GLOBAL REPORT—The recovery might be spotty, but hotel owners generally walked away from 2011 with extra profits in their pockets.
According to STR’s recently released 2012 HOST Study, the 3,593 limited-service hotels sampled in the United States reported gross operating profit of 48.8% during 2011—an increase from 48% during 2010. These properties generated $45.28 in GOP per occupied room night and $11,517 per available room. STR is the parent company of HotelNewsNow.com.
The 2,574 full-service hotels sampled in the study reported similar gains, with GOP up from 29.9% in 2010 to 31.5% in 2011. In 2011, GOP was approximately $18,633 per available room and $75.54 per occupied roomnight.
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Increases in profitability primarily were driven by gains in revenue as opposed to cuts in expenses, sources said.
“It was all about the increased revenues from increased occupancies,” said Joe Smith, executive VP of Greenbelt, Maryland-based Chesapeake Hospitality, which manages 44 hotels across the U.S.
“Obviously everybody had done all the cost-cutting measures and had gotten the most productivity out of everybody at the individual hotels during 2010 and into 2011,” he said. “So when that occupancy came back in 2011, we were still able to get the job done with that staffing and the new productivity and the new cost cutting, so the money flowed to the bottom line.”
“No question: driving rate,” said Robert Habeeb when asked which area was the biggest contributor of revenue for First Hospitality Group’s 47 properties in the U.S. Increased food-and-beverage sales also was a significant driver, he added.
“I think everybody got very creative at cutting and maintaining costs. Right now we’re having a little of that back just because there’s only so long you can forestall certain expenses, the most significant of which are wage increases,” said Habeeb, who serves as president and COO of the Rosemont, Illinois-based ownership and management company.
Labor costs in the U.S. hotel industry increased by 4.1% during the year—a result of a 3.3% bump in salaries, wages and bonuses combined with a 6.1% rise in payroll-related expenses, which typically comprise labor-related taxes and employee benefits that are mandated by contract or government regulations, according to PKF Hospitality Research.
Despite the increase, hoteliers did a good job of controlling expenses during 2011, especially when compared to prior recovery when labor costs and other expenses have skyrocketed, said Robert Mandelbaum, director of research information services for the firm.
“We’re very comfortable with the fact that hotel managers are doing a good job controlling expenses,” he said. “Relative to what we have seen in terms of expense growth coming out of previous recessions, managers are doing a much better job controlling it this time around.”
According to PKF, hotels on average saw net operating income increase 12.7% during 2011.
On a global scale
The profitability picture throughout the rest of the world is more difficult to discern. Data from select cities in STR Global’s Annual Profitability Survey, shows varying levels of performance.
In Buenos Aires, Argentina, gross operating profit per occupied room ratio in U.S. dollars increased 3.9 percentage points year on year to 29.9 percent share of total revenue. The growth was led by increases in occupancy, average daily rate and improvement in food-and-beverage profit, which saw total F&B revenue increasing by $15.91 per occupied room.
In China, Tianjin’s GOPPOR increased by 19.5% year on year in 2011 as RevPAR grew by 18.2%.
Sharm el Sheikh in Egypt saw total revenues POR declining to $118.69 (-21.7%) in 2011 as the Arab Spring impacted the leisure destination.
In Europe, the GOPPOR ratio in Warsaw, Poland, and Berlin increased by 2.2 percentage points and 0.5 percentage points, respectively, compared to the previous year. The growth in Warsaw was led mainly by an increased ADR (+2.1%), as well as declining rooms payroll and related expenses by 6.1% per occupied room. In Berlin, GOPPOR growth was led in 2011 by increased total revenues (+ €7.21 per occupied room) year on year, benefiting from a relatively low increase in rooms payroll and related expenses (+ €0.33 POR) and undistributed operating expenses (+ €0.12 POR).
In London, The Levin hotel saw a “dramatic” increase in profitability, according to Kate Levin, GM of the 12-room luxury, boutique hotel.
“Our bedrooms were our greatest growth in profitability through a steady increase of room rate now that our reputation is set,” she said.
The property’s online reputation also played a significant role in driving profitability, she added.
“Having an excellent reputation on things like Trip Advisor and maintaining this as best we can ensured that 2011 was an excellent year in terms of occupancy,” Levin said. “With such a small hotel, each bedroom is worth 8%, so to have it empty on a night is a big drop in profitability. Last year, we were so busy that this was rare and had a big effect on our numbers.”
Predicting profitability
In 2011, industrywide NOI per available room was $12,972, according to PKF’s 2012 HR Trends in the Hotel Industry survey. Despite increases in profitability, the U.S. hotel industry, at least, has a few more years before it reaches the 2007 peak in NOI, when the industry recorded $16,868 NOI per available room, Mandelbaum said.
The number is expected to reach $18,216 during 2014. It fell as low as $10,483 during 2009, according to PKF. U.S. hotels will enjoy significant profit growth through 2015 because occupancy levels will begin to exceed long-run averages in most chain-scale categories, which means managers will be able to aggressively push rate.
“When revenue is being driven by ADR instead of occupancy, that’s just much more profitability because you’re not incurring the additional variable expenses that you do by increasing your occupancy count. You’re literally just getting more dollars per occupied room and that just flows through the bottom line,” Mandelbaum said.
PKF’s updated forecast calls for RevPAR increases of 6.6% in 2013 and 7.8% in 2014. Profit growth for the same years is predicted to be 11.7% and 15%, respectively.
