Let's not beat around the bush. Motley Fool Income Investor selection Equity Inns (NYSE:ENN) reported very impressive fourth-quarter and fiscal 2005 numbers Thursday evening, yet the shares are down more than 5% today. That's largely due to a forecasted slowdown in growth, but let's look at the whole picture.
Like Host Marriott (NYSE:HMT) and Hospitality Properties Trust (NYSE:HPT), Equity Inns operates in the hotel business as a REIT. However, the company has focused itself on extended-stay, suite, and midlevel limited-service hotels.
Funds from operations (FFO) increased 27.5% for the year, to $1.02 per share. Adjusted funds from operations (AFFO) per share, which the company uses to remove non-cash charges and non-recurring items, were up 36.5% for the year to $1.16 per share. To put that in context, the company now trades at about 14.8 times FFO and 13 times AFFO, which I consider reasonable given the company's rate of growth.
Equity Inns' growth was powered by a mix of rate increases, occupancy increases across its total portfolio, and acquisitions of new hotels. The company also benefited from occupants displaced by Hurricanes Katrina, Rita, and Wilma. For the entire year, the company saw its revenue per average room (RevPAR) increase by 10.1%. On the company's conference call, management commented that the RevPAR growth was a balance of rising rates and occupancy, with rates providing the most important portion.
It's also worth noting that the company raised its quarterly dividend twice in the last year, from $0.13 per share to $0.15 and $0.17, respectively. That's a 23% total increase against last year's payout. The annual dividend rate currently stands at $0.68 per share, for a 4.5% dividend yield.
More importantly, the annual dividend now totals 66.7% of FFO and 58.6% of AFFO. That's a very healthy yield, but there's still room for more increases. Given the company's FFO forecast of $1.20 to $1.30 per share in 2006, another dividend hike seems likely.
While the FFO increase is a welcome sight, you may have noticed that its midpoint of $1.25 represents a lower FFO growth rate (22.5%) than the company saw in the year just past. This is due to inflated 2005 growth from hurricane-related occupancy increases and some upcoming 2006 remodeling costs. The outlook for RevPAR growth is much lower; the company expects to increase RevPAR by only 3% to 6%. The outlook doesn't include any acquisitions Equity Inns may make during the year, which would further increase FFO.
Overall, I see reasons to like Equity Inns. The company's balance sheet is sound, with 97% of its debt either fixed or hedged. The company still expects to grow at what I consider a healthy pace next year; the economy and travel markets are stable; and there's room for an increase in the dividend as well. The only thing I'm missing is a sufficient margin of safety in the valuation. However, if investors continue to view the company's forward guidance negatively and push the shares down further, a margin of safety may develop in the coming weeks. In that case, I'd be willing to take on the risk that comes with investing in a business tied to the travel industry.
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Nathan Parmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
