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The
March 2010 edition of PKF Hospitality Research's (PKF-HR) Hotel HorizonsŪ
report predicts hotels in the U.S. will suffer a 1.1 percent decline in
RevPAR for 2010, which will translate into an estimated 5.3 percent drop in
net operating income[1] (NOI) for the year.
The March 2010 edition of PKF Hospitality Research's
(PKF-HR) Hotel
HorizonsŪ (NOI) for the
year. This
will represent the third consecutive year of decreases in these two important
performance measures. While the annual forecasts are disappointing, a
closer look at the quarterly movements of these indicators throughout 2010
reveals that U.S. lodging industry demand, occupancy, average daily rate
(ADR), and rooms revenue per available room (RevPAR) will all start to show
year-over-year quarterly gains sometime during the year.
Given the turn towards favorable market conditions that is expected to occur
during 2010, an opportunity will exist for some U.S. hotels to improve their
performance and achieve growth in NOI. To identify potential tactics
managers can implement to take advantage of the improving operating
environment, PKF-HR has examined the financial performance of hotels that
achieved a gain in profits (NOI) during 2003. The year 2003 was chosen
because, like 2010, this historical period represented that last of year of a
three year (2001 - 2003) industry recession. The data that was analyzed
comes from PKF-HR's proprietary TrendsŪ
in the Hotel Industrydatabase of revenues, expenses, and profits
from 6,000 hotel operating statements.
Who Increased Their
Profits In 2003?
In
2003, 34.5 percent of the hotels that participated in the TrendsŪ survey achieved
a gain in NOI. This compares to an all time low of 25.1 percent in
2001, and an increase to 32.9 percent in 2002. In aggregate, the
properties that achieved growth in NOI in 2003 enjoyed a 14.9 percent
increase in profits. This compares to the overall TrendsŪ
Among property type categories, four of ten limited-service hotels achieved
an increase on the bottom-line in 2003. This is not a surprise since
40.3 percent of limited-service hotels were able to achieve profit growth
during the depth of the recession in 2001.
Conversely, resort hotels had the greatest reversal of fortune during the
last major industry downturn. In 2001, only one in four resort
properties were able to achieve an increase in NOI. However, by the
third year of the recession, 41.4 percent of the resort managers in our TrendsŪsample were
able to turn things around on the bottom line. Many resort hotels fall
into the upper-upscale and luxury chain-scale segments. Historically,
these two segments have seen some of the greatest declines in performance
during the early stages of industry recessions, but tend to recover
relatively quickly.
Convention hotels (23.6 percent), followed by full-service properties (26.1
percent) had the lowest share of properties that experienced an increase in
NOI from 2002 to 2003.
sample that suffered a 12.4 percent decline in NOI from 2002 to 2003.
How Did They Benefit?
An increase
in top-line revenues, as opposed to controlling costs, was the main reason
for growth on the bottom-line at those properties that achieved a gain in NOI
from 2002 to 2003. In 2003, total revenues for the properties in this
group grew 6.9 percent, while expenses rose only 4.0 percent. For the
overall TrendsŪ
sample that year, total revenues declined 1.8 percent, while expenses grew
2.1 percent.
Prior research conducted by PKF-HR has found that changes in ADR have a
significant impact on the profitability of hotels. In 2003, those
hotels that were able to take advantage of the improving market conditions by
raising their room rates were most likely to achieve an increase in
profits. Of the hotels that posted a gain in NOI, 50.8 percent achieved
an increase in ADR. This compares to just 32.5 percent for the overall TrendsŪsample. In aggregate, the hotels that posted an increase in profits averaged an ADR
increase of 0.4 percent in 2003, compared to a decline of 2.6 percent for the
entire survey sample.
Part of the reason for the relatively strong 4.0 percent rise in expenses at
the hotels that improved their profits was the increased business
volume. On average, these hotels sold 6.5 percent more room nights in
2003 than they did in 2002. Accordingly, the predominately variable
department expenses at these properties rose 5.2 percent. In addition
to the rise in occupied rooms, the growth in total revenue allowed management
at these hotels to reinstate services, amenities, and employee positions that
may have been cut or reduced during the recession.
Fixed expenses typically get overlooked by owners because they tend to be
less influenced by management and business volume. However, in 2003,
property taxes and insurance expenses moved along divergent paths and
impacted the bottom-line in different ways.
The hotels that were able to achieve an increase in NOI in 2003 had to
overcome a significant 18.7 percent rise in the cost of insurance. In
the wake of the terrorist attacks of 2001, insurance premiums soared for
three consecutive years.
The other "fixed" cost, property taxes, took a different turn in
2003. For the entire TrendsŪ
sample, property taxes increased 2.2 percent. However, for
those properties that enjoyed profit growth during the year, property taxes
decreased an average of 9.7 percent. After suffering low levels of
revenues and profits in 2001 and 2002, it appears that the owners of these
hotels were successful in proving the decline in value of their properties
and thus lowering their property tax assessments.
Who May Benefit in
2010?
The
ability to raise room rates was the most common factor driving profit growth
during the final year of the last industry recession. According to the
March 2010 edition of Hotel
HorizonsŪ, hotels operating in the mid-scale without F&B
segments are forecast to experience a 0.4 percent decline in ADR in
2010. This is the lowest decline among all chain scale categories and
implies that several properties in the segment will actually enjoy an
increase in ADR during the year. This segment is dominated by
limited-service hotels, which is also the property type that displayed the
greatest propensity to post an increase in NOI during the final year of the
last recession.
Hotels in the upper-upscale segment are forecast to experience a decline in
ADR of 2.3 percent. For these hotels, expense control will be the key
to improving profitability in 2010. Also lagging in ADR growth, and the
potential for profit gains, are the properties in the midscale with F&B
and economy segments.
***Robert
Mandelbaum is the Director of Research Information Services for PKF
Hospitality Research. He is located in the firm's Atlanta office (www.pkfc.com). Portions of
this article was published in the March 2010 edition of Lodging.
[1] Before deductions
for capital reserve, rent, interest, income taxes, depreciation, and
amortization. |
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