STR: Hotel profitability bouncing back
STR: Hotel profitability bouncing back
31 AUGUST 2012 5:58 AM

The U.S. hotel industry saw net income of approximately $33 million during 2011—an increase of 15.7% from the prior year, according to STR.

By  Carter Wilson  and  Ali Hoyt

BOULDER, Colorado—The U.S. hotel industry achieved a net income of approximately $33 billion, or 21.4% of total revenues, during 2011—a healthy increase of 15.7% over 2010 levels, according to STR through its Hotel Operating Statistics, or HOST, program. STR is the parent company of

The following chart details U.S. hotel-industry profitability from 2001 through 2011. A few caveats: This data extrapolates only on scale with the total amount of properties reporting room revenue to STR. Also, house profit is defined as profit before deductions for fixed charges and management fees, while net income includes those deductions.

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Overlaying industry profit levels and profit percentage (as a percent of total revenues), we can see industry profit has consistently hovered between 20% and 26% of total revenue, as detailed in the following chart:

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Further annual changes are detailed below:

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Changes in net income are on an order of magnitude with changes in revenue, and from 2004 through 2006 U.S. hotel profits grew at two to three times the rate of revenue gains. They were of a roughly equal magnitude in 2007, and then as revenue fell in 2008 and 2009, profits sank more dramatically than revenues did. We recently have experienced revenue gains (2010 and 2011), and profits are back to their recovery pace of approximately two times the increase in revenues.

Hotel class makes a difference for profit levels
Profitability increases during 2011 ranged from 9.3% to 41.5% among the classes. This range can be explained by evaluating the performance of the individual classes. The chart below visually depicts each class’ 2011 profitability (net income as a percent of total revenues) and percent change from the previous year. The total U.S. profitability and percent change creates a benchmark.

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A profitability of 42.3% for 2011 bodes well for the largest class (in terms of number of hotels and total rooms), a 13.4% increase from the previous year. The 2011 profitability percentage weighs in just above the economy class’ 10-year average of 40.1%. The greatest decline in profitability was in 2009 when the class experienced a 32% decline. For 2011, net income showed approximately an 86% recovery to the 2008 year total.

Midscale was the second most profitable class, posting 27.1% profitability for 2011, which is a 14.7% increase from the previous year. The class experienced slight growth among average daily rate, occupancy, and revenue per available room, with the greatest increase in RevPAR of 7.1%.

Upper midscale
The upper-midscale class posted 24.4% profitability for 2011, which is a 9.3% increase from the previous year. Upper-midscale is the closest competitor with 1.9% RevPAR compound annual growth rate for the same period.

The upscale class has seen solid performance numbers. Profitability has been consistent with the 2011 performance of 26.4%, bringing net income back to 93% of the 2008 total.

Upper upscale
Upper-upscale is one of two classes with profitability below the total U.S. average. The class did experience an 8.5% increase in total revenue, which translated into a 7.3% increase in RevPAR.

At first glance, the luxury class shows the lowest profitability and highest growth among all the classes. With a low profitability percentage such as 15.7%, a small increase in profit can inflate the percentage increase from the previous year. But, don’t label the luxury class a low performer just yet, as the luxury class has experienced 2.1% RevPAR compound annual growth rate during the 2010-to-2011 period, the leader among all the classes.

After all this, we have approached a realistic model to calculate industry profitability. However, we must keep these numbers—whether the 15.7% increase in profitability or the average industry profit of 21.4%—in perspective. They certainly serve as a way to evaluate the health of the industry, but the results will always partially stem from modeled data.

Profitability numbers in the making
STR, through its HOST program, has historically not only been able to measure industry revenues but industry profitability. For the 2011 HOST Study, STR collected more than 6,100 profit and loss statements from U.S. hotels. This data, used in conjunction with trend data from the more than 30,000 hotels that participate in the STAR program, allow us to glean insights regarding industry profitability.

The objective is to provide the most accurate calculation of industry profitability, a valuable benchmarking tool for hotel owners, investors, and operators. Rather than focusing on just the collected data, through the use of corresponding trend data, we are able to model with greater accuracy. The 6,100 P&L statements collected represent about a fifth of the hotels that report total rooms revenue to STR. Using trend data from the larger reporting sample for room revenues, and using the remaining income and expense ratios from the HOST data, we can get an idea of industry (U.S.) profit.

From the aggregate trend data, three values are linked into the model: total room supply, occupied rooms, and total rooms revenue. The HOST ratios are then applied to the trend data to extrapolate absolute values for each line item. We also include all expenses that follow undistributed operating costs that hotels nearly uniformly report, including management and franchise fees, property taxes, and insurance, as well as an imputed 4% reserve for replacement fee. We do not deduct for leases—neither equipment nor ground—as these are either applicable only to a small fraction of the properties or are not reported to STR in consistently among properties.

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