Hotel Online  Special Report

Fewer Hotels Deficient on Interest Payments; Low Interest Rates, Refinancing, and Rising Profits Are Major Factors 
PKF Study 
ATLANTA July 5, 2005 -- An improved hotel operating environment, coupled with low interest rates that encouraged debt refinancing, contributed to a 22 percent reduction in the number of hotel loan deficiencies in 2004, the first such decline since 1996. Although some hotels will continue to struggle, positive results for the first six months of 2005 and an upbeat forecast for the remainder of the year point to a continued improvement in the number of hotels generating sufficient cash flow to cover their interest obligations, a welcome sign to owners and their lenders.

These observations come from a special analysis of the data collected for the recently released 2005 edition of Trends in the Hotel Industry published by PKF Hospitality Research (PKF-HR), an affiliate of PKF Consulting. The study was based on approximately 1,000 properties that reported their 2003 and 2004 interest expense.

The average hotel in the PKF-HR study sample reported a 2.2 percent decline in their interest payments from 2003 to 2004. "Since our Trends survey consists solely of 'same-store' properties that provided data for both 2003 and 2004, the reduction in interest expense can most likely be attributed to re-financing," said R. Mark Woodworth, executive managing director of Atlanta-based PKF-HR. "With profits increasing and interest costs on the decline, the percentage of properties that failed to generate enough operating income to meet their interest obligations declined from 17.5 percent in 2003 to 13.6 percent in 2004."

PKF-HR's Trends in the Hotel Industry report presents 200 discrete hotel revenue and expense items. The 2005 edition marks the 69th annual review of U.S. hotel operations conducted by PKF. This year's sample draws upon year-end 2004 financial statements received from more than 5,000 hotels across the country.

Interest Coverage Ratios Improve

In 2003, the typical hotel paid $5,250 per-available-room (PAR) in interest expense, while earning a profit of $8,568 PAR. This equates to an interest coverage multiple of 1.63. In 2004, the average interest expense dropped to $5,133 PAR, while profits rose to $9,548, for a healthy coverage multiple of 1.86.

"If interest expenses were to remain flat in 2005, and profits grow at our forecast rate of 15.5 percent, the coverage multiple could go as high as 2.15 this year. This means that hotels will be generating more than double the amount of money needed to pay their lender," noted John Keeling, senior vice president, PKF Capital Markets Group in Houston, which provides real estate transaction advisory services. "The number of properties unable to cover their interest payments could decline to just 8.6 percent of the hotel population in 2005. Importantly, this high coverage level should result in a continued strong market for lending activity through 2006."

Fewer Limited-Service Deficiencies

Both limited- and full-service hotels benefited from declining interest payments in 2004, albeit to varying degrees. Within the study sample, limited-service hotels enjoyed 4.9 percent decline in interest expense, compared to 1.9 percent for full-service properties. Concurrently, the limited-service hotels in the sample enjoyed greater gains in profitability. In 2004, the deficiency rate for limited-service properties was 7.2 percent. On the other hand, 16.1 percent of the full-service hotels fell short of their ability to cover their interest payment for the year.

"The hotel property market is experiencing a process of 'natural selection'," Woodworth observed. "Hotels in the deficient pool are generally older, tired, independent, full-service properties with serious income shortages. These will likely phase out of the market over the near to intermediate term."

Percent of Hotels*
Not Covering Interest Payments

               Year                         Percent of Hotels*
----------------------------------  ----------------------------------
            2005 EST**                            8.6%
               2004                              13.6%
               2003                              17.5%
               2002                              16.7%
               2001                              15.9%
               2000                              13.6%
               1999                              11.1%
               1998                               9.1%
               1997                               7.8%
               1996                               7.1%
               1995                               8.8%
               1994                              10.0%
               1993                              18.6%
               1992                              23.9%

Note: Data prior to 2003 from different samples.
      *  - Percent of hotels in PKF-HR database
      ** - Assumes 15.5% growth in NOI and no increase in interest

Source: PKF Hospitality Research

                        CHANGE IN PROFITS* vs
                           INTEREST EXPENSE
                             2003 - 2004

     Property Type             Interest                Profits*
----------------------- ----------------------- ----------------------
All Hotels                       -2.2%                  11.3%
Full-Service                     -1.9%                  11.2%
Limited-Service                  -4.9%                  12.6%

Note: * - Income before capital reserve, rent, interest, income taxes,
          depreciation, and amortization.

Source: PKF Hospitality Research

                       HOTEL INTEREST COVERAGE
                     Interest / Profit* Multiple

  Property Type         2003             2004           2005 EST**
------------------ ---------------- --------------- ------------------
All Hotels              1.63             1.86             2.15
Full-Service            1.61             1.82             2.10
Limited-Service         1.86             2.20             2.54

Note: * - Income before capital reserve, rent, interest, income taxes,
          depreciation, and amortization.
     ** - Assumes 15.5% growth in NOI and no increase in interest

Source: PKF Hospitality Research

                        HOTEL INTEREST EXPENSE
                      Dollars Per Available Room

     Property Type                2003                   2004
----------------------- ----------------------- ----------------------
All Hotels                       $5,250                 $5,133
Full-Service                     $5,534                 $5,428
Limited-Service                  $3,654                 $3,473

Source: PKF Hospitality Research

                        HOTEL INTEREST EXPENSE
                       Percent of Total Revenue

     Property Type                2003                   2004
----------------------- ----------------------- ----------------------
All Hotels                        13.7%                  12.6%
Full-Service                      13.4%                  12.3%
Limited-Service                   17.2%                  15.2%

Source: PKF Hospitality Research

Relaxed Lending Criteria

"The decline in deficient hotels is yet another indicator of the strong health of the U.S. lodging industry," Woodworth said. "Lenders will gain further confidence in hotel investments when they hear news like this. Due to the robust recovery of the lodging sector compared to other forms of real estate, we have already seen more liberal lending criteria for hotel loans."

PKF Consulting's recently released 2005 Hospitality Investment Survey found a relaxation of both investment return requirements and lending restrictions. "Loan-to-value ratios crept up to more than 70 percent for first mortgages -- territory not visited since our surveys of the 1980s. In addition, debt coverage ratios continue to move in favor of borrowers as they seek more leverage. These terms indicate that lenders feel adequately protected from a recurrence of delinquency and default risk experienced in 2002 and 2003," Woodworth concluded.

Copies of the 2005 Trends in the Hotel Industry report, which provides owners, investors, property managers, asset managers and others with detailed information on all aspects of hotel revenues, operating costs and profits, are available at PKF's online store at, or by calling Claude Vargo toll free at (866) 842-8754.

PKF Hospitality Research (PKF-HR), headquartered in Atlanta, is the research affiliate of PKF Consulting, a consulting and real estate firm specializing in the hospitality industry. PKF Consulting has offices in New York, Philadelphia, Washington DC, Atlanta, Indianapolis, Houston, Dallas, Los Angeles, and San Francisco.


R. Mark Woodworth
PKF Hospitality Research
3340 Peachtree Road, Suite 580
Atlanta, GA 30326
(404) 842-1150, ext 222

Also See: Hotels Increase Marketing Budgets by 6.1 Percent in 2004; Hotels Continue to Shift Marketing Dollars from Advertising to Person-to-Person Selling / PKF Study / June 2005
Hotel Insurance Expense: Minor Cost, Major Concern; PKF Study Finds Premiums Doubled Since 1999 / June 2005
Rampant Optimism in U.S. Hotel Investment Arena / PKF / June 2005
Hotel Real Estate is Alive in 2005 / Scott Smith, MAI / June 2005
U.S. Hotels Staff Up - Rising Benefit Costs at Highest in 15 Years / Mark Woodworth / May 2005
Hotel Guests Not Picking Up the Phone / Robert Mandelbaum / April 2005
Are Hotel Employee Benefits Really Soaring? / Gregory J. Miller and Robert Mandelbaum / March 2005
Plying the Per Diems: How Market Forecasts Should Impact Hotel Rate Strategy / Gregory J Miller / PKF / February 2005
Double-Digit Profit Growth for U.S. Hotels in 2004 and 2005; Strong Revenue Growth Overcomes Some Expense Concerns / PKF / February 2005
Hotel Construction Signs Along the Road to Recovery; Measuring Hotel Developer Intent / R. Mark Woodworth and Robert Mandelbaum / January 2005
Understanding the Recovery Occurring in the Meeting’s Market; Surveying the Meeting Planners / Robert Mandelbaum / December 2004
First Half 2004 Hotel Profits Solidify 2005 Outlook; Industry Still Lags Far Behind its Past Peak Performance in 1998 / HRG & PKF Consulting / December 2004
Room Rates Across the Top 50 Hotel Markets in the U.S. Will Increase by 3.7% in 2004; Five Highest and Five Lowest Average Daily Room Rate Hotel Markets in 2005 / December 2004
Perspectives on the Road to Recovery - U.S. Lodging Industry 2005 / HRG & PKF Consulting / November 2004
Other Revenue Is Good Revenue / Robert Mandelbaum / November 2004
Uncanny! Hotel Occupancies “Key Indicator” of Presidential Election Outcome / October 2004
Is the Hotel Industry Smart Enough to Avoid Overbuilding; Ten Reasons Why Real Estate Markets Become Overbuilt / Jack B. Corgel / July 2004
PKF Consulting/HRG Survey Forecasts Banner Year for Hotel Transactions; Investors Favoring the Full-service Segment / May 2004
First Uptick for Hotel Industry in Three Years; Full-Service Hotels Lead the Way In U.S. Hotel Profits for 2004 / Hospitality Research Group / March 2004
Demand in the Full-service Hotel Sector is Expected to Increase by 6.3% in 2004; Best and Worst Hotel Markets in Terms of RevPAR Growth / PKF Consulting / January 2004

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