Atlanta, GA, Hotel performance has been on a downward spiral over the past two years, putting a strain on the ability of many property managers and owners to cover expenses. The Hospitality Research Group of PKF Consulting (HRG) examined over 3,900 financial statements contained in the Trends in the Hotel Industry database and found that the number of deficient hotels, those with insufficient operating income to cover interest expenses, rose significantly in both 2001 and 2002. The percentage of hotels in HRG's Trends database that were unable to cover interest expenses with the property's operating income over the period 1992 through 2001 are presented in Figure 1.

In 1992, 23.9 percent of the hotels in HRG's Trends database, the highest percent recorded, were deficient, while 19.8 percent of properties in the database are estimated by HRG as deficient in 2002. The financial institution environment in 2002 is completely different than what it was in 1992 so more lender forbearance is possible today. During the current industry recession, hotel owners and lenders worked together to manage interest expenses and temper the number of hotel loan problems. "Some hotel owners have paid interest shortfalls out of their own pockets, while others refinanced loans to lower interest rates," notes Jack Corgel, PhD, Managing Director of HRG. "Both strategies helped avoid financial stress in the industry thus far, but we are now seeing a resurgence of loan problems."

Figure 2 presents monthly hotel loan delinquency rate data from Trepp and JP Morgan, and shows the percentage of properties that have actually missed interest payments from June 1998 to January 2003.

The delinquency rate increased sharply through the beginning of 2002, but then decreased in the spring and summer months. After a slight increase, the delinquency rate generally fell each month starting in the summer of 2002, which seemed to signal that although the delinquency rate was higher than past years, hotel loan problems were at least being kept in check. As reported by Trepp, the 2002 year-end delinquency rate for hotel loans was 5.1 percent. However, toward the end of 2002 and into 2003, the delinquency rate has been rising, indicating renewed loan problems in the industry. The hotel loan delinquency rate is forecast by JP Morgan to jump to over 7 percent by year-end 2003.

While the HRG forecast for interest deficiency rate for 2003 is expected to decrease slightly to 18.5 percent, the hotels in this deficient pool are generally older, tired properties with serious income shortages. These lower-quality hotel assets are likely to continue to experience greater shortages in cash flow than high-quality, well-known, branded properties. Fears of war with Iraq and estimates of an industry rebound not to begin until the second half of 2003 are expected to cause these problematic properties to become delinquent.

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.

Gary Carr
+1 925-672-8717
CBRE Hotels