PKF - The U.S. lodging
industry recovery may have begun in 2010, but it wasn’t until 2011 that
the improved prosperity was shared by most all hotels in the country. In
2011, 80.5 percent of the properties that participated in PKF
Hospitality Research’s (PKF-HR) Trends® in the Hotel Industry
annual survey enjoyed an increase in total revenue, while nearly
three-quarters (72.3%) of the participants achieved growth in profits. The 2012 edition of Trends®
presents aggregate average changes in unit-level revenues, expenses,
and profits from 2010 to 2011. The data come from a sample of nearly
7,000 financial statements received from hotels located throughout the
United States. For the Trends® report, profits are defined as
net operating income (NOI) before deductions for capital reserves, rent,
interest, income taxes, depreciation, and amortization.
Profits for All
On average, hotels in the 2012 edition of Trends®
sample saw their profits increase by 12.7 percent in 2011. In fact, all
property type categories experienced gains on the bottom-line in excess
of 6.0 percent. Resort hotels lead
the way with an NOI gain of 18.1 percent, followed by full-service
hotels which posted a 14.7 percent increase in profits. Not
surprisingly, these two property type categories also achieved the
greatest gains in average daily room rates (ADR) from 2010 to 2011. Lagging in profit
growth were suite hotels. Both extended-stay and full-service suite
hotels were unable to leverage their lofty occupancy levels into the
magnitude of ADR gain required to significantly drive profitability. While news of
growing profits is welcome, longer-term U.S. hotel owners know that
their investment still has a ways to go to achieve the annual dividends
that were earned prior to the recent recession. In 2011, the average Trends®
hotel achieved a profit level equal to $12,972 per available room. In
nominal dollars, this is still short of the NOI that was achieved in
2005 ($13,886), and roughly 25 percent short of the peak profit levels
achieved in 2007 ($16,868).
Expense Control
In 2011, managers of the properties in the Trends®
sample were able to convert a 6.2 percent increase in total revenue
into the 12.7 percent NOI gain by limiting operating expense growth to
just 4.3 percent. While the 4.3 percent growth in expenses was greater
than the 3.2 percent rise in inflation for year, it is relatively modest
compared to the increases in operating expenses observed during the
second year of previous industry recoveries. When analyzing
changes in operating expenses, we always begin with an examination of
labor costs. In 2011, labor represented 45.7 percent of all operating
expenses, or 34.6 percent of total revenue. In 2011, the number of occupied rooms at the average Trends®
property increased by 3.1 percent. This is less than the 4.1 percent
increase in labor costs for the year, thus implying a decline in
productivity. However, further analysis indicates that operators did an
admiral job managing the most controllable components of labor related
expenses. The 4.1 percent
increase in total labor costs was the result of a 3.3 percent increase
in salaries, wages, and bonuses, combined with a 6.1 percent rise in
payroll-related expenses. Payroll-related expenditures are comprised of
several labor related taxes and employee benefits that are mandated by
either contract or government regulations. Therefore, they are mostly
fixed in nature and unable to be adjusted based on the volume of
business. Total operated
department expenses increased by 4.5 percent in 2011, while
undistributed costs grew by 4.7 percent. Because of the increasing
number of hotels that enjoyed gains in both total revenues and NOI,
management fees rose a relatively strong 5.9 percent on average. The only expense
category to post a decline from 2010 to 2011 was property taxes. We
attribute this to the continued success of property tax appeals based on
the declines in value seen in 2009 and 2010.
Future Profits
Based on the June 2012 edition of PKF-HR's Hotel Horizons®,
U.S. hotels will enjoy significant gains in revenue through 2015.
Because occupancy levels will begin to exceed long-run averages in most
chain-scale categories, hotel managers will be able to implement more
aggressive pricing policies. Accordingly, future revenue growth will be
driven mostly by increases in ADR. As we know from previous analyses,
revenue gains that are driven by ADR growth are very profitable. The operating
practices implemented in 2009 to cut costs during the depths of the
recession appear to have continued through 2010 and into 2011. If this
continues, the combination of cost controls and profitable revenue
growth will result in one of the most extraordinary periods of profit
growth our firm has seen since the first Trends® survey was initiated in 1937.
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