In October 2008, when PKF Consulting Inc. (PKF) held our annual Canadian Accommodation Outlook Forums, the Toronto Stock Exchange (TSX) was sitting at approximately 11,000 points. As of February 2009, the TSX was sitting at approximately 8,000 points, equating to a decline of approximately 30%. The unforeseen magnitude of the subprime-lending crisis has forced a global revision of forecasts and projections and the accommodation sector has not been immune to this process. As such, PKF has prepared the following revised Industry Financial Outlook.
PKF's original National Outlook was for a 3.5% increase in profitability at year-end 2008, equating to a net operating income (NOI) per room of approximately $12,000, with the industry projected to remain flat in 2009. However, due to the recent economic turmoil on a National level, net operating income per room has been revised and is anticipated to post a decline of 4.5% in 2008, followed by a further decline of 9.4% in 2009, equating to an NOI per room of $11,000 and $10,000 respectively.
Financial Outlook National |
|
Original |
Revised |
|
NOI Per Room |
Annual % Growth |
NOI Per Room |
Annual % Growth |
PKF 2008 Forecast |
$ 12,000 |
3.5% |
$ 11,000 |
-4.5% |
PKF 2009 Projection |
$ 12,000 |
0.0% |
$ 10,000 |
-9.4% |
*NOI (Net Operating Income) – cash available to service debt, provide an equity dividend, and pay income taxes.
For the most part Canada has been commended for its conservative lending practices that have limited its exposure to the subprime crisis. However, the Nation’s reliance on International visitations has not left Canada in the clear. The struggling economies around the globe have caused consumer and investor confidence levels to plummet, which in turn has severely curtailed borrowing, investing and spending.
Further, travel budgets are being restricted, which has led to reduced transient travel and increased cancellations of group bookings. Overall, the majority of citizens are focusing on keeping their jobs, as opposed to where the next overnight stay will be. It is apparent that the near term will present troubling times for the hospitality industry.
PKF's original Atlantic Canada Outlook was for a 2.5% increase in profitability at year-end 2008, followed by a 1.1% increase in 2009, equating to an NOI per room of approximately $9,100 and $9,200 respectively. The original Outlook has been revised to reflect an NOI per room decline of 4.0% in 2008, followed by a further decline of 11.6% in 2009, equating to an NOI per room of $8,600 and $7,600 respectively.
A relatively stagnant top line performance outlook, predominantly supported by anticipated poor rate performance, is expected to contribute to bottom line erosions.
Financial Outlook Atlantic Canada |
|
Original |
Revised |
|
NOI Per Room |
Annual % Growth |
NOI Per Room |
Annual % Growth |
PKF 2008 Forecast |
$ 9,100 |
2.5% |
$ 8,600 |
-4.0% |
PKF 2009 Projection |
$ 9,200 |
1.1% |
$ 7,600 |
-11.6% |
*NOI (Net Operating Income) – cash available to service debt, provide an equity dividend, and pay income taxes.
PKF's original Central Canada Outlook was for a 3.2% increase in profitability at year-end 2008, followed by a 3.1% decrease in 2009, equating to an NOI per room of approximately $9,800 and $9,500 respectively. The original Outlook has been revised to reflect an NOI per room decline of 10.3% in 2008 followed by a further decline of 13.9% in 2009, equating to an NOI per room of $8,600 and $7,400 respectively.
Central Canada is anticipated to be negatively impacted by the struggling manufacturing sector. Rising operating and labour costs will further compound troubles for this region.
Financial Outlook Central Canada |
|
Original |
Revised |
|
NOI Per Room |
Annual % Growth |
NOI Per Room |
Annual % Growth |
PKF 2008 Forecast |
$ 9,800 |
3.2% |
$ 8,600 |
-10.3% |
PKF 2009 Projection |
$ 9,500 |
-3.1% |
$ 7,400 |
-13.9% |
*NOI (Net Operating Income) – cash available to service debt, provide an equity dividend, and pay income taxes.
PKF's original Western Canada Outlook was for a 4.7% increase in profitability at year-end 2008, followed by a 3.2% increase in 2009, equating to an NOI per room of approximately $15,600 and $16,100 respectively. The original Outlook has been revised to reflect an NOI per room decline of 3.8% in 2008 followed by a further decline of 4.2% in 2009, equating to an NOI per room of $14,300 and $13,700 respectively.
Western Canada is projected to post declining revenues in both 2008 and 2009, however, at a much softer rate then the rest of the Nation. Overall, Western Canada is projected to post an NOI per room of $13,700 in 2009, which is 30.0% ahead of its 2000 NOI per room of $10,500.
Financial Outlook Western Canada |
|
Original |
Revised |
|
NOI Per Room |
Annual % Growth |
NOI Per Room |
Annual % Growth |
PKF 2008 Forecast |
$ 15,600 |
4.7% |
$ 14,300 |
-3.8% |
PKF 2009 Projection |
$ 16,100 |
3.2% |
$ 13,700 |
-4.2% |
*NOI (Net Operating Income) – cash available to service debt, provide an equity dividend, and pay income taxes.
In conclusion, as we continue to navigate through these troubled times, it is important to note the following business planning considerations:
- If at all possible the industry should try not to compete solely on rate.
- History and research show that discounting only serve to reduce revenue. There is little impact on the number of people traveling.
- Rather than discounting, provide a renewed emphasis on value and packaging.
- Hoteliers should not defer asset maintenance.
- When the economy eventually gets back on track Hoteliers do not want to be “caught” with a decrepit asset. This was unfortunately the case for a number of assets coming out of the ’90’s recession and they suffered severely.
- As such, continue to maintain the physical product in order to be well positioned for the upswing.
- Strategically the focus should be on where we want to be positioned in 2011 or 2012.
- Hoteliers should be cognizant of the fact that whatever you give up today will be much harder to get back down the road.
Matthew W. Cornell, Consultant
PKF Consulting Inc. - Toronto
