the date the derivative contract is entered, we designate the derivative as one of the following: a hedge of a forecasted transaction or the variability of cash flows to be paid (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability (“fair value hedge”), or an undesignated hedge instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge or net investment hedge are recorded in the condensed consolidated statements of comprehensive income (loss) until they are reclassified into earnings in the same period or periods during

which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the condensed consolidated statements of cash flows.

If we determine that we qualify for and will designate a derivative as a hedging instrument at the designation date, we formally document all relationships between hedging activities, including the risk management objective and strategy for undertaking various hedge transactions. This process includes matching all derivatives that are designated as cash flow hedges to specific forecasted transactions, linking all derivatives designated as fair value hedges to specific assets and liabilities in our condensed consolidated balance sheets, and determining the foreign currency exposure of net investment of the foreign operation for a net investment hedge.

On a quarterly basis, we assess the effectiveness of our designated hedges in offsetting the variability in the cash flows or fair values of the hedged assets or obligations via use of a statistical regression approach. Additionally, we measure ineffectiveness using the hypothetical derivative method. This method compares the cumulative change in fair value of each hedging instrument to the cumulative change in fair value of a hypothetical hedging instrument, which has terms that identically match the critical terms of the respective hedged transactions. Thus, the hypothetical hedging instrument is presumed to perfectly offset the hedged cash flows. Ineffectiveness results when the cumulative change in the fair value of the hedging instrument exceeds the cumulative change in the fair value of the hypothetical hedging instrument. We discontinue hedge accounting prospectively when the derivative is not highly effective as a hedge, the underlying hedged transaction is no longer probable, or the hedging instrument expires, is sold, terminated or exercised.

Equity-Based Compensation — We recognize the cost of services received in an equity-based payment transaction with an employee as services are received and record either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria.

The measurement objective for these equity awards is the estimated fair value at the grant date of the equity instruments that we are obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The compensation cost for an award classified as an equity instrument is recognized ratably over the requisite service period. The requisite service period is the period during which an employee is required to provide service for an award to vest. We recognize forfeitures as they occur.

Compensation cost for awards with performance conditions is recognized over the requisite service period if it is probable that the performance condition will be satisfied. If such performance conditions are not considered probable until they occur, no compensation expense for these awards is recognized.

Income Taxes —We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings during the period in which the new rate is enacted. For financial reporting purposes, income tax expense or benefit is based on reported financial accounting income and income taxes related to our taxable subsidiaries.

We evaluate the probability of realizing the future benefits of deferred tax assets and provide a valuation allowance for the portion of any deferred tax assets where the likelihood of realizing an income tax benefit in the future does not meet the more-likely-than-not criteria for recognition.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We accrue interest and, if applicable, penalties for any uncertain tax positions. Our policy is to classify interest and penalties as a component of income tax expense. The Company has open tax years dating back to 2010.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected us, including a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the

Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, we consider the deferred tax re-measurements and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.

Newly Issued Accounting Standards

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this update is to better align a company’s risk management activities and financial reporting for hedging relationships, simplify the hedge accounting requirements, and improve the disclosure of hedging arrangements. ASU 2017-12 is effective for annual reporting periods, and interim periods beginning after December 31, 2018. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. Historically, credit losses have not been material to the Company. We are currently evaluating the impact of this guidance on our financial position, results of operations and related disclosures but do not expect the implementation of this guidance to have a material impact on our consolidated financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The guidance is effective for the interim and annual periods beginning after December 15, 2018. An early adoption is permitted. The impact of this guidance is expected to increase assets and liabilities on the Company’s consolidated balance sheet. We are currently evaluating the magnitude of the impact of this guidance on our consolidated financial position, results of operations and related disclosures.

Newly Adopted Accounting Standards

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which provides guidance from the SEC allowing for the recognition of provisional amounts in the financial statements for the year ended December 31, 2017 as a result of the Tax Act that was signed into law in December 2017. The guidance allows for a measurement period of up to one year from the enactment date to finalize the accounting related to the Tax Act. The Company has applied and continues to apply the guidance in this update within its financial statements for the year ended December 31, 2017.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Act from accumulated other comprehensive income into retained earnings. The Company early adopted this guidance as of January 1, 2018, and recorded a $0.2 million adjustment to retained earnings for stranded tax effects related to our interest rate hedge.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This update clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. ASU 2017-09 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted and prospective application is required. We adopted on January 1, 2018 and it did not have a material effect on our financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance for evaluating whether certain transactions are to be accounted for as an acquisition (or disposal) of either a business or an asset. This standard is applied on a prospective basis. Early adoption is permitted for transactions occurring subsequent to the issuance of ASU 2017-01 and not reported in the financial statements. The guidance is effective for the interim and annual periods beginning after December 15, 2017, on a prospective basis, and earlier adoption is permitted for transactions occurring subsequent to the issuance of ASU 2017-01 and not reported in the financial statements. We adopted on January 1, 2018 and it did not have a material effect on our financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). La Quinta implemented ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective method for open contracts. In accordance with this adoption method the prior period results will not be recast to reflect the new standard. We recorded a net reduction to opening retained earnings of approximately $14.9 million, net of tax, as of January 1, 2018 due to the cumulative impact of adopting ASC 606.

Our operating results are impacted by ASC 606 in the following areas:

Revenue related to our La Quinta Returns loyalty program will be recognized upon point redemption as opposed to when points are issued. Also, as a sponsor of the loyalty program, any points issued for stays at owned hotels will be accounted for as a reduction in revenue from owned hotels as opposed to expense; and the portion of the service obligation expected to be fulfilled at owned hotels will be considered deferred revenue.

Application, initial and transfer fees charged when new franchised hotels enter our system or there is a change of ownership will be recognized over the term of the franchise contract, rather than primarily upon execution of the contract;

Certain customer acquisition costs in the form of commission expense will be deferred and recognized as part of general and administrative expense over the period of expected benefit; and

Certain customer acquisition costs in the form of key money incentives will continue to be recognized as a reduction in revenue. However, the term of amortization will change to the period of expected benefit, as opposed to the specific contractual term.

The net impact to revenues for the quarter ended March 31, 2018 as a result of applying ASC 606 was approximately $0.5 million. The impact to expenses for the quarter ended March 31, 2018 was immaterial.

Contract balances:

With the transition to ASC 606, we recorded an increase to retained earnings of $4.6 million, net of tax, related to net contract acquisition costs related to commission expenses paid to employees. We established an asset of $7.1 million with accumulated amortization of $1.0 million through January 1, 2018. We also recorded a deferred liability tax $1.5 million as a result of this transition. As of March 31, 2018, the asset and accumulated amortization balances were $7.1 million and $1.0 million, respectively, and included within other non-current assets in the accompanying balance sheet.

Additionally, we recorded an increase to retained earnings of $0.5 million, net of tax, related to the amortization of customer acquisition costs in the form of key money incentives. The value, net of accumulated amortization, increased from $4.5 million to $5.2 million as of January 1, 2018. As of March 31, 2018, this balance was $5.1 million and was included within other non-current assets in the accompanying balance sheet.

Balances related to remaining performance obligations:

With the transition to ASC 606, we recorded a decrease to retained earnings of $8.3 million, net of tax, related to our loyalty program. At the time of transition, we established deferred revenue of $29.9 million as of January 1, 2018 related to our loyalty program, of which $10.3 million was considered accrued expense and other liabilities and $19.6 million was considered other long-term liabilities. Of this amount, $18.9 million was considered a points liability under previous accounting policies, with $6.5 million included in accrued expenses and other liabilities and $12.4 million included in other long-term liabilities. As a result, the transition impact was $11.0 million offset by a deferred tax asset of $2.7 million for a net of $8.3 million. As of March 31, 2018, the deferred revenue associated with our loyalty program was $29.6 million, of which $10.1 million was included in accrued expense and other liabilities and $19.5 million was included within other long-term liabilities in the accompanying balance sheet.

Additionally, we recorded a decrease in retained earnings related to initial and transfer fees of $11.7 million, net of tax. As of January 1, 2018, we established deferred revenue related to initial and transfer fees of $16.5 million. Of this amount, $0.9 million was considered deferred revenue under our prior accounting policies. As a result, the transition impact was $15.6 million offset by a deferred tax asset of $3.9 million for a net impact of $11.7 million. As of March 31, 2018, the deferred revenue associated with these fees was $16.4 million and was included in other long-term liabilities.

From time to time, new accounting standards are issued by FASB or other standards setting bodies, which we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

NOTE 3. ASSETS HELD FOR SALE

As of December 31, 2017, three hotels were classified as assets held for sale. The sale of these assets does not represent a major strategic shift and does not qualify for discontinued operations reporting. During the first quarter of 2018, one of these hotels was sold for $4.4 million, net of transaction costs, resulting in a gain of $0.5 million. The remaining two hotels are expected to be sold before the end of 2018.

As of March 31, 2018 and December 31, 2017, the carrying amounts of the major classes of assets held for sale were as follows:


	March 31, 2018		December 31, 2017
	(in thousands)
Current assets	$	5	$	33
Property and equipment, net		4,747		8,611
Other non-current assets		35		62
Total assets held for sale	$	4,787	$	8,706

NOTE 4. PROPERTY AND EQUIPMENT

The following is a summary of property and equipment as of March 31, 2018 and December 31, 2017:

	March 31, 2018			December 31, 2017
	(in thousands)
Land	$	738,474		$	738,760
Buildings and improvements		2,744,041			2,713,860
Furniture, fixtures, equipment and other		483,211			474,776
Total property and equipment		3,965,726			3,927,396
Less accumulated depreciation		(1,536,360	)		(1,497,718	)
Property and equipment, net		2,429,366			2,429,678
Construction in progress		82,417			76,845
Total property and equipment, net of accumulated depreciation	$	2,511,783		$	2,506,523

Depreciation and amortization expense related to property and equipment was $39.7 million and $36.0 million for the three months ended March 31, 2018 and 2017, respectively. Construction in progress includes capitalized costs for ongoing projects that have not yet been put into service.

NOTE 5. LONG-TERM DEBT

Long-term debt as of March 31, 2018 and December 31, 2017 was as follows:

	March 31, 2018		December 31, 2017
	(in thousands)
Current portion of long-term debt	$	17,514	$	17,514
Long-term debt		1,667,476		1,670,447
Total long-term debt ⁽¹⁾	$	1,684,990	$	1,687,961

⁽¹⁾	As of March 31, 2018 and December 31, 2017, the 30 day United States dollar London Interbank Offering Rate (“LIBOR”) was 1.88% and 1.56%, respectively. As of March 31, 2018, the interest rate, maturity date and principal payments on the Term Facility (as defined below) were as follows:

•

During the three months ended March 31, 2018, we made a quarterly scheduled principal payment of $4.4 million.

•

The interest rate for the Term Facility through July 31, 2015 was LIBOR with a floor of 1.0% plus a spread of 3.0%. As of July 31, 2015, we achieved a consolidated first lien net leverage ratio of less than 4.50 to 1.00, and as a result the rate decreased to LIBOR with a floor of 1.0% plus a spread of 2.75% for the period from August 1, 2015 to September 30, 2017. As of March 6, 2018, our first lien net leverage ratio was greater than 4.50 to 1.00, and as a result, the rate increased to LIBOR with a floor of 1.0% plus a spread of 3.0% for the period from March 6, 2018 to March 31, 2018. Included in the Term Facility as of March 31, 2018 and December 31, 2017 is an unamortized

original issue discount of $4.9 million and $5.3 million, respectively. Included in the Term Facility, as of March 31, 2018 and December 31, 2017, is the deduction of debt issuance costs of $13.4 million and $14.4 million, respectively. As of March 31, 2018 and December 31, 2017, we had $16.8 million and $16.2 million, respectively, in accrued interest included within accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.

Term Facility

On April 14, 2014, Holdings’ wholly owned subsidiary, La Quinta Intermediate Holdings L.L.C. (the “Borrower”), entered into a new credit agreement (the “Agreement”) with JPMorgan Chase Bank, N.A. (“JPM”), as administrative agent, collateral agent, swingline lender and L/C issuer, J.P. Morgan Securities LLC, Morgan Stanley Senior Funding, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs Bank USA, and Wells Fargo Securities, LLC, as joint lead arrangers and joint book runners, and the other agents and lenders from time to time party thereto.

The Agreement provides for senior secured credit facilities (collectively the “Senior Facilities”) consisting of:

•

$2.1 billion senior secured term loan facility (the “Term Facility”), which will mature in 2021; and

•

$250 million senior secured revolving credit facility (the “Revolving Facility”), $50 million of which is available in the form of letters of credit, which will mature in 2019.

Interest Rate and Fees—Borrowings under the Term Facility bear interest, at the Borrower’s option, at a rate equal to a margin over either (a) a base rate determined by reference to the highest of (1) the JPM prime lending rate, (2) the Federal Funds Effective Rate plus 1/2 of 1.00% and (3) the adjusted LIBOR rate for a one-month interest period plus 1.00% or (b) a LIBOR rate determined by reference to the Reuters LIBOR rate for the interest period relevant to such borrowing. The margin for the Term Facility is 2.00%, in the case of base rate loans, and 3.00%, in the case of LIBOR rate loans, subject to one step-down of 0.25% upon the achievement of a consolidated first lien net leverage ratio (as defined in the Agreement) of less than or equal to 4.50 to 1.00, subject to a base rate floor of 2.00% and a LIBOR floor of 1.00%. As of July 31, 2015, we achieved a consolidated first lien net leverage ratio of less than 4.50 to 1.00, and, as a result we realized the step-down of 0.25% after that date. As of March 6, 2018, our consolidated first lien net leverage ratio was greater than 4.50, and as a result we realized a step-up of 0.25% as of that date.

Borrowings under the Revolving Facility bear interest, at the Borrower’s option, at a rate equal to a margin over either (a) a base rate determined by reference to the highest of (1) the JPM prime lending rate, (2) the Federal Funds Effective Rate plus 1/2 of 1.00% and (3) the adjusted LIBOR rate for a one-month interest period plus 1.00% or (b) a LIBOR rate determined by reference to the Reuters LIBOR rate for the interest period relevant to such borrowing. The margin for the Revolving Facility is 1.50%, in the case of base rate loans, and 2.50%, in the case of LIBOR rate loans, subject to three step-downs of 0.25% each upon the achievement of a consolidated first lien net leverage ratio of less than or equal to 5.00 to 1.00, 4.50 to 1.00 and 4.00 to 1.00, respectively. As of March 2, 2015, we achieved a consolidated first lien net leverage ratio of less than 5.00 to 1.00, and after March 2, 2015 we realized the first step-down in margin of 0.25%. As of July 31, 2015, we achieved a consolidated first lien net leverage ratio of less than 4.50 to 1.00, and, as a result we realized the second step-down of 0.25% after that date. As of March 6, 2018, our consolidated first lien net leverage ratio was greater than 4.50, and as a result we realized a step-up in margin of 0.25% as of that date.

In addition, the Borrower is required to pay a commitment fee to the lenders under the Revolving Facility in respect of the unutilized commitments thereunder. The commitment fee rate is 0.50% per annum subject to a step-down to 0.375%, upon achievement of a consolidated first lien net leverage ratio less than or equal to 5.00 to 1.00. As of March 2, 2015, we achieved a consolidated first lien net leverage ratio of less than 5.00 to 1.00, and after March 2, 2015, the commitment fee rate is 0.375%. The Borrower is also required to pay customary letter of credit fees.

Amortization—Beginning September 2014, the Borrower is required to repay installments on the Term Facility in quarterly installments equal to 0.25% of the original principal amount less any voluntary prepayments on the Term Facility, with the remaining amount payable on the applicable maturity date with respect to the Term Facility.

The Senior Facilities contain certain representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs, the lenders under the Senior Facilities will be entitled to take various actions, including the acceleration of amounts due under the Senior Facilities and actions permitted to be taken by a secured creditor. As of March 31, 2018, we were in compliance with all applicable covenants under the Senior Facilities.

Letters of Credit

As of both March 31, 2018 and December 31, 2017, we had $14.4 million, in letters of credit obtained through our Revolving Facility. In 2014, we were required to pay a fee of 2.63% per annum related to these letters of credit. As of March 2, 2015, we achieved a consolidated first lien net leverage ratio of less than 5.00 to 1.00, and after March 2, 2015 we realized the first step-down in rate of 0.25%, resulting in a reduction of the per annum fee to 2.38%. As of July 31, 2015, we achieved a consolidated first lien net leverage ratio of less than 4.50 to 1.00, and, as a result we realized the step-down of 0.25% after that date, for a margin of 2.13%. As of March 6, 2018, our consolidated first lien net leverage ratio increased to greater than 4.50 to 1.00, and as a result we realized a step-up of 0.25% after that date for a margin of 2.38%.

Interest Expense, Net

Net interest expense, including the impact of our interest rate swap (see Note 6), consisted of the following for the three months ended March 31, 2018 and 2017:

	For the Three Months Ended March 31,
Description	2018			2017
	(in thousands)
Term Facility	$	20,328		$	18,739
Amortization of deferred financing costs		1,030			999
Amortization of original issue discount		377			367
Other interest		8			3
Interest income		(287	)		(128	)
Total interest expense, net	$	21,456		$	19,980

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

During the three months ended March 31, 2018 and 2017, derivatives were used to hedge the interest rate risk associated with our variable-rate debt.

Term Facility Interest Rate Swap

On April 14, 2014, the Borrower entered into an interest rate swap agreement with an aggregate notional amount of $850.0 million that expires on April 14, 2019. This agreement swaps the LIBOR rate in effect under the new credit agreement for this portion of the loan to a fixed-rate of 2.0311%, which includes a 1.00% LIBOR floor. Management has elected to designate this interest rate swap as a cash flow hedge for accounting purposes.

Fair Value of Derivative Instruments

The effects of our derivative instruments on our condensed consolidated balance sheets were as follows:

March 31, 2018

December 31, 2017

Balance Sheet

Classification

Fair Value

Balance Sheet

Classification

Fair Value

(in thousands)

Cash Flow Hedges:

Interest rate swap

Other non-

current assets

2,922

Other long-

term liabilities

1,169

Earnings Effect of Derivative Instruments

The effects of our derivative instruments on our condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss), net of the effect for income taxes, were as follows:

	Classification of Gain	For the Three Months Ended March 31,
	(Loss) Recognized	2018		2017
		(in thousands)
Cash Flow Hedges:
Interest rate swap ⁽¹⁾	Other comprehensive gain	$	3,068	$	1,778

⁽¹⁾There were no amounts recognized in earnings related to hedge ineffectiveness or amounts excluded from hedge effectiveness testing during the three months ended March 31, 2018 and 2017, respectively.

NOTE 7. FAIR VALUE MEASUREMENTS

The carrying amount and estimated fair values of our financial assets and liabilities, which include related current portions, were as follows:

	March 31, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Cash and cash equivalents ⁽¹⁾	$	113,486	$	113,486	$	140,849	$	140,849
Interest rate swaps ⁽²⁾		2,922		2,922		1,169		1,169
Long-term debt ⁽³⁾⁽⁴⁾		1,684,990		1,692,758		1,687,961		1,705,592

⁽¹⁾	Classified as Level 1 under the fair value hierarchy.

⁽²⁾	Classified as Level 2 under the fair value hierarchy.

⁽³⁾	Classified as Level 3 under the fair value hierarchy.

⁽⁴⁾ Carrying amount includes deferred debt issuance costs of $13.4 million and $14.4 million as of March 31, 2018 and December 31, 2017, respectively.

We believe the carrying amounts of our cash and cash equivalents approximated fair value as of March 31, 2018 and December 31, 2017, as applicable. Our estimates of the fair values were determined using available market information and valuation methods appropriate in the circumstances. Considerable judgment is necessary to interpret market data and develop estimated fair values. Proper placement of fair value measurements within the valuation hierarchy is considered each reporting period. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The fair values of interest rate swaps are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the agreements, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

We estimate the fair value of our long-term debt using discounted cash flow analysis based on current market inputs for similar types of arrangements. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. We estimated the discount rates to be approximately 4.9% and 4.2%, as of March 31, 2018 and December 31, 2017, respectively. Fluctuations in these assumptions will result in different estimates of fair value.

We test long-lived assets for impairment if events or changes in circumstances indicate that the asset might be impaired. The following fair value hierarchy table presents information about assets measured at fair value on a nonrecurring basis and related impairment charges during the periods ended March 31, 2018 and 2017:

March 31, 2018	Level 1		Level 2		Level 3		Total Fair Value
	(in thousands)
Assets held for sale⁽¹⁾	$	—	$	—	$	4,787	$	4,787
	$	—	$	—	$	4,787	$	4,787

⁽¹⁾Assets held for sale include two hotels designated as held for sale. As of December 31, 2017 we had three hotels in assets held for sale and during the first quarter of 2018, we sold one hotel.

March 31, 2017	Level 1		Level 2		Level 3		Total Fair Value
	(in thousands)
Assets held for sale⁽¹⁾	$	—	$	—	$	9,048	$	9,048
Owned hotels identified for possible sale ⁽²⁾		—		—		227,816		227,816
	$	—	$	—	$	236,864	$	236,864

⁽¹⁾	Assets held for sale include three hotels and a restaurant parcel designated as held for sale. During the first quarter of 2017 we added one additional hotel to held for sale.

⁽²⁾

During the first quarter of 2016, we identified approximately 50 hotels where it became more likely than not that the holding period will be significantly shorter than the previously estimated useful lives. These assets did not meet the classification as assets held for sale and the fair value estimate is considered to be Level 3 within the fair value measurement hierarchy. As of March 31, 2018, of the approximately 50 hotels identified for possible sale in the first quarter of 2016, we have sold five and one hotel is classified as an asset held for sale.

Additional hotel sales

In the third quarter of 2017, we entered into an agreement to sell one of our owned hotels, located in Morrisville, North Carolina. We classified this hotel as held for sale during the third quarter of 2017, and it was sold in the first quarter of 2018 for approximately $4.4 million, net of transaction costs, resulting in a gain of $0.5 million.

NOTE 8. RELATED PARTY TRANSACTIONS

Prior to the IPO Effective Date, Holdings and predecessor entities were owned and controlled by Blackstone Real Estate Partners IV L.P. and affiliates (“BREP IV”) and Blackstone Real Estate Partners V L.P. and affiliates (“BREP V”). BREP IV and BREP V are affiliates of The Blackstone Group L.P. (collectivity, the “Funds” or “Blackstone”). In connection with the IPO, the Funds and other pre-IPO owners contributed their equity interests in the predecessor entities to Holdings in exchange for an aggregate of 81.06 million shares of common stock of Holdings. Holdings then transferred such equity interests to its wholly-owned subsidiary which pledged these interests as security for borrowings under a new credit agreement.

In November 2014 and in April 2015, Blackstone completed two secondary offerings in which it registered and sold 23.0 million and 23.9 million shares of Holdings common stock, respectively. As of March 31, 2018, Blackstone beneficially owned 30.0% of Holdings’ shares of common stock outstanding.

As of March 31, 2018 and December 31, 2017, approximately $81.6 million and $81.8 million, respectively, of the aggregate principal amount of our Term Facility was owned by affiliates of Blackstone. We make periodic interest and principal payments on such debt in accordance with its terms.

We also purchase products and services from entities affiliated with or owned by Blackstone in the ordinary course of operating our business. The fees paid for these products and services were approximately $0.3 million and $0.6 million during the three months ended March 31, 2018 and 2017, respectively.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Environmental — We are subject to certain requirements and potential liabilities under various federal, state and local environmental laws, ordinances, and regulations. Such requirements often impose liability without regard to whether the current or previous owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Although we have incurred and expect to incur remediation and other environmental costs during the ordinary course of operations, we anticipate that such costs will not have a material effect on our financial condition, results of operations, or cash flows.

Litigation — Three putative class action lawsuits were filed on March 8, 2018, March 9, 2018 and March 19, 2018, by purported stockholders of the Company in the United States District Court for the Northern District of Texas challenging the Merger. The lawsuits are styled Cunha v. La Quinta Holdings Inc., et al., Rosenblatt v. La Quinta Holdings, Inc., et al. and Bushansky v. La Quinta Holdings, Inc., et al (the “Actions”). All of these complaints allege violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended and Rule 14a-9 promulgated thereunder in connection with the Merger. The Rosenblatt complaint names the Company and its directors as defendants; the Cunha complaint names the Company and its directors as well as Merger Sub and

Wyndham Worldwide; and the Bushansky complaint names the Company and its directors as defendants. The complaints allege that the proxy statement filed by the Company is materially incomplete and misleading. The complaints seek, among other relief, either an order enjoining the Merger or rescission if the Merger is consummated. The Bushansky complaint also seeks to enjoin the stockholder vote on the Merger. On April 16, 2018, the parties to the Actions (the “Settling Parties”) entered into the confidential Memorandum of Understanding providing for the settlement of the Actions. The Company believes that the lawsuits are without merit and that no further disclosure is required to supplement the proxy statement disclosed in the Company’s definitive merger proxy statement filed with the SEC on March 20, 2018 (as amended or supplemented from time to time, the “proxy statement”) under applicable laws; however, to eliminate the burden, expense and uncertainties inherent in such litigation, and without admitting any liability or wrongdoing, the Company has agreed, pursuant to the terms of the confidential Memorandum of Understanding, to make certain supplemental disclosures to the proxy statement. Nothing in these supplemental disclosures shall be deemed an admission of the legal necessity or materiality under applicable laws of any of the disclosures set forth therein. The defendants have vigorously denied, and continue vigorously to deny, that they have committed any violation of law or engaged in any of the wrongful acts that were alleged in the Actions. The confidential Memorandum of Understanding outlines the terms of the Settling Parties’ agreement in principle to settle and release all claims which were or could have been asserted in the Actions.

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. On July 21, 2016, the court appointed lead plaintiff (“plaintiff”), and, on December 30, 2016, plaintiff filed the operative complaint on behalf of purchasers of the Company’s common stock from November 19, 2014 through February 24, 2016 (the “Class Period”) and on behalf of a subclass who purchased the Company’s common stock pursuant to the Company’s March 24, 2015 secondary public offering (the “March Secondary Offering”). The complaint 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. Plaintiff seeks unspecified compensatory damages and other relief. On February 10, 2017, defendants filed a motion to dismiss the complaint. On August 24, 2017, the motion to dismiss was granted with prejudice. Subsequently, on September 20, 2017, plaintiff filed an appeal with the U.S. Court of Appeals for the Second Circuit. On December 29, 2017, plaintiff submitted its appellant brief. Appellate briefing is scheduled to be completed in May 2018. The Company believes that the putative class action lawsuit is without merit and intends to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of this lawsuit.

In addition, we are a party to a number of pending claims and lawsuits arising in the normal course of business, including proceedings involving tort and other general liability claims, workers’ compensation and other employee claims and intellectual property claims. We do not consider our ultimate liability with respect to any such claims or lawsuits, or the aggregate of such claims and lawsuits, to be material in relation to our consolidated financial condition, results of operations or our cash flows taken as a whole.

We maintain general and other liability insurance; however, certain costs of defending lawsuits, such as those below the retention or insurance deductible amount, are not covered by or are only partially covered by insurance policies, and our insurance carriers could refuse to cover certain claims in whole or in part. We regularly evaluate our ultimate liability costs with respect to such claims and lawsuits. We accrue costs from litigation as they become probable and estimable.

Casualty Losses — We maintain insurance for property and casualty damage, subject to deductibles and policy terms and conditions, attributable to wind, flood, and earthquakes. We also maintain business interruption insurance.

Tax Contingencies — We are subject to regular audits by federal and state tax authorities. These audits may result in additional tax liabilities. 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 and 2011. 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, as amended (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. In November 2017, IRS Appeals returned the matter to IRS Examination for further factual development. 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 March 31, 2018, 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. The IRS has since indicated that it will not pursue the transfer-pricing adjustment. On August 8, 2017, the IRS issued a 30-Day Letter, in which it is proposed to disallow net operating loss carryovers originating in tax years 2006-2011 or, in the alternative, tax years 2006-2009, depending upon the outcome of the 2010-2011 examination discussed above. On September 26, 2017, we furnished a timely protest to the IRS exam team. They have since indicated that they intend to furnish a rebuttal to our protest, at which time the matter will be referred to the IRS Appeals Office. Based on our analysis of the NOL notice, we believe the IRS NOL disallowances applied in the 2012-2013 audit contain the same flaws present in the 2010-2011 audit and that the IRS proposed NOL 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 March 31, 2018, 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 IRS notified the Company that it intended to audit the tax return of one of its subsidiaries, Lodge Holdco II L.L.C., for the short taxable year ended April 13, 2014. In March 2018, the examination was closed on a “no change” basis.

Purchase Commitments — As of March 31, 2018, we had approximately $31.1 million of purchase commitments related to certain continuing redevelopment and renovation projects and information technology enhancements.

Franchise Commitments — Under certain franchise agreements, we are committed to provide certain incentive payments, reimbursements, rebates, and other payments to help defray certain costs. Our obligation to fund these commitments is contingent upon certain conditions set forth in the respective franchise agreement. The franchise agreements generally require that, in the event that the franchise relationship is terminated, the franchisee is required to repay any outstanding balance plus any unamortized portion of any incentive payment. As of March 31, 2018, we had $29.6 million in outstanding commitments owed to various franchisees for such financial assistance.

NOTE 10. INCOME TAXES

The Company recorded a provision for federal, state and foreign income tax benefit of approximately $1.9 million and income tax expense of $2.3 million for the three months ended March 31, 2018 and 2017, respectively. The provision for the three month periods ended March 31, 2018 and 2017, differs from the statutory federal tax rates of 21% and 35%, respectively, primarily due to the impact of state income taxes and the impact of certain costs relating to the pending separation of our franchise and management business from our owned real estate assets that are not deductible for income tax purposes.

NOTE 11. EQUITY-BASED COMPENSATION

We issue time-vesting restricted stock awards (“RSAs”), time-vesting restricted stock units (“RSUs”), and performance-based restricted stock units (“PSUs”).

During the three months ended March 31, 2018 and 2017, we recognized equity-based compensation expense of $3.1 million and $3.9 million, respectively, excluding related taxes. Unrecognized compensation expense as of March 31, 2018 was $12.4 million, which is expected to be recognized over a weighted-average period of 1.3 years.

As of March 31, 2018, there were 10.6 million shares of common stock available for future issuance under our Amended and Restated 2014 Omnibus Incentive Plan, including shares issuable pursuant to the units granted under our restricted stock unit awards.

No equity awards were issued during the three month period ended March 31, 2018.

NOTE 12. EARNINGS PER SHARE

Basic (loss) earnings per share is computed by dividing net (loss) income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted (loss) earnings per share is computed by dividing net (loss) income available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding plus other potentially dilutive securities. Dilutive securities include equity-based awards issued under long-term incentive plans.

The calculations of basic and diluted (loss) earnings per share are as follows:

	For the Three Months Ended March 31,
	2018			2017
	(in thousands, except per share data)
Numerator:
Net (loss) income attributable to La Quinta Holdings’ stockholders	$	(15,139	)	$	1,589
Denominator:
Weighted average number of shares outstanding, basic		116,324			115,936
Weighted average number of shares outstanding, diluted		116,324			116,368

Basic and diluted (loss) earnings per share	$	(0.13	)	$	0.01

For the three month periods ended March 31, 2018 and 2017, approximately 0.1 million shares and 0.7 million shares, respectively, were excluded from the computation of diluted shares, as their impact would have been anti-dilutive.

NOTE 13. SEGMENTS

Our operating segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by our Chief Executive Officer, who is our chief operating decision maker, to assess performance and make decisions regarding the allocation of resources. Our operating and reportable segments are defined as follows:

•

Owned Hotels—This segment derives its earnings from the operation of owned hotel properties located in the United States.

•

Franchise and management—This segment derives its earnings primarily from revenues earned under various franchise and management agreements relating to our owned and franchise hotels, which provide for us to earn compensation for the licensing of our brand to franchisees, as well as for services rendered, such as hotel management and providing access to certain shared services and marketing programs such as reservations, Returns, and property management systems.

Corporate and other includes revenues generated and operating expenses incurred in connection with the overall support and brand management of our owned, managed, and franchised hotels and operations.

The performance of our operating segments is evaluated primarily based upon Adjusted EBITDA, which should not be considered an alternative to net income (loss) or other measures of financial performance or liquidity derived in accordance with GAAP. We define Adjusted EBITDA as our net income (loss) (exclusive of non-controlling interests) before interest expense, income tax expense (benefit), and depreciation and amortization, further adjusted to exclude certain items, including, but not limited to: gains, losses, and expenses in connection with: (i) asset dispositions; (ii) debt modifications/retirements; (iii) non-cash impairment charges; (iv) discontinued operations; (v) equity-based compensation and (vi) other items.

The table below shows summarized consolidated financial information by segment for the three months ended March 31, 2018 and 2017:

	For the Three Months Ended March 31,
	2018			2017
	(in thousands)
Revenues
Owned Hotels	$	197,555		$	205,635
Franchise and management ⁽¹⁾		27,180			26,714
Segment revenues		224,735			232,349
Other fee-based revenues from franchise properties		6,397			5,754
Corporate and other ⁽²⁾		28,206			28,783
Intersegment elimination ⁽³⁾		(30,558	)		(32,614	)
Total revenues	$	228,780		$	234,272
Adjusted EBITDA
Owned Hotels	$	49,247		$	58,721
Franchise and management		27,180			26,714
Segment Adjusted EBITDA		76,427			85,435
Corporate and other		(12,415	)		(13,485	)
Adjusted EBITDA	$	64,012		$	71,950

(1)

This segment includes intercompany fees which are charged to our owned hotels to reflect that certain functions, such as licensing and management, are included in the franchise and management segment. We charge a franchise fee of 4.5% of gross room revenues and a management fee of 2.5% of gross operating revenue for our owned hotels. These fees are charged to Owned Hotels and are eliminated in the accompanying condensed consolidated financial statements.

(2)

Includes revenues related to our brand management programs and other cost reimbursements. The portions of these fees that are charged to our owned hotels totaled $15.7 million and $16.7 million for the three month periods ended March 31, 2018 and 2017, respectively. This includes a reservation fee of 2.0% of gross room revenues, which is reflected in corporate and other. These fees are charged to owned hotels and are eliminated in the accompanying condensed consolidated financial statements.

(3)

Includes management, license, franchise, BMF, Returns, reservation fees and other cost reimbursements totaling $30.6 million and $32.6 million for the three month periods ended March 31, 2018 and 2017, respectively. These fees are charged to owned hotels and are eliminated in the accompanying condensed consolidated financial statements.

The table below provides a reconciliation of net (loss) income attributable to La Quinta Holdings’ stockholders to EBITDA and EBITDA to Adjusted EBITDA for the three month periods ended March 31, 2018 and 2017. Adjusted EBITDA and EBITDA should not be considered an alternative to net (loss) income or other measures of financial performance or liquidity derived in accordance with GAAP:

	For the Three Months Ended March 31,
	2018			2017
	(in thousands)
Net (loss) income attributable to La Quinta Holdings’ stockholders	$	(15,139	)	$	1,589
Interest expense		21,744			20,108
Income tax (benefit) expense		(1,927	)		2,290
Depreciation and amortization		39,893			36,257
Noncontrolling interests		71			89
EBITDA		44,642			60,333
(Gain) loss on sales		(498	)		138
Gain related to casualty disasters		(928	)		(1,928	)
Equity-based compensation		2,365			3,943
Amortization of software service agreements		2,467			2,359
Retention plan ⁽¹⁾		2,484			2,550
Reorganization costs ⁽¹⁾		9,894			2,143
Other losses, net ⁽²⁾		3,586			2,412
Adjusted EBITDA	$	64,012		$	71,950

⁽¹⁾

Included cash and non-cash charges associate with the Spin and Merger.

⁽²⁾

Other losses, net consists of net loss attributable to the BMF (which, over time, runs at a break-even level, but may reflect a profit or loss from period to period), IRS legal defense costs and litigation reserve adjustments.

The following table presents assets for our reportable segments, reconciled to consolidated amounts as of March 31, 2018 and December 31, 2017:

	March 31, 2018		December 31, 2017
	(in thousands)
Total Assets
Owned Hotels	$	2,556,234	$	2,550,064
Franchise and management		207,476		201,548
Total segments assets		2,763,710		2,751,612
Corporate and other		183,569		201,484
Total	$	2,947,279	$	2,953,096

The following table presents capital expenditures for our reportable segments, reconciled to our consolidated amounts for the three months ended March 31, 2018 and 2017:

	For the Three Months Ended March 31,
	2018		2017
Capital Expenditures
Owned Hotels	$	37,287	$	41,432
Franchise and management		—		—
Total segment capital expenditures		37,287		41,432
Corporate and other		2,884	$	4,746
Total	$	40,171	$	46,178

************

Item 2.

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

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”), as filed with the SEC, as such risk factors may be updated from time to time in our periodic filings with the SEC. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.

Our business

We are a leading owner, operator and franchisor of select-service hotels primarily serving the midscale and upper-midscale segments under the La Quinta brand. All new franchised hotels are La Quinta Inn & Suites in the U.S. and Canada and LQ Hotel in Mexico and in Central and South America. Our system-wide portfolio, as of March 31, 2018, consisted of 907 hotels representing approximately 88,800 rooms located predominantly across 48 U.S. states, as well as in Canada, Mexico, Honduras, Colombia and Chile, of which 316 hotels were owned and operated and 591 were franchised. We also have a pipeline of 259 franchised hotels in the United States, Mexico, Colombia, Nicaragua, Guatemala and El Salvador. We primarily derive our revenues from owned hotel operations and fees generated from franchised hotels.

All of our long-lived assets are located in the United States and, during the three months ended March 31, 2018, we derived over 99% of our revenue from within the United States.

Recent Developments

Spin of CorePoint Lodging and Merger Agreement with Wyndham Worldwide

On January 17, 2018, La Quinta Holdings Inc. and Wyndham Worldwide entered into a definitive agreement (the “Merger Agreement”) under which Wyndham Worldwide will acquire our hotel franchise and hotel management business for $1.95 billion in cash. The acquisition is expected to close in the second quarter of 2018. Under the terms of the agreement, our stockholders will receive $16.80 per share in cash (after giving effect to the Reverse Stock Split, as defined below), and Wyndham Worldwide will repay approximately $715 million of our net debt and set aside a reserve of $240 million for estimated taxes expected to be incurred in connection with the Spin (as defined below). In connection with the Merger Agreement, on January 17, 2018, we entered into a Separation Agreement with CorePoint Lodging Inc. (“CorePoint Lodging”), pursuant to which, on the terms and subject to the conditions set forth in the Separation Agreement, immediately prior to the Merger (as defined below), we will, among other things, (i) effect a reclassification and combination of our common stock whereby each share of our common stock will be reclassified and combined into one half of a share of our common stock (par value $0.02) (the “Reverse Stock Split”), (ii) convey our owned real estate assets and certain related assets and liabilities to CorePoint Lodging and, (iii) thereafter, distribute (the “Spin”) to our common stockholders all of the issued and outstanding shares of common stock of CorePoint Lodging, which will become a separate publicly traded company. Immediately following the Spin, in accordance with and subject to the terms of the Merger Agreement, Merger Sub will merge with and into the Registrant, with the Registrant continuing as the surviving company and as a wholly-owned indirect subsidiary of Wyndham Worldwide (the “Merger”), and our common stock will be delisted from the New York Stock Exchange.

The boards of directors of each of Wyndham Worldwide and La Quinta Holdings Inc. have approved the Merger Agreement. Our stockholders approved the Merger Agreement at a special meeting of stockholders on April 26, 2018. The Merger is subject to the completion of the Reverse Stock Split and the Spin and certain other customary conditions. We may be required to pay to Wyndham Worldwide a termination fee of $37 million if the Merger Agreement is terminated under certain circumstances, including because our board of directors has made an adverse recommendation change in connection with the special meeting of stockholders.

There is no assurance that the Spin and/or the Merger will occur. See “Risk Factors—Risks related to the pending Spin and Merger” in our 2017 Form 10-K.

Financing in connection with the Spin and Merger

and certain accrued but unpaid expenses incurred in connection with the Spin and the Merger, immediately prior to and as a condition of the Spin. The consummation of the Merger is subject to the consummation of the Spin.

On January 17, 2018, CorePoint Lodging received a binding commitment letter (the “Commitment Letter”) from JPMorgan Chase Bank, N.A. (“JPMorgan Chase Bank”) pursuant to which, and subject to the conditions set forth therein, JPMorgan Chase Bank committed to provide a secured mortgage and, in certain circumstances mezzanine credit facility, in an aggregate principal amount of $1.035 billion and a $50 million secured revolving credit facility. The ultimate funding by JPMorgan Chase Bank under the Commitment Letter is subject to certain customary conditions, including, but not limited to, receipt of financial information, delivery of customary documentation relating to CorePoint Lodging and its subsidiaries and consummation of the Spin and the Merger.

Hurricane Harvey and Hurricane Irma

During the third quarter of 2017, two major hurricanes made landfall impacting areas serviced by our hotels. In August 2017, Hurricane Harvey lingered over Texas and parts of Louisiana causing widespread flooding and associated damage. In September 2017, Hurricane Irma made its way up Florida’s west coast causing widespread wind damage, flooding and power outages. Many franchised and owned hotels in affected areas were impacted by the storms, including property damage, damage to infrastructure surrounding the hotels and business interruption. As it relates to our franchised hotels, the primary impact was on the amount of fees we collected from our franchisees during the periods since, as these fees are typically revenue based. As it relates to our owned hotels, the storms impacted and will continue to impact in the near term, our owned hotel revenues, expenses and gains and losses, as we are the owner/operator of these hotels. Hurricanes Harvey and Irma had a meaningful impact on our business in the third and fourth quarters of 2017, as well as the first quarter of 2018.

As of March 31, 2018, approximately three percent of our owned rooms remain out of service due to hurricane damage. We continue to work closely with our insurance adjusters, claims adjusters and construction staff to bring the affected rooms back online as quickly as possible. Property and business interruption insurance claims will be made as determined through the evaluation process; however, the timing and amount of insurance proceeds are uncertain and may not be sufficient to cover all losses. Capital expenditures will be made in order to restore these hotels to pre-hurricane condition and may be larger than normal due to the scope of the damage. Timing differences are likely to exist between the capital expenditures and insurance proceeds reflected in our financial statements.

Strategic Priorities

Beginning in 2016 and continuing in 2018, the Company has been focusing on key strategic priorities designed to (1) Drive consistency in our product, (2) Drive consistency in the delivery of an outstanding guest experience, and (3) Drive engagement with our brand by investing in points of differentiation. Our current strategic initiatives in support of these priorities are centered around (1) a continuous review of our owned hotel portfolio to evaluate the position of each hotel within our brand, (2) identifying, testing, and implementing enhancements to the hotel operating model for our owned hotels, and (3) enhancing the La Quinta Returns loyalty program. Possible outcomes from the review of our owned hotel portfolio include, but are not limited to, improving and/or repositioning a hotel through a significant renovation, determining a hotel is appropriately positioned within its market, or disposing of a hotel and/or removing it from the La Quinta brand and opening the market up to potential new franchise development. This review of our owned hotel portfolio has identified approximately 50 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.

These significant renovations commenced in the fourth quarter of 2016, with the start and completion dates for these projects being staggered through the end of 2018. The timing of the renovations has been sequenced with the goal of minimizing displacement, and maximizing readiness for peak demand seasons. As of March 31, 2018, the construction phase of the repositioning effort had been completed for 39 of these hotels.

If a decision is made to dispose of a hotel or groups of hotels from the La Quinta brand, we expect that our revenue and Adjusted EBITDA from owned hotels will decrease and that decrease may be material. Additionally, a decision to dispose of a hotel or groups of hotels may result in an impairment charge related to the reduced holding period of the hotels.

Segments

•

Owned Hotels—This segment derives its earnings from the operation of owned hotel properties located in the United States.

•

Franchise and management—This segment derives its earnings primarily from fees earned under various license and franchise hotel agreements relating to our owned and franchised hotels. These agreements provide for us to earn compensation for the licensing of our brand to franchisees, for providing certain services (including hotel management services) and for providing access to certain shared services and marketing programs such as reservations, La Quinta Returns, and property management systems. We do not currently generate, and did not generate over the periods presented, any revenue from the management of hotel operations for third parties. This segment includes intercompany fees, which are charged to our owned portfolio to reflect that certain functions, such as franchise, licensing and management, are included in the franchise and management segment. Franchise agreements with our owned hotels provide for a franchise fee of 4.5% of gross room revenues and a management fee of 2.5% of gross operating revenue for our owned hotels. We set the franchise fee on a basis that reflects the services and rights covered by the franchise agreements and because, as a public company with two segments that may be valued differently by investors, we believe it is meaningful to investors to show a franchise fee on our owned portfolio that is consistent with the franchise fee we charge our franchisees. We set the management fee on a basis that reflects current market rates for select service hotels, and the current composition of our owned portfolio and the services to be provided. These fees are charged to owned hotels and are eliminated in the accompanying condensed consolidated financial statements.

Our segment information also reflects corporate and other, which includes revenues generated by and related to operating expenses incurred in connection with the overall support and brand management of our owned, managed and franchised hotels and operations. The franchise agreements with our owned hotels also include a reservation fee of 2.0% of gross room revenues, which is reflected in corporate and other.

We have a business model that involves both ownership of properties and franchising of third-party owned properties. This provides us with diversified revenue and income streams that balance both the advantages and risks associated with these lines of business.

As an owner of hotels, we can capture the full benefit of increases in operating profits during periods of increasing demand or ADR. The cost structure of our typical hotel is more fixed than variable, so as demand and ADR increase over time, the pace of increase in operating profits typically is higher than the pace of increase of revenues. Hotel ownership is, however, more capital intensive than granting franchise agreements to third-party hotel owners, as we are responsible for the costs and capital expenditures for our owned hotels. The profits realized by us in our Owned Hotels segment are generally more significantly affected by economic downturns and declines in revenues than the results of our Franchise hotels. See also “—Key components and factors affecting our results of operations—Expenses” below and “Risk Factors—Risks related to our business and industry” in our 2017 Form 10-K.

As a franchisor of hotels, growth in the number of franchised hotels and earnings from franchises typically results in higher overall returns on invested capital because the capital required to build and maintain franchised hotels is typically provided by the owner of the respective property with minimal or no capital required by us, as franchisor. During periods of increasing demand, we do not, however, share in most of the benefits of increases in profits from franchised hotels because franchisees do not pay us fees based on profits. A principal component of our current growth strategy is to focus our expansion on our franchise business.

For purposes of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the following table sets forth the number of owned and franchised La Quinta branded hotels as of March 31, 2018 and 2017.

	As of March 31,
	2018		2017
Number of Hotels in Operation
Owned hotels⁽¹⁾		316		319
Franchised hotels ⁽²⁾		591		570
Total Owned and Franchised Hotels		907		889

⁽¹⁾

Owned Hotels includes 18 properties that are subject to ground leases; we include these 18 properties as owned hotels throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Owned Hotels also include one hotel owned via a joint venture in which we have a controlling interest. At March 31, 2018 and 2017, Owned Hotels include two and three hotels, respectively, which met the criteria to be classified as assets held for sale.

⁽²⁾

As of both March 31, 2018 and 2017, Franchised Hotels includes four hotels, respectively, that are temporary franchise agreements related to owned hotels that are in the process of exiting the system.

The following table summarizes our owned and franchised hotels as of March 31, 2018 and 2017:

	As of March 31,
	2018		2017
Number of Hotels in Operation
Company Owned Hotels⁽¹⁾
La Quinta Inn & Suites (interior corridor)		181		178
La Quinta Inn & Suites (exterior corridor)		3		3
La Quinta Inns (interior corridor)		41		46
La Quinta Inns (exterior corridor) ⁽²⁾		91		92
Total Owned		316		319
Franchised Hotels
La Quinta Inn & Suites (interior corridor)		522		492
La Quinta Inn & Suites (exterior corridor)		6		4
La Quinta Inns (interior corridor)		46		62
La Quinta Inns (exterior corridor)		4		1
LQ Hotel (interior corridor)		13		11
Total Franchised		591		570
Total Hotels		907		889

⁽¹⁾

Of the two owned hotels designated as assets held for sale as of March 31, 2018, one is a La Quinta Inn (interior corridor) and one is a La Quinta Inn (exterior corridor). Of the three owned hotels designated as assets held for sale as of March 31, 2017, one is a La Quinta Inns (interior corridor) and two are La Quinta Inns (exterior corridor).

⁽²⁾	Subsequent to March 31, 2018, one La Quinta Inn was re-branded to a Baymont Inn.

Seasonality

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 quarterly results may be further 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.

Inflation

We do not believe that inflation had a material effect on our business during the three month periods ended March 31, 2018 and 2017. Although we believe that increases in the rate of inflation will generally result in comparable increases in hotel room rates, severe inflation could contribute to a slowing of the U.S. economy. Such a slowdown could result in a reduction in room rates and occupancy levels, negatively impacting our revenues and net income.

Key components and factors affecting our results of operations

Revenues

We primarily derive our revenues from the following sources:

•

Room revenues. Represents revenues derived from hotel operations at owned hotels which are almost exclusively driven by room rentals. These revenues are primarily derived from three categories of guests: leisure, corporate and group.

•

Franchise fees. Represents revenues derived from franchise fees received in connection with the franchising of our brand, and other revenue generated by the incidental support of hotel operations for franchised hotels. Franchise fees consist of an initial fee upon the entry of a new hotel into the system and a monthly royalty fee, generally calculated as a percentage of gross room revenue. As new franchised hotels are established in our franchise system, we expect the franchise fees received from such hotels to increase over time as they establish their presence in the marketplace and stabilize their operations. If a franchise property changes owners, we generally charge a transfer fee.

•

Management fees. Represents revenues derived from management fees received in connection with the management of day-to-day hotel operations, and other revenue generated by the incidental support of hotel operations for managed properties. Management fees are generally calculated as a percentage of gross room revenue.

•

Other hotel revenues. Other hotel revenues include revenues generated by the incidental support of hotel operations for owned hotels, including charges to guests for vending commissions, meeting and banquet room revenue, laundry services, and other rental income from operating leases associated with leasing space for restaurants, billboards and cell towers.

•

Brand marketing fund revenues from franchised and managed properties. These revenues represent the fees collected from our franchised and managed hotels related to our Brand Marketing Fund (“BMF”), which are calculated as a percentage of gross room revenues. The corresponding expenses are presented as other expenses from franchised and managed properties in our condensed consolidated statements of operations, resulting in no impact to operating income (loss) or net income (loss).

Consumer demand for our services is closely linked to the performance of the general economy on both a national and regional basis and is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and adverse political conditions can lower the revenues and profitability of our owned hotels and the amount of franchise fee revenues we are able to generate from our franchised hotels. As a result, changes in consumer demand and general business cycles can subject, and have subjected, our revenues to significant volatility. See “Risk Factors—Risks related to our business and industry” in our 2017 Form 10-K.

Activities in the oil and gas industry over the past few years have significantly affected demand in the markets defined by STR, Inc. (“STR”), a primary source for third-party market data and industry statistics and forecasts, as “oil tracts,” significantly affecting our business in those markets, and additional acceleration or deceleration of activities in this industry could further affect our business in those markets.

In addition to general economic conditions, our guest satisfaction scores, the location of our hotels, the expenditures that we and our franchisees incur to improve our hotels, our loyalty program and the quality of our service impact our ADR, occupancy rates, RevPAR and RevPAR Index performance (each of which is described below under “—Key indicators of financial condition and operating performance”). Changes in ADR and occupancy have the potential to significantly impact our revenues.

Expenses

We primarily incur the following expenses:

•

Direct lodging expenses and other lodging and operating expenses. Direct lodging and Other lodging and operating expenses reflect the operating expenses of our owned hotels, including both direct and indirect hotel operating expenses. Direct lodging expenses include items such as compensation costs for hotel level management, housekeeping, laundry and front desk staff, supply costs for guest room amenities and laundry, repairs and maintenance, utilities, sales and local marketing, bad debt expenses related to direct-bill corporate customers, and online and offline travel agency commissions. Other lodging and operating expenses include indirect property operating expenses, primarily property taxes and insurance.

•

Depreciation and amortization. These are non-cash expenses that primarily consist of depreciation of fixed assets such as buildings, furniture, fixtures and equipment at our owned hotels, as well as certain corporate assets. Amortization expense primarily consists of amortization of intangibles related to our franchise business, and other leasehold interests, all of which are amortized over their estimated useful lives.

•

General and administrative expenses. General and administrative expenses consist primarily of compensation expense for our corporate staff and personnel supporting our business segments, professional fees (including consulting, audit and legal fees), travel and entertainment expenses, contractual performance obligations and office administrative and related expenses.

•

Impairment losses. We hold amortizing and non-amortizing intangible assets and long-lived assets. We evaluate these assets for impairment as further discussed in “—Critical accounting policies and estimates” previously disclosed in our 2017 Form 10-K. These evaluations have, in the past, resulted in impairment losses for certain of these assets based on the specific facts and circumstances surrounding those assets and our estimates of the fair value of those assets. Based on economic conditions, estimated holding periods or other factors at a hotel-specific or system-wide level, we may be required to take additional impairment losses to reflect further declines in our asset and/or investment values.

•

Brand marketing fund expenses from franchised and managed properties. These expenses represent the expenditure of BMF fees collected from our franchised hotels for marketing and other support of the La Quinta brand. The corresponding revenues are presented as other revenues from franchised properties in our condensed consolidated statements of operations, resulting in no impact to operating income or net income.

•

Marketing, promotional and other advertising expenses. These expenses include advertising costs associated with general promotion of the La Quinta brand and specific advertising and marketing support for our operation and for the operations of our franchisees, which are in addition to the expenditure of BMF fees collected from franchised and managed properties for the same purpose.

Fluctuations in operating expenses at our owned hotels can be related to various factors, including changes in occupancy rates, which directly impact certain variable expenses including labor, supplies, utilities and other operating expenses. However, certain of our expenses are relatively fixed, including rent, property taxes, liability insurance and, to a certain extent, payroll. As market conditions dictate, we take steps to adjust both our variable and fixed costs to levels we feel are appropriate to enhance guest experience, maximize profitability and respond to market conditions without jeopardizing the overall guest experience or the value of our hotels or brand. In addition, changes in depreciation expenses may be impacted by renovations of existing hotels or the disposition of existing hotels through sale or closure. For other factors affecting our costs and expenses, see “Risk factors—Risks related to our business and industry” in our 2017 Form 10-K. General and administrative expenses may also fluctuate from period to period, primarily related to support of the Company’s overall strategic initiatives.

Key indicators of financial condition and operating performance

We use a variety of financial and other information in monitoring the financial condition and operating performance of our business. Some of this information is financial information that is prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America, while other information may be financial in nature and may not be prepared in accordance with GAAP. Our management also uses other information that may not be financial in nature, including statistical information and comparative data that are commonly used within the lodging industry to evaluate hotel financial and operating performance. Our management uses this information to measure the performance of hotel properties and/or our business as a whole. Historical information is periodically compared to our internal budgets, as well as against industry-wide information. We use this information for planning and monitoring our business, as well as in determining management and employee compensation.

Average daily rate (“ADR”) represents hotel room revenues divided by total number of rooms sold in a given period. ADR measures the average room price attained by a hotel or group of hotels, and ADR trends provide useful information concerning pricing policies and the nature of the guest base of a hotel or group of hotels. Changes in room rates have an impact on overall revenues and profitability.

Occupancy represents 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. Occupancy measures the utilization of our hotels’ available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR levels as demand for hotel rooms increases or decreases.

Revenue per available room (“RevPAR”) is defined as the product of the ADR charged and the average daily occupancy achieved. RevPAR does not include other ancillary, non-room revenues, such as food and beverage revenues or parking, telephone or other guest service revenues generated by a hotel, which are not significant for the Company.

As it pertains to owned hotels, RevPAR changes that are driven predominately by occupancy have different implications for overall revenue levels and incremental hotel operating profit than changes driven predominately by ADR. For example, increases in occupancy at a hotel would lead to increases in room revenues, as well as incremental operating costs (including, but not limited to, housekeeping services, utilities and room amenity costs). RevPAR increases due to higher ADR, however, would generally not result in additional operating costs, with the exception of those charged or incurred as a percentage of revenue, such as credit card fees and commissions. As a result, changes in RevPAR driven by increases or decreases in ADR generally have a greater effect on operating profitability at our owned hotels than changes in RevPAR driven by occupancy levels. Changes in RevPAR for our franchised hotels, whether driven by occupancy or ADR, directly impact our franchise revenues, as these revenues are generally based on a percentage of the franchised hotels’ room revenues. Due to seasonality in our business, we review RevPAR by comparing current periods to budget and period-over-period.

RevPAR Index measures a hotel’s or group of hotels’ fair market share of a competitive set’s revenue per available room. RevPAR Index is stated as a percentage and is calculated for each hotel by comparing the hotel’s RevPAR to the aggregate RevPAR of a group of competing hotels generally in the same market. RevPAR Index is a weighted average of the individual property results. We subscribe to STR, which collects and compiles the data used to calculate RevPAR Index, and STR may calculate ADR and RevPAR differently than we and our competitors do. The owner of each La Quinta hotel exercises its discretion in identifying the competitive set of properties for such hotel, considering, subject to STR’s guidelines, such factors as physical proximity, competition for similar customers, services and amenities, quality and average daily rate. We initially review the competitive set makeup of each new hotel that enters our system and review the continuing appropriateness of each hotel’s competitive set on an ongoing basis. Accordingly, while the hotel brands included in the competitive set for any individual La Quinta hotel depend heavily on market-

specific conditions, the competitive sets for La Quinta hotels most often include one or more of Comfort, Holiday Inn Express and Hampton. Management uses RevPAR Index and changes in RevPAR Index, particularly year-over-year percentage changes, to evaluate the performance of individual or groups of hotels relative to other competing hotels.

Comparable hotels are defined as hotels that were active and operating in our system for at least one full calendar year as of the end of the applicable reporting 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, and RevPAR on a system-wide basis and for each of our reportable segments. We report variances in ADR, occupancy, and RevPAR between periods for the set of comparable hotels existing at the reporting date versus the results of the same set of hotels in the prior period. Of the 907 hotels in our system as of March 31, 2018, 847 have been classified as comparable hotels.

EBITDA and Adjusted EBITDA. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is a commonly used measure in many industries. We adjust EBITDA when evaluating our performance because we believe that the adjustment for certain items, such as restructuring and acquisition transaction expenses, impairment charges related to long-lived assets, non-cash equity-based compensation, discontinued operations, and other items not indicative of ongoing operating performance, provides useful supplemental information to management and investors regarding our ongoing operating performance. We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors, lenders and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

EBITDA and Adjusted EBITDA are not recognized terms under GAAP, have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP. Some of these limitations are:

•

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

•

EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

•

EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;

•

EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

•

EBITDA and Adjusted EBITDA do not reflect the impact on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

•

other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

Results of operations

The following table presents hotel operating statistics for our system-wide (owned and franchised) comparable hotels for the applicable periods ⁽¹⁾:

	Three Months Ended March 31, 2018			Variance Three Months 2018 vs. Three Months 2017
Occupancy		62.9	%	-7		bps
ADR	$	91.60			4.4	%
RevPAR	$	57.59			4.3	%

⁽¹⁾	See definition of comparable hotels in “—Key indicators of financial condition and operating performance—Comparable hotels.”

In addition, the following table presents RevPAR Index for our system-wide (owned and franchised) hotels for the applicable periods:

Three Months

Ended March 31,

2018

Variance Three Months

2018 vs. Three Months

2017

RevPAR Index ⁽¹⁾

93.7

-9 bps

⁽¹⁾	Information based on the STR competitive set of hotels existing as of March 31, 2018.

We experienced a decrease in RevPAR Index during the three months ended March 31, 2018. Beginning in the second half of 2016, we began enacting several key initiatives designed to further improve our RevPAR performance, including taking steps to enhance consistency of product and guest experience and investing in points of differentiation to encourage engagement with the brand. These initiatives caused incremental expenditures in 2017 and continuing into 2018. We expect to incur additional incremental expenditures in the future as these initiatives are implemented.

From March 31, 2017 to March 31, 2018, our total number of owned and franchised La Quinta hotels has grown from 889 to 907 with rooms increasing from 87,400 rooms to 88,800 rooms and number of franchised hotels increasing from 570 to 591. At March 31, 2017, our franchise pipeline numbered 249 hotels with 23,300 rooms, and grew to 259 hotels with 24,400 rooms at March 31, 2018, while we have opened a net total of 21 franchised hotels over that time period. Each of our pipeline hotels is represented by an executed franchise agreement, and approximately 29% of the conversions and new construction projects have commenced as of March 31, 2018.

Three months ended March 31, 2018 compared with three months ended March 31, 2017

For the three months ended March 31, 2018, we experienced, on a system-wide comparable hotels basis, increases in ADR and RevPAR compared to the three months ended March 31, 2017.

The following tables present our overall operating performance, and system-wide and segment occupancy, ADR and RevPAR rates on a comparable hotel statistic basis, in each case, for the three months ended March 31, 2018 and 2017, including the amount and percentage change in these results between the periods:

	For the Three Months Ended March 31,						Increase/(Decrease)
(in thousands)	2018				2017		$ change			% change
Revenues
Room revenues	$	191,708			$	199,744	$	(8,036	)		(4.0	)
Franchise and other fee-based revenues		25,896				23,978		1,918			8.0
Other hotel revenues		4,779				4,796		(17	)		(0.4	)
		222,383				228,518		(6,135	)		(2.7	)
Brand marketing fund revenues from franchised properties		6,397				5,754		643			11.2
Total Revenues		228,780				234,272		(5,492	)		(2.3	)
Operating Expenses
Direct lodging expenses		103,875				100,334		3,541			3.5
Depreciation and amortization		39,702				36,040		3,662			10.2
General and administrative expenses		41,835				35,438		6,397			18.1
Other lodging and operating expenses		15,323				14,060		1,263			9.0
Marketing, promotional and other advertising expenses		17,804				18,536		(732	)		(3.9	)
(Gain) loss on sales		(498	)	&n

La Quinta Holdings Inc. 10-Q