La Quinta (LQ) reported solid operating results for the second quarter despite some headwinds and investor worries.  Revenue and EBITDA matched Wall Street estimates despite three unexpected issues.  First, the massive rainfall and flooding in Texas impacted occupancy in the state, which contains 25% of LQ’s hotels.  One LQ hotel in San Marcos was flooded and has been operating on a restricted basis.  Second, the company mishandled a switch in their reservation system that led to staffing issues in the call center.  This led to some lost reservations and occupancy.  Third, the largest hotel in the chain, in Minneapolis, Minnesota had to close for structural repairs when weakness was found in the façade.  Taken together, these items cost the company about $3.5 million in operating cash flow in the quarter and reduced REVPAR by 150 to 175 basis points.  Management lowered 2015 guidance by $5 million as the reservation system and the closed hotel will linger during the second half of the year.  Guidance for 2015 full year REVPAR was also lowered, primarily due to the shortfall in the second quarter and the issues that will continue through yearend.

There were a lot of positives in the quarterly report.  The company announced a $200 million share buyback that should kick in at the start of 2016 when debt pay down targets will be reached.  Adding back the $3.5 million in unusual items means the quarter actually was running 3% ahead of expectations.  This is especially impressive given the hit to the Texas economy from the collapse in oil prices. Management also noted that July bookings and revenue were back on trend after the weather related June weakness.  Finally, the company announced that it is a portfolio of 24 hotels.  This sale will be accretive to valuation and will open up the markets to new owned or franchised hotels, enchancing the company’s growth potential.  Many lodging companies have been selling properties at premium prices much to the liking of investors.  When LQ establishes a premium market price for its hotel assets, this should help the valuation of the shares.

Overall, the quarter fully supports Northlake’s bullish view of LQ.  Unfortunately, sentiment toward hotel stocks is very poor at the moment as investors are concerned that the multiyear recovery may be losing steam.  Many companies have reduced  REVPAR guidance for the year and there is some concern that hotel supply is rising too rapidly in certain large markets.  Northlake disagrees with this analysis and sees LQ as particularly insulated should the lodging cycle be slowing.  Debt pay down, share buybacks, an attractive pipeline, the start of rationalization of the current footprint to enhance value and growth, attraction as a takeover candidate, and the cheapest valuation in the lodging group all make LQ a very attractive holding looking out over the next six to twelve months.

<i>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 regulatory filings can be found at www.sec.gov.  LQ is a net long position in the Entermedia Funds.  Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies.