La Quinta Holdings (LQ) reported strong results for 1Q15, beating street expectations on revenue and adjusted EBITDA. LQ raised the low end of their adjusted EBITDA guidance, reflecting management’s confidence that results for the rest of the year will continue to be strong. Shares of LQ responded positively and reached a new 52-week high the day following the earnings report.

One highlight from the report was that LQ made a voluntary debt payment of $65m during the quarter. This is important for our investment thesis as the company moves closer to achieving their goal of reaching 4x leverage and initiating some form of capital return to shareholders. We believe reducing leverage at this pace should allow LQ to announce either a share repurchase plan or a dividend sometime in the second half of the year.

Another positive from the report was that LQ increased its pipeline of new rooms from 17,000 to 17,700, providing a clear path for sustainable growth. Additionally, LQ management noted on the earnings call that even if they completed building all of the hotel rooms in their pipeline, they would still be present in only 70% of Smith Travel Research’s U.S. tracts. LQ competitors are present in 90%+ of Smith Travel Research’s U.S. tracts, leaving the company with many new markets where they could potentially expand and continue to grow.

One concern for LQ shareholders has been how the lower price of oil and gasoline would impact the company, since LQ has a large presence in Texas and other markets where oil-related industries comprise a large part of the local economy. LQ continues to state that they will see a net benefit from low oil and gas prices. One reason for this is that corporate business from oil and gas companies make up a very small percent of total group business for LQ. The company believes that any losses in business from oil and gas companies will be more than offset by increased traffic from other consumers who are benefitting from low gasoline prices as LQ hotels are mostly considered “drive-to” locations.

Overall, our investment thesis remains intact. We believe shares of LQ can continue to climb towards $30 as the company continues to execute well and begins to return excess capital to shareholders.

LQ is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  LQ is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.