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Right On Schedule

In the fall of 2010, when U.S. hotel managers were preparing 2011 budgets, most industry participants were pleasantly surprised at the strong pace of the recovery in lodging demand. By year-end 2010, the occupancy level for U.S. hotels increased by 5.4 percent. While hopeful their good fortune would continue into 2011, managers were somewhat skeptical given the continued sluggishness of the economy.

This skepticism appears to have influenced the 2011 budgets. Operators planned for a continuation of growth in occupancy, but not at the same rapid pace enjoyed in 2010. At the same time, they also realized that the soft economy would inhibit their ability to raise room rates.

As 2011 transpired, the budgeted projections actually transformed into reality. In fact, the 2011 U.S. hotel budgets were the most precise we have seen since PKF Hospitality Research LLC (PKF-HR) began tracking budget accuracy in 2001.

General managers, controllers, and directors of sales are currently beginning the process of preparing their budgets and marketing plans for 2013. To assist them, we present our annual look at the budgeting accuracy of U.S. hotel operators. From PKF-HR’s Trends® in the Hotel Industry database, we identified 623 operating statements that contained both actual and budgeted data for 2011. Using these statements, we compared the revenues and expenses projected for 2011 with what was actually earned and spent during the year.

JUST SHORT ON TOP
For 2011, hotel managers were expecting occupancy to continue to dominate rooms revenue growth. The average 2011 budget called for a 5.1 percent increase in occupied rooms, combined with a 3.4 percent gain in ADR. The net result was a forecast of 8.6 percent growth in rooms revenue. At the end of 2011, rooms revenue at the properties in our study sample increased by 8.2 percent, just short of the budgeted 8.6 percent growth rate.

Contrary to expectations, occupancy levels at the subject hotels did not increase as much as projected. In 2011, rooms occupied grew by 4.1 percent, a full percentage point short of the budgeted 5.1 percent growth rate. Conversely, the ADR increased 3.9 percent, greater than the budgeted projection of 3.4 percent. Throughout the year, it appears that the managers in our study sample were able to be more aggressive with their pricing policies than initially anticipated.

Total revenue growth for the sample fell just 0.1 percent short of expectations. This implies that the combined growth in revenue from food and beverage, other operated departments, and rentals and other income exceeded the budget.

PRESERVING THE BOTTOM-LINE
With occupancy levels falling below expectations, it is not surprising that total operating expenses also came up short of the budgeted amount. Hotel managers had expected a 5.8 percent increase in expenses in 2011, but only spent 5.4 percent more to operate their properties. By spending less than the budgeted amount for expenses, hotel managers were able to overcome their revenue shortfall and exceed the budgeted levels of net operating income (NOI). The hotels in our study sample enjoyed a 16.1 percent increase in NOI in 2011, 0.9 percentage points greater than the 15.2 percent budgeted growth rate.

CAUTIOUS OPTIMISM
The attitude of U.S. hoteliers has not changed much since the fall of 2010. Entering 2013, uneven economic news tempers the enthusiasm of hotel owners and operators despite the fact that revenues and profits continue to grow at a healthy rate. Based on our June 2012 edition of Hotel Horizons®, PKF-HR is forecasting a 6.3 percent increase in total revenue during 2013 that will result in an 11.7 percent rise in NOI. It will be interesting to see how aggressive hotel managers are when budgeting revenue, expense, and profit growth rates for 2013.

Robert Mandelbaum and Viet Vo work in the Atlanta office of PKF Hospitality Research, LLC (PKF-HR); www.pkfc.com/store.

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