News for the Hospitality Executive
May 1, 2012, Atlanta, Ga. The U.S. lodging industry recovery may have begun in 2010, but it wasn’t until 2011 that the improved prosperity was shared by nearly all hotels in the country. In 2011, 80.5 percent of the properties that participated in the PKF Hospitality Research, LLC (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 recently released 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, hotel 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. The good news is not isolated to a select few property categories, but rather, all hotel types were able to enjoy gains on the bottom-line,” said R. Mark Woodworth, president of PKF-HR.
Resort hotels led 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 types also achieved the greatest gains in average daily room rates (ADR) from 2010 to 2011,” Woodworth noted.
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,” Woodworth added. “In 2011, the average Trends® hotel achieved a profit level equal to $12,972 per available room. In nominal dollars, this is roughly 25 percent short of the peak profit levels achieved in 2007.”
Revenues and Expenses
In 2011, the properties in the Trends® sample averaged a 7.1 percent increase in rooms revenue per available room (RevPAR), and a 6.2 gain in total revenue. For comparison purposes, the average 2011 RevPAR growth rate as reported by Smith Travel Research for all U.S. hotels was 8.2 percent. “Since the average increase in RevPAR for the total national inventory of hotels was greater than that achieved by the Trends® sample, this would suggest that most U.S. hotels enjoyed a profit increase greater than 12.7 percent,” Woodworth said.
Managers of the properties in the Trends® sample were able to convert the 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,” Woodworth said.
An analysis of changes in operating expenses typically begins with an examination of labor costs. 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.
“Further analysis, however, indicates that operators did an admiral job managing the most controllable components of labor related expenses,” Woodworth noted. “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 mostly are 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 the decline in 2011 property taxes to the continued success of property tax appeals based on the declines in value seen in 2009 and 2010,” Woodworth explained.
Based on the March 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 demonstrated by 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,” Woodworth concluded.
ABOUT PKF CONSULTING USA, LLC
Headquartered in San Francisco, PKF Consulting USA, LLC (www.pkfc.com) is an advisory and real estate firm specializing in the hospitality industry. PKF Consulting USA, LLC is owned by FirstService Corporation (FSRV) and is a subsidiary of Colliers International. The firm operates two companies: PKF Consulting USA and PKF Hospitality Research. The firm has offices in New York, Boston, Portland ME, Indianapolis, Chicago, Philadelphia, Washington DC, Atlanta, Jacksonville, Tampa, Orlando, Houston, Dallas, Los Angeles, Bozeman, and San Francisco.
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