April 24, 2014, Atlanta, Ga. – According to the 2014 edition of Trends® in the Hotel Industry, an annual report recently released by PKF Hospitality Research, LLC (PKF-HR), hotel profits are on pace to exceed pre-recession levels in 2014.
Despite the slowdown in the pace of rooms revenue (RevPAR) growth in 2013, U.S. hotels were able to sustain strong gains in net operating income (NOI) during the year. Looking forward, the combination of rising average daily rates (ADR) in a low-inflation environment will allow for continued profit growth in excess of 10 percent through 2015. This five year period (2011-2015) of continuous double-digit gains on the bottom-line will be the longest such streak for U.S. hotels since the high inflation days of the late 1970s.
“By 2014, the average hotel in our Trends® sample will finally achieve bottom-line profits greater than their pre-recession peak on a nominal basis. Perhaps of greater importance is that hotel profits, in inflation-adjusted terms, will exceed 2007 levels in 2015,” said R. Mark Woodworth, president of PKF-HR. PKF-HR is forecasting unit-level NOI increases of 12.4 percent in 2014, and another 14.2 percent in 2015.
Trends® in the Hotel Industry is an annual compendium of hotel operating statistics that dates back to 1937. The 2014 Trends® results are based on a sample of operating statements from approximately 7,000 properties in the U.S. that voluntarily participated in the survey.
“The 10.1 percent increase in hotel profits during 2013 was the result of a 5.4 percent gain in total hotel revenue, along with a 3.7 percent increase in operating expenses,” said R. Mark Woodworth, president of PKF-HR. “An accumulation of market, operational, and economic factors has resulted in a business environment that is very conducive to increases of both the top-line and bottom-line. We are in the middle of the sweet spot in the business cycle for hotel profits.”
Other Revenues Bounce Back
“The initial years of the U.S. lodging industry recovery from the 2008/2009 recession were led by strong gains in occupancy. However, once the growing number of guests checked in, hoteliers struggled to entice them to spend money on other hotel services and amenities. This trend began to dissipate in 2013,” said Woodworth.
During 2013, RevPAR for the Trends® sample increased by 5.9 percent, while the combined revenue from food and beverage, other operated departments, and rentals and other income grew by 4.2 percent. This growth rate for other revenue sources is up from the 2.3 percent increase posted in 2012.
Measured on a dollar-per-occupied room basis, the increase in other revenues grew from 0.5 percent in 2012 to 2.7 percent in 2013. “This indicates that either hoteliers were able to raise the prices for the additional services, or more guests took advantage of the on-site restaurants and lounges, recreation venues, and other miscellaneous service outlets,” Woodworth observed.
Despite a slowdown in RevPAR gains, the increase in revenues from sources other than the rooms department resulted in a rise in the pace of total hotel revenue growth. Total hotel revenues increased by 5.4 percent in 2013 compared to just 5.0 percent in 2012.
Variable vs Fixed Costs
Like other industries, hotel operators are tasked with controlling both fixed and variable expenses. In the hotel industry operated department expenses tend to be highly variable, while the majority of undistributed expenses are mostly fixed in nature.
In 2013, operated department costs increased by 3.9 percent, while undistributed expenses rose by just 3.1 percent. “Clearly the lodging industry is at a point when business volume is covering most of the fixed undistributed expenses, while continued occupancy growth is driving the variable departmental costs,” Woodworth said.
Some lodging expenses, such as utilities, property taxes, and insurance, are largely out of the day-to-day control of management. In 2012, utility costs at U.S. hotels declined from 2011 levels, but the downward trend ended in 2013 as the combined cost of electricity, gas, steam, water, and sewer increased by 2.0 percent. Property taxes and insurance grew by 3.9 percent in 2013, an increase from the 3.5 percent growth rate observed in 2012.
According to Moody’s Analytics, PKF-HR’s source for economic forecast data, the nation’s unemployment levels will remain above 5.5 percent for the next few years, and inflation is expected to persist below 2.5 percent. “These two macroeconomic factors will help suppress the increases in the less-controllable fixed component of hotel operating expenses,” said John B. (Jack) Corgel, Ph.D., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “The unemployment rate will temper the need to raise salaries and wages, while low inflation will moderate increases in most of the goods and services purchased by hotels.”
Profit Growth for All
All property types enjoyed an increase in profits during 2013. For the year, NOI for the average hotel in the Trends® sample grew by 10.1 percent in 2013. Resort hotels enjoyed the greatest gains (11.9%), followed by full-service (11.5%) properties. Lagging behind the overall average profit growth rate were limited-service hotels (6.8%), suite hotels with F&B (6.8%), and suite hotels without F&B (7.9%).
Convention hotels achieved a profit growth of 8.2 percent in 2013. “While this was less than the overall sample average, it is greater than the profit growth these properties achieved in 2012. The increased profitability of convention hotels is consistent with the initial stages of the recovery of the group demand segment that we have observed,” Woodworth said.