Over
the last few months, we at PKF have been extremely active in sharing
our views on the health of the Canadian Accommodation Sector with a
cross section of owners, operators and lenders across the country. In
February, we were represented at the Hotel Association of Canada’s
Annual Conference presenting our outlook on the market and financial
prospects for the industry. In March, we participated in the Hotel
Investment Conference session on Supply & Demand Implications
impacting the Canadian Industry. In June, we presented at the Hospitality
Financial & Technology Professionals Annual Conference,
addressing market and operational trends impacting both the accommodation
and clubs sectors. Over this same period we have participated in a number
of Hotel Company sponsored forums on behalf of their managers,
franchisees, and have also presented to numerous Lenders and Financial
Institutions.
Our
message has been clear….
The
market and financial prospects for the hotel industry in Canada have
never been better and it is a great time to be an owner.
Dispelling the Myths
It
is difficult to pick up the newspaper, or listen to the radio, without
someone lamenting the woes of the stock market and suggesting a downturn
in the Canadian economy. While this may make headlines, it flies in
the face of almost every economic forecast out there. From the Conference
Board to each of the major financial institutions, economic growth in
the range of 2% to 3% is forecast over the next two years.
The
fundamentals of our economy remain strong.
In
light of recent US experiences, as well as in a select few Canadian
markets, the fear of overbuilding and the impact of supply growth are
being raised. The reality is that on a national basis supply grew by
3% in 1999, 3% in 2000 and based on projects in the ground will grow
by 2% this year and next. Demand growth over this same period has been
in the range of 2% per annum. While we experienced a minor decrease
in national occupancy in 1999 and 2000, the prospects for 2001 and 2002
indicate no further erosion. Despite a softening in the Toronto, Ottawa
and Montreal markets in May, year to date occupancy has held in these
markets and nationally, relative to last year and rates and revpar are
up by over 4% nationally.
While
one must always be cognizant of local market dynamics, our national
and regional forecasts suggest a continued balance between supply and
demand over the next two years.
There
has also been stated concern that the profitability of the industry
has peaked and that bottom lines are about to erode. Preliminary results
from our 2001 Financial Trends Report, which will be available
late this summer, indicate that industry bottom lines increased by 7%
in 2000, after increasing by over 10% in 1999, and by over 20% in 1998.
With occupancy flat and rates going up by only 4% to 5% per
annum this year and next, our forecasts indicate a continued growth
in profitability, albeit at levels lower than that previously experienced.
After
a 7% increase in 2000, bottom lines will continue
to grow, 6% this year and next.
The
outlook for the industry is not without some challenges. Cost
controls, specifically in the area of undistributed expenses
needs to be examined more closely. While revenues over the 1993-2000
period are up 50%, and net income is up 600%, undistributed expenses
are up 25%, 50% above the rate of inflation. A&G up 32% over this
period, is a primary concern. While this is an area to look at, it
may also present some opportunity for enhanced profitability. Energy
Costs will remain a concern over the next few years, and Property
Taxes continue to erode profits and values.
While
challenges exist, the fundamentals of the industry are sound and the
prospects for continued growth are strong.
Brian
Stanford, CMC
Director
Pannell
Kerr Forster
