Meditrust to Buy La Quinta Inns for $3 Billion
Taking advantage of a tax loophole that shields it from corporate taxes, Meditrust Corp., the owner of horse-racing operator Santa Anita Cos., on Sunday agreed to buy motel company La Quinta Inns Inc. for about $3 billion in cash and stock.
The deal is the latest in a series that, in effect, are broadening the use of a rare 1983 tax law exemption. It also marks the first move into hotels by Meditrust, the nation’s largest health-care and real estate investment trust (REIT), with stakes in more than 500 medical properties nationwide.
La Quinta, the San Antonio-based hotel company, owns 270 motels and hotels in 31 states, with about 15 of them in California. Company officials said they expect to open 100 hotels by the end of 1998, including about six in California.
“California is one of the states that has been targeted for expansion,” said David F. Benson, president of Needham, Mass.-based Meditrust. “We are looking at a variety of opportunities; retirement communities; golf companies; hospitality and REIT consolidation.”
Under the terms of the deal, Meditrust will pay $26 a share in cash and stock for La Quinta, a 28% premium over La Quinta’s closing price of $20.25 a share on Friday. Meditrust will also assume $900 million of outstanding La Quinta debt.
The deal is one of a string of major deals by a handful of companies that can operate under a corporate structure that shields them from taxes.
Meditrust is one of only four “paired-share” REITs in the United States, a status it received by buying Arcadia-based racetrack owner and operator Santa Anita Cos. for about $458 million last year.
Because it is a paired-share REIT, it can take advantage of an federal tax loophole that allows Meditrust to pair its REIT and operating company shares into a single stock trading on the New York Stock Exchange.
This gives the company a big advantage in raising capital for acquisitions because investors know that Meditrust can own and operate businesses while still keeping the tax advantages of a REIT.
Typically, a REIT must derive at least 75% of its income from real property or it has to pay corporate taxes. But under the paired-share structure, Meditrust is really two companies, one that owns real estate and another that operates businesses.
Congress banned this paired-share structure in 1983, but existing companies like Santa Anita Cos. were allowed to continue doing business under a grandfather clause.
Other paired-share REITs include Starwood Lodging Trust, which is buying ITT Corp., and Patriot American Hospitality Inc., which last month agreed to buy Interstate Hotels Co. Like the La Quinta deal, these recent ones were designed to take advantage of the tax exceptions by bringing more operations under their special structure.
The Meditrust-La Quinta deal is expected to close in the second quarter.
