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Resorts Bounce Back

Resorts Bounce Back

Luxury and Income
Our analysis has found that upper-tier properties benefit most from growth in income, while the lower-tier hotels are dependent on growth in employment.
Since the depths of the recession in 2009, personal income has recovered to pre-recession levels. Unfortunately, employment recovery is forecast to lag until 2015. With personal income leading the slow economic comeback, luxury and upper-upscale hotels have recovered at a quicker pace than properties in the more moderately priced chain scales.

Given the Class C resort average ADR of $175.74 in 2012, the vast majority of properties in the sample are positioned in the upper-upscale and luxury chain-scale segments. Therefore, a significant driver of the recent strong performance of these high-end resorts has been the rising income of the relatively wealthy individuals that patronize these properties.

Moody’s Analytics forecasts persistent growth in personal income over the next five years. Therefore, we project the occupancy for Class C resorts will continue to grow and exceed the LRA of 66.6 percent each year from 2013 through 2017.

Having surpassed the LRA occupancy level, the U.S. resort market is reaching the point where market conditions should allow managers to raise room rates significantly. PKF forecasts room rates increasing at a compound annual growth rate (CAGR) of 5.7 percent from 2013 through 2017. Driven predominantly by gains in ADR, Class C resort RevPAR is projected to increase at a CAGR of 6.8 percent over the next five years.

Financial Performance
While resort hotel revenues are forecast to return to their pre-recession levels in 2014, recovery on the bottom line will take longer. We analyzed the operating performance of comparable destination resort hotels for 2007 through 2012.

Similar to that of the average U.S. hotel, the net operating income (NOI) at resorts declined significantly in 2008 and 2009. Unlike other property types, however, NOI at resorts continued to decline through 2010. From 2007 to 2010, profits at resorts declined 41.5 percent. By year-end 2012 we estimate that resort hotels had recouped only 39 percent of the lost profits, thus indicating that full recovery on the bottom line will not occur until beyond the top-line recovery in 2014.

Resorts, more than any other type of hotel, rely on revenues from other sources outside the rental of guestrooms. On average, the resorts in our study sample earned 43.8 percent of their revenue from sources such as restaurants, lounges, golf, spa, and retail outlets.

As of 2012, RevPAR levels were still down 7.1 percent from 2007. Concurrently, total resort revenue (inclusive of food and beverage and recreation) was off by 10 percent. This indicates that resorts have struggled to induce additional expenditures from guests once they check in.

Conversations with resort general managers indicate that the leisure traveler has returned to the market, while corporate and association groups are coming back at a slower rate. Groups that are traveling again for meetings and training have cut down on auxiliary spending such as spa and golf outings. Furthermore, groups that previously may have provided three meals for meeting attendees may now just provide two or will cut back significantly on all three. As corporate profits continue to rise, the hope is that meeting planner budgets will allow ancillary expenditures to return.

After suffering greatly during the initial stages of the recession, resort owners and operators can begin to relax and grab a drink by the pool. Increases in personal income and corporate profits have helped preserve travel budgets for high-income individuals and business groups—two of the largest sources of demand for high-end destination resorts. This has contributed to the recovery in revenue. Profits are also on the rise. Recovery on the bottom line is only a few years away.

Robert Mandelbaum is director of research information services, and Caroline Robichaud is a senior consultant with PKF Hospitality Research

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