Headlines – Week of May 13, 2012

May 20, 2012

U.S. Hotel Profit Recovery Widespread

According to a recent report by PKF Consulting, the U.S. lodging industry recovery may have begun in 2010, but it wasn’t until 2011 that the improved prosperity was shared by nearly all hotels in the country. In 2011, 80.5 percent of the properties that participated in the PKF Trends® in the Hotel Industry annual survey enjoyed an increase in total revenue, while nearly three-quarters (72.3%) of the participants achieved growth in profits.

The Trends®   report presents aggregate average changes in unit-level revenues, expenses and profits from 2010 to 2011. The data come from a sample of nearly 7,000 financial statements received from hotels located throughout the United States. For the Trends® report, hotel profits are defined as net operating income (NOI) before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization.

On average, hotels in the 2012 saw their profits increase by 12.7 percent in 2011 as 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.  

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.

While news of growing profits is welcome, longer-term U.S. hotel owners know that their investment still has a ways to go to achieve the annual dividends that were earned prior to the recent recession. In 2011, the average Trends® hotel achieved a profit level equal to $12,972 per available room. In nominal dollars, this is roughly 25 percent short of the peak profit levels achieved in 2007.

In 2011, the properties in the Trends® sample averaged a 7.1 percent increase in rooms revenue per available room (RevPAR), and a 6.2 gain in total revenue.

For comparison purposes, the average 2011 RevPAR growth rate as reported by Smith Travel Research for all U.S. hotels was 8.2 percent.

Managers of the properties in the Trends® sample were able to convert the 6.2 percent increase in total revenue into the 12.7 percent NOI gain by limiting operating expense growth to just 4.3 percent

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 labor costs for the year, thus implying a decline in productivity.

Total operated department expenses increased by 4.5 percent in 2011, while undistributed costs grew by 4.7 percent. Because of the increasing number of hotels that enjoyed gains in both total revenues and NOI, management fees rose a relatively strong 5.9 percent on average.

The only expense category to post a decline from 2010 to 2011 was property taxes.

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.

Extended Stay Takes Lead in Rate Growth

According to The Highland Group’ quarterly report on the extended-stay hotel business, extended-stay hotel operators seems to have learned a lesson others in the hotel industry have missed: Demand is rising, supply is non-existent, so it’s time to raise rates because that’s where the profits are found.

In the first quarter, extended-stay hotels were able to push ADR by 7.2%, much higher than the overall industry (+4.0%, says STR) and the fastest quarterly growth for the segment in more than four years.

While average rates were up for all price tiers of extended-stay hotels, the mid-price segment (chains like Candlewood, Extended Stay America, Hawthorn, Home2 Suites, TownePlace and others) posted a rate increase of 10.0% in the quarter. That follows a 6.9% increase in ADR in 2011. The other price tiers showed more modest rate increases in the first quarter: 5.5% for upscale and 3.9% for economy.

If you look at last year’s extended-stay numbers, each quarter the rate of [ADR] increase was bigger than the previous quarter, and by the middle of the year it was rising faster than the overall hotel industry.

The mid-priced extended-stay tier saw a slight decline in demand (down 0.6%) and a decrease in occupancy (down 3.5% to 66.7%) in Q1. Extended stay’s aggressive rate tactics cost the entire segment in demand and occupancy. While economy and upscale posted modest increases in occupancy, the overall number was flat, but at a still-healthy 71.5%. And even though demand growth was modest (2.5%), extended-stay hotels reported record room revenues for the quarter of $1.72 billion, up 9.8% over the first quarter of last year and 16.1% above the previous quarterly peak set in 2008.

According to the report, the ultimate key to success of the segment, aside from rate growth, is the lack of new supply. During the quarter, the number of extended-stay rooms grew just 1.3% to 348,562 rooms. And supply growth rate could decline even further in 2012 because rooms under construction at the end of 2011 fell to its lowest level for 15 years.

Overall hotel rates have gone up more slowly than everyone expected at this point. If extended stay is going to go forward with these levels of increases, the overall hotel industry has got to step in line as well. Extended stay is a price buy and eventually its price-value proposition will erode and operators be forced to pull back.

Posted by Scott R. Lodde

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