Hotel Online News for the Hospitality Executive By Gary McDade and Robert MandelbaumApril 17, 2013 The U.S. lodging industry recovery made great progress in 2011 with over 70 percent of the hotels in the nation showing increases in both revenue and profits during the year. Many industry prognosticators, including PKF Hospitality Research, LLC (PKF-HR), are expecting this trend to continue in the future. Based on the PKF-HR’s December 2012 Hotel Horizons® forecast, U.S. hotels will enjoy compound annual growth (CAGR) in rooms revenue (RevPAR) of 6.5 percent through 2016. In turn, this should result in a CAGR of 6.1 percent in total hotel revenue during the same period. Given these strong projections of revenue growth, how much profit can hoteliers expect to earn in the coming years? To understand how these increased revenues will flow to the bottom line, PKF-HR evaluated the financial performance of hotels for the period 1978 through 2011. The information came from data published in PKF-HR’s Trends® in the Hotel Industry reports for that period. During our analysis, we measured the relationship between annual changes in total hotel revenue and movements in net operating income (NOI) for four different property types: full-service, limited-service, resort and convention hotels. For this analysis, NOI is defined as income before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization. Calculating Flow For each property type we calculated a “flow-multiple” that measures how much an increase (or decrease) in revenue was retained as profits. Simply put, the flow-multiple is the ratio of year-to-year changes in profit to changes in revenue, and therefore, provides evidence of how well properties manage expenses and maximize profits. During our research, we discovered that the flow-multiples varied greatly between recessionary periods and times of prosperity. Therefore, we chose to analyze these two situations separately using different flow-multiple calculation equations:
Years When Hotel Revenue Increased
Flow Multiple =
Profit Variance
Revenue Variance
Example – Full Service Hotels in 2011
Change in Total Revenue
6.2%
Change in Net Operating Income:
14.5%
Flow Multiple:
2.34
Years When Hotel Revenue Decreased
Flow Multiple =
Revenue Variance – Profit Variance
Revenue Variance
Example – Full Service Hotels in 2009:
Change in Total Revenue
-18.4%
Change in Net Operating Income:
-37.6%
Flow Multiple:
(1.04)
The average historical flow-multiples for each property type in our Trends® report are presented in Figure One. 
Full-service and resort hotels posted the most consistent flow-multiples from 1978 through 2011, as well as the greatest ability to maximize profits during the prosperous periods (Figure Two). In the years when hotel revenues increased, full-service (1.13) and resort (1.12) hotels achieved the greatest flow-multiples. Conversely, during industry recessions when revenues fell, managers at these properties were best able to limit their declines in NOI. 
Historically limited-service properties have achieved the highest profit margins due to reduced staffing levels and limited amount of guest services and amenities. However, because of the austere level of operations, these hotels also have a high percentage of fixed costs, thus limiting management’s ability to cut expenses during industry recessions. Accordingly, limited-service hotels averaged a flow-multiple of negative 5.81 (-5.81) during years when revenues in this category declined. This is the lowest flow-multiple among all property types. Convention hotel profits also exhibited a high degree of sensitivity to decreases in revenue. Over the entire period of analysis, the average flow-multiple for these properties was negative 3.34 (-3.34) during years when revenue declined. However, it should be noted that greatest levels of negative flow-multiples occurred during the 1980s. In recent years, convention hotels have been able to achieve more efficient flow-multiples during periods of both revenue growth and decline. Future Flow According to PKF-HR’s December 2012 Hotel Horizons® forecast, hotels in the luxury, upper-upscale, and upscale chain-scales exceeded their long-run average occupancy levels in 2011. Therefore, RevPAR gains for properties in these categories are already being influence by ADR growth. As we know from previous research, RevPAR growth driven by ADR contributes to high flow-multiples. Based on this trend, and historically high flow-multiples, the profit outlook for full-service, resort, and convention hotels is extremely bright. Significant profit flow for limited-service hotels, on the other hand, will be delayed by a year or two. The recovery for hotels in the upper-midscale, midscale, and economy segments has lagged the upper-tier properties. Therefore, ADR influenced RevPAR gains for these mostly limited-service properties will not occur until 2013 or 2014. Lagging ADR growth, combined with historically low flow-multiples, implies that profits for limited-service hotels will grow, albeit at a slower pace compared to the full-service properties.
Robert Mandelbaum is Director of Research Information Services for PKF Hospitality Research, LLC (www.pkfc.com). Gary McDade is a Research Analyst. Both work in the firm’s Atlanta office. To purchase a copy of Trends® in the Hotel Industry and benchmark the flow-multiples of your hotels, please visit www.pkfc.com/store. This article appeared in the March 2013 issue of Lodging.
Years When Hotel Revenue Increased
Flow Multiple =
Profit Variance
Revenue Variance
Example – Full Service Hotels in 2011
Change in Total Revenue
6.2%
Change in Net Operating Income:
14.5%
Flow Multiple:
2.34
Years When Hotel Revenue Decreased
Flow Multiple =
Revenue Variance – Profit Variance
Revenue Variance
Example – Full Service Hotels in 2009:
Change in Total Revenue
-18.4%
Change in Net Operating Income:
-37.6%
Flow Multiple:
(1.04)
Flow Multiple =
Profit Variance
Revenue Variance
Example – Full Service Hotels in 2011
Change in Total Revenue
6.2%
Change in Net Operating Income:
14.5%
Flow Multiple:
2.34
Flow Multiple =
Revenue Variance – Profit Variance
Revenue Variance
Example – Full Service Hotels in 2009:
Change in Total Revenue
-18.4%
Change in Net Operating Income:
-37.6%
Flow Multiple:
(1.04)
Contact:
Robert Mandelbaum Director of Research Information Services Colliers PKF Hospitality Research 3475 Lenox Road Suite 720 Atlanta, GA 30326 404-842-1150, ext 223 (Direct) 404-842-1165 (Fax) [email protected] www.pkfc.com
Also See: Select Your Profits: A Comparison of Select-Service Versus Full-Service Performance / Robert Mandelbaum / March 2013 Meeting Planners Are Positive For 2013 / Robert Mandelbaum / February 2013 U.S. Hotel Guests Hanging Up and Logging In / Robert Mandelbaum /January 2013 Presentations, Service Charges, and Booze; Recent Trends in Hotel Food & Beverage / Robert Mandelbaum / December 2012 Conference Center Recovery Is Challenged / Dave Arnold / November 2012 U.S. Hotel Managers Nailed Their Budgets In 2011 / Robert Mandelbaum & Viet Vo / September 2012 Staffing For Prosperity / Robert Mandelbaum / August 2012 Here Come the Profits! / Robert Mandelbaum / July 2012 The Cost Of Guest Loyalty / Robert Mandelbaum /June 2012 Giving And Taking of Credit at U.S. Hotels / Robert Mandelbaum and Alvin Minsk /April 2012 Will Meetings Market Recovery Continue In 2012? / Robert Mandelbaum / February 2012 Hotel Managers Labor To Control Labor / Robert Mandelbaum / January 2012 2010 Was A Budget Beater For U.S. Hotels; Looking Forward – 2012 Should Result in a 15.2% Rise in Profits for the Average U.S. Hotel / Robert Mandelbaum / October 2011 U.S. Hotel Utility Costs Under Control Adding to the Bottom Line / Robert Mandelbaum / September 2011 Price Begets Profits / Robert Mandelbaum / August 2011 One Night Stands Are Expensive / Robert Mandelbaum / July 2011 Hotel Food and Beverage: Locals Up, Lounges Down / Robert Mandelbaum / June 2011 FREEBIES: Hotels Give Some Things for Nothing / Robert Mandelbaum / April 2011 Hang Up The Phone And Hold The Starch, But Please Park The Car / Robert Mandelbaum /February 2011 Meeting Planners Optimism Rising / Robert Mandelbaum / January 2011 How Profitable Will Your RevPAR Be In 2011? / Robert Mandelbaum / December 2010 No Show – No Problem; Hotels Profit from Attrition and Cancellation Income / Robert Mandelbaum / November 2010 Right Direction – Wrong Amount: Hotel Managers Underestimated 2009 Declines in Performance / Robert Mandelbaum / October 2010 Surprised, or Stubborn? U.S. Hotel Managers Missed Their Budgets In 2008 / Robert Mandelbaum / October 2009