PKF Reports - Profits Decline Record 35.4 Percent

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. May 04, 2010

MAY 3, 2010 - PKF According to survey results in the recently released Trends® in the Hotel Industry report issued by PKF Hospitality Research (PKF-HR), the average U.S. hotel suffered a 35.4 decline in profits in 2009. This is the greatest annual fall-off in the bottom line since PKF-HR began tracking the industry in the 1930s.

“Declines in revenues make the headlines, but the bottom line is where the rubber meets the road for owners,” said R. Mark Woodworth, president of PKF-HR. “The 35.4 percent decline in profits realized in 2009 has severely stressed borrower/lender relationships throughout the country as delinquencies, defaults, foreclosures, and bankruptcies continue to escalate.”

“2009 was such a singular year in terms of hotel expenses and profits,” he added. “As the industry approaches a turn, all parties with a vested interest in the bottom line should be measuring their performance against that of comparable facilities to insure that optimum operational efficiency is being realized. Because of these extraordinary times, the detailed 2010 Trends® data is more valuable than ever.”

Each year PKF-HR collects financial statements from thousands of hotel owners and operators across the U.S. for its annual Trends® in the Hotel Industry report. The 2010 Trends® report marks the 74th edition of this publication and provides industry benchmarks for 2009 unit-level revenues, expenses, and profits. For the purpose of this report, profits are defined as net operating income (NOI) before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization.

Everyone Suffered
Virtually all hotels in the Trends® sample suffered a decline in revenues and profits in 2009. Ninety-five percent of the properties experienced a decline in rooms revenue and total hotel revenue from 2008 to 2009. “Of note is the fact that 81.5 percent of the sample rented fewer guest rooms during the year, implying that the practice of discounting room rates was the main culprit that led to the decline in revenue at most hotels,” Woodworth noted. On average, the properties in the Trends® sample experienced a 7.5 percent decline in occupancy and a12.1 percent decline in average daily rate (ADR).

With ADR driving the declines in revenue, it is not surprising that approximately 90 percent (91.4 percent) of the hotels in the survey sample saw their profits decline from 2008 to 2009. For reference purposes, 74.9 percent of the Trends® sample reported a decline in NOI during the 2001 industry recession. Profit declines in 2009 were reported for all property types. Resort (-37.8%), convention (-37.5%), and full-service (-37.4%) hotels endured the greatest declines in profits. Those bearing the least loss in the bottom line were suite hotels with F&B (-22.8%), suite hotels without F&B (-25.1%), and limited-service properties (-29.7%).

Expenses Cut
“Consistent with past practices, managers were able to cut the operating expenses at their properties by an average of 11.8 percent. Unfortunately, this fell well short of the average revenue decline of 18.5 percent,” Woodworth observed.

Management was able to affect expense reductions in the areas over which they have the greatest control. On average, operated department costs dropped 12.9 percent in 2009, while undistributed expenses declined 11.1 percent. Within most of these departments, labor costs were the greatest single expense item. A combination of layoffs, reduced hours, furloughs, and salary, wage, and benefits reductions resulted in a decline of 10.4 percent in total labor costs from 2008 to 2009.

Among those costs that are more fixed and contractual in nature, insurance expense fell 4.3 percent, but property taxes increased 3.6 percent. “It is expected that the lower profit achieved in 2009 and associated decline in asset value will result in many more successful real property tax appeals in 2010,” Woodworth said.

Because of the 18.5 percent decline in total revenue, the fees paid to management companies dropped 25.4 percent. With the decline in management fees exceeding the decline in revenue, it is clear that operators did not garner the incentives fees they earned in 2008.

Everyone Can Learn
“Now that the dust has settled, owners should take the time to evaluate how their property managers responded to the adverse operating conditions in 2009, and determine what lessons can be applied in the future,” Woodworth recommended. “What impact did rate cuts have on profits? Was labor adjusted to match business volume? Were superfluous expenses cut, and can these cuts be retained? Yes, 2009 was a tough year. However, with proper benchmarking against industry standards, it can all be put in perspective.”

As noted, the unprecedented decline in profits has resulted in numerous bankruptcies and foreclosures. Many banks and other debtors find themselves in the undesirable position of being a hotel owner. “Unwilling owners need to gain a thorough understanding of the potential cash flows they can expect from their hotel assets, and the impact this has on value,” Woodworth advised. “I'm sure their bankruptcy attorneys can also benefit from 2009 financial benchmarks as well.”

Besides owners, other industry constituent groups have an interest in how much hotel expenses and profits declined in 2009. Industry vendors can monitor their sales volumes against actual changes in hotel expenditures in 2009. Municipal appraisers can use the change in profits data presented in the Trends® report to adjust the assessed value of hotels in their jurisdiction.

Tough In 2010
The March 2010 edition of Hotel Horizons® published by PKR-HR forecast a 1.1 percent annual decline in RevPAR for 2010. Typical of historical industry recoveries, occupancy is projected to recover first (+0.3%), while ADR growth will continue to lag (-1.4%). “Hotel operators will find it more difficult to cut costs as the industry recession lingers. In addition, PKF-HR research has found that hotel expenses frequently increase as the markets begin to turn and managers have to reinstate services, amenities, and staffing because of increased guest counts. These factors all contribute to PKF-HR's forecast of a 5.3 percent drop in unit-level NOI in 2010,” Woodworth concluded.