Hotel Profits Up in 2010 by 9.8 Percent

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 the 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.

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 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.

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.

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, PKF says. “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.”