The profit outlook for full-service, resort and convention hotels is bright. However, the forecast for limited-service hotels is decidedly less sunny. The hotel industry overall is expected to see 6.5% compound annual growth in room revenue through 2016, resulting in a CAGR of 6.1% percent in total hotel revenue during the same period.
So found PKF Hospitality Research LLC, which examined the financial performance of hotels for the period 1978 through 2011, and used the data to measure the relationship between annual changes in total hotel revenue and movements in NOI for full-service, limited-service, resort and convention hotels.
For each lodging subsector, PKF-HR's Robert Mandelbaum, director of research information services, and research analyst Gary McDade calculated a "flow-multiple" that measures how much an increase or decrease in revenue was retained as profits. "Simply put," says Mandelbaum, "the flow-multiple is the ratio of year-to-year changes in profit to changes in revenue and, therefore, provides evidence of how well properties manage expenses and maximize profits."
The duo found that flow-multiples varied greatly between recessionary and boom times. As such, the two periods were analyzed separately using different flow-multiple calculation equations. For years in which hotel revenues increased, the flow multiple was calculated by dividing the profit variance by the revenue variance. The formula was a little more complex for recessionary periods; the analysts subtracted profits from revenue variance before dividing by the latter.
Between 1978 and 2011, the most consistent flows were seen in full-service and resort hotels, resulting in the greatest ability to maximize profits during the period of prosperity. In recessionary periods, the operators of these properties were able to limit NOI declines better than their counterparts in other segments.
"Historically," says Mandelbaum, "limited-service properties have achieved the highest profit margins due to reduced staffing levels and limited services and amenities. Yet these austere operations also cause these hotels to have a high percentage of fixed costs, thus limiting management's ability to cut expenses during industry recessions." Thus, limited-service hotels had the lowest negative average flow multiple (-5.81) of all segments during down times.
SOURCE: PKF Hospitality Research
Revenue decreases also greatly affected convention hotels, averaging a flow multiple of -3.34 for recessionary periods. However, Mandelbaum points out that the greatest levels of negative flow-multiples occurred during the 1980s. "In recent years, convention hotels have been able to achieve more efficient flow-multiples during periods of both revenue growth and decline," he states.
Looking ahead, PKF-HR research reports that hotels in the luxury, upper-upscale, and upscale chain-scales exceeded their long-run average occupancy levels in 2011. Their RevPAR gains are influenced by ADR growth, a factor that contributes to high flow-multiples. On the flip side, significant profit for limited-service hotels will be delayed by a year or two. "The recovery for hotels in the upper-midscale, midscale, and economy segments has lagged the upper-tier properties," says Mandelbaum. "Lagging ADR growth, combined with historically low flow-multiples, implies that profits for limited-service hotels will grow, albeit at a slower pace compared to the full-service properties."
For more insight on lodging and hospitality sector, check out GlobeSt.com's NEW columnist, HREC Investment Advisors' Geoffrey E. Davis, as he provides insights on the current state of hotel investment.
Sule Aygoren is the New York City-based Content Curator for ALM's Real Estate Media Group and Editor-in-Chief of Real Estate Forum magazine. She has been reporting on business, finance and commercial real estate since 2001, with a particular emphasis on all areas of multifamily housing. Sule has received numerous awards for her coverage of the industry, including first-place for Best Trade Magazine Report and runner-up for the James D. Carper Award for Best Entry by a Young Journalist. She is a frequent moderator and speaker at industry events, including the RealShare Conference Series, and media-related panels.
A cum laude graduate with a B.A. in Media & Society and English/Creative Writing from Hobart & William Smith Colleges, Sule currently lives in Long Island with two small tyrants that she lovingly refers to as her "children," two geckos and a seemingly endless string of goldfish.
Source: GlobeSt.com
