PKF Reports U.S. Hotel Profits Grew 9.8 Percent in 2010

May 17, 2011, Atlanta, GA–After two years of declining profits, the average U.S. hotel enjoyed a 9.8 percent bottom line increase in 2010, according to a recently released report, Trends® in the Hotel Industry, issued by PKF Hospitality Research (PKF-HR).  The gain, however, does not make up for the 37.9 percent cumulative loss experienced by U.S. hotels during 2008 and 2009.

While 70 percent of the properties in the Trends® sample enjoyed an increase in total revenue in 2010, only 60 percent were able to convert that into more money in the bank, indicating that the turnaround in industry performance has not occurred evenly across all sectors of the U.S. lodging industry

“In the March 2011 edition of our monthly Hospitality Market Update newsletter, we noted that the driving force behind revenue growth in 2011 starts with the price tier segment you are positioned within,” said R. Mark Woodworth, president of PKF-HR.  “The higher the price tier, the greater the projected growth in ADR and, consequently, RevPAR.  After analyzing the results of the 2011 Trends® in the Hotel Industry survey, the relationship between price position and profits appears to be as strong as the correlation between room rates and the ability to grow revenue.”

According to the 2011 edition of Trends®, hotels in the highest room rate categories achieved the greatest increases in net operating income in 2010.  Conversely, properties in the lowest rate categories either achieved minor increases in profit or suffered their third consecutive year of bottom line declines.

“The full-service properties in the Trends® sample typify this relationship between prices and profits,” Woodworth said.  “Within the full-service category, those hotels in the lowest ADR category (less than $100) saw just a slight 0.3 percent increase in profits in 2010.  At the other end of the spectrum, upper-upscale and luxury hotels with an ADR greater than $200 enjoyed a strong 33.0 percent gain in profit.”

Each year PKF-HR collects financial statements from thousands of hotel owners and operators across the U.S. for its Trends® in the Hotel Industry report.  The 2011 Trends® report marks the 75th anniversary of this publication and provides industry benchmarks for 2010 unit-level revenues, expenses, and profits.  For the purpose of this report, profits are defined as net operating income (NOI) before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization.

Revenue Up For Most Everyone

Nearly 80 percent of hotels in the Trends® sample enjoyed an increase in rooms occupied in 2010, but only 67 percent were able to leverage that into increases in total revenue.  On average, the hotels in the Trends® sample achieved a 6.2 percent increase in occupancy, but were unable to raise their room rates.  In the aggregate, ADR for the overall sample declined 0.9 percent.

Based on the preceding changes in occupancy and ADR, the Trends® sample averaged a 5.3 percent rise in rooms revenue in 2010.  Among the other sources of revenue, food and beverage sales increased 5.6 percent and other operated department revenue rose 2.2 percent, but rentals and other income declined 10.0 percent.  The net result was a 4.8 percent increase in total hotel revenue for the overall Trends® sample.

Expense Growth Suppressed

Given the fact that the gains in revenue were driven by growth in the number of rooms occupied, it is not surprising that the costs and expenses to operate a hotel also grew.  Total operating expenses increased 3.4 percent in 2010.

“While this growth in expenses was more than double the rise in the consumer price index for the year, it is slightly less than expected given the historical expenditure patterns we observed during the initial stages of past lodging industry recoveries,” 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.  “Part of the reason for the more modest growth in operating expenses is the continued high rate of unemployment and the resulting lack of pressure on wage rates.  Labor costs for U.S. hotels increased a modest 2.7 percent from 2009 to 2010.”

In contrast, the amount spent to purchase all other goods and services needed to operate a hotel (excluding management fees, property taxes, and insurance) climbed 5.3 percent in 2010.  The largest increases among these expenditures occurred in the rooms (6.2 percent) and food and beverage (9.3 percent) departments.  These higher operated department costs are to be expected, given that revenue growth was driven by increased business volume as opposed to a rise in prices.

Facing dramatic declines in revenue in 2009, hotel managers were effective in cutting all department expenses except fixed charges (property taxes and insurance).  “As we predicted in the 2010 Trends® report, the profit declines in 2009 led to decreases in property values in 2010.  Accordingly, fixed charges fell 3.8 percent in 2010, the only expense category to be reduced during the year,” Woodworth said.

Profit Growth Varied

On average, unit-level NOI for the Trends® sample rose 9.8 percent in 2010, with the ability to grow profits varying by property type.  The greatest gains in NOI were achieved by full-service (+14.4%), resort (+10.4%), and convention hotels (+8.7%).  Limited-service (+0.5%) and suite hotels with food and beverage (+1.8%) lagged in their ability to generate more dollars on the bottom line.  This diversity of performance follows the previously described observation relating profit growth to price positioning.

2011 Outlook

Based on the March 2011 edition of Hotel Horizons®, PKF-HR is forecasting that the average hotel in the U.S. will be able to increase their total revenue by 6.8 percent for the entire year.  The revenue growth will come from a relatively equal contribution of increases in occupancy and ADR.

Accordingly, hotel operators will need to continue their diligent efforts to control costs.  “Assisting management in curbing costs in 2011 will be the continued lack of upward pressure on wages resulting from lingering high levels of unemployment,” said Corgel.  “However, commodity price escalation has already contributed to a rise in utility costs, delivery surcharges, and the cost of goods sold.  Cost controls might be what dictates hotel profitability in 2011."