Put another strong quarter in the books for Income Investor selection Equity Inns
The third-largest hotel REIT (real estate investment trust), which focuses on the less volatile extended-stay and suite properties, reported that revenue increased by 21.3% and funds from operations (FFO) per share increased by 14.8%. This performance was driven by an increase in revenue per available room (RevPAR) of 6.9%, which consisted of a 7.7% increase in the company's average daily rate and a slight decline in occupancy. For the remainder of the year, the company expects RevPAR growth to be driven primarily by rate increases and flat occupancy, with slower growth in the fourth quarter. The company experienced strong occupancy rates in that quarter last year because of displaced Hurricane Katrina victims.
While Equity Inns' management is certainly doing a great job, it is also operating in an environment that provides a number of tailwinds. Among the most important of these tailwinds are an improving travel economy and very slow growth in supply of additional hotel rooms. Similar strong performances over the past couple of years can also be found among fellow hotel REITs LaSalle Hotel Properties
Equity Inns continues to expand and reposition its portfolio of hotels by acquiring newer buildings under the Hilton and Marriott mastheads and by disposing of older properties. However, the company still maintains a very reasonable amount of leverage, with only 35% of its total market capitalization (equity market cap plus debt) consisting of debt. 96% of the company's debt load is fixed or hedged, and the company's average interest rate on its debt decreased in comparison with last year.
If the economy softens, some of the tailwind that Equity Inns enjoys could always subside or, even worse, become a headwind. However, the company is reasonably valued, and in the long term, Equity Inns looks to be a solid candidate for dividend growth and capital gains.
At the time of publication, Nathan Parmelee had a beneficial interest in shares of Equity Inns but had no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.