| EQUITY INNS INC ITEM 1A RISK FACTORS The risks described below could materially and adversely affect our business, financial condition and results of operations |
| The following risk factors are not necessarily exhaustive, particularly as to possible future events, and new risk factors may arise from time to time |
| Many things can happen that can cause our actual financial and operating results to be different than those described or anticipated by us in our SEC filings |
| The events of September 11, 2001, recent economic trends, the US-led military action in Iraq and prospects for future terrorist acts and military action have adversely affected the hotel industry generally, and these adverse effects may continue |
| The terrorist attacks of September 11, 2001 and the after-effects (including the prospects for future terror attacks in the United States and abroad), combined with recent economic trends and the US-led military action in Iraq, substantially reduced business and leisure travel and lodging industry RevPAR generally |
| We cannot predict the extent to which these factors will continue to directly or indirectly impact an investment in our common stock, the lodging industry or our operating results in the future |
| Any of these events in the future, coupled with additional terrorist attacks, acts of war or similar events, could have an adverse effect on our results of operations and financial condition, including our ability to remain in compliance with our debt covenants, our ability to fund capital improvements at our hotels, and our ability to make shareholder distributions necessary to maintain our status as a REIT Our ability to maintain our historic rate of distributions to our shareholders is subject to fluctuations in our financial performance, operating results and capital expenditure requirements |
| As a REIT, we are required to distribute at least 90prca of our taxable income each year to our shareholders |
| In the event of downturns in our operating results and financial performance or unanticipated expenditures, we may be unable to declare or pay distributions to our shareholders |
| The timing and amount of distributions are in the sole discretion of our Board, which will consider, among other factors, our financial performance, debt service obligations and debt covenants, debt refinancing and capital expenditure requirements |
| We cannot assure you either that we will continue to generate sufficient cash flow in order to fund distributions at the same rate as our historic rate, or that our Board will continue to maintain our distribution rate at the same levels as we have in the past |
| Risks affecting our ability to make distributions to shareholders include: - competition from other hotels that compete with our hotel properties in a particular geographic market; - over-building of hotels in our markets, which adversely affects occupancy and revenues at our hotels; - dependence on business and commercial travelers and tourism; - increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists; - increases in operating costs due to inflation and other factors that may not be offset by increased room rates; 12 _________________________________________________________________ [63]Table of Contents - RevPAR trends and operating margins; - adverse effects of general, regional and local economic conditions; - adverse effects of a downturn in the hotel industry; - risks generally associated with the ownership of hotels and real estate; - acquisition and disposition strategy; - construction cost overruns and delays; - uncertainties as to market demand or a loss of market demand after renovations have begun; - adverse changes in national and local economic and market conditions; - changes in interest rates and in the availability, cost and terms of debt financing; - changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; - changes in traffic patterns and neighborhood characteristics; - the potential for uninsured or underinsured property losses; - the ongoing need for capital improvements, particularly in older structures; - unanticipated capital expenditures required by damage to our hotels or imposed by our franchisors; - increases in real property tax rates and other operating expenses; - the relative illiquidity of real estate investments; and - other circumstances beyond our control |
| Our debt service obligations could adversely affect our overall operating results, may require us to liquidate our properties, and may jeopardize our tax status as a REIT In the course of our business, we maintain a significant amount of debt outstanding |
| Although our Board has adopted a policy of limiting the amount of debt we will incur to approximately 45prca of our investment in hotel properties, at cost, the Board may change this debt policy at any time without shareholder approval |
| At December 31, 2005, our consolidated indebtedness was 43dtta2prca of our investment in hotel properties, at cost |
| We and our subsidiaries may be able to incur substantial additional debt, including secured debt, in the future |
| Our level of debt could subject us to many risks, including the risks that: - an increase in interest rates could increase our debt service obligations on our floating rate debt; - our cash flow from operations will be insufficient to make required payments of principal and interest; - our debt may increase our vulnerability to adverse economic and industry conditions; - covenants on our debt may restrict our operations and strategies; - debt service payments may reduce cash available for distribution to our shareholders, funds available for operations and capital expenditures, future business opportunities or other purposes; - in the event of defaults, our lenders could foreclose on our assets; - existing debt, including secured debt, may not be refinanced, forcing us to sell some of our assets on unattractive terms; and - the terms of any refinancing may not be as favorable as the terms of our current debt |
| 13 _________________________________________________________________ [64]Table of Contents If we violate covenants in our indebtedness agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all |
| Our returns depend on management of our hotels by third parties, and ineffective or poor management could result in losses to our shareholders |
| In order to qualify as a REIT, we cannot operate any hotel or participate in the decisions affecting the daily operations of any hotel |
| Thus, third-party operators, under a management agreement with one of our taxable REIT subsidiary lessees, control the daily operations of each of our hotels |
| Under the terms of the management agreements, our ability to participate in operating decisions regarding the hotels is limited |
| We depend on these third-party management companies to adequately operate our hotels as provided in the management agreements |
| We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel (for instance, setting room rates) |
| Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, RevPAR and average daily rates, we may not be able to force the management comp any to change its method of operation of our hotels |
| We can only seek redress if a management company violates the terms of the applicable management agreement, and then only to the extent of the remedies provided for under the terms of the management agreement |
| Additionally, in the event that we need to replace any of our management companies, we may experience significant disruptions at our hotels and in our operations generally |
| Problems with our third party managers could thus result in losses to our shareholders |
| Upon expiration of current agreements with one of our managers or if the manager defaulted on its obligations to provide minimum net operating income to us on 18 of our hotels, net income from these hotels would decrease substantially and our results of operations would be adversely affected |
| We have entered into management agreements with subsidiaries of Hyatt Corporation, which are structured so that no management fee is payable until we have achieved minimum net operating income at each of our 18 AmeriSuites hotels |
| The management agreements specify a net operating income threshold for each of these hotels |
| If a hotel fails to generate net operating income sufficient to reach the threshold, Hyatt’s subsidiaries are required to contribute the greater of a predetermined minimum return or the net operating income plus 25prca of the shortfall between the threshold amount and the net operating income of the hotel |
| For 2005, 2004 and 2003, we recorded approximately dlra3dtta7 million, dlra4dtta8 million and dlra4dtta7 million, respectively, in minimum income guarantees from Hyatt as a reduction of our base management fee expense in the accompanying consolidated statements of operations |
| If the Hyatt subsidiaries default on their obligations t o make these shortfall payments when required, net income from our AmeriSuites hotels would decrease substantially and our results of operations would be adversely affected |
| These minimum net operating income agreements are set to expire beginning in 2008 |
| Upon expiration, we will no longer receive these payments from Hyatt and conversely may be required to pay Hyatt base and incentive management fees |
| Accordingly, after the expirations of these agreements, net income from our AmeriSuites hotels may decrease substantially and our results of operations could be adversely affected |
| Our inability to obtain financing could limit our growth |
| Internal growth, which includes periodic capital expenditures and renovation of our hotels to achieve improved revenue performance, along with external growth, in the form of acquisitions, are both important parts of our strategy |
| We may not be able to fund growth solely from 14 _________________________________________________________________ [65]Table of Contents cash provided from our operating activities because we must distribute at least 90prca of our taxable income each year to maintain our REIT tax status |
| As a result, our ability to fund capital expenditures, acquisitions or hotel development through retained earnings is very limited |
| Consequently, we rely upon the availability of debt or equity capital to fund hotel acquisitions and improvements |
| Our ability to grow through acquisitions or development of hotels will be limited if we cannot obtain satisfactory debt or equity financing |
| Our ability to raise additional debt or equity capital will depend on market conditions and we cannot assure you that we will be able to obtain additional equity or debt financing on favorable terms or at all |
| We may not be able to sell our hotels on favorable terms, which could adversely affect our return to shareholders |
| We periodically sell hotels that we believe no longer meet our strategic objectives |
| We cannot assure you that the market value of our hotels will not decrease in the future |
| We may not be able to sell our hotels on favorable terms, or such hotels may be sold at a loss, which could adversely affect our return to shareholders |
| Our insurance maintained for our hotels may be inadequate |
| We maintain comprehensive insurance on each of our hotels, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners |
| We have been informed by our carriers that our properties are not insured under our current “all-risk” policies against acts of domestic or foreign terrorism |
| Several of our lenders have required, and other of our lenders may require, that we carry foreign terrorism-specific insurance |
| We purchased foreign terrorism-specific insurance covering all of our properties beginning in 2003 |
| We have been informed by our lenders that our current coverage satisfies our lenders’ insurance requirements, but we have no assurances that our lenders will not require additional coverage in the future |
| We also purchased domestic terrorism coverage beginning in 2003 |
| In the future, we may not be able to obtain foreign or domestic terrorism insurance with policy limits and terms (including deductibles) that satisfy us or our lenders, or to obtain this insurance at an economically justifiable price |
| If we cannot satisfy a lender’s insurance requirements in any respect, including but not limited to terrorism coverage, the lender could declare a default, which could have a material adverse effect on our results of operations and ability to obtain future financing |
| In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment |
| Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed |
| Under those circumstances, the insurance proceeds we receive might be in adequate to restore our economic position on the damaged or destroyed property |
| Our hotels could be subject to environmental risks |
| Our hotel properties are subject to various federal, state and local environmental laws |
| Under these laws, courts and government agencies have the authority to require the owner of a contaminated property to clean up the property, even if the owner did not know of or was not responsible for the contamination |
| These laws also apply to persons who owned a property at the time it became contaminated |
| In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property |
| Under the environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, like a landfill or an incinerator, to pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment |
| Various court decisions have established tha t third parties may recover damages for injury caused by property contamination, such as asbestos |
| 15 _________________________________________________________________ [66]Table of Contents We could be responsible for the costs discussed above if an environmental condition existed or was alleged to exist at one of our properties |
| The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be substantial and could adversely affect our results of operations and funds available for distribution to our shareholders |
| Even though we have not encountered a substantial environmental claim to date, we may have material environmental liabilities of which we are unaware |
| We can make no assurances that (1) future laws or regulations will not impose material environmental liabilities, (2) the current environmental condition of our hotels will not be affected by the condition of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us, or (3) hotels that we acquire in the future will not contain adverse environmental conditions |
| Our hotels may not comply with the American Disabilities Act and other government regulations |
| Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons |
| Compliance with the ADA’s requirements could require costly removal of access barriers, and non-compliance could result in the US government imposing fines or in private litigants winning damages |
| If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to make distributions to our shareholders could be adversely affected |
| The terms of our franchise agreements and the risk of loss of a franchise could adversely affect our distributions to our shareholders |
| Our hotels operate under franchise agreements, and we are subject to the risks that are found in concentrating our hotel investments in several franchise brands |
| These risks include reductions in business following negative publicity related to one of our brands |
| The maintenance of the franchise licenses for our hotels is subject to our franchisors’ operating standards and other terms and conditions |
| Our franchisors periodically inspect our hotels to ensure that we and our lessees and management companies follow their standards |
| Failure by us or one of our management companies to maintain these standards or other terms and conditions could result in a franchise license being canceled |
| If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the franchisor for a termination payment, which varies by franchisor and by hotel |
| As a condition of our continued holding of a franchise license, a franchisor could also possibly require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment |
| Nonetheless, we may risk losing a franchise license if we do not make franchisor required capital expenditures |
| If a franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise or to operate the hotel without a franchise license |
| The loss of a franchise license could materially and adversely affect the operations or the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor and could materially and adversely affect our revenues and cash available for distribution to shareholders |
| Provisions of our charter and Tennessee law may limit the ability of a third party to acquire control of us, even if in the best interest of shareholders |
| Ownership Limitation |
| Our charter provides that no person may directly or indirectly own more than 9dtta9prca of our common stock or any series of our preferred stock without a waiver from our Board |
| Staggered Board of Directors |
| Under our charter, our Board has three classes of directors |
| Directors for each class are elected for a three-year term |
| Since all directors are not up for 16 _________________________________________________________________ [67]Table of Contents reelection every year, the staggered terms of our directors may affect the ability to change the control of our Company |
| Consent Rights of the Limited Partners |
| Under the partnership agreement of the Partnership, we generally will be able to merge or consolidate with another entity with the consent of limited partners holding interests that are more than 50prca of the aggregate percentage interests of the outstanding limited partnership interests not held by us or if the holders of limited partnership interests have the right to receive the same consideration as our shareholders |
| Authority to Issue Preferred Stock |
| Our charter authorizes our Board to issue up to 10cmam000cmam000 shares of preferred stock and to establish the preferences and rights of any shares issued |
| Future issuances of shares of preferred stock may have the effect of delaying or preventing a change in control of our company |
| We adopted a shareholder rights plan which provides, among other things, that when specified events occur, our shareholders, other than an acquiring person, will be entitled to purchase from us shares of a newly created class of preferred stock |
| The exercise of these preferred share purchase rights would cause substantial dilution to a person or group that attempts to acquire us in a transaction not approved by our Board |
| Tennessee Anti-Takeover Statutes |
| As a Tennessee corporation, we are subject to various anti-takeover laws found in Chapter 103 of Title 48 of the Tennessee Code |
| These laws place restrictions on and require compliance with various procedures designed to protect the shareholders of Tennessee corporations against unfair or coercive mergers and acquisitions |
| Each of these restrictions and procedural requirements restrict the transferability of our capital stock and may discourage or prevent takeover offers for, or changes in control of our Company, including transactions at a premium over the market price of our capital stock, even if shareholders believe that a change of control is in their best interest |
| Our failure to qualify as a REIT under the federal tax laws will result in adverse tax consequences, which could adversely affect our return to shareholders |
| We have operated and intend to continue to operate in a manner that is intended to qualify us as a REIT under the federal income tax laws |
| The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited |
| Accordingly, we cannot be certain that we have been or will continue to be successful in operating so we can continue to qualify as a REIT At any time, new laws, interpretations, or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT In order to qualify as a REIT, each year we must pay out to our shareholders in distributions at least 90prca of our taxable income, other than any net capital gain |
| To the extent that we satisfy this distribution requirement, but distribute less than 100prca of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income |
| In addition, we will be subject to a 4prca nondeductible excise tax if the actual amount that we pay out to our shareholders in a calendar year is less than a minimum amount specified under federal tax laws |
| Our only source of funds to make these distributions comes from distributions that we receive from Equity Inns Partnership, LP through its general partner and our wholly-owned subsidiary, Equity Inns Trust |
| Accordingly, we may be required to borrow money or sell assets to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4prca nondeductible excise tax in a particular year |
| This risk may be intensified if our current indebtedness restricts our ability to borrow money and sell assets, even if necessary to make distributions to maintain our REIT status |
| 17 _________________________________________________________________ [68]Table of Contents If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory savings clauses, we will be subject to federal income tax on our taxable income |
| We might need to borrow money or sell hotels in order to pay any such tax |
| If we cease to be a REIT, we no longer would be required to distribute most of our taxable income to our shareholders |
| Unless the federal income tax laws excused our failure to qualify as a REIT, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT The market price of our equity securities may vary substantially |
| The trading prices of equity securities issued by REITs have historically been affected by changes in market interest rates |
| One of the factors that may influence the price of our common stock or preferred stock in public trading markets is the annual yield from distributions on our common stock or preferred stock as compared to yields on other financial instruments |
| An increase in market interest rates, or a decrease in our distributions to shareholders, may lead prospective purchasers of our shares to demand a higher annual yield, which could reduce the market price of our equity securities |
| Other factors that could affect the market price of our equity securities include the following: - actual or anticipated variations in our quarterly results of operations; - changes in market valuations of companies in the hotel or real estate industries; - changes in expectations of future financial performance or changes in estimates of securities analysts; - fluctuations in stock market prices and volumes; - issuances of common stock or other securities in the future; and - announcements by us or our competitors of acquisitions, investments or strategic alliances |
| We depend on our key personnel, the loss of any of whom could have an adverse effect on our operations |
| We depend on the efforts and expertise of our Chairman, President and Chief Executive Officer, Chief Financial Officer, Executive Vice President of Development, Senior Vice President of Asset Management, Senior Vice President of Real Estate and Controller to manage our day-to-day operations and strategic business direction |
| The loss of any of their services could have an adverse effect on our operations |