Revenue Premiums Offset Higher Costs in Historic Hotels
Some old hotels age gracefully and have achieved the status of "grande dame" hotels. These properties typically compete in the luxury or upper-upscale market segments, and frequently achieve occupancy and average daily rate (ADR) premiums versus their contemporary competition. In addition, the historic properties often have wonderful stories and folklores associated with them that attract both travelers and hotel investors.
While owners and managers appreciate the sentiment and stature of these properties, historic hotels have their unique operational challenges. As with any old structure, there are operating functions that require greater than average time and expense. On the other hand, the popularity of these aged properties has enabled them to recover faster from the depths of the great recession compared to their younger competitors.
To analyze the performance of historic hotels, PKF Hospitality Research (PKF-HR), a CBRE Company, examined the performance of luxury and upper-upscale hotels that opened prior to 1960. Comparisons were made to the performance of comparable luxury and upper-upscale properties built since 1960. Only hotels that provided data for PKF-HR's Trends in the Hotel Industry survey each year from 2007 through 2014 (most current annual data available) were included in the study sample.
The study sample consisted of 30 historic hotels with an average age of 96.6 years, and an average size of 427 rooms. Nine of the 30 historic properties are resorts, with the remaining urban/suburban full-service hotels. The contemporary sample averaged 23.4 years in age, and 363 rooms in size. Thirty-nine of the newer hotels were resorts, while another 201 were full-service properties.
In 2014, the average historic resort property in our sample achieved a 3.2 percentage point occupancy premium over the average contemporary resort. On the other hand, the historic full-service hotels lagged the average occupancy level of their contemporary counterparts by 2.5 percentage points. In total, the average historic hotel achieved an occupancy level of 76.9 percent, slightly greater than the 76.7 percent aggregate average for the contemporary sample.
Despite the fact that both the historic and contemporary samples consisted of properties in the luxury and upper-upscale categories, we observed some significant differences in the average daily room rates (ADR) achieved in 2014. During the year, the historic hotels averaged an ADR of $262.27, a 17.7 percent premium over the $222.84 ADR for the contemporary sample. Both the historic resort (24.9%) and full-service (8.1%) hotels achieved ADR premiums over their respective new property samples.
Given the aforementioned occupancy and ADR premiums, the historic hotel sample was able to achieve a 2014 RevPAR of $201.65 which was 18.1 percent greater than the $170.81 RevPAR earned by the contemporary properties. Given the greater contribution of food and beverage revenue at the historic hotels, the older sample was able to realize an even greater total RevPAR premium of 25 percent.
While the historic hotels in the study sample achieved revenue premiums, lower profit margins indicate that these hotels are somewhat less efficient to operate. In 2014, the average profit margin for the historic hotels was 26.1 percent, while the contemporary hotels were able to bring 27.7 percent of their revenue to the bottom-line. For the purposes of this analysis, profits are defined as net operating income (NOI) before deductions for capital reserve, rent, interest, income taxes, depreciation and amortization.
Labor costs are the largest single operating expense for hotels. In 2014, the combined cost of salaries, wages, and benefits averaged 35.5 percent of revenue at the historic hotels, compared to 33.9 percent for the contemporary properties.
The relative comparability of these ratios is deceptive given the revenue premiums earned by the historic hotels. In 2014, the average historic hotel spent $43,693 per-available-room (PAR) on total labor costs which is 36.2 percent greater than the $32,063 PAR paid by the contemporary properties. Controlling for the differences in occupancy, an equal disparity was observed when analyzing the labor cost data on a dollar per-occupied-room basis. Older buildings typically lack service elevators and storage rooms. Guest rooms are inconsistent in configuration, and the hallways are long. It can be assumed that these physical attributes contribute to relatively high staffing levels, operational inefficiencies, and resulting greater labor costs at historic hotels.
The age of the buildings also contributed to greater than average maintenance, utility, and insurance expenditures. In 2014, maintenance expenditures measured on a dollar PAR basis were 30.1 percent higher at the historic hotels, while energy costs were 17.7 percent greater. Further, it costs historic hotel owners 49.7 percent more to insure their properties.
While it is currently costing historic hotel owners and managers more to operate their hotels, the good news is that these properties have already returned to their pre-recession peak (2007) levels of profitability. The comparable contemporary hotels, on the other hand, are still lagging in recovery on the bottom-line.
As of year-end 2014, total revenue levels at the historic hotels had exceeded pre-recession levels by 9.9 percent. At the contemporary properties, 2014 total revenues were just 3.0 percent above 2007 levels.
Historic hotel expenses have increased to a greater degree than the contemporary hotels over the past seven years. However, the revenue premiums achieved by the older properties have offset the impact on the bottom-line. As of year-end 2014, the average NOI for the properties in the historic sample was 12.5 percent greater than the profits achieved in 2007. On the other hand, 2014 profits at the newer hotels were still 1.4 percent less than their 2007 levels.
No Retirement Soon
Based on the September 2015 edition of Hotel Horizons, PKF-HR is forecasting occupancy levels for both the luxury and upper-upscale lodging segments to remain above 70 percent through 2019. This will allow for healthy gains in ADR as well. Given the strong recent performance of the historic hotels, it does not appear that the "grande dames" will be heading for retirement anytime soon.