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strategy of newer, better-branded products in the midscale segment has proven to be
Equity Inns, Inc.
7700 Wolf River Boulevard
Germantown, TN 38138
President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
February 9, 2006
Howard A. Silver
Howard A. Silver is President and CEO of Equity Inns, a hotel real estate investment trust
(REIT) and the largest REIT focused on the upscale extended stay, all-suite and midscale
limited-service segments of the hotel industry. He joined Equity Inns in May 1994 as
Secretary and Treasurer, and later served as Executive Vice-President of Finance, Chief
Financial Officer and Chief Operating Officer. Since he assumed the role of President in
1998, Equity Inns market capitalization has dramatically increased to approximately
$1.4 billion, and the Company now owns over 123 hotels throughout the United States. The
Companys hotels are franchised primarily by Marriott, Hilton and Hyatt.
Prior to joining Equity Inns, Mr. Silver was Chief
Financial Officer and Vice President of Operations for Alabaster Originals, L.P., a
fashion jewelry wholesaler. He also worked in the auditing field for thirteen years
collectively at Ernst & Young and PricewaterhouseCoopers. Mr. Silver has been a
certified public accountant since 1980. Mr. Silver holds a B.S. in Accounting from the
University of Memphis.
Mr. Silvers demonstrated
prowess in finance, hotels and public company operations, together with his knowledge of
real estate and accounting, has led to his nomination and selection to serve as a director
on other boards. In addition to Equity Inns, Mr. Silver serves on the following boards:
- Capital Lease Funding, Inc., a
public net lease REIT; chairman of the audit committee, sits on the nomination and
- Great Wolf Resorts, Inc., a
public family entertainment resort company; chairman of the compensation committee, sits
on the audit committee
- GHII, LLC, a private national
hotel furniture and equipment provider
- Ridgeway Country Club,
- Founding board member of the
Memphis chapter of the Association for Corporate Growth (ACG)
Mr. Silver is a frequent speaker at key REIT and
lodging events including The Lodging Conference and Hotel Investment Conference. In his
spare time, he enjoys spending time with his wife and two children and playing golf and
Equity Inns, Inc. is a Memphis-based, self-advised real estate investment trust (REIT) and
is the largest U.S. REIT focused on the upscale extended stay, all-suite and midscale
limited-service segments of the hotel industry. Equity Inns became publicly traded
in 1994 and is now the oldest public hotel REIT in the U.S. Presently, the Company
owns a geographically diverse portfolio of 125 hotels with over 14,967 rooms, located in
36 states. The hotel portfolio is managed by several leading independent lodging and
hotel management companies. Over ninety-five percent of the hotel portfolio is comprised
of the following leading franchise brands: Homewood Suites, Hampton Inn, Hampton Inn
& Suites and Hilton Garden Inn by Hilton, Residence Inn, Courtyard and SpringHill
Suites by Marriott and AmeriSuites by Hyatt Corporation.
CEOCFO: Mr. Silver, what was your vision when you became CEO,
and how has that progressed?
Mr. Silver: I just became CEO about a year ago today. I
want to continue on the growth pattern that Equity has had, both externally and
internally. What we have been able to do for the past twelve months externally is acquire
16 hotels at a 28% external growth number at an average capitalization rate of just under
10% on trailing twelve-month numbers. When you add that to what we did in 2004, we have
grown externally about 40-something percent. Internally, we have not yet announced our 4th
Quarter numbers but through the 3rd Quarter, we were up almost 9% in revenue
against an industry-wide increase of 8.3%. What we are most proud of on that number, is we
have increased our rate about 6.6% or about 75% of the increase. The important part about
our increasing rate is that most of that falls at the bottom line. Our gross operating
profit margins increased 150 basis point the third quarter alone, which gave us the
ability to increase dividends the third quarter.
CEOCFO: Why is your
pricing ability greater than the industry?
Mr. Silver: After the recession of 2001, many of our
competitors started giving up occupancy to keep the rate and they were not able to
increase the rate. Because the brands that we have, we made a concerted decision to keep
the occupancy, so that when things turned around, that we would still have full occupancy,
and then any increase in revenue would come from rate. We were able to do that for two
reasons; our brands and the segments we are in; the midscale segment of the hotel
industry, which has had the strongest demand in the last ten years annually. We were able
to keep the heads in the beds. Because we have the Hilton and Marriott brands in this
segment, which are the two gorillas in the segment, we are able to keep high occupancies.
As I am sitting now, 3rd Quarter I had occupancy of around 70%, which is close
to full occupancy for our kind of segment, which gave me the ability to increase rate.
CEOCFO: How do you
choose what to buy?
Mr. Silver: One is that we are sticking to this niche.
The one thing Equity Inns have always done is feel comfortable with the mid and upscale
niches because they had the strongest demand of any of the other niches in the hotel
industry. Secondly, they are a lot less volatile because you do not have food, restaurants
and bars, the revenue and expenses do not go up and down quite so violently. Our earnings
are then a lot less volatile and when you pay a dividend that is important. I buy
primarily the better brands, the Hilton brands such as Hampton Inns Homewood Suites,
Hilton Garden Inn, the Marriot brand such as the Courtyard, Residence Inn, SpringHill
Suites and AmeriSuites by Hyatt Corporation. Once you get past that, the next thing is
location, location, location. You try to get on corners where there are great barriers to
entry and it is harder to build a new hotel. We try to be geographically diverse; we are
in 36 states around the country, that way not one area can hurt you too bad during certain
regional economic downturns.
CEOCFO: Are there other areas where you would like to be?
Mr. Silver: It does not make a difference if it meets
all the other criteria. If you look at a map of Equity Inns hotels, we only have one
hotel in California; we dont have many hotels in the greater DC area except for
Baltimore. We do not have much in the northeast, and much of that is because the prices or
the cap rates that the sellers were requiring did not make any sense to us. We were
constantly looking for areas that have greater barriers to entry, but it is like anything
else, when you look at the population movement in the US, a great amount of the residents
and corporations are moving south and southwest. You are always looking to get in areas
where there is more demand and places where you have some barriers to entry. Sometimes
Texas is a great place to build, but it is easy to build and that can be problematic
CEOCFO: Do you turn over
Mr. Silver: If we bought 46 in the past two years, I
think we have sold ten hotels in the past three years. We have pruned the portfolio with
primarily older average age like eighteen years, and smaller hotels. We constantly prune
CEOCFO: How do you deal
with REIT laws with regard to managing your hotels?
Mr. Silver: Under REIT laws, hotel REITs are not
allowed to manage. What happens in many of our peers cases is you are allowed to have an
affiliated management company, which means your chairman or president owns a management
company that manages for the REIT. Most of my peers do that; we chose not to, because we
felt it was better to have more regional managers managing our hotels since we were so
spread out over the country.
CEOCFO: How do you maintain quality control over with such a
large geographic footprint?
Mr. Silver: What is interesting about the kind of
brands we have is that we have several sets of eyes that are watching the hotels. For one,
you have the management companys set of eyes. Management companies typically have
regional people that visit and report to us on their numbers. Secondly, obviously monthly
we get financial statements that show budget, actual variances and things such as that.
Then you have the franchisors that inspect the facilities two or three times a year at
minimum. Thirdly, Equity Inns have a set of asset managers that visit the hotels several
times a year, so if you sit back and look at it, besides the GM who is out there, you have
outside people that the management company, the franchisor or all people, looking at the
hotels probably seven or eight times a year.
CEOCFO: You have many
levels of inspection!
Mr. Silver: It is always good to know what is going on
with the real estate. When you are as spread out as we are, I think it is a good idea.
CEOCFO: What is the
industry facing, which may not have been an issue years ago, such as construction and
labor costs, and increasing interest rates?
Mr. Silver: The cost of new construction now is so high
that we are not seeing a lot of new supply in the markets. That always helps the people
that own real estate because you are not going to see a new hotel right next door to you
like you may have five or six years ago. Those costs are going up because concrete costs
are going up, steel costs are going up and much of it has to do with the demand of Chinese
and Indian construction and what they are doing to the cost of building. On the down side,
you have utilities going up, but if it goes up 20 or 30%, in our kind of hotels that are
limited service that is not a huge number. It is a concern but it does not keep me up at
night. The next thing that should concern people is interest rates. Interest rates go up
and you have a bunch of assumable debt or debt that is coming due, that can hurt.
We have been lucky in the last few years; we have locked in 97% of our debt long-term at a
rate under 7%, so we are locked in. The good thing about hotels compared to other real
estate is when interest rates go up; historically, you have been able to increase the
rates of the hotel, unlike other real estates where you have a years lease or a
five-year lease, and you do not have the ability to adjust your lease on a daily basis,
like hotels. Labor costs and health insurance are always concerns. I do not see wages and
salaries being a big problem in the next two years because we took care of a lot of that
in the last couple of years. Benefits typically have been going up dramatically and you
just look for better ways and better groups. What we have been able to do ourselves is,
with having 125 hotels; we have been using that leverage to get better pricing. Labor and
benefits are probably fifty percent of our expenses. The rest is real estate taxes,
utilities and things such as that.
CEOCFO: What is the most
meaningful decision you have made in the last year or so?
Mr. Silver: The most meaningful decision we have made
in the past year or so was to bring in some better people. We have grown to the point
where we have started out with eight hotels back in 1994, and we have 125 hotels. We
brought in some better people on the finance side, the asset management side, on the
renovation side, to be able to handle this growth and to delegate to other people to give
us time to continue our plan.
CEOCFO: Is reaching
shareholders or investors a focus for you?
Mr. Silver: Oh sure! In fact, one of our objectives
about two years ago, was to get out and tell the story because we were known as a
small-cap, limited service REIT, and we had about 25% of our investors were institutional
investors. We were always known as a defensive stock, because when the hotel segment had a
recession, it was a good thing to jump into our stock, because we could continue
dividends. About two years ago, we said that is nice but we also do very well in good
times. We went out and I bet you we talked to 200 institutions in the past
year-and-a-half, to where now, 80% percent of our ownership, are institutions, where two
years ago, 20% were institutions. We are going out and telling our story and by looking at
our returns, it is accepted very well.
CEOCFO: Why should
investors be interested in hotel REITs and Equity Inns in particular?
Mr. Silver: "I think for people that want to own a
diverse portfolio of real estate, and get a good return, whether a current return through
a dividend, or a good total shareholder return through appreciation, REITs have been
tremendous in the last several years. Most asset allocaters have accepted them, as you
should have x-percent of your portfolio in REITs. They are very accepted right now as a
stock whereas probably five years ago, they were still new. Hotel REITs, are probably the
most volatile of REITs, because we are more of an operating business opposed to having
year-long or five-year long leases, so the operating numbers are more volatile. This means
it can go up faster and down faster. If you want to play a little bit in the hotel
business and have a diverse portfolio of hotels, then the chance of making some faster
money with a good return, then hotel REITs are a good place to play. Equity Inns has the
best of both worlds. We have the opportunity to play with a diverse portfolio of hotels,
but not have the volatile nature of most hotel REITs. Even though we are called more slow
and steady, when you sit back and look at the total shareholder return that Equity Inns is
able to provide our shareholders, over the past five years, three years, one year, we are
leading the hotel REITs because we have been slow and steady without volatile results. We
should continue to do the same thing.
CEOCFO: You have a
well-thought out and effective strategy!
Mr. Silver: What happens in the REIT world, when you
are young and have a lot of money to invest, you kind of feel forced to have to buy hotel
product and whatever is available. We are the oldest hotel REIT, so we made our mistakes
early. We came to the conclusion, that to do better than our peers, we really have to have
a strategy, and our strategy has been to grow with newer, better branded products in this
midscale segment. Therefore, that is exactly what we are doing. We are not trying to be
everything to everybody. We definitely have a niche, and it has proven to be effective.
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