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By
now everyone has heard just how much U.S. hotels suffered on the top
line in 2009. The 16.7 percent decline in RevPAR reported by Smith
Travel Research for 2009 was greater than any annual decrease in
revenue published in PKF Hospitality Research’s (PKF-HR) annual Trends® in the Hotel Industry reports since 1932.
Certainly movements in revenue are extremely important for all industry
participants. However, for hotel owners and lenders, the impact of the
recession on bottom line profits is more pertinent. Accordingly, the
35.4 percent decline in unit-level profitability from 2008 to 2009 that
was reported in the 2010 edition of Trends®
in the Hotel Industry has more relevance to industry participants who
are involved in the real estate and finance side of lodging. For the
purpose of this report, profits are defined as net operating income
before deductions for capital reserves, rent, interest, income taxes,
depreciation, and amortization. The 2010 edition of Trends® presents aggregate average changes in unit-level revenues, expenses, and profits from 2008 to 2009.
Everyone Suffered
Virtually all hotels in the Trends®
sample suffered a decline in revenues and profits in 2009.
Ninety-five percent of the properties experienced a decline in room
revenue and total hotel revenue from 2008 to 2009. Of note is the fact
that 81.5 percent of the sample rented fewer guestrooms during the
year, implying that the need to discount room rates was the main
culprit for the decline in revenue at several hotels. On average, the
hotels in the Trends® sample experienced a 7.5 percent decline in
occupancy and a 12.1 percent decline in average daily rate (ADR).
With ADR driving the decreases in revenue, it is not surprising that
91.4 percent of the hotels in the survey sample saw their profits
decline from 2008 to 2009. For reference purposes, 74.9 percent of the Trends®
sample reported a decline in NOI during the 2001 industry
recession. Profit declines were reported for all type of
properties. Resort (-37.8 percent), convention (-37.5 percent), and
full-service (-37.4 percent), hotels endured the greatest declines in
profits in 2009. Those bearing the least loss on the bottom line
were suite hotels with food and beverage (-22.8 percent), suite hotels
without food and beverage (-25.1 percent), and limited-service
properties (-29.7 percent).
Expenses Cut
As they have historically, hotel managers were able to cut the
operating expenses at their properties by an average of 11.8 percent.
Unfortunately, this falls short of the average revenue decline of 18.5
percent.
Management was able to reduce all the expenses for which they have the
greatest control. On average, operated department costs dropped 12.9
percent in 2009, while undistributed expenses declined 11.1 percent.
Within most of these departments, labor costs were the greatest single
expense item. A combination of layoffs, reduced hours, furloughs, and
salary and wage reductions resulted in a decline of 10.4 percent in
total labor costs from 2008 to 2009.
Among those line items on the operating statement that are more fixed
and contractual in nature, insurance costs fell 4.3 percent, but
property taxes increased 3.6 percent. It is expected that the lower
profit achieved in 2009 will result in successful property tax appeals
in 2010. Because of the 18.5 percent decline in total revenue, the fees
paid to management companies dropped 25.4 percent. With the
decline in management fees exceeding the decline in revenue, it can be
assumed that operators did not qualify for the incentives fees they
earned in 2008.
Tough in 2010
The March 2010 edition of Hotel Horizons®
published by PKR-HR forecast a 1.1 percent annual decline in RevPAR for
2010. Typical of historical industry recoveries, occupancy is projected
to recover first (+0.3 percent), while ADR growth will continue to lag
(-1.4 percent). In addition, hotel operators find it more difficult to
cut costs as industry recessions linger. In fact, hotel expenses
frequently increase as managers have to reinstate services, amenities,
and staffing because of increased guest counts. These factors all
contribute to PKF-HR’s forecast of a 5.3 percent drop in unit-level NOI
in 2010.
Robert Mandelbaum is director of research information services for PKF Hospitality Research. He is located in the firm’s Atlanta office. (www.pkfc.com). To purchase a copy the 2010 Trends® in the Hotel Industry report, please visit www.pkfc.com/buyannualtrends.
Other Finance articles:
2010: A Revised Outlook
Continuing Improvement
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