Mr. Mandelbaum

Hotel Market Reports

Measuring Business Interrupted by Hurricane Katrina

By Robert Mandelbaum, Director of Research Information Services, CBRE Hotels' Americas Research

Gather Your Historical Data

What is frequently overlooked in the immediate turmoil is the need to secure important data and documents. This information is especially vital for those owners that wish to recover lost business income from their insurance company. While the actual filing of claims and negotiations may not occur until a year or two after the horrific event, several pieces of data and documents need to be gathered in the short-term in order to achieve a favorable settlement later on.

After working with our clients to recoup business interruption benefits from their insurance companies, we have found certain data and documents to be extremely useful in our calculations of lost revenues and profits. The following is a partial list of reports (effective the day of the catastrophic event) that should be gathered and preserved by management.

The Lost Business Calculation

Once the historical performance data is gathered from the documents listed above, the next step is to estimate how the hotel would have performed if the catastrophic event had not occurred. To prepare this forecast, we utilize budget, marketing plan, reservation, and group booking information contained in the secured documents. In addition, we rely on the most recent forecast developed prior to the catastrophic event for the subject property's MSA.

Using the MSA forecast as a baseline for future supply, demand, and revenue conditions within the market for the projection period, we then estimate the market penetration of the subject property based on historical correlations to MSA performance. This provides us with estimates of the potential rooms revenue the subject property would have earned had the catastrophic event not occurred. From these estimates of rooms revenue, we then prepare projections of net income using historical financial statements from the subject property, as well as data from our firm's Trends in the Hotel Industry database.

The calculation of lost business is derived from the difference between the performance of the subject property estimated under the "no catastrophic event" scenario, and the data from the actual performance of the hotel during the projection period. Estimates can be made for lost room nights, revenue, and net income.

Objectivity Is Key

A key to the lost business calculation is the ability to provide an objective estimate of the "no catastrophic event" scenario. The foundations of this estimate are the actual advanced booking data from the subject hotel and the MSA forecast. Since the MSA forecast was developed prior to the catastrophic event, it can be viewed as the prevailing outlook for future market conditions as of the day of the event.

In conjunction with Torto Wheaton Research, PKF Hospitality Research prepares econometric forecasts of hotel supply, demand, occupancy, ADR, and RevPAR for 53 major markets across the nation. The forecast reports are entitled Hotel Outlook. Each Hotel Outlook report contains forecast performance data for both full-service and limited-service hotels in a given market. The forecasts are made for a six-year period, and are updated every three months. The Hotel Outlook econometric model is based on data from economy.com, Smith Travel Research, Torto Wheaton Research, and PKF Hospitality Research. An accuracy analysis conducted in early 2005 proved the Hotel Outlook forecasts to be 99.9 percent accurate.

Hypothetical Lost Revenue For New Orleans

To depict how lost business can be calculated, we have prepared a hypothetical lost rooms revenue calculation for the full-service hotels in the New Orleans MSA. It is very important to note that this example is intended solely to demonstrate our lost business methodology. The two recovery scenarios outlined below do not necessarily represent our firm's opinion on the future performance of the New Orleans full-service hotel market.

The Fall 2005 Hotel Outlook forecast for the New Orleans MSA full-service hotel market was developed on August 18, 2005, a full 11 days before Hurricane Katrina hit the coast of Louisiana. The Fall 2005 forecast projected a 65.8 percent increase in the rooms revenue collected by New Orleans full-service hotels from year-end 2004 to 2014. The bases for this forecast were a 27.6 percent increase in supply, a 25.4 percent increase in demand, and a 32.2 percent jump in room rates. In aggregate, the full-service hotels of New Orleans were forecast to generate an additional $526.3 million in rooms revenue from 2004 to 2014.

With the "what would have been" scenario developed based on the Hotel Outlook forecast, we then put together two hypothetical recovery scenarios for the New Orleans full-service hotel market. One scenario is based on a slower and weaker recovery pattern. The other assumes a quicker and stronger recovery.

The following bullet statements state the assumptions made for the two hypothetical recovery scenarios:

Slow / Weak Recovery

Actual room revenue data was used for the operating period January 1, 2005 through August 28, 2005. Based on the preceding supply assumptions, we assumed demand and ADR growth rates for each year from 2006 through 2014. The net result was a calculation of rooms revenue collected for each year from 2006 through 2014 under each scenario. Chart A compares the annual rooms revenue growth from the Fall 2005 Hotel Outlook forecast to the rooms revenue generated under the two hypothetical recovery scenarios.

By subtracting the rooms revenue of the recovery scenarios from the rooms revenue of the Hotel Outlook forecast, we are able to calculate the revenue deficits (Chart B). As would be expected, the revenue deficits are greater under the slow / weak scenario, especially during the initial years of the projection period.

Given the assumptions made for this demonstration, a quick / strong recovery scenario would result in a total rooms revenue deficit of approximately $1.8 billion over the 10 year projection period (Chart C). On the other hand, a slower and weaker recover would generate a rooms revenue deficit of $3.0 billion.

The Bottom Line Really Counts

It is important to note that the preceding example portrayed the methodology used to calculate lost revenue. For most business interruption insurance claims, it is the lost net income that would be estimated. As mentioned before, the translation of revenues to profits can be done based on the historical performance of the subject property, as well as industry wide financial benchmarks.

Receiving your business interruption insurance benefits never fully alleviates the emotional damage and pain caused by a catastrophic event. However, the funds do go a long way to help preserve "the business."

Robert Mandelbaum is the Director of Research Information Services for CBRE Hotels’ Americas Research. He is based in the firm’s Atlanta office, where he is in charge of Research Information Services. Research Information Services produces the annual Trends® in the Hotel Industry statistical report, along with customized financial and operational analyses for client projectsMr. Mandelbaum began his hospitality industry career with Holiday Inns, Inc. in Memphis, Tennessee. He started his career with the firm in 1983 in the Memphis office of Pannell Kerr Forster, where he conducted market and financial feasibility studies and operational analyses for hotel, restaurant, club, and conference center clients. Prior to moving to Atlanta in November 1997, he also worked in PKF’s San Francisco office. Mr. Mandelbaum can be contacted at 404-8902-3959 or robert.mandelbaum@cbre.com Please visit http://www.cbre.com for more information. Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:

MAY: Eco-Friendly Practices: The Value of Sustainability

Eric Ricaurte

In 2011, we visited the 10 hotels contracted in the room block for the Greenbuild conference in Toronto. As part of their award-winning sustainable event program, the conference organizers embedded green practices into the contract language for these hotels, who either had to comply with the requirements, explain their reason why they couldn’t implement them, or pay a $1,000 fine. Part of our consulting work was to gather the data and confirm some of the practices on-site. READ MORE

Susan Tinnish

Hotels brands have actively engaged in large-scale efforts to become more environmentally friendly. Individual hotels have made great strides on property. Many significant large-scale eco-initiatives s are most easily built initially into the infrastructure and design of the building and surrounding areas. Given that the adaptation of these large-scale changes into the existing asset base is expensive and disruptive, hotels seek different ways to demonstrate their commitment to sustainability and eco-friendly practices. One way to do so is to shift the focus from large-scale change to “small wins.” Small wins can help a hotel create a culture of sustainability. READ MORE

Shannon Sentman

Utility costs are the second largest operating expense for most hotels. Successfully reducing these expenses can be a huge value-add strategy for executives. Doing this effectively requires more than just a one-time investment in efficiency upgrades. It requires ongoing visibility into a building’s performance and effectively leveraging this visibility to take action. Too often, efficiency strategies center on a one-time effort to identify opportunities with little consideration for establishing ongoing practices to better manage a building’s performance ongoing. READ MORE

Joshua Zinder, AIA

Discussions of sustainability in the hospitality industry have focused mainly on strategies at the level of energy-efficient and eco-friendly adjustments to operations and maintenance. These "tweaks" can include programs to reduce water usage, updating lighting to LEDs, campaigns to increase guest participation in recycling, and similar innovative industry initiatives. Often overlooked—not only by industry experts but even by hotel operators and designers—are possibilities for hotel design and construction that can make a property truly sustainable from the get-go. READ MORE

Coming Up In The June Online Hotel Business Review




{300x250.media}
Feature Focus
Sales & Marketing: Who Owns the Guest?
Hotels and OTAs are, by necessity, joined at the hip and locked in a symbiotic relationship that is uneasy at best. Hotels require the marketing presence that OTAs offer and of course, OTAs guest’s email when it sends guest information to a hotel, effectively allowing OTAs to maintain “ownership” of the guest. Without ready access to guest need hotel product to offer their online customers. But recently, several OTAs have decided to no longer share a data, hotels are severely constrained from marketing directly to a guest which allows them to capture repeat business – the lowest cost and highest value travelers. Hotels also require this data to effectively market to previous guests, so ownership of this data will be a significant factor as hotels and OTAs move forward. Another issue is the increasing shift to mobile travel bookings. Mobile will account for more than half of all online travel bookings next year, and 78.6% of them will use their smartphone to make those reservations. As a result, hotels must have a robust mobile marketing plan in place, which means responsive design, one-click booking, and location technology. Another important mobile marketing element is a “Click-to-Call” feature. According to a recent Google survey, 68% of hotel guests report that it is extremely/very important to be able to call a hotel during the purchase phase, and 58% are very likely to call a hotel if the capability is available in a smartphone search. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.