PKF Hospitality Research (PKF-HR), the research affiliate of PKF Consulting, has completed a special analysis of the hotel industry that predicts the number of full service U.S. hotels lacking the cash flow needed to pay their debt will increase by 25 percent in 2009, and property values will likely decrease another 20.1 percent (after a 14.1 percent decline in 2008). The analysis reviewed two critical issues facing hotel lenders today: the borrower’s ability to meet their debt-service obligations and the underlying value of their collateral. PKF-HR says 2009 could be the worst year for the hotel industry since it began tracking performance data more than 20 years ago.
PKF-HR analyzed information from its Trends in the Hotel Industry database of 6,000 actual hotel financial statements. The forecast, based on preliminary year-end data from Smith Travel Research (STR), projects that the average U.S. hotel will experience a 9.8 percent decline in the revenue received from the rental of guest rooms (RevPAR) in 2009, after having already declined an estimated 1.8 percent in 2008. Of the 6,000 hotel financial statements in PKF-HR’s proprietary database, an estimated 15.9 percent were unable to generate sufficient cash from operations to cover their debt service payments in 2008. Based on current RevPAR and NOI forecasts, PKF-HR estimates this number will increase to 19.9 percent in 2009.
"The drop in RevPAR for 2009 will be the fourth largest annual decline in this important measure since 1930,” says R. Mark Woodworth, president of PKF-HR. “Further, PKF-HR is forecasting that the nation’s hotels will not experience a year-over-year quarterly increase in RevPAR until the third quarter of 2010. Few hotel lenders have had to deal with such precipitous declines in revenues. Therefore, they are unprepared to gauge the pending impact on the ability of their borrowers to re-pay their obligations."
Full-service hotels with occupancy greater than 70 percent were deemed “high occupancy” properties for the research. PKF-HR believes this high occupancy hotels will not appear on lender watch lists. “While no lender likes to see debt-coverage ratios drop, they should be reassured that most stable full-service hotels will still be able to generate enough cash flow to pay their mortgages,” Woodworth said.
Meanwhile, properties performing at less than 70 percent were deemed “low occupancy” hotels. Given the extreme fall-off in profits, PKF-HR observed an equally dramatic decline in the ability of these hotels to cover their debt service obligations. “Clearly, for hotels that are already under performing, the prospects for surviving the current recession are bleak,” says Woodworth. “For the lenders to these hotels, careful consideration should be given to two critical issues: (1) management’s planned operational strategies and (2) the underlying value of their collateral.”