US hotel profit growth in ‘sweet spot’
28 MAY 2014 7:50 AM
Hotel profits in 2013 totaled $41 billion, up 10.2%, according to HOST data. Sources say there is still room for further profit growth.
REPORT FROM THE U.S.—Profit growth in the U.S. hotel industry has been on a fast track since the depths of the downturn in 2009. It’s not coming to a stop anytime soon.
Industry profits in 2009 totaled $24.5 billion, according to Hotel Operating Statistics, or HOST, Almanac from STR Analytics, a sister company of Hotel News Now. During 2013, profits stood at $41 billion, a 67.3% increase from 2009. During the same period, industry revenues grew nearly 30% to $163 billion from $125.5 billion.
Between 2012 and 2013, profit grew 10.2% while revenue was up by 5.4%, according to HOST data. There was little difference in the percentage increase in revenue for limited-service hotels and full-service hotels, with limited service up 5.5% and full service growing by 5.4%.
The 2013 HOST Almanac includes data from 51,521 hotels comprising 4.9 million rooms.
Profit growth at this point in the cycle is being sparked by rate growth rather than occupancy, so everything is being driven directly to the bottom line, said Robert Mandelbaum, director of research information services at PKF. He said the industry is in a “sweet spot” as it relates to the level of hotel profits.
“It all starts with revenue,” he said. “You can’t have profits without revenue.”
Fred Malek, co-founder of Thayer Lodging Group, which was recently acquired by Brookfield Asset Management, said industry profits are in a good place.
“It’s improved quite a bit,” Malek said. “When you increase (revenue per available room) by 1%, you generally see a 2% increase in profit.”
RevPAR has largely been on the way up of late for all of the chain scales but most notably for the luxury sector. Luxury average daily rate and RevPAR grew by 5.3% and 7.3%, respectively, between 2012 and 2013, according to HOST data.
“Even on an individual property basis, upper tier … hotels were much more likely to see higher profitability,” said Caitlyn Milton, business intelligence manager at STR Analytics.
Ruby Huang, senior VP of asset management at Starwood Capital Group, said, “This is the time to pay close attention to all areas that generate revenues by testing rate increases and driving ancillary income.
Melissa Silvers, principal at hotel investor and asset manager SCS Advisors, said there are times owners need to spend money to make money, especially when it comes to repositioning a hotel in order to capture higher rated business.
“What can we do to this hotel to increase its asset value?” she said. “Sometimes it’s add meeting space; sometimes it’s repositioning the restaurant; sometimes it’s take these parlors that we don’t really sell as rooms and make them rooms so I’m adding five keys,” she said. “How can I do that and keep going? Anything to increase your (net operating income).”
As Silvers alluded to, hotel expenses are edging up, according to HOST data. Total departmental expenses totaled $61.8 billion a year ago, up 4.3%. Total fixed expenses were $14.5 billion, a 6.2% jump. And total operating expenses were $41.5 billion, a 1.9% increase. Total payroll grew nearly $2 billion to $52 billion.
Michael Doyle, an executive VP with Capital Hotel Management, said he has noticed cost creep. “We’re very mindful of the cost side of things,” he said.
All told, hotel owners and operators appear to have done a decent job at having the expense cutting that went on during the downturn stick, Mandelbaum said. He pointed to the introduction of grab-and-go roomservice offerings as one example of what hotels are doing to mitigate food-and-beverage expenses. F&B expense increased to $23.8 billion last year, a 2.2% increase, according to HOST data.
Mandelbaum said occupancy-driven profit is not as lucrative because more expenses creep their way in, such as housekeeping costs.
“That extra dollar or two you keep … most of that flows to the bottom line,” he said.
PKF President Mark Woodworth said overall labor costs have been kept in check in the industry thanks to a large pool of labor from which hotels have to find workers.
“The greater the supply of labor, the lower the cost of that labor,” he said.
In addition to expenses, another threat to hotel profitability is consumer confidence, Doyle said. Demand growth has slowed in recent years, the HOST data shows. Demand growth in 2013 was 2.2%, down from 2.8% in 2012.
“Yes indeed, people are spending more, but our view is that they are being very careful, very cautious about how they’re spending and the way they’re spending and the value they expect from that dollar they are spending,” he said.
Looking forward, Woodworth said the outlook for hotel profits will continue to be bright.
He said based on the depth the downturn reached in 2009, the upturn in the hotel cycle should last seven to 10 years. “We could be on the outer edge of that range,” he said.
Despite the strong profit levels, hotel operators still need to maintain a watchful eye over their businesses, Milton said.
“It would be naïve to think (profits) will continue for the next five or 10 years,” she said. “People need to have a plan. They need to be ready. Hotels are going to remain at the vanguard of the next downturn.”