While this is an increase from 16.4% in the previous year, "the percentage would have been much higher had hotel managers not reduced interest expenses by an average of 9% during 2001," Jack Corgel, managing director of HRG, says in the report.

Corgel expects the number of deficient properties, those with insufficient operating income to cover interest expenses, to rise again this year, then "noticeably decline in 2003 as hotel markets recover."

HRG's analysis is based on the 3,900 financial statements in its "Trends in the Hotel Industry" database.

The 9% decline in interest payments is attributed to hotel owners' ability to refinance at today's low interest rates. "More than three-quarters of the hotels in our sample reported a reduction in interest payments from 2000 to 2001," Corgel says.

While all segments of the lodging industry suffered revenue declines during 2001, HRG discovered some consistent characteristics in the deficient hotels. Those unable to cover interest obligations tended to be older, smaller, full-service properties that achieved a relatively low occupancy rate.

"While experiencing double-digit declines in profits, 29% of the full-service hotels in our sample were unable to cover their interest payments in 2001 from the hotels' net income," Corgel says. "This compares to just 11.2% of the limited-service hotels."

HRG projects a moderate increase in the number of deficient hotels this year, primarily because of the lodging industry's continued slide in performance.

"Our economic model forecasts a 1.5% decline in hotel revenues that should result in a 2.8% decline in property-level profits," Corgel says. "Assuming no change in interest expense from 2001 to 2002, the number of hotels unable to cover their interest payment will increase another 8.3%," a number that could be reduced by more refinancing, he says.

HRG's model projects a turnaround in 2003 with a 7% increase in hotel revenues. "This will allow for more hotels to pay their interest from the cash generated from operations," Corgel says.

HRG estimates that in 2003, just 12.5% of the hotels in its database will be unable to cover their interest payments, the lowest percentage since 1998.

Instant Insights /

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