Equity Inns Reports First Quarter Results; Results Exceed Analyst Expectations by 31 Percent
GERMANTOWN, Tenn.–(BUSINESS WIRE)–May 2, 2002–Equity Inns, Inc. (NYSE: ENN), a hotel real estate investment trust (REIT), today announced first quarter results for the period ended March 31, 2002.
Highlights
– First quarter FFO per share five cents, or 31 percent, higher than consensus analysts' expectations
– Dividend reinstated to $0.12 cents a share, in line with guidance
– RevPAR declined 7.2 percent, compared to 10.5 percent industry-wide, outpacing industry for fifth consecutive quarter
– Significant gains in overall occupancy penetration and RevPAR yield, compared to competitive set
– Raised approximately $27 million from sale of common stock and used proceeds to pay down debt to lowest level in four years
Funds from operations (FFO) for the 2002 first quarter decreased to $7.9 million, compared to $10.9 million for the same period a year ago. FFO per share was $0.21, compared to $0.29 in the 2001 first reporting period. FFO per share was five cents higher than consensus analysts' estimates.
We knew we'd have a down quarter, given the post-September 11 consumer sentiment, said Phillip H. McNeill, Sr., chairman of Equity Inns. Fortunately, our ability to control costs, together with our strong brands and geographic diversity, enabled us to post results that surpassed expectations. Ultimately, these are the qualities that reduce our exposure to a downturn in any one segment or region and the same characteristics that will drive our growth over the next 12 to 24 months. We are especially encouraged that our occupancy was nearly unchanged from the same period a year earlier.
Revenue Results
We experienced a particularly strong first quarter last year when revenue per available room (RevPAR) rose 5.4 percent, so we are pleased with our 2002 first quarter results, especially considering the softness in travel demand, said Donald H. Dempsey, Equity Inns' chief financial officer. Dempsey said that the decline in both revenues and FFO was due primarily to lower revenues caused by a 6.4 percent decline in average daily rate (ADR) to $76.39. He noted that the company's operating strategy at this stage of the recovery was to focus more on occupancy and margins than on average daily rate. Our goal is to stabilize our occupancy as quickly as possible so that we can more easily increase rate as conditions warrant.
For the 2002 first quarter, RevPAR for Equity Inns' comparable 96-hotel portfolio declined to $47.81, down 7.2 percent compared to the same period a year earlier and compared to an industry-wide 10.5 percent decline in first quarter RevPAR. For January, February and March, our RevPAR decreased 8.3 percent, 4.3 percent, and 8.7 percent, respectively, compared to the same periods last year.
Some of the March decline was attributable to the Easter/Passover holiday falling in March 2002, compared to April in 2001. Historically, occupancy is low during this holiday period. We expect the March decrease from Easter to be offset by April gains. In the first two weeks of April, for example, RevPAR was up 3.5 percent, confirming the impact of the Easter/Passover holiday on March results. For the full month, RevPAR is projected to decline between 2 percent and 3 percent, which would be consistent with the trend we've seen of gradually improving RevPAR.
Dempsey pointed out that the ENN portfolio's occupancy penetration increased four percentage points, compared to its competitive set of hotels for the trailing 12 months and that RevPAR yield improved 3.7 points. We continue to achieve significantly higher results than our competitive set, which is due in large part to the diligent efforts of our management companies in driving revenue. We are working closely with them to find additional ways to further improve our top line.
Operating Margins
Howard Silver, president and chief operating officer, said that meaningful comparisons between the first quarter of 2002 and 2001 were difficult because Equity Inns had 19 leases during 2001. For the remainder of the year, we will focus on margins as a better indicator of our net hotel operations, he said. Gross operating profit (GOP) margins in the 2002 first quarter were 39.7 percent, compared to a budgeted amount of 37.8 percent and 41.9 percent in the 2001 first quarter.
Margins, which historically are lower in the first quarter, declined from last year primarily as a result of lower ADR. However, margins were higher than our internal budgets. Once again, this is a direct result of our management companies effectively controlling costs in this environment. Our per occupied room (POR) expenses were lower in the 2002 first quarter: $47.32 compared to $49.79 in the 2001 first quarter, and compared to a budgeted $48.43. POR is defined as the hotel operating expenses divided by the occupied room nights and is a good measure of the cost of operating a hotel.
Balance Sheet Changes
During the first quarter, the company completed the sale of approximately 3.5 million shares of common stock at an average price of $8.00 per share, generating net proceeds of approximately $27 million. The proceeds were used to pay down the company's $125 million line of credit from $105.5 million to $78.5 million. Our debt-to-hotel cost level is now 38.9 percent, the lowest in four years, said Silver. The additional equity gives us greater flexibility to take advantage of acquisition opportunities that are expected to increase over the next six to 18 months as hotel real estate prices become more attractive.
Dividend Policy and 2002 Guidance
We reinstated our dividend in the first quarter with a $0.12 per common share payment, an amount we felt was prudent, said McNeill. Our target for the year remains in the $0.46 to $0.58 range with an annualized return by year-end in a range of $0.52 to $0.58, assuming the economy rebounds as predicted by most experts.
Dempsey stated that the company continues to expect 2002 FFO per share of $1.05 to $1.10, with approximately $0.14 being tax benefit attributable to the taxable REIT subsidiary losses. With the additional equity, we expect to see a $0.04 dilution for the remainder of the year without any acquisitions, which is why we have not raised our guidance, he said. The range assumes the continued, gradual recovery in the economy, especially in the 2002 second half.
FFO per share contributions for the remainder of the year are projected to be $0.31 to $0.33 in the second quarter, $0.36 to $0.38 in the third, and $0.17 to $0.18 in the fourth quarter. The weighted number of common shares is expected to increase to 41.7 million for the remainder of the year, Dempsey added.
Our portfolio of hotels has clearly held up in a difficult economy, McNeill said. In our view, it is a function of having the right brands in the right markets with the right level of diversity. As we look to 2003 with an improved balance sheet and our interests closely aligned with all of our managers, we remain cautiously optimistic about our prospects. Therefore, with a renewed sense of financial operational health, we will approach our growth opportunities in a prudent manner while maintaining an attractive total-return profile for the investment community.