Here Come the Profits
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).
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.
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.
* * *
Robert Mandelbaum is Director of Research Information Services for PKF Hospitality Research, LLC. He is located in the firm's Atlanta office (www.pkfc.com). To purchase a copy the 2012 Trends in the Hotel Industry report, please visit www.pkfc.com/buyannualtrends. This article was published in the June 2012 issue of Lodging.