In 2009 the average hotel participating in PKF Hospitality Research's (PKF-HR) Trends® in the Hotel Industry survey suffered a staggering 35.4 percent decline in net operating income (NOI). This is the greatest annual decline in profits recorded by PKF-HR in the 77 years the firm has been tracking the performance of U.S. hotels. For U.S. hotel owners it is the cash flow from operations that they rely on to pay their debt obligations. Therefore, owners, and their lenders, were in shock when facing the severe impact of the great recession on the lodging industry.

As expected, the number of hotels that were unable to generate sufficient cash flows to cover their interest payments nearly doubled in 2009. Fortunately, since the depths of the recession, a combination of rising profits and declining interest rates has allowed for a return to pre-recession interest coverage ratios.

To measure the impact of the recession on the ability of hotels to cover their interest payments, PKF-HR analyzed the performance of a same-store sample of 262 U.S. hotels that reported a significant interest payment annually from 2008 through 2012. We then prepared estimates for 2013. For each year we compared the relationship between the interest payments reported, and the NOI generated from the operations of the hotel. For the purpose of this analysis, NOI is defined as income (profits) before the deduction for capital reserve, rent, interest, income taxes, depreciation and amortization.

Deep Deficiency In 2009

After several years of profit growth, the U.S. lodging industry was in a very healthy position in 2008. During that year, only 7.6 percent of the properties in our sample were unable to achieve an NOI greater than their interest payment. Limited-service hotels were less likely to not cover their interest payments (3.8%) compared to full-service properties (9.3%).

After the large decline in profits occurred in 2009, the percent of hotels that were unable to cover their interest payments increased to 14.5 percent. Analyzing the data by property-type, the percent of deficient full-service properties rose to 14.8 percent in 2009, while the limited-service deficiency ratio peaked at 16.5 percent in 2010. It should be noted that some deficient owners continued to pay their interest obligations out of their own pocket or reserve funds.

Fortunately for U.S. hotel owners, it appears that lenders took note of the extraordinary circumstances and worked with their debtors. From 2008 to 2009, the total interest paid by the properties in our sample declined by 12.6 percent. Despite the drop in interest paid, the magnitude of the decline in profits was great enough to lower the interest coverage ratio from 2.7 in 2008 to 2.1 in 2009.

Coverage Improves

Since 2010 we have seen a steady decline in the number of hotels that have been unable to achieve sufficient cash flows to pay the interest on their loans. Based on our September 2013 Hotel Horizons® forecasts, we estimate the number of properties in our sample earning an NOI less than their interest payments will be just 9.2 percent in 2013.

While the 9.2 percent of deficient properties is greater than the 7.6 percent figure posted in 2008, it should be noted that on average, the properties in our sample are in a stronger financial position to cover their interest obligation. The interest coverage ratio estimated for 2013 is 2.9. This is greater than the 2.7 ratio posted in 2008.

The lower deficiency rate and improved coverage ratio can be attributed to a combination of rising profits, and lower interest rates. From 2010 through 2013, industry-wide profits have grown an estimated 49.9 percent. Concurrently, hotel interest rates, according to the March 2013 edition of PKF-HR's Hospitality Investment Survey, have declined from 7.7 percent in 2010 to 5.5 percent in 2013.

Future Coverage

As of September 2013, PKF-HR is forecasting double-digit gains in unit-level hotel profits through 2015. In addition, Moody's Analytics, PKF-HR's economic forecasting agent, is projecting a relatively low inflationary environment for the next few years. Combined, we foresee a continuation of healthy interest coverage ratios, and declining levels of deficiencies.

About Robert Mandelbaum and Viet Vo

Robert Mandelbaum and Viet Vo work in the Atlanta office of PKF Hospitality Research, LLC (PKF-HR). To purchase a copy of Trends® in the Hotel Industry, please visit This article was published in the November 2013 edition of Lodging.

Contact: Robert Mandelbaum / 404 809 3959

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