Jones Lang LaSalle Hotels

Melinda McKay and Karen Johnson

So who says five-star resort properties are not as profitable as their shiny CBD cousins? A benchmark of comparable properties in key resort/city locations demonstrates a similar income result, although variations in how they got there are compelling. In some areas we were surprised at the results and have attributed this to the sample, which included a basket of 26 comparable five-star resorts and city-based hotels in the United States. Resorts in more remote locations are likely to have wider variations in items such as food and beverage (F&B) revenue and operation/maintenance costs. Regardless, such a benchmark of operational structures is relevant around the world, no matter where the properties are based - it all comes down to the fundamentals of how resorts and city-based hotels operate.

Departmental Revenues

A higher occupancy and average daily rate (ADR) for hotels characterised our sample. The hotels had an occupancy of 75.1%, higher than the resorts' average of 71.7%. The weighted ADR was 12.3% higher for city hotels at $338 versus $301 for resorts. Most surprising was the relatively low ratio of room revenue for urban five-star hotels, at only 56.7% of total revenue, compared with just over half for resorts. Our resort sample generated 27.6% of its revenues from F&B sales, compared to 33.5% for the urban hotels. The same relationship held true in absolute dollars - the urban properties had F&B sales of $199 per occupied room, compared to $161 for the resort properties.

Under normal circumstances, we would have expected to see higher F&B sales among resorts that have a relatively "captive" audience as compared to urban properties, for which local restaurant competition is generally fierce. We surmise that these top-tier urban hotels host a large number of social banquet functions, and that some of the resorts may have followed the trend of bringing in a "celebrity chef " and leasing out at least one of their restaurants.

Resorts generated substantially more revenue in other operated departments than their urban counterparts, due to their recreational amenities such as golf, spas and water sports. For the urban hotels, other operated departments are generally confined to parking, a business centre and a minor health club operation. Other operated departments accounted for 17.7% of total revenues in resorts, whereas the hotels earned only 4.3% of their revenues from other operated departments.

On balance, the slightly higher ADR of the urban hotels carried their total revenue figure to $595 per occupied room, compared to $584 per occupied room for the resorts. Each hotel room generated $163,221 pa. in revenue for the city hotels, as compared to $152,747 pa. for the resorts.

Departmental Expenses

The rooms costs were remarkably similar between the resorts and urban hotels, with a 0.2 percentage point efficiency for resorts and an identical cost per occupied room of $90. Considering the spatial layout of many resorts, we expected to see higher costs of servicing rooms at resorts. In resorts, room costs had a ratio of 26.4% to room revenue, compared with 26.6% for hotels. To put it another way, the cost differential between revenue and expenses on a per occupied room basis for rooms was $221 for resorts and $248 for hotels.

Hotels appear more efficient in terms of F&B than resorts - we attribute this to their more remote locations and provisioning problems. Transit costs increase food expenses, and the less regular deliveries make inventory management more difficult and contribute to higher incidences of spoilage. F&B costs had a ratio of 82.2% to its revenue in resorts, while hotels only had a 78.1% ratio.

While the resorts lagged in F&B profitability, they led in profitability in "Other Operated Departments". Our information indicates that the resorts' largely recreational departments are run profitably, with expenses equating to only 54.4% of sales. This "catch-all" department had an expense ratio of 66.8% for urban hotels.

The weighted effect of these individual ratios is a departmental expense ratio of 45.2% for urban hotels, compared to 46.7% for resort properties. In absolute dollars, there was $89,412 in departmental profit per urban hotel key, as compared to $81,438 for the resort properties. The chart below indicates the relative revenue and expenses per occupied room, with the size of the dot correlated to the ratio to total revenue. The graph 'Benchmark of Departmental Expense Ratios' on the following page is also provided to reinforce the differences in departmental expense ratios.

Undistributed Expenses - Resorts Pay More For Maintenance

The key disparity between resorts and hotels was in "Property Operation and Maintenance" expenses. These costs were almost 10.6% higher in resorts as compared to urban hotels, or another $712 per available room per year. With elaborately landscaped grounds to maintain as well as the possible weathering affects of seaside locations, resorts are less efficient than the downtown hotel tower. Administrative and general (A&G) expense for the two types of lodging were identical at 7.1% to total sales. On a per available room basis, A&G expense was actually lower for resorts. Marketing expenses were slightly higher for resorts, both as a ratio of total sales (4.7% compared to 4.2%) and as a per available room (per year) indicator at $7,108 versus $6,788. In absolute dollars, the resorts' marketing expenses were 4.7% higher on a per key basis. Intuitively, this makes sense as the marketing effort for resorts entails more reminders.

Other Fixed Costs

Management fees were larger for hotels than resorts, perhaps relating to the dominance of the branded management companies in this arena. Property taxes and other municipal charges were substantially higher for hotels, a function of the greater burden of social services in these urban locations.

Contrary to our expectations, insurance costs for resorts were lower than at urban hotels. According to our extensive experience, resorts usually incur higher insurance cost due to location issues e.g. beach erosion or even physical/weather concerns such as typhoons. We attribute this to differences in charts of accounts. A change in the Uniform System of Accounts for hotels prescribes that liability insurance is now to be captured in A&G, and only building casualty insurance is to be shown as a separate line item. We speculate that many of the hotels in the city sample included all forms of insurance, as the $804 per room indicator appears high.

The below chart provides a graphic and numeric comparison of undistributed expenses between resorts and hotels.

Profit Comparison - A Virtual Tie

Despite a number of minor disparities in revenue and cost structures, resorts and hotels perform equally well in terms of profitability. Although the total dollar amount per available room per year in this benchmark exercise was modestly higher for hotels than resorts ($48,029 compared to $45,185 respectively), the ratio of net income was almost identical: 29.6% for resorts and 29.4% for hotels. As environmental concerns mount in wilderness and coastal areas, and development slows, the ADR gap between five-star urban hotels and their resort counterparts should dissipate. If this comes to pass, resorts' profitability should exceed that of their urban counterparts.

Anna Town
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JLL