Video: U.S. Hotel Profits: Prosperity Spreads
On average, the properties in the Trends® sample achieved a 6.2 percent increase in total hotel revenue. Rooms revenue, which represented 66.8 percent of total revenue, grew by 7.1 percent in 2011, the result of a 3.1 percent increase in occupancy and a 3.9 percent rise in ADR.
Among the other sources of revenue, food and beverage sales grew 5.2 percent while rental and other income increased by 3.2 percent. Revenue from other operated departments (i.e. retail, recreation, telecommunications, laundry) lagged with a growth rate of just 0.9 percent.
Cost Controls Continue
Managers of the properties in the Trends® sample were able to convert the 6.2 percent increase in total revenue into a 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 hotel operating expenses observed during the second year of previous industry recoveries.
An analysis of changes in operating expenses typically begins with an examination of labor costs. 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 hotel labor costs for the year, thus implying a decline in productivity.
Further analysis, however, 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 mostly are 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. Among the individual departments, sales and marketing expenditures increased the greatest. Since franchise royalty fees and chain marketing assessments are included in this department, the relatively strong increase can be partially attributed to the 7.1 percent rise in rooms revenue. Similarly, the increasing number of hotels that enjoyed gains in both total revenues and NOI influenced the 5.9 percent increase in management fees.
The only expense category to post a decline from 2010 to 2011 was property taxes. We attribute the decline in 2011 property taxes to the continued success of property tax appeals based on the declines in value seen in 2009 and 2010.
All Benefit On The Bottom Line
On average, hotels in the 2012 edition of Trends® sample saw their NOI increase by 12.7 percent in 2011. The good news is not isolated to a select few property categories, but rather, all hotel types were able to enjoy gains on the bottom-line.
Resort hotels led 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 types also achieved the greatest gains in average daily room rates 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.
Based on the March 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 demonstrated by 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.
Director of Research Information Services