SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

 

EQUITY INNS, INC.

7700 Wolf River Boulevard, Germantown, Tennessee 38138

(901) 754-7774

Securities registered pursuant to Section 12(b) of the Act:
8.75% Series B Cumulative Preferred Stock, $.01 par value

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o.

Aggregate market value of voting stock and non-voting common stock held by nonaffiliates of the registrant as of June 30, 2004: $407,381,615.

Number of shares of Common Stock, $.01 par value, outstanding as of March 9, 2005: 53,966,935

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s proxy statement for its 2005 Annual Meeting of Shareholders to be held May 12, 2005 (the “Proxy Statement”) are incorporated by reference into Part III of this Report.

Exhibit Index beginning on Page 81.

 

EQUITY INNS, INC
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2004

TABLE OF CONTENTS

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PART I

Throughout this Form 10-K, the words “Company”, “Equity Inns”, “we”, “our”, and “us” refer to Equity Inns, Inc., a Tennessee corporation, and its consolidated subsidiaries, unless otherwise stated or the context requires otherwise.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, “may”, “believes”, “estimates”, “projects”, “plans”, “intends”, “will”, “anticipates”, “expects” and words of similar import. Such forward-looking statements relate to future events, the future financial performance of our Company, and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to, the following: the ability of the Company to cope with domestic economic and political disruption and Federal and state governmental regulations or war, terrorism, states of emergency or similar activities; risks associated with debt financing; risks associated with the hotel and hospitality industry; the ability of the Company to successfully implement our operating strategy; availability of capital; changes in economic cycles; competition from other hospitality companies; and changes in the laws and government regulations applicable to us. Readers should specifically consider the various factors identified, or incorporated by reference in this report including, but not limited to those discussed in our Current Report on Form 8-K filed March 16, 2005, and in any other documents filed by us with the Securities and Exchange Commission that could cause actual results to differ from those implied by the forward-looking statements. We undertake no obligation and do not intend to publicly update or revise any forward-looking statements contained herein to reflect future events or developments, whether as a result of new information, future events or otherwise.

ITEM 1. BUSINESS

(a) General Development of Business

Equity Inns is a Memphis-based, self-advised hotel real estate investment trust (“REIT”) primarily focused on the upscale extended stay, all-suite, midscale limited service and full service segments of the hotel industry. The Company, through its wholly-owned subsidiary, Equity Inns Trust (the “Trust”), is the sole general partner of Equity Inns Partnership, L.P. (the “Partnership”) and at December 31, 2004 owned an approximate 97.3% interest in the Partnership. The Partnership and its affiliates lease all of our hotels to wholly-owned taxable REIT subsidiaries of the Company (the “TRS Lessees”).

(b) Narrative Description of Business

We commenced operations on March 1, 1994 upon completion of our initial public offering and the simultaneous acquisition of eight Hampton Inn hotels with 995 rooms. Since then, we have grown with a focus on both geographic and brand diversity. We believe that diversity in our asset portfolio reduces operational variance from year-to-year and results in less volatility as compared to the overall hotel industry.

At December 31, 2004, we owned 110 hotel properties with a total of 13,508 rooms located in 34 states. In order to qualify as a REIT, we cannot operate hotels. Therefore, our hotels are leased to our TRS Lessees and are managed by unrelated third parties. By maintaining these leases

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through our TRS Lessees, we realize the economic benefits and risks of operating these hotels and report all hotel revenues and expenses in our accompanying consolidated statements of operations.

We maintain management agreements with unrelated third parties for our hotels that range in remaining terms from one to four years. The majority of our management contracts renew annually. The management fees consist of a base fee ranging from 1.5% to 3.0% of hotel revenues and an incentive fee consisting of a percentage of gross operating profits in excess of budget, as defined by the management agreements. These fees are recorded by us as a component of direct hotel expenses in our accompanying consolidated statements of operations.

The diversity of our portfolio is such that, at December 31, 2004, no individual hotel exceeded 1.9% of the total rooms in the portfolio. Our geographical distribution and franchise diversity is illustrated by the following charts.

Brand Diversity

Franchise Affiliation

(1)	Hilton Hotels Corporation
(2)	Marriott International, Inc.
(3)	Hyatt Corporation, which purchased the AmeriSuites brand from the Blackstone Group in January 2005, which purchased the brand from Prime Hospitality Corporation in October 2004
(4)	Choice Hotels International, Inc.
(5)	Intercontinental Hotels Group, PLC

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Geographical Diversity

We believe that geographic diversity helps to limit our exposure to any one market. At December 31, 2004, we owned a geographically diverse portfolio of 110 hotels with 13,508 rooms located in 34 states. Additionally, our property mix is spread between suburban and urban locations, helping to insulate us from various economic climates, including a depressed business travel climate.

Our hotel portfolio includes midscale limited service hotels, all-suite hotels, upscale extended stay hotels and full service hotels. This array of product offering allows us to diversify the asset portfolio in an effort to reduce risk in various economic environments.

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Approximately 95% of our hotel portfolio is comprised of the following leading franchise brands: Homewood Suites, Hilton Garden Inn, Hampton Inn & Suites and Hampton Inn by Hilton, Residence Inn, Courtyard and SpringHill Suites by Marriott and AmeriSuites by Hyatt Corporation. We believe that multiple brands at the midscale, upscale extended stay and all-suite levels help to insulate our asset portfolio against the volatility of individual brand results relative to industry revenue per available room (“RevPAR”) performance. Descriptions of each of our significant brands are as follows:

Homewood Suites by Hilton:

A premier upscale extended stay hotel, focusing on extended stay, corporate transient and family travelers. Rated the #1 extended stay hotel brand by Business Travel News in 2005.

Hampton Inn by Hilton:

A premier midscale without food and beverage hotel chain with over 1,000 locations. Rated the #1 midprice without food and beverage by Business Travel News in 2005.

Residence Inn by Marriott:

A premier upscale extended stay hotel, focusing on extended stay, corporate transient and family travelers. Rated the #2 extended stay hotel brand by Business Travel News in 2005.

Courtyard by Marriott:

An upscale full service hotel designated as the hotel designed by business travelers for business travelers. Rated the #1 midprice with food and beverage by Business Travel News in 2005.

AmeriSuites by Hyatt Corporation:

An upscale all-suite hotel, billed as America’s most affordable all-suite hotel.

Approximately 80% of our hotels are branded by Hilton and Marriott, which both provide national marketing support and frequent stay programs that continue to drive additional revenue. We believe that better brands generate RevPAR premiums over their peers and focusing on these premium brands is another factor in our strategy to limit risk in the volatility of our hotel portfolio.

In order to qualify as a REIT, we cannot operate hotels and, consequently, we outsource the management of our hotels to leading independent management companies. By utilizing third-party managers with relatively short-term contracts that provide for strong operating incentive management fees, we believe that we have better control over the operating results of our hotels. At December 31, 2004, our hotel managers are as follows:

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GROWTH STRATEGY

The Company’s business objectives are to increase funds from operations and dividends, while enhancing shareholder value primarily through (i) aggressive asset management and the strategic investment of capital in its diversified hotel portfolio, primarily with mid-scale and upscale properties in strategic urban and suburban areas, (ii) selectively acquiring hotels that have been underperforming due to the lack of sufficient capital improvements, poor management or franchise affiliation, and (iii) selectively disposing of hotels that have reached their earnings potential or may, in management’s judgment, suffer adverse changes in their local market, or require large capital outlays. This process is ongoing, and activity could potentially increase given a more fluid marketplace.

EMPLOYEES

At March 9, 2005, we employed, through a wholly-owned subsidiary, 19 employees.

COMPETITION

The hotel industry is highly competitive with various participants competing on the basis of price, level of service and geographic location. Each of our hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse effect on the occupancy, average daily rate (“ADR”) and RevPAR of our hotels or at hotel properties acquired in the future. We believe that brand recognition, location, the quality of the hotel, consistency of services provided, supply of rooms in the market and price are the principal competitive factors affecting our hotels.

FRANCHISE AGREEMENTS

A part of our asset management program is the licensing of all of our hotels under nationally franchised brands. We believe that the public’s perception of quality associated with a franchisor is an important feature in the operation of a hotel. We also believe that franchised properties generally have higher levels of RevPAR than unfranchised properties due to access to national reservation systems and advertising and marketing programs provided by franchisors. Our franchise agreements generally have initial terms ranging from 10 to 25 years and expire beginning in 2005 through 2028. Franchise renewal procedures are currently underway for several of our hotels.

We are also committed to franchisors to make certain capital improvements to our hotel properties, which will be funded primarily through our operating cash flows. We made capital improvements of approximately $25.3 million to our hotels in 2004. In 2005, we expect to fund approximately $25.0 million of capital improvements to our hotels, with approximately $13.0 million representing major refurbishment projects to six hotels.

SEASONALITY

Our operations historically have been seasonal in nature, generally reflecting higher RevPAR during the second and third quarters. This seasonality can be expected to cause fluctuations in our quarterly operating results. To the extent that cash flows from our hotel operations are insufficient to fund our operating or investing requirements or dividend distributions, we may fund seasonal-related shortfalls with borrowings under our Line of Credit.

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INFLATION

Operators of hotels in general have the ability to adjust room rates quickly. However, competitive pressures may limit our ability to raise room rates in the face of inflation.

TAX STATUS

We intend to operate so as to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended. As long as we qualify for taxation as a REIT, with certain exceptions, we will not be taxed at the corporate level on our taxable income that is distributed to our shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it must distribute annually at least 90% of its taxable income in the form of dividends to its shareholders. Failure to qualify as a REIT will render us subject to tax (including
any applicable alternative minimum tax) on our taxable income at regular corporate rates and distributions to the shareholders in any such year will not be deductible by us. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property. In connection with our election to be taxed as a REIT, our Company charter imposes certain restrictions on the transfer of shares of our common stock and preferred stock. We have adopted the calendar year as our taxable year.

The REIT Modernization Act (“RMA”), which generally took effect on January 1, 2001, includes several REIT provisions which revised extensively the tax rules applicable to our TRS Lessees. Under the RMA provisions, we are allowed to own all of the stock in our TRS Lessees. In addition, our TRS Lessees are allowed to perform “non-customary” services for hotel guests and are permitted to enter into many new businesses. However, our TRS Lessees are not allowed to manage hotels. Instead, our TRS Lessees are required to enter into management contracts for our hotels with independent management companies. The use of TRS Lessees, however, is subject to certain restrictions, including the following:

	•	no more than 20% of the REIT’s assets may consist of securities of its TRS Lessees;
	•	the tax deductibility of interest paid or accrued by TRS Lessees to their affiliated REIT is limited; and
	•	a 100% excise tax is imposed on non-arm’s length transactions between TRS Lessees and their affiliated REIT or the REIT’s tenants.

ENVIRONMENTAL MATTERS

In connection with most of our acquisitions, Phase I environmental site assessments were obtained for our hotels. These assessments included historical reviews of the hotels, reviews of certain public records, preliminary investigations of the sites and surrounding properties, screenings for hazardous and toxic substances and underground storage tanks, and the preparation and issuance of a written report. These assessments did not include invasive procedures to detect contaminants from former operations of our hotels or migrating from neighbors or caused by third parties. These assessments have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, nor are we aware of any such liability or material environmental issues.

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EXECUTIVE OFFICERS OF THE COMPANY

The Company’s executive officers, listed below, serve in their respective capacities for approximate one year terms and are subject to re-election annually by the Board of Directors, normally in May of each year.

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*		Mr. McNeill, Sr. served as our Chief Executive Officer until January 15, 2005. He became non-executive Chairman on January 15, 2005. Mr. Silver assumed the role of Chief Executive Officer on January 15, 2005.
**		Mr. Ansbro was elected by our Board to be Senior Vice President of Real Estate effective January 1, 2005.

Phillip H. McNeill, Sr. (age 66) has served as our Chairman of the Board of Directors and Chief Executive Officer since our Company was founded in 1993. In January 2005, Mr. McNeill, Sr. became non-executive Chairman and Mr. Silver assumed the role of Chief Executive Officer. Mr. McNeill, Sr. has been Chairman and President of McNeill Investment Company, Inc. since 1977. From 1963 to 1977, he served in various capacities, including President and Chief Executive Officer with Schumacher Mortgage Company, Inc., a mortgage banking firm and subsidiary of Time, Inc. Mr. McNeill, Sr. has served as President and Director of the Memphis Mortgage Bankers Association and the Tennessee State Mortgage Bankers Association. He has been a past director of National Commerce Financial Corporation and Interstate Hotels Corporation, a member of the Board of Trustees of Rhodes College, a trustee of Wetlands America Trust, Inc., a member of the Board of Visitors of the University of Memphis and a board member of the Society of Entrepreneurs and Youth Villages, Inc. Mr. McNeill, Sr. is the father of Phillip H. McNeill, Jr., our Executive Vice President of Development.

Howard A. Silver (age 50) is our President and Chief Executive Officer, positions he has held since January 2005. From June 1998 until December 2004, Mr. Silver served as our President and Chief Operating Officer. Mr. Silver joined our Company in May 1994 and has served in various capacities, including Executive Vice President of Finance, Secretary, Treasurer and Chief Financial Officer of our Company until June 1998. From 1992 until joining our Company, Mr. Silver served

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as Chief Financial Officer of Alabaster Originals, L.P., Memphis, Tennessee, a fashion jewelry wholesaler. From 1978 to 1985, Mr. Silver was a certified public accountant with the national accounting firm of Coopers & Lybrand L.L.P., from 1985 to 1987, Mr. Silver served as Vice President of Finance of Fogelman Properties, Inc., Memphis, Tennessee, an apartment management company, and from 1987 to 1992, Mr. Silver was employed as a certified public accountant with the national accounting firm of Ernst & Young. He has been a certified public accountant since 1980. Mr. Silver has been a director of our Company since December 1998. Mr. Silver is a director of Capital Lease Funding, Inc. (NYSE: LSE) (Audit Committee (Chairman), Corporate Governance and Nomination Committee, Investment Committee) and Great Wolf Resorts, Inc. (NASDAQ: WOLF) (Audit Committee, Compensation Committee (Chairman)). Mr. Silver serves as the financial expert for the Audit Committee of Capital Lease Funding, Inc. Mr. Silver is also on the Board of Managers of GHII, LLC, a private furniture and equipment contractor in which we own a 45% interest. Mr. Silver is also Treasurer of the Ridgeway Country Club.

J. Mitchell Collins (age 36) is our Executive Vice President, Chief Financial Officer, Treasurer and Secretary, positions he has held since January 2004. From 2000 until 2003, he served as Executive Vice President and Chief Financial Officer of ResortQuest International, Inc., a public company that performed rental property management in resort areas. ResortQuest was purchased by Gaylord Entertainment, Inc. in late 2003. From 1990 until 2000, Mr. Collins worked with Arthur Andersen LLP, where he represented the firm as part of its National Hospitality practice and also was a Team Leader for Andersen’s Real Estate and Hospitality practice in its Mid-South region. Mr. Collins currently serves on the Board of Trustees of the Dixon Gallery and Gardens, serves as a member of the Zoological Council of the Memphis Zoo, and also serves on the Accountancy Alumni Board of the University of Mississippi (“Ole Miss”). Mr. Collins is also a member of the American Institute of Certified Public Accountants.

Phillip H. McNeill, Jr. (age 43) is Executive Vice President of Development of the Company, a position he has held since 1996. From 1994 to 1996, he served as President of Trust Leasing, Inc., formerly McNeill Hotel Co., Inc., the Company’s former lessee, and from 1984 to 1996 served as Vice President of Trust Management, Inc., formerly McNeill Hospitality Corporation, which was an affiliate of McNeill Hotel Company. Mr. McNeill, Jr. is on the Board of Managers of GHII, LLC. Mr. McNeill, Jr. is the son of Phillip H. McNeill, Sr., our non-executive Chairman.

Richard F. Mitchell (age 59) is Senior Vice President of Asset Management of the Company, a position that he has held since 1997. From 1995 to 1996, he was Vice President of Operations for Trust Leasing and joined Trust Leasing in 1994 as an Area Manager. From 1989 to 1994, Mr. Mitchell held various positions with North American Hospitality, Inc., including Director of Training and Development. Prior to 1989, Mr. Mitchell has held management positions in a number of hotels including Sheraton, Hampton Inn, Residence Inn and Best Western. Mr. Mitchell is a member of the Homewood Suites Franchise Advisory Council, a member of the Hampton Inn Brand Operations Council and is President of the AmeriSuites Franchise Advisory Council.

Edwin F. Ansbro (age 47) is Senior Vice President of Real Estate. Mr. Ansbro joined our Company in January 2005 after serving as an in-house consultant for approximately six months. From 2002 to February 2004, he served as Senior Vice President of New Business Development for Storage USA, a wholly-owned unit of GE Real Estate. From 1998 to 2002, Mr. Ansbro served as Senior Vice President and Chief Development Officer for Storage USA Franchise Corporation, a wholly-owned subsidiary of Storage USA prior to its acquisition by GE Real Estate. From 1994 to 1998, he served as Vice President of Development for Promus Hotel Corporation.

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J. Ronald Cooper (age 56) is Vice President, Controller, Assistant Secretary and Assistant Treasurer of the Company, positions he has held since 1996. From October 1994 to 1996, he was Controller and Director of Financial Reporting for McNeill Hotel Company. Mr. Cooper has been a certified public accountant since 1972. From 1978 until joining McNeill Hotel Company, Mr. Cooper was employed as Secretary, Treasurer and Controller of Wall Street Deli, Inc., a publicly-owned delicatessen company. Prior to that, Mr. Cooper was a certified public accountant with the national accounting firm of Coopers & Lybrand L.L.P. from 1970 to 1976.

AVAILABLE INFORMATION

Our Internet website address is: www.equityinns.com. We also make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).

We have also made available our Corporate Governance Guidelines and the charters of the Audit Committee, Compensation Committee and Corporate Governance and Nomination Committee on our website under “Corporate Governance.” We have also adopted a Code of Ethics that applies to our president and chief executive officer, our chief financial officer, our controller, and all other employees and have posted this Code of Ethics, along with our Whistleblower policy, on our website. We intend to satisfy the disclosure requirements under Item 10 of Form 8-K relating to amendments to or waivers from any provision of the Code of Ethics by posting such information on our website. Our corporate governance documents are also available in print upon written shareholder request to our Secretary, J. Mitchell Collins, at 7700 Wolf River Boulevard, Germantown, Tennessee 38138, or by filling out an information request on our website under “Information Requests.”

The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings that we make with the SEC.

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ITEM 2. PROPERTIES

Our principal executive offices are located at 7700 Wolf River Boulevard, Germantown, Tennessee 38138. We carry out all aspects of our business at this location. We lease approximately 8,000 square feet at our headquarters building. We believe that our present facilities are adequate for our current and presently projected needs.

The following table sets forth certain information for two years ended December 31, 2004 with respect to our hotels:

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(1)	Represents “all comparable” statistics for hotels owned by us at year end as if we had owned the hotels for both periods presented.
(2)	Determined by multiplying occupancy times the average daily rate.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various legal actions arising in the ordinary course of business. Management does not believe that any of the pending actions will have a material adverse effect on our business, financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our shareholders during the fourth quarter of 2004, through the solicitation of proxies or otherwise.

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ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) Market Information

The Company’s common stock, $.01 par value, is traded on the NYSE under the symbol “ENN.” The following table sets forth for the indicated periods the high and low closing prices for the common stock as traded through the facilities of the NYSE and the cash distributions declared per share:

(b) Shareholder Information

On March 9, 2005, there were 660 record holders of the Company’s common stock, including shares held in “street name” by nominees who are record holders, and approximately 20,400 beneficial owners.

(c) Distributions

We have adopted a policy of paying regular quarterly distributions on our common stock, and cash distributions were paid on our common stock each quarter since our initial public offering in March 1994, except for the fourth quarter of 2001. Earnings and profits determine whether distributions to our shareholders are taxable as ordinary income or are a non-taxable return of capital. Earnings and profits for federal income tax purposes will differ from net income reported for financial purposes primarily due to the difference for federal tax purposes in the estimated lives used to compute depreciation on our hotels.

We expect to make future quarterly distributions to our shareholders. The amount of our future distributions will be based upon quarterly operating results, economic conditions, capital requirements, the Internal Revenue Code’s annual distribution requirements, leverage restrictions imposed by our Line of Credit and other factors which our Board of Directors deems relevant.

A portion of the distribution to our shareholders is expected to represent a return of capital for federal income tax purposes. Our distributions made in 2004, 2003 and 2002 are considered to be approximately 15%, 1% and 3% return of capital, respectively, for federal income tax purposes.

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(d) Equity Compensation Plan Information

We do not have any equity compensation plans not approved by security holders.

(e) Recent Sales of Unregistered Securities

For 2004, we issued approximately 36,000 shares of common stock in transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, upon the redemption of units of limited partnership interest in our Partnership.

We did not purchase any of our registered equity securities in 2004.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data for the Company that has been derived from the financial statements of the Company and the notes thereto. Such data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all of the financial statements and notes thereto.

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EQUITY INNS, INC.
SELECTED FINANCIAL DATA
(in thousands, except per share data)