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By Alexander Feneck, Hospitality Research
Group of PKF Consulting
December 2002 It may be difficult to recall, given the current dismal performance of the lodging industry, but hotel revenue grew at a compound annual rate of 6.5 percent from 1994 through 2000. While enjoying such strong revenue growth, controlling expenses was not a concern. However, as the lodging industry slowed and then declined during 2001, expenses became a critical focus as owners and managers looked for ways to protect profits. �Fixed costs� are considered to be beyond the control of hotel owners and operators, but according to the analysis performed at PKF Consulting, both owners and operators have found ways to adjust their �fixed costs� commensurate with changes in revenue. Specifically, hotel owners have contributed to the reduction of a �fixed cost� by successfully managing their debt and interest payments to compensate for the fluctuations of the hotel business cycle. To study the changes in interest payments made by hotel owners during the past several years, financial records from PKF�s 2002 Trends in the Hotel Industry database were analyzed. The sample was made up of the same 147 hotels that made interest payments from 1995 through 2001. The following paragraphs detail PKF�s findings. Taking On Debt In The 1990s Large percentages of the hotels in the sample reported reductions to interest payments from 1996 through 1999. Chart I shows the annual percent of our sample that reported an interest payment reduction from the prior year. While a large number of properties reduced their
interest payments each year, the total interest paid by the entire sample
showed a small increase from year to year (see Chart II) during this period.
This seemingly counterintuitive result indicates that many of the hotels were able to pay down the principle on their mortgages with the growing profits of the late 90s, while other hotel owners enjoyed the benefits of increasing property values and refinanced their mortgages. By 2000, the economy had begun to slow and, although hotel profits continued to grow, the lodging industry could already foresee the declines to revenues that were to occur in 2001. With interest rates falling and property values still firm, owners refinanced once again pulling out large amounts of equity from their properties. Total dollars paid in interest payments increased 5.4 percent during 2000. This is a dramatic jump from the 0.6 percent growth of 1999. The outstanding debt of the majority of hotel mortgages must have increased, as indicated by the relatively small 34.5 percent of the hotels that reduced interest payments despite declining interest rates. Reducing Debt In 2001 During 2001, hotels experienced even larger than expected declines in revenues. Allen Greenspan continued to fight the recession by lowering interest rates even further. Hotel owners took full advantage of the declining interest rates and refinanced once again. This time, however, they did not increase the size of their debt; they merely restructured it. In 2001, 77.3 percent of the hotels in our sample enjoyed lower interest payments. The total dollars paid in interest payments declined 9.0 percent, demonstrating that no new debt was taken on. The Management of Interest From 1995 through 2001, interest payments stayed
between 12.6 and 10.8 percent of total revenue despite the large fluctuations
in revenue and total dollars paid in interest payments (see Chart III).
This narrow range, within which interest payments remained, demonstrates
the responsiveness of owners to revenue changes and how these owners reacted
by adjusting the �fixed cost� of interest payments.
. Alexander Feneck is a Research Coordinator with The Hospitality Research Group, the research affiliate of PKF Consulting. He is in the firm�s Atlanta office. |
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For additional information contact Robert Mandelbaum at the firm: email [email protected] PKF Consulting 3391 Peachtree Road Suite 420 Atlanta, GA 30326 phone (404) 842-1150 fax (404) 842-1165 |
Also See | With Hotels, Does Spending Money Make Money? / Robert Mandelbaum / Sept 2002 |
What Made Profits Drop in 2001? / PKF Consulting / Oct 2002 | |
Commissions in the Hotel Industry: Agents for Change? / Robert Mandelbaum / PKF / Aug 2002 | |
Will Hotel NOIs and Property Prices Follow Revenues in Their Downward Spiral? / John (Jack) B. Corgel, Ph.D / Hospitality Research Group of PKF Consulting / June 2002 | |
Hotel Room Sales Now Unaffected by Travel Fears; Only Economic Conditions Affecting Demand in Most Markets / August 2002 |