Granted, it wasn't the most impressive of the company's recent quarters. But considering some of the hurricane-related benefits in occupancy a year ago, it was a fairly solid quarter for Income Investor selection Equity Inns (NYSE:ENN).
The third-largest hotel REIT, which focuses on less volatile extended-stay and suite properties, reported that revenue increased by 17% and funds from operations (FFO) increased by 8.8% compared to last year. This performance was driven by an increase in revenue per available room (RevPAR) of 4.8%, which consisted of an 8.1% increase in the company's average daily rate and a 2.4% decline in occupancy. That's a mixed bag on the surface, but last year's occupancy results benefited from hurricanes, particularly in Florida. The company's growth was also slightly hampered by the conversion of 18 of its hotels from AmeriSuites to Hyatt Place Hotels.
While Equity Inn's management is certainly doing a great job, it is also operating in an environment that provides a number of tailwinds, one of which is the slow growth in supply of additional hotel rooms. Similar strong performances over the last couple of years can also be found among fellow hotel real estate investment trusts LaSalle Hotel Properties (NYSE:LHO), FelCorLodging Trust (NYSE:FCH), and Sunstone Hotel Investors (NYSE:SHO).
Equity Inns continued 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 36% of its total market capitalization (equity market cap plus debt) consisting of debt. Within the company's debt load, 96% is fixed or hedged and the company's average interest rate on its debt decreased in comparison to last year. Equity Inns also moved from a secured line of credit to an unsecured line.
Given the company's performance the past couple of years, its 5.6% dividend yield, and its reasonable valuation, I have considered picking up shares on any kind of short-term weakness. There will be some cyclicality in the business, but with the dividend well covered and the business geared toward less volatile properties, I still think this company will offer a compelling return in the long term.
Equity Inns has outperformed the market by 33% since it was recommended in the pages of Income Investor. Click here for more dividend-paying stock ideas.
At the time of publication, Nathan Parmelee had a beneficial interest in shares of Equity Inns, but no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
