Industry Update
Performance 3 August 1998

U.S. Hotel Industry Now Breaks Even at 55.5 Percent Occupancy, Bear Stearns and PricewaterhouseCoopers Report Cutting Fixed Costs, Aids Drop From 62.6 Percent in 1992, Firms Say

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Coopers & Lybrant LLP.

NEW YORK, July 29 / Even as U.S. hotel occupancy rates are forecast to continue to decline through the millennium, U.S. hotels have achieved an historically low "breakeven occupancy" rate, or the occupancy level at which a hotel's expenses and revenues are equal, according to new analysis by Bear, Stearns & Co, and PricewaterhouseCoopers using data from Smith Travel Research.

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U.S. hotels' occupancy rate will decline from 63.9 percent in 1998 to 62.9 percent in 1999 and 62.5 percent in 2000, according to an econometric forecast by the PricewaterhouseCoopers lodging and gaming group. But analysis shows the U.S. hotel industry overall achieves breakeven occupancy at approximately 55.5 percent. That breakeven level is down from 62.6 percent in 1992 – the year at which the lodging industry returned to profitability following several years of significant financial losses.

"The hotel industry's new, lower break-even occupancy level comes as we are nearing the end of a boom cycle in U.S. lodging," observes Jason Ader, New York-based Bear Stearns senior managing director. "As a result of the new breakeven level, the hotel industry may find itself in a more defendable position now than in previous down cycles," he adds.

"Three factors underlie the dramatic reduction in breakeven occupancy to 55.5 percent," notes Bjorn Hanson, Ph.D., New York-based chairman of the PricewaterhouseCoopers lodging and gaming group. "They are: average daily room rates that have been increasing at greater than the rate of inflation; a redefined hotel revenue mix that emphasizes rooms revenue over revenue from low-margin food and beverage operations; and lower debt and equity costs for the industry as a whole," Hanson explains.

Breakeven Occupancies Vary By Hotel Segment

Bear Stearns and PricewaterhouseCoopers calculated breakeven occupancy levels for eight of the nine Bear Stearns hotel segments (the Deluxe, Upscale, Luxury, Midscale with Food and Beverage, Midscale without Food and Beverage, Economy, Budget and Upper-Tier Extended-Stay segments).

Additionally, for each segment, the firms compared the new breakeven occupancy level to the segment's 1997 reported occupancy level. This analysis was performed to ascertain how close each segment is operating to its breakeven level.

Of the eight segments tested, Upscale hotels are operating closest to their breakeven occupancy level. The Upscale segment breaks even at 63.0 percent occupancy, according to Bear Stearns and PricewaterhouseCoopers. In 1997, the upscale segment reported occupancy of 69.4 percent. That's a narrow gap of just 640 basis points (or 640 hundredths of a point) between breakeven occupancy and 1997 occupancy.

"Even with such a narrow gap between reported and breakeven occupancy, demand for rooms in the Upscale segment would have to drop by 9.2 percent for the Upscale segment to rub against its breakeven level," Ader explains. "That's a fairly substantial drop."

The biggest occupancy surpluses arc in the Midscale without Food and Beverage, Economy and Extended-Stay (Upper Tier) segments. Their combinations of low cost structure and relatively high average daily room rates gives them the greatest amount of insulation from occupancy declines.

The Midscale without Food and Beverage segment breaks even at 49.0 percent occupancy, according to Bear Steams and PricewaterbouseCoopers. Meanwhile, that segment reported a 1997 occupancy rate of 67.1 percent, according to Smith Travel Research, for a cushion of 1,810 basis points (or 1,810 hundredths of a point) between breakeven occupancy and reported occupancy.

The Economy segment breaks even 41.0 percent, according to Bear Stearns and PricewaterhouseCoopers. The economy segment reported a 1997 occupancy level of 58.5 percent, according to Smith Travel Research, for a cushion of 1,750 basis points between breakeven occupancy and reported occupancy.

The Upper-Tier Extended Stay segment breaks even at 60.0 percent occupancy, according to Bear Stearns and PricewaterhouseCoopers. Meanwhile, that segment reported a 1997 occupancy rate of 79.7 percent, according to Smith Travel Research, for a cushion of 1, 180 basis points between breakeven occupancy and reported occupancy.

These results are encouraging, as the Upper-Tier Extended Stay and Midscale without F&B segments have seen some of the industry's highest supply growth over the past two to three years, Hanson of PricewaterhouseCoopers and Ader of Bear Stearns agree.

Bear, Stearns & Co., Inc., a leading worldwide investment banking and securities trading and brokerage firm, is the major subsidiary of The Bear Stearns Companies Inc. BSC. With approximately $18.3 billion in total capital, Bear Stearns serves governments, corporations, institutions, and individuals worldwide. The company's business includes corporate finance and mergers and acquisitions, institutional equities and fixed income sales and trading, private client services, derivatives, asset management, correspondent clearing, securities lending, and custody services. Headquartered in New York City, the company has approximately 9,200 employees located in domestic offices in Atlanta, Boston, Chicago, Dallas, Los Angeles, and San Francisco; and an international presence in Beijing, Buenos Aires, Dublin, Geneva, Hong Kong, London, Lugano, Paris, Sao Paulo, Shanghai, Singapore and Tokyo.

The PricewaterhouseCoopers lodging and gaining group offers professional services including tax, assurance, financial advisory, management consulting, strategic research and related services to hotel and casino companies, their executives, owners, managers and brokers, as well as to financial institutions, governments, academics, attorneys and others. The group maintains a presence in major U.S. cities and around the globe.

PricewaterhouscCoopers ( www.pwcglobal.com), the world's largest professional services organization, helps its clients build value, manage risk and improve their performance.

Drawing on the talents of more than 140,000 people in 152 countries, PricewaterhouseCoopers provides a full range of business advisory services to leading global, national and local companies and to public institutions. These services include audit, accounting and tax advice; management, information technology and human resource consulting; financial advisory services including mergers and acquisitions, business recovery, project finance and litigation support; business process outsourcing services; and legal services through a global network of affiliated law firms.

PricewaterhouseCoopers refers to the U.S. firm of PricewaterhouseCoopers LLP and other members of the worldwide PricewaterhouseCoopers organization.

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