Budgeting for 2007? All areas up!
Wednesday, 26th July 2006
Source : PKF Hospitality Research (PKF-HR)
US hotels are forecast to enjoy their fourth consecutive year of profit growth in 2007, by the end of 2007, the average hotel in the nation is projected to achieve an operating profit of $15,996 per available room, up 9.8 percent from the year-end estimates for 2006. This forecast is based on an analysis of the results of the 2006 edition of Trends in the Hotel Industry published by PKF Hospitality Research (PKF-HR), an affiliate of PKF Consulting.

"By year-end 2007, unit-level hotel profits will have increased 59.8 percent from the depths of the industry recession in 2003. This is comparable to 60.4 percent pace of profit growth we observed during the first four years of the recovery from the 1991 recession," said R. Mark Woodworth, president of Atlanta-based PKF-HR. "However, since the 2001 to 2003 downturn was so severe, the forecast profit level of $15,996 per available room for 2007 is just slightly above the $15,674 mark achieved in the pre-recession year of 2000."

"News of a nominal-dollar profit recovery is certainly welcome. However, in real dollars, most owners and operators will still be 21 percent behind where they were in 2000. For those property owners that have been riding the ups and downs of the lodging cycle since the year 2000, their smile will not totally return until real profits have fully recovered, which might not be until the end of this decade," Woodworth concluded.

The 2006 Trends in the Hotel Industry report marks the 70th annual review of U.S. hotel operations conducted by PKF. This year's sample draws upon year-end 2005 financial statements received from approximately 5,000 hotels across the country. Profits are defined as income after management fees, property taxes, and insurance, but before capital reserves, debt service, rent, income taxes, depreciation, and amortization

Efficient Revenue

PKF-HR is forecasting a 6.0 percent increase in total hotel revenue from 2006 to 2007. Rooms revenue is projected to grow by 4.9 percent, the result of a 0.6 percent decline in occupancy, but a 5.5 percent increase in ADR.

The catalyst of the outlook for profit growth is the efficient mix of occupancy and ADR that is driving the growth in Revenue per Available Room ('RevPAR'). Previous studies by PKF-HR have found that hotels are most profitable when ADR increases dominate RevPAR growth. "Since we are approaching the peak of the recovery cycle, it is natural to start seeing ADR growth, as opposed to occupancy gains, dominate increases in RevPAR," Woodworth noted. "In 2005, 57.5 percent of the hotels in our Trends database saw their RevPAR increase propelled by gains in ADR. This measurement is forecast to grow to 75.0 percent in 2007."

Another factor influencing the positive outlook for profits in 2007 is the forecast gains in other hotel revenues. "An additional benefit for hotels is the anticipated re-emergence of revenues from sources other than the rental of guest rooms. Historically, we have seen the growth in sales from the food, beverage, retail, recreational, and other operated departments exceed the pace of growth of rooms revenue as hotels approach peak performance," Woodworth explained. For 2007, PKF is forecasting the combined growth of revenues from other operated departments and miscellaneous sources to be 6.0 percent. This is greater than the 4.9 percent gain in rooms revenue projected for 2007.

Expenses Mute Profits

A big area of concern for hoteliers is the growth in operating expenses. For 2007, the cost of operating a U.S. hotel is forecast to increase 4.5 percent, a full one and a half percentage points above the estimated pace of inflation.

Historically, hotel operating expenses have increased greater than the pace of inflation. "Fortunately, hoteliers have been able to mask the impact of rising costs by boosting room rates and growing revenues. Since the hotel industry is so labor intensive, it has not enjoyed the benefits of automation to the same degree as other industries," Woodworth noted. From 1959 through 2005, inflation has averaged 4.2 percent per year. Concurrently, expenses have increased at a 4.5 percent annual pace, while revenues have grown at a 4.3 percent per annum.

At 44.4 percent of total operating expenses, increases in labor costs certainly influence the profitability of hotels. However, labor is a semi- variable expense and can be controlled by management to some degree. Of more concern to hotel operators are the rises in selected fixed operating costs. "Property taxes, utilities, management fees, franchise royalties, and insurance are either contractual in nature, or legislated by the local municipality. These are the expenses exhibiting the greatest growth. Unfortunately they are also the expense items that management has least control over," Woodworth said.

PKF Hospitality Research offers a variety of reports and tools that can assist hotel managers prepare their 2007 budgets. These include the annual Trends in the Hotel Industry report, Hotel Outlook forecast reports for 52 U.S. cities, and customized Benchmarker financial analyses. To view a complete listing of all the products and services of PKF-HR, please visit the firm's website at www.pkfc.com/store

PKF Hospitality Research (PKF-HR), headquartered in Atlanta, is the research affiliate of PKF Consulting, a consulting and real estate firm specializing in the hospitality industry. PKF Consulting has offices in New York, Philadelphia, Washington DC, Atlanta, Indianapolis, Houston, Dallas, Los Angeles, and San Francisco.

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