a Distinctive Portfolio of quality brands Equity innsEQUITY INNS, INC. 1998 98 ANNUAL REPORT Company Profile

Equity Inns, Inc. is a Memphis-based, self-advised real estate investment trust (REIT) focused on the upscale extended stay, all-suite and midscale limited-service segments of the hotel industry. At year-end 1998, the Company owned a geographically diverse portfolio of 102 hotels with over 12,600 rooms, located in 36 states. The hotel portfolio is leased and managed by several leading lodging and hotel management companies which have strategic alliances with Equity Inns.

Geographic Diversification

Equity Inns, Inc. Corporate Office

■ Pre-1998 Hotels • 1998 Acquisitions ▲ Under Development

For a complete listing of our premium and upscale locations see page 27.

ENN Primary Brands

Primary Brands Number of Hotels Percent of Revenue Average Age

55 51.3 10.2

12 16.0 11.7

19 18.0 3.6

7 7.7 3.3 Equity Inns, Inc. Financial Data (in millions, except per share data)

Year Ended December 31, 1998 1997 Revenues $106.7 $ 71.8 Net income applicable to common shareholders $ 28.2 $ 23.5 Funds from operations (1) $ 65.0 $ 45.7 Net income per share, basic and diluted $ .78 $ .82 Funds from operations per share and Unit (2) $1.71 $1.53 Dividends per common share $1.24 $1.14 Investment in hotels, net $790.1 $617.1

(1) Industry analysts generally consider funds from operations to be an appropriate measure of the performance of an equity REIT. Funds from operations is defined as income before minority interest of unit holders in the Partnership plus certain non-cash items, such as depreciation, gain on sale of hotel properties and write-off of deferred financing fees. (2) Funds from operations per share is computed as funds from operations divided by the weighted number of outstanding shares of common stock and Units of the Partnership.

Hotel Operating Statistics 1 Year Ended December 31, 1998* 1997* Change Revenue per Available Room (RevPAR) $52.36 $50.95 2.8% Occupancy 70.80% 72.77% (2.7)% Average Daily Rate $73.95 $70.01 5.6%

*Same-store basis (excluding sale hotels) for hotels owned both full years

ENN Strategic Partners

Partner’s Role Applicable Brands Source of Hotel Managed Included in Franchisor Company Acquisitions Lessee Management Franchisor Hotels Strategic Partnership of Brand

■■ ■ 54 Hampton Inn Promus 3 Comfort Inn Choice 1 Hampton Inn & Suites Promus 11 Residence Inn Marriott 3 Holiday Inn Bass 4 Homewood Suites Promus 2 Independent N/A 78 Subtotal

■■■3 Homewood Suites Promus 1 Hampton Inn Promus

■■ ■ ■ 19 AmeriSuites Prime

■ 1 Residence Inn Marriott MERISTAR

■■ ■ ■ — Hawthorn Suites USFS 102 Letter To Shareholders

necessary capital improvements to Our determination to emphasize our existing properties — critical the upscale all-suite and extended investments toward increasing stay segments in our growing internal growth. portfolio is based on a number of important factors. Premium brands In September, the Company ter- in major metropolitan and subur- minated a pending merger agree- ban markets in these particular ment with RFS Hotel Investors. niches offer both high demand The completion of a transaction and high barriers to entry, and of this magnitude is a dynamic have exhibited greater resiliency process, and although the com- during times of economic slow- bination would have been a stra- down. Further, our recently tegic fit, we determined that acquired hotels are typically newer 2 changing market conditions and facilities, allowing us to achieve more costly components of the accelerated growth in RevPAR proposed merger would result in compared to mature properties. n 1998, Equity Inns expanded the overall value for Equity Inns into new regions and broad- shareholders not being enhanced. Accordingly, of the 16 properties Iened the diversity of its portfo- we acquired in 1998, comprising lio of properties, concentrating on However, the termination of the 2,123 rooms, three were Residence acquiring upscale extended stay merger in no way altered our fun- Inns, two were Homewood Suites and all-suite hotels in markets with damental strategy. In 1998, we and nine were AmeriSuites, includ- significant barriers to entry. We made significant progress in diver- ing this chain’s largest hotel, a 202- acquired 16 quality branded hotels, sifying our portfolio by segment room facility in Las Vegas, Nevada. while reducing our exposure to and geography. Equity Inns enters We also completed and opened the midscale limited-service seg- 1999 a stronger and more diverse our first development property, a ment, by selling smaller hotels in company by any measure. 125-room Hampton Inn and Suites secondary and tertiary markets. in the upscale Wolfchase Galleria area near Memphis, Tennessee. DIVIDEND PER SHARE GROWTH Despite a more difficult operating environment, our financial per- (dollars) At the same time, we continued to formance was solid. Funds from 1.40 selectively prune our portfolio of Operations (FFO) grew by 42% primarily smaller properties in the to $65.0 million on revenues of 1.20 midscale limited-service sector. This $106.7 million, and on a same- combination of key acquisitions store sales basis, excluding hotels 1.00 and selected divestitures increased for sale, revenues per available the revenue derived from our room (RevPAR) increased 2.8% to 0.80 upscale extended stay/all-suite $52.36. The Company dividend properties to 43%, from 34% in increased 9% to $1.24 for the year, 0.60 1997, while decreasing the percent- while the FFO payout ratio was age of our revenue derived from 0.40 reduced to 72.5%. the midscale limited-service sector to 54% from 61% in 1997. This 0.20 We strengthened our management trend should continue over the team, improved our capital struc- next several years. 0.00 ture and continued to make the ’94 ’95 ’96 ’97 ’98* * 15.4% compounded growth rate Equity Inns enters 1999 a

stronger and more diverse

Equity Inns invested $26 million company by any measure. in capital improvements.

The Company strengthened both GROWTH IN FUNDS FROM OPERATIONS part of a larger Disney entertain- its management team and Board (dollars in thousands) ment and office complex. The sec- of Directors during the past year. ond is a 300-room/suite Hawthorn Howard Silver, who had served as 70 Suite Hotel located near the O’Hare Chief Financial Officer of Equity Airport. The third, a 252-suite 60 Inns since 1994, was named Homewood Suites, is near the President and Chief Operating 50 convention center and adjacent to Officer in June, and Donald a new upscale shopping center in Dempsey, who has over 30 years 40 Orlando. We also have identified experience in the hotel industry, 3 12 hotels which we expect to sell was named Chief Financial Officer 30 in 1999, primarily in the midscale in July. In December, Mr. Silver, Mr. limited-service segment. Dempsey and Raymond E. Schultz, 20 retired chairman and chief execu- 10 We took a number of important tive officer of the Promus Hotel steps in 1998 to improve our capi- Corporation, were named to the 0 tal position, minimizing our expo- Board of Directors of Equity Inns. ’94 ’95 ’96 ’97 ’98 sure to variable rate debt, while assuring that we have sufficient In a relatively short period of resources through the prudent time, from our early beginnings The quality of our assets is reflected use of equity, preferred equity in the Southeast, Equity Inns has in outstanding brand name hotels, and debt to fund our develop- expanded and grown, and cur- such as AmeriSuites, Residence Inn ment projects and acquisition rently owns 102 hotels in 36 by Marriott, Homewood Suites and activity. In February, Equity Inns states. We fully intend to continue Hampton Inn, acquired through our completed the first of two $10 mil- this course into the new millen- strategic alliances. Equity Inns is lion sales of common stock. In nium, enhancing our portfolio one of the few multi-tenant/lessee June, the Company sold 2.75 mil- and broadening our reach into hotel REITs, which allows us not to lion shares of Series A Cumulative growing and diversified markets be dependent on any one lessee. Preferred Stock for an aggregate of opportunity. Our strategic focus, our strong principal amount of approximately brands and our key partnerships $69 million. Also, we are currently are discussed in greater detail in the proceeding with $100 million of pages immediately following this fixed rate secured debt to fund letter to shareholders. the acquisition of the three hotels previously mentioned and free up Phillip H. McNeill, Sr. At this time, we expect to acquire a portion of our line of credit for Chairman and three large properties in 1999, future acquisitions. Chief Executive Officer including two upscale extended stay hotels in the Chicago market Investments in our current asset March 23, 1999 and the system’s largest Homewood base are a basic necessity for the Suites in Orlando. The first, a 235- future growth of RevPAR and pro- suite Homewood Suites, is located tection of our respective market in downtown Chicago, and will be positions. During the past year, Diversity high\ demand niches

4 quity Inns is the largest hotel and demand trends of hotel seg- These hotels are primarily new, REIT concentrating on three ments and locations, and how with recognized national names, Eof the fastest growing seg- best to take advantage of these enjoy high customer satisfaction ments in the lodging industry — trends to complement and expand and acceptance, and command upscale extended stay, all-suite and the Company’s current base of both rate and occupancy premi- midscale limited-service hotels. The quality properties. ums. They have proven to be the Company’s portfolio of 102 hotels most recession-proof in the indus- comprising over 12,600 rooms, has All-suite hotels feature guest try during times of economic grown through strategic alliances suites with a kitchen and living downturn, when business and with major hotel companies, who area separate from the bedroom, leisure travelers tend to scale continue to provide a steady while “extended stay” hotels are down from higher rate hotels. pipeline of high quality acquisitions designed for professionals staying Most importantly, by concentrat- of nationally recognized franchised in a particular location for a week ing on premium brands in key brands. Already the largest single or more and provide more home- markets, Equity Inns will grow, owner of Hampton Inns, a recog- like amenities for traveling execu- build and expand a portfolio with nized leader in the midscale limited- tives. Demand for these two high barriers to entry, which limits service sector, the Company has products is high and cuts across competition and overbuilding. and will continue to increase its geographic segments, particularly concentration of assets in the in major suburban and urban upscale all-suite and extended markets where the Company has stay segments of the marketplace. been building its presence.

Managing an expanding portfolio TARGET MARKET SEGMENT/ Upscale of hotel properties is a dynamic PRIMARY BRANDS enterprise, and Equity Inns’ deter- Residence Inns mination to increase its presence Upper Upscale AmeriSuites in these two areas is based on a Homewood Suites careful examination of the supply Midscale w/o F&B Midscale w/F&B Hampton Inn

Economy Budget within

5

AmeriSuites — Miami Airport, Florida Acquiring

6

Residence Inn — Portland, Oregon

s indicated in the charts Additional acquisitions included on the left, the percent- three Residence Inns, one in 1998 PORTFOLIO REVENUES Aage of Equity Inns rev- downtown Portland, Oregon, close enue from all-suite and upscale to the convention center, the sec- extended stay hotels increased ond in downtown Boise, Idaho, dramatically in 1998, and the three miles from the Boise airport Company expects their contri- and a third in Somers Point, New bution to exceed 50% in 1999. Jersey, ten miles south of Atlantic Underlying this trend is the exe- City. In addition, Equity Inns opened its first development ■ All-Suite – 18.0% cution of a focused strategy to ■ Upscale Extended Stay – 24.4% broaden and diversify the Equity property, and first Hampton Inn ■ Midscale Limited Service – 52.9% Inns portfolio with premium & Suites in the Wolfchase area ■ Full Service – 4.7% brands and desirable locations near Memphis, Tennessee. A within these segments. complete list of Equity Inns hotels and locations is located 1997 PORTFOLIO REVENUES In 1998, the Company’s acquisitions on page 27 of this annual report. included nine AmeriSuites hotels. Equity Inns has acquired a total of A cornerstone of the Company’s 19 hotels of this chain, with more growth is the strategic alliances than 2,400 rooms since entering formed with five major industry into a strategic alliance with Prime partners: Interstate Hotels Hospitality in 1997. In addition to Corporation, Prime Hospitality the largest AmeriSuites located in Corporation, Promus Hotel ■ All-Suite – 0.8% Las Vegas, Nevada, the hotels are Corporation, MeriStar Hotels & ■ Upscale Extended Stay – 22.3% located in important growing mar- Resorts and US Franchise Systems. ■ Midscale Limited Service – 69.0% ■ Full Service – 7.9% kets including Miami, Florida, These relationships provide Minneapolis (Mall of America), Equity Inns with the formidable Minnesota, and near the BWI competitive advantage of being a Airport in Baltimore, Maryland. multi-tenant/lessee hotel REIT. Properties with high barriers to entry

Specifically, the Company has Promus Hotels is the franchisor 1996, and enables Equity Inns to 7 a broad wealth of acquisition of two of the primary brands in view and purchase large portfolios sources of varied products and our portfolio, Hampton Inns and of properties. locations, and the right of first Homewood Suites, as well as refusal to purchase many new and manager of a portion of our All of these partnerships provide a attractive brand name properties, Homewood Suites portfolio. Prime strong core of quality acquisition eliminating the need for a more Hospitality is a hotel owner/opera- candidates and Equity Inns has the competitive bidding process. The tor, developer and franchisor of right of first refusal for more than Company also benefits from the AmeriSuites, the leading brand in 80 hotel properties over the next national management and market- the lower upscale all-suite lodging three years. A grid which illus- ing expertise of its partners in pro- segment of the industry, and the trates our partners, their brands moting and in maintaining a high most significant area of acquisi- and their roles as lessees, fran- level of quality for their brands. tions for Equity Inns in 1998. US chisors and property managers for Franchise Systems is the exclusive Equity Inns can be found on page franchisor of Hawthorn Suites, an one of this report. upscale extended stay brand, and provides a valuable future source of quality acquisition candidates, PREMIUM FRANCHISE BRANDS particularly in the eastern and AS A PERCENTAGE OF HOTELS midwestern states. Our relation- ship with Interstate dates back to Choice Hotels International 3 – 3% Comfort Inn 3 Bass Hotels & Resorts 3 – 3% Holiday Inn 3

Independent 2 – 2%

Promus Hotels 63 Hampton Inn 55 Hampton Inn & Suites 1 Homewood Suites 7 92% Marriott 12 Residence Inn Hotels 12

Prime Hospitality 19 AmeriSuites 19

Residence Inn — Portland, Oregon Investing in our future; Managing and enriching our portfolio

nhancing the quality of its asset base and broadening Eits geographic reach through acquisitions is a primary goal of Equity Inns. However, the ongo- ing management and evaluation of the Company’s existing proper- 8 ties is equally important, in assur- ing the growth and health of the Company’s portfolio and the return on investment for Equity Inns Hampton Inn — San Antonio (Downtown), Texas shareholders. An integral element of this process is the regular our target markets. The properties AVERAGE CAPITAL EXPENDITURES – assessment of the Company’s mix may be in locations where over- PER HOTEL of properties by segment, location building is occurring or could easily (dollars in thousands) and product, as well as present be established, and in general, are 450 and potential future performance. located in markets where demand and barriers to entry are not high. 375 In 1998, Equity Inns sold three properties, and for 1999 has identi- This evaluation also enables the 300 fied 12 more, which are not consis- Company to precisely determine tent with the criteria we have set for which hotels require investments to maintain and strengthen their posi- 225 tion in the market. Equity Inns has ROOM GROWTH SINCE IPO invested over $70 million over the 150 (thousands of rooms) past four years in capital expendi- tures primarily to upgrade the qual- 75 14 ity of its portfolio and improve its 12 overall performance. 0 ’95 ’96 ’97 ’98 10 The acquisition of premier hotel properties in vibrant market seg- With a strong focus on the upscale 8 ments is a key growth strategy for all-suite/extended stay market the Company. However, pruning segments, an established base of 6 the portfolio of properties that no quality midscale limited-service longer match Equity Inns’ long- properties, a steady pipeline of 4 term objectives, coupled with quality brand acquisitions through ongoing investments to strengthen its strategic partnerships, and the 2 the performance of existing hotels, essential and prudent management are critical to the Company’s future of its portfolio, Equity Inns is well 0 growth and success. positioned for strong growth and ’94 ’95 ’96 ’97 ’98 performance in the years ahead.