Measuring The Business Interrupted By A Catestrophic Event

Immediately after a catastrophic event such as the Gulf Oil Spill or the floods in Nashville, the thoughts of hotel owners and operators go in many directions. First priority is the safety of the guests and employees. Once the human situation is secure, attention then turns to rebuilding the facilities and services of the hotel and getting “back to business.”
Gather Your Historical Lodging Data
What is frequently overlooked in the immediate turmoil is the need to secure important hotel 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 pieces of hotel 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.

• Five-year history of competitive position reports (i.e. STR report), including current year-to-date.
• Five-year history of your annual hotel financial statements, including current year-to-date.
• Budgeted performance for the remainder of the current year.
• Budgeted performance for the upcoming year.
• Marketing plan for the current year
• Marketing plan for the upcoming year
• Capital improvement plan – current and future years
• Guaranteed reservations and advance deposit activity.
• Group contracts
• Group booking pace for the next 10 years

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 market.
Using the market forecast as a baseline for future hotel 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 market 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 hotel rooms revenue, we then prepare projections of net operating income (NOI) using historical hotel 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 hotel NOI.
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 property and the hotel market forecast. Since the 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.
PKF Hospitality Research prepares econometric forecasts of hotel supply, demand, occupancy, ADR, and RevPAR for 50 major markets across the nation. The forecast reports are entitled Hotel Horizons®. Each Hotel Horizons® report contains forecast performance data for both upper-price and lower-price hotels in a given market. The hotel forecasts are made for a five-year period, and are updated every three months. The Hotel Horizons® econometric models are based on data from Moody’s economy.com, Smith Travel Research and PKF Hospitality Research.
The Bottom Line Really Counts
It is important to note that, for most business interruption insurance claims, it is the lost net income that would be estimated. As mentioned before, the translation of revenue to hotel profit 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.”