Atlanta, GA, September 17, 2002 - Reduced interest payments helped to mitigate an increase in the number of U.S. hotels unable to meet their interest obligations in 2001.  While the number of deficient properties, those with insufficient operating income to cover interest expenses, is expected to rise again by year-end 2002, the percentage of hotels unable to cover interest payments is expected to decline noticeably in 2003 as hotel markets recover.  These conclusions, which have direct implications for hotel loan security, were reached by The Hospitality Research Group of PKF Consulting (HRG), an international management consulting firm that specializes in the hotel industry.

An analysis of the 3,900 financial statements contained in HRG's Trends in the Hotel Industry database determined that an estimated 19.2 percent of these hotels were unable to generate sufficient cash from operations to cover their interest obligations in 2001.  This number is up from 16.4 percent in 2000.  "As expected, we saw an increase in the number of hotels whose operating incomes were less than their interest obligation in 2001," says John (Jack) B. Corgel, Ph.D., Managing Director of HRG.  "This percentage would have been much higher, had hotel managers not reduced interest expenses by an average of 9.0 percent during 2001."

Operating income is defined as the net income after management fees, property taxes, and insurance, but before deductions for capital reserves, rent, income taxes, amortization, and depreciation.

Interest Reduction

"We attribute the 9.0 percent decline in interest payments to the ability of hotel owners to refinance and take advantage of attractive interest rates," says Dr. Corgel.  "Just as hotel managers reduce other expenses when facing declining revenues, we believe hotel owners did an excellent job of re-working their debt obligations in the face of declining profits.  More than three-quarters of the hotels in our sample reported a reduction in interest payments from 2000 to 2001."
 
Variances By Property Type

While all segments of the lodging industry suffered revenue declines during 2001,  deficient hotels showed some consistent characteristics.  In general, hotels not able to cover interest obligations tended to be older, smaller, full-service properties that achieved a relatively low occupancy rate.

Dr. Corgel notes that "full-service hotels clearly struggled more than limited-service hotels during the current recession.  While experiencing double-digit declines in profits, 29.0 percent of the full-service hotels in our sample were unable to cover their interest payments in 2001 from the hotels' net income.  This compares to just 11.2 percent of the limited-service hotels."

The Future

Looking forward, HRG projects a moderate increase in the number of deficient hotels in 2002.  "The primary reason for the increase in deficient hotels in 2002 is the continued slide in performance of the U.S. lodging industry," says Dr. Corgel.  "For the year, our econometric model forecasts a 1.5 percent decline in hotel revenues that should result in a 2.8 percent decline in property-level profits.  Assuming no change in interest expense from 2001 to 2002, the number of hotels unable to cover their interest payment will increase another 8.3 percent.  More refinancing, of course, lowers this estimate."

HRG's econometric model forecasts a turnaround for the U.S. lodging industry in 2003.  The firm estimates that hotel revenues will increase seven percent from 2002 to 2003.  "This will allow for more hotels to pay their interest from the cash generated from operations," Dr. Corgel concludes.  HRG estimates that in 2003, only 12.5 percent of the hotels in its Trends database will be unable to cover their interest payments.  This will be the lowest percentage posted since 1998.

Owner And Lenders Work Together

During the current industry recession, hotel owners and lenders have worked together to lessen the number of hotel loan problems.

"Historically, hotel loan deficiencies have served as a precursor to loan delinquencies," notes Dr. Corgel.  "In 1992, 28.0 percent of the hotels in our sample were deficient and approximately 16.0 percent of hotel loans were in default.  Today a far smaller percentage of hotel loans are delinquent relative to the percent deficient.  The financial institution environment in 2002 is completely different than what it was in 1992.  Hence, more lender forbearance is possible today."

On the other side of the table, hotel owners have made some sacrifices and taken other preventative measures.  "Some hotel owners have paid their interest shortfalls out of their own pockets, while others refinanced loans to lower debt obligations," says Dr. Corgel.  "Both strategies helped to avoid the levels of financial stress that occurred during the last industry recession.  This year, hotel loans that become delinquent are becoming current more quickly."

For more information on the forecasts and management tools offered to hotel owners and operators, please contact HRG at (404) 842-1150, ext 223.

The Hospitality Research Group (HRG), headquartered in Atlanta, is the
research affiliate of PKF Consulting, the international consulting and real estate firm specializing in the hospitality industry.  PKF Consulting has offices in New York, Boston, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, San Francisco, and Singapore,