Nine Out of Ten Hotels Lost Profits In 2009

By now everyone has heard just how much U.S. hotels suffered on the top line in 2009. The 16.7 percent decline in RevPAR reported by Smith Travel Research for 2009 was greater than any annual decrease in revenue published in PKF Hospitality Research's (PKF-HR) annual Trends in the Hotel Industry reports since 1932.

Movements in revenue are extremely important for all industry participants. However, for hotel owners and lenders, the impact of the recession on bottom line profits is more pertinent. Accordingly, the 35.4 percent decline in unit-level profitability from 2008 to 2009 that was reported in the 2010 edition of Trends® in the Hotel Industry (Trends) has more relevance to industry participants who are involved in the real estate and finance side of lodging. For the purpose of this report, profits are defined as net operating income (NOI) before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization.

The 2010 edition of Trends presents aggregate average changes in unit-level revenues, expenses, and profits from 2008 to 2009. The data comes from a sample of the 6,400 financial statements received from hotels located throughout the United States.

Everyone Suffered

Virtually all hotels in the Trends sample suffered a decline in revenues and profits in 2009. Ninety-five percent of the properties experienced a decline in rooms revenue and total hotel revenue from 2008 to 2009. Of note is the fact that 81.5 percent of the sample rented fewer guest rooms during the year, implying that the need to discount room rates was the main culprit for the decline in revenue at several hotels. On average, the hotels in the Trends® sample experienced a 7.5 percent decline in occupancy and a12.1 percent decline in average daily rate (ADR).

With ADR driving the decreases in revenue, it is not surprising that approximately ninety percent (91.4%) of the hotels in the survey sample saw their profits decline from 2008 to 2009. For reference purposes, 74.9 percent of the Trends® sample reported a decline in NOI during the 2001 industry recession. Profit declines were reported for all type of properties. Resort (-37.8%), convention (-37.5%), and full-service (-37.4%), hotels endured the greatest declines in profits in 2009. Those bearing the least loss on the bottom line were suite hotels with F&B (-22.8%), suite hotels without F&B (-25.1%), and limited-service properties (-29.7%).

Expenses Cut

As they have historically, hotel managers were able to cut the operating expenses at their properties by an average of 11.8 percent. Unfortunately, this falls short of the average revenue decline of 18.5 percent.

Management was able to reduce all the expenses for which they have the greatest control. On average, operated department costs dropped 12.9 percent in 2009, while undistributed expenses declined 11.1 percent. Within most of these departments, labor costs were the greatest single expense item. A combination of layoffs, reduced hours, furloughs, and salary and wage reductions resulted in a decline of 10.4 percent in total labor costs from 2008 to 2009.

Among those line items on the operating statement that are more fixed and contractual in nature, insurance costs fell 4.3 percent, but property taxes increased 3.6 percent. It is expected that the lower profit achieved in 2009 will result in successful property tax appeals in 2010. Because of the 18.5 percent decline in total revenue, the fees paid to management companies dropped 25.4 percent. With the decline in management fees exceeding the decline in revenue, it can be assumed that operators did not qualify for the incentives fees they earned in 2008.

Tough In 2010

The June 2010 edition of Hotel Horizons published by PKR-HR forecast a 1.7 percent annual increase in RevPAR for 2010. Typical of historical industry recoveries, occupancy is projected to recover first (+3.4%), while ADR growth will lag (-1.6%). In addition, hotel operators find it more difficult to cut costs as industry recessions linger. In fact, hotel expenses frequently increase as managers have to reinstate services, amenities, and staffing because of increased guest counts. These factors all contribute to PKF-HR's forecast of a 1.4 percent drop in unit-level NOI in 2010.

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Robert Mandelbaum is Director of Research Information Services for PKF Hospitality Research. He is located in the firm's Atlanta office (www.pkfc.com). To purchase a copy the 2010 Trends® in the Hotel Industry report, please visit www.pkfc.com/buyannualtrends. This article was published in the June 2010 issue of Lodging.

photo of Robert Mandelbaum