A CBRE budget analysis of 400 U.S. hotel operating statements indicates a majority of managers exceeded their 2015 revenue projections while spending less in operations than anticipated.
REPORT FROM THE U.S.—Hotel managers achieved the winning formula in 2015—exceeding their budgeted revenue projections while at the same time spending less than expected to operate their hotels. The result was a 2.2% profit surplus compared to budget.
As general managers, controllers and sales directors prepare their budgets and marketing plans for 2017, CBRE Hotel’s most recent report offers some insight into the budgeting accuracy of U.S. hotel operators.
From CBRE Hotels’ Americas Research’s “Trends in the Hotel Industry” database, we identified 400 operating statements that contained both actual and budgeted data for 2015. Using these statements, we compared the revenues and expenses projected for 2015 with what was actually earned and spent during the year.
Budget accuracy continues
Since 2001, CBRE Hotels’ Americas Research has assessed the accuracy of hotel budgets. Over the past 15 years, one trend has become very predictable. During times of industry prosperity, hotel budgets are extremely accurate.
During the depths of the 2001 and 2009 industry recessions, hotel managers underestimated their revenue levels by an average of 10.4%, while the profit deficits averaged 23.4%. Conversely, when the industry has been in periods of growth, the budget variance for revenues has been +0.5% on average, while profit goals were exceeded by 1.4%. For the purpose of this analysis, profits are defined as earnings before income taxes, depreciation and amortization.
This trend of budget accuracy during periods of prosperity was demonstrated once again in 2015, another year of growth for U.S. hoteliers. Comparing 2015 budgeted to actual performance, hotel managers surpassed their total revenue goal by 0.2%, and beat their profit targets by 2.2%.
Occupancy overcomes ADR
Since the depth of the industry recession in 2009 through 2015, our firm’s “Hotel Horizons” forecasts have, in general, underestimated occupancy growth and overestimated changes in average daily rate. In 2014, it appears that hotel managers analyzed the history of these forecasts and made their own adjustments when preparing their 2015 budgets. Unlike our published forecasts, hotel managers overestimated their potential growth in occupied rooms for 2015, but surpassed their projections for growth in ADR.
For 2015, hotel managers estimated a 1.9% increase in the number of occupied rooms. By year-end, the actual growth in occupancy was 1.6%. Conversely, ADR was budgeted to grow by 3.3%, but hotel managers were able to beat that mark and achieve a 4.2% increase.
Given the record-high levels of occupancy achieved by most hotels in the U.S., it is not a surprise that hotel occupancy growth is slowing down. Given the daily and seasonal demand patterns they have to deal with, it is unrealistic for most hotel operators to continue to accommodate significantly greater numbers of guests. On the other hand, it appears that hotel managers took advantage of the high occupancy levels and pushed room rates to a greater degree than anticipated.
The net result was a revenue per available room that exceeded budget by 0.5%. Concurrently, total hotel revenue exceeded budget by 0.2%. This implies that the combined growth in revenue from food and beverage, other operated departments and miscellaneous income lagged the budget.
Less occupancy, fewer expenses
By accommodating fewer rooms than budgeted, the hotels in our sample incurred less expense growth than planned. During 2015, expenses at the properties increased by 5.2% (0.5% less than the budgeted expense growth rate).
Fortunately for hotel operators, and their owners, the combination of greater-than-expected revenue growth and less-than-projected expense growth resulted in a substantial budget surplus on the bottom line. On average, the hotels in our sample exceeded their 2015 budgeted EBITDA goals by 2.2%.
What to budget for 2017
According to the September 2016 edition of “Hotel Horizons,” CBRE Hotels’ Americas Research is projecting that a 3.9% increase in RevPAR will lead to a 4.3% gain in total hotel revenues for 2017. Concurrently, operating expenses are forecast to rise by 3.9%. This should result in an improvement in profits of roughly 5.2%.
Given this positive market forecast, historical trends indicate that the odds are favorable for U.S. hotels to achieve their budgeted targets once again in 2017. For participants in the lodging industry, accurate budgets and forecasts provide predictability. For investors and lenders, predictability implies less risk. For owners, predictability leads to better management of cash flows and investments. For operators, predictability (in theory) means fewer headaches.
Robert Mandelbaum is director of research information services for CBRE Hotels’ Americas Research. CBRE offers hotel managers several tools and reports to assist them in the preparation of their 2017 budgets. For more information, visit pip.cbrehotels.com, or call (855) 223-1200. An earlier version of this article was published in the September 2016 edition of Lodging.
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