Strategy 1: "always use other people's money." (Corporate Finance)

• Author: Bissaillon, Francis P.

Francis P, Bissaillon Senior Vice President-Administration & Treasurer La Quinta Motor Inns Inc.

Business: Motel operator

Total assets: $550 million

Credit rating: B2

The rundown on La Quinta: We own 210 motels, each with about 120 rooms. We operate in 29 states, although about 50 percent of our properties are in Texas. Our concept is limited services. That is, we don't offer conference rooms, restaurants, or bars. We don't franchise. Unlike most of our competitors, we now own most of the real estate on which we're located.

Our revenue stream is a little over $200 million a year, and we generate anywhere from $30 million to $40 million a year in cash flow. From the accounting earnings perspective, we've had a few tough years recently. Most of our earnings have come from disposition of properties and asset sale gains. But if you look at operating earnings relative to the $30 or $40 million in cash flow, we're probably at only $2 or $3 million in worth.

La Quinta built its first motel in 1968 and went public in 1973. Our stock is traded on the New York Stock Exchange, and our headquarters is in San Antonio.

Over the years, our financial strategy has been based upon the overall strategy of the company: first, to grow, and second, to always use other people's money. Our shareholders' equity is about $150 million, but add the equity of our partners plus the total long-term debt, and that number is $508 million. Of course, borrowing sometimes has been extremely difficult. Lenders are very nervous today, especially about lending to any facility that has beds, be it a hotel, motel, nursing home, or hospital.

But we've found ways to make lenders more comfortable with us. First, we don't finance long-term assets with short-term debt. We've used our bank credit lines for construction loans, for instance, but only when we've had a long-term debt commitment waiting.

Second, La Quinta has no compulsion. Our building program at one point was around 20 properties a year. In 1986, when Texas went into its recession, we virtually stopped building. We've always been very cautious, probably because of our highly leveraged position. And I think potential lenders and equity investors recognize that fact.

The type of financing we've used over the years, some asset based and some corporate, has depended on the markets. Some techniques still work and some techniques don't.

The financing path

The first approach La Quinta used to raise equity, from the late 1970s to...