As 2010 comes to a close, hotel owners and operators start to focus on the upcoming year and ask the question, “How much money will we make in 2011?” Based on the September 2010 edition of Hotel Horizons®, Colliers PKF Hospitality Research (PKF-HR) is forecasting occupancy for the overall U.S. lodging industry to grow 2.1 percent in 2011, along with a 3.8 percent gain in average daily rate (ADR). The net result is a 5.9 percent increase in RevPAR that should yield a 10.8 percent lift in the net operating income (NOI) of the average U.S. hotel.
To provide some more refined guidance regarding the potential NOI growth U.S. hotel owners and managers can expect in 2011, we took a look back at changes in hotel profitability from 2003 to 2004. This time period was selected because like 2011, the year 2004 is the third year out from the start of an industry recession and the first year of expected significant NOI growth.
Our analysis consisted of a review of the 2004 operating statements in our Trends® in the Hotel Industry database. In aggregate, these properties achieved a 7.8 percent increase in RevPAR from 2003 to 2004, and a 12.0 percent gain in NOI.
As expected, there is a relationship between the magnitude of change in RevPAR and the amount of change in NOI. On average, unit-level profits changed at a factor of 1.6 relative to the change in RevPAR. In other words, NOI changed 1.6 percentage points for every 1.0 percentage point change in RevPAR.
When analyzing the data by levels of RevPAR growth, we see that the NOI to RevPAR ratio increases as the magnitude of the RevPAR growth rises.
Hotels that achieved a RevPAR increase between 5 and 10 percent during the study period saw their profits increase by an average 11.6 percent (a 1.5 factor). For hotels that enjoyed RevPAR growth greater than 20 percent, their profits grew on average a staggering 69.3 percent (a 2.5 factor).
The only band to experience an inverted NOI to RevPAR relationship was hotels that achieved a RevPAR increase between 0 and 5 percent. On average, hotels in this group achieved a RevPAR increase of 2.8 percent from 2003 to 2004, but saw their profits rise just 1.7 percent (a factor of 0.6).
When forecasting NOI, PKF-HR looks not only at the magnitude of the projected change in RevPAR, but the mix of the components that drive room sales. In general, RevPAR growth that is driven mostly by gains in occupancy will result in less of a positive impact on the bottom line as compared to RevPAR growth driven primarily by an increase in ADR. The reason is the incremental variable costs associated with servicing the additional occupied rooms.
PKF-HR examined the performance of the same 2004 operating statements in order to determine the optimum mix of occupancy and ADR that maximized profit growth that year. Once again we divided the hotels in the sample into groupings based on the occupancy and ADR contribution to the change in RevPAR. For example, the 7.8 percent RevPAR increase achieved by the entire study group was driven by a 4.1 percent increase in occupancy (53 percent contribution) and a 3.7 percent gain in ADR (47 percent contribution).
The greatest growth in NOI was achieved by the group of hotels where ADR was the primary driver of RevPAR growth (between 50 and 75 percent contribution) and occupancy contributed between 25 and 50 percent. On average, hotels in this group enjoyed a 22.5 percent increase in profits. From 2003 to 2004, these properties averaged a RevPAR increase of 12.0 percent, driven by an occupancy contribution of 36 percent and an ADR contribution of 64 percent.
It is interesting to note that the lowest gains in NOI were achieved by groups of hotels that on average saw either a decline in occupancy or ADR for the year. In other words, RevPAR growth driven exclusively by increases in just occupancy or just ADR has a comparatively low impact on the bottom line.
While it is obvious that hotels with the strongest increases in RevPAR will result in the largest gains in profits, the influence of occupancy and ADR growth will dictate the efficiency to which top line dollars will flow to the bottom line. It is tempting for hotel managers to push ADR at the expense of occupancy. However, there does appear to be a tipping point when the additional guest count does outweigh the incremental variable costs and helps to boost the bottom line. Each hotel must find their own tipping point and proper mix of RevPAR drivers to maximize their 2011 profits.
Robert Mandelbaum is the director of research information services for Colliers PKF Hospitality Research. For more information on the benchmarking and forecast reports PKF-HR offers, visit www.pkfc.com/store.