Unit-Level Hotel Profits Grew 7.2 Percent in 2007

PKF Hospitality Research (PKF-HR) today announced that the average hotel in its 2008 edition of Trends in the Hotel Industry survey enjoyed a 7.2 percent gain in Net Operating Income (NOI) in 2007. While this bottom-line improvement was more than twice the pace of inflation for the year, the single-digit gain was the lowest year-over-year increase since 2004 and is further evidence of a projected slowdown in hotel income that PKF is forecasting for the near future.

“Throughout 2007, hotel owners and operators were increasingly concerned about downtrending occupancy levels compared to 2006 and a slower pace of ADR growth, and their potential impact on 2007 profitability. Despite these concerns, year-end results indicated that the typical U.S. hotel was able to achieve gains in revenue and profits above their respective long-term averages,” said Mark Woodworth, president of PKF Hospitality Research. “2008 may be a different story in view of the difficult economic outlook for the remainder of this year, and the dampening effect it will have on U.S. hotel revenue growth. Managers will be hard pressed to grow profits in 2008.”

According to Smith Travel Research, RevPAR was up just 1.9 percent through the first quarter of 2008 compared to the same period in 2007. With poor prospects for summer travel, the second quarter 2008 Hotel Horizons report of PKF Hospitality Research is forecasting an annual increase in RevPAR of just 1.5 percent. This RevPAR forecast is the result of a projected 2.5 percent decline in occupancy, combined with a 4.0 percent increase in ADR.

With occupancy and guest count on the decline, PKF-HR is forecasting that a 1.5 percent gain in RevPAR will translate to just a 1.0 percent increase in total revenue for 2008. “History has shown that U.S. hotel managers will control expenses during periods of an industry slowdown. Accordingly, we are projecting a slight 0.2 percent increase in total operating expenses for the year. The net result is a PKF-HR forecast of just a 2.9 percent gain in NOI for the average U.S. hotel in 2008,” Woodworth concluded. For the purposes of our analysis, NOI is defined as income before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization.

“In last year’s Trends in the Hotel Industry report we forecast a 4.7 percent increase in revenue and a 6.5 percent increase in profits for 2007. While our forecast of a year ago was highly accurate, it was slightly conservative as ADR once again surpassed most analysts’ expectations,” Woodworth noted.

The 2008 Trends report reflects changes in the Uniform System of Accounts for the Lodging Industry (USALI), which PKF-HR adopted this year. The USALI changes in revenue and expense classifications may result in some comparability issues from year to year. While PKF-HR does not believe that these changes had a material impact on the overall report findings, readers of the Trends report should be aware of these issues. A full explanation/description of the USALI revisions and their impact on the data contained in the Trends report is available at PKF’s web site, www.pkfc.com/USALIchanges.

Revenue Driven By ADR

Primarily because of increases in the competitive supply, just over half (50.9 percent) of the properties that participated in the Trends survey reported fewer occupied rooms in 2007 than 2006. Overall sample occupancy declined from 70.9 percent in 2006 to 70.8 percent in 2007.

“Despite the decline in occupancy, hotel managers continued to be aggressive with their pricing policies. The average daily room rate for our Trends sample increased 6.2 percent in 2007. This compares favorably to the 2.9 percent annual inflation rate for the year. The 6.2 percent increase in ADR also served to make up for the 0.1 percentage point decline in occupancy. Thus, RevPAR for the Trends sample grew 6.0 percent in 2007,” Woodworth noted.

Costs Somewhat Controlled

Tighter control of costs in response to diminished revenue growth, combined with fewer occupied rooms, resulted in a slowdown in the pace of operating expense growth in 2007. During the year, the combined costs associated with all operated departments, undistributed departments, and fixed charges grew 4.8 percent. While this level of expense growth was above the pace of inflation, it is less than the 6.3 percent annual average recorded from 2004 through 2006.

“Labor costs accounted for three-quarters of the expense growth at the average property in our Trends sample,” Woodworth said. “From 2006 to 2007, total labor costs grew 7.8 percent, the largest increase since 1984. As a result, labor costs represented 46.8 percent of total operating expenses in 2007, compared to 45.5 percent in 2006.” It should be noted that USALI changes to the classification of contract labor costs did impact the increase in total labor costs.

As a group, Total Departmental Expenses (rooms, F&B, minor operated) increased 3.6 percent in 2007, compared to a rise in Undistributed Operating Expenses of 6.2 percent. “Clearly this shows management’s ability to control the variable expenses associated with operating the Rooms, Food and Beverage, and Minor Operated departments. Conversely, it takes more effort to cap the fixed ‘overhead’ costs found in the A&G, Marketing, Maintenance, and Utility departments,” Woodworth explained.

Looking at the Fixed Charges, the combined cost of property taxes and insurance increased 5.7 percent in 2007.

Trends Follows Industry Trends

The 2008 edition of Trends in the Hotel Industry marks the 72nd consecutive year of this almanac of U.S. unit-level hotel operating performance. The data is based on a sample of 6,000 year-end financial statements from properties all across the nation.

“We continually strive to present the most relevant data in the most useable format. Therefore, the look and content of our report has evolved over the years,” Woodworth said. “In our 2008 Trends report, readers will notice some additional content, as well alterations to our presentation. The changes were based on feedback from our clients, as well as revisions made to revenue and expense classifications found in the 10th edition of Uniform System of Accounts for the Lodging Industry (USALI).”

In the 2008 Trends report, readers will now find certain measures presented on a dollar-per-occupied-room basis. In addition, the report contains a separate section for Suite Hotels without Food and Beverage operations. For clients who order custom Benchmarker reports, F&B sales are broken down by source of revenue, and further expense detail is provided for such expenditures as e-commerce and information systems.

“As the lodging industry evolves, PKF Hospitality Research will continue to adjust our reports to maintain their high level of value and relevance,” Woodworth concludes.