In the disastrous wake of Hurricanes Katrina, Rita, and Wilma, there were many predictions about which companies would benefit. I remember plenty of talk about RV makers, generator manufacturers, and energy companies, but I don't remember anyone making a big deal about hotel real estate investment trusts (REITs). Yet hotel REITs such as La Quinta
Equity Inns, which is primarily focused on extended-stay suite hotels, was already enjoying a robust recovery before Katrina and friends rolled into town. Last week brought further confirmation of that solid performance; the company increased its adjusted funds from operations (AFFO) guidance for its fiscal fourth quarter to $0.23 to $0.25 per share, up from the previous $0.17 to $0.19 per share. The company attributes three cents of that AFFO increase to increased hurricane-related bookings. That, in turn, helped the fourth quarter's revenue per average room (RevPAR) increase more than 8% year over year. The 8%-plus RevPAR gain comes on top of last quarter's 8.9% gain, matching reported results from industry leader Host Marriott
AFFO is a cash flow-based metric used to evaluate REITs. It adds non-cash depreciation charges back to earnings, but subtracts maintenance capital expenditures needed to maintain the business, along with any non-cash benefits to earnings.
Removing the estimated three cents of AFFO owed to the hurricanes, the company still beat its own estimates by another three cents. That's an impressive performance for a company that has been steadily increasing both its AFFO and its dividend for the last couple of years. Based on the company's recent hotel purchases, it appears this trend should continue -- so long as the economy remains healthy enough for Equity Inns to pull in the business and leisure travelers it needs for growth.
Equity Inns has been a big winner for our Motley Fool Income Investor newsletter service since being selected a little over a year ago, with total returns of 38.7% vs. the S&P 500's total return of just 8.3%. Today, the shares still yield 4.6%, and the company's annual dividend of $0.68 is only 59% of its estimated FY 2005 AFFO of $1.15 ($0.23 estimated for the fourth quarter, plus $0.92 in the first three quarters). That leaves plenty of room for further dividend increases.
Overall, it's hard to see Equity Inns repeating such large AFFO and RevPAR gains in the near-term. Given the company's current dividend yield and the positive trends in its business, a better-than-average performance of 8%-10% seems reasonable.
For more REIT Foolishness:
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