Equity Inns isn’t the flashiest publicly traded company in the state, but it is one of the more reliable. Even 9/11-induced slumps in travel and tourism didn’t prevent the Germantown-based lodging company from safeguarding the feature its shareholders’ value most—its dividend.
The shares’ dividend yield, currently 4.8% (52 cents in annual dividends on shares recently trading $10.75), has held firm and is roughly half the 9% compound average annual return Equity Inns shareholders have earned since the initial public offering in 1994.
“The stability of Equity Inns’ dividend since the terrorist attacks on the United States is rare within the hotel REIT sector,” says analyst Nap Overton, who covers real estate investment trusts for Morgan Keegan & Co.
That’s no accident according to Equity Inns President Howard Silver. “It’s important for shareholders to get dividends consistently,” Silver says. “If you are hot one month and cold the next, the investor won’t know what to think about it.”
Silver and CEO Phillip McNeill Sr. rely on a multi-pronged strategy to deliver such predictable results. First, they have diversified their portfolio of 106 hotels by brand, price and geography. “After 9/11, the guys with a bulk of their hotels in San Francisco or New York just got creamed,” Silver says. “You have to be diverse. At one time, we owned 75 Hampton Inns. But that was too concentrated, and we started diversifying away from them.”
Today, three-quarters of Equity Inns’ hotels operate under various Hilton or Marriott brands. Its mid-range and upper price properties include Marriott Courtyard, Hampton Inn, AmeriSuites and Spring Hill Suites. Most are limited service (no restaurant), but some are extended-stay operations. They are scattered throughout the country, with the majority of the hotels located in Florida, Ohio, Texas and Tennessee. Overton says this diversity protects the company’s cash flow, so it is not drastically harmed by any single poorly performing hotel segment or by any regional economic problems.
In 2004, the company paid special attention to upgrading to newer, branded properties in faster-growing markets, though acquisitions have always been a central part of the Equity Inns strategy. While harvesting a few hotels, it acquired or had under contract more than $180 million of properties and had $60 million earmarked to spend on new properties early this year. Acquired properties share one critical trait: they are in markets with high barriers to entry. “A high barrier to entry means that there is little land nearby, the zoning laws are tight, or it is just too expensive to build,” Silver says. “When you build a hotel and then there is more land near it and an 80-room hotel comes in and takes all your demand, you are sunk.”
This active pruning of and adding to the hotel portfolio makes Silver and McNeill hospitality executives worth emulating, says Bob O’Halloran, who heads the Kemmons Wilson School of Hospitality and Resort Management at the University of Memphis. “They have a strong business reputation and really focus on the value of their assets.”
They also focus on the details of the contracts with companies that manage Equity Inns hotels. (Interstate Hotels and Resorts, an Arlington, Va.-based publicly traded company, manages nearly half of Equity Inns’ hotels, and Hilton and Prime Hospitality operate another 35.) When Equity Inns acquires a hotel, it tightly controls quality by granting short-term contracts—generally three years—so under-performing management companies can be cut loose if needed, Silver says. “If they do a good job, we keep them,” Silver says. “If they don’t, they’re gone.”
That’s smart. In this age of three-cents-a-share brokerage commissions, stock market investors are not a patient lot. Anyone that jeopardizes Equity Inns’ precious dividend merits eviction from this soundly managed lodging company.
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