According to Smith Travel Research (STR), 1997 surpassed 1996 as the most profitable year in the history of the U. S. lodging industry. Total industry pre-tax profits were actually $17.0 billion rather than the original estimate of $14.6 billion. This figure is nearly 40 percent more than the industry's $12.5 billion profits netted in 1996 and double the amount earned in 1995. (see Chart A). Total industry revenues increased from an estimated $71 billion in 1995 to over $85 billion in 1997 (see Chart B for the sources of this revenue).

Based on data to be released in STR's 1998 Hotel Operating Statistics (HOST) Study, the industry experienced its second year of declining occupancies in 1997. Also, the trend in the increases in room revenue per available room (RevPAR) slowed from an annual rate of over 6 percent to nearly 5 percent in 1997. In addition, for the first time since 1991, the rate of growth in supply in 1997 (3.4 percent) exceeded the corresponding increases in demand (2.5 percent). "Despite declining occupancies and slowing RevPAR growth," observes Randy Smith, STR's Chief Executive Officer, "hotel operators were able to make significant improvements in Gross
Operating Profit (GOP) and pre-tax profits, yielding the best bottom-line performance in the industry's history!"

According to the 1998 HOST Study, both full-service properties (those with food & beverage revenues) and limited-service properties (those without food & beverage revenues) have reported increases in GOP measured as a ratio to sales since 1990. "These improvements can be attributed to healthy increases in Average Daily Rates (ADRs), as well as enhancement in operating efficiencies, especially among limited-service properties," says Smith. In addition, both service segments also continue to experience declines in fixed charges, again measured as a ratio to sales, over the same time period. Fixed charges include property taxes, property insurance, rent, interest, depreciation & amortization and equipment leases. In fact, in 1997 both types of facilities reported the highest GOP since STR began tracking the industry's financial performance in 1990 (see attached Chart C & Chart D). Also noteworthy in 1997, both segments reported the lowest ratio of fixed charges to total revenue this decade. This relationship should continue in the near-term, as long as interest rates stay at their present levels.

"For full-service properties, the increases were particularly dramatic as improvements in GOP coupled with declines in fixed charges resulted in pre-tax income of 20.1 percent, a 28 percent rise over 1996. While part of the profitability improvement in full-service hotels is certainly due to enhanced operating efficiency, a significant portion is also due to increased levels of revenue, especially through ADR increases at two to three times the rate of inflation in many major markets", explains Smith. "A similar, but more dramatic GOP improvement occurred in limited-service properties last year. ADR increases over 1996 were not quite as strong as those experienced by full-service hotels, yet, the reported increases in GOP jumped 5 percentage points, from 48.4 percent of total revenue to 53.4 percent. This improved profit margin is due primarily to better operating efficiencies through the use of technology and more management attention on labor costs."

In addition to the comprehensive financial data contained in the annual HOST Study, this yearís edition contains a special review of the industry's performance during 1997, plus STR's outlook for 1998. Also included is a brief overview of the current state of the Extended-Stay lodging segment.

The HOST Study is based on data assembled and compiled solely by STR. The 1998 edition, reporting on results for calendar year 1997, contains data on revenues and expenses for over 2,500 hotels, the largest sampling of financial data ever published on the U.S. lodging industry. Data is presented for full-service and limited - service hotels by region, size, price and location categories. The 1998 HOST Study will be available July 1, 1998.

Smith Travel Research-- the leader in lodging industry tracking and analysis -- provides regular industry reporting to all major U.S. chains, many independent hotels, and a variety of managementcompanies and hotel owners. The company also tracks lodging industry performance in Canada, Mexico, and other major world-wide destinations.