A Tight Ship: Hotel Operators Adapt and Survive in 2020

Money

Faced with the greatest declines in revenue since the 1930s, U.S. hotel operators in 2020 have demonstrated their ability to adapt to difficult market environments and squeeze the greatest efficiencies from their operations. Through the first seven months of 2020, U.S. hotels have been on track to achieve profit margins better than those observed at past comparable levels of depressed occupancy.

Since May of 2020, CBRE has collected monthly operating statements from a sample of 500 diverse hotels across the country. As of July 31, the year-to-date gross operating profit (GOP) margin for the sample was 13.6 percent. This was achieved at an occupancy level of 37.6 percent. Based on CBRE’s August 2020 forecast for the entirety of 2020, U.S. hotel occupancy is projected to be 39.8 percent. Using information from CBRE’s Trends in the Hotel Industry database, at 39.8 percent, hotels have historically averaged a GOP margin of just 11.6 percent.

Controlling the Controllables

What the greater-than-expected GOP margin reveals is the extent to which hotel managers have adjusted their operations and demonstrated the ability to control the variable costs for which they have the greatest influence.

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During the first seven months of 2020, operating expenses through GOP have declined by 43 percent on a per-available-room (PAR) basis compared to the same period in 2019. The 49.1 percent decline in occupancy for the sample was the primary reason for this decline as operating expenses rose 12 percent measured on a per-occupied-room (POR) basis.

Further analysis of the operated department expenses versus the undistributed department expenses reveals a more informative story, as well as the impact of fixed versus variable expenses.

Within the undistributed departments, expenses declined by 34.7 percent PAR, but rose a strong 28.2 percent POR. This typifies the fixed nature of most costs within the undistributed departments.

Within the operated departments, we can see the resourcefulness of management. Operated department expenses through the first seven months dropped by 43 percent PAR and declined by 0.4 percent POR. The decline in operated department expenses on a POR basis indicates that the reduction in costs were not just attributable to the decline in business volume, but improvements in efficiency as well. Expenses within the operated department are mostly variable in nature, thus management has more control over the direction of these costs.

The decline in operated departments costs measured on a POR basis was first observed during the month of July and was ubiquitous across all property types. On average, the entire sample of properties enjoyed a 26.8 percent decline in operated department expenses POR during July 2020. POR declines were greatest at extended-stay hotels and lowest at resorts.

By controlling their operating departments expenses, the hotels in the sample achieved an average GOP margin of 14.7 percent during the month of July. This is greater than the negative 5.7 percent GOP margin suffered during May and the positive 1.1 percent margin recorded in June. Of note is that the resort hotels in the sample achieved a GOP margin of 26.4 percent during July of 2020 at an occupancy level of 31.7 percent. This is greater than the 25.9 percent GOP margin that these same resorts earned in July of 2019 at an occupancy level of 76.4 percent. Clearly, U.S. hotel operators are adapting to the reduced levels of revenue, upward pressure on cleaning related costs, and downward benefits of reduced levels of services and amenities.

Efficient, Yet Unprofitable

Of course, the greater levels of operating efficiency do not provide enough joy to overcome the pain of an average 2020 year-to-date decline in GOP in excess of 80 percent. For owners, earnings before interest, taxes, depreciation, and amortization have dropped by 111 percent through July of 2020, thus implying a negative cash flow before debt service for the average hotel in the sample.

Per the August 2020 edition of CBRE’s Hotel Horizons forecast report, CBRE projects U.S. occupancy levels during the second half of 2020 will be slightly less than what was achieved during the first half of the year. This intensifies the need to continue to suppress operating expenses. Fortunately, as we have observed during the first seven months of 2020, as well as during the past two recessions, cost control measures have tended to linger after periods of depressed performance. Lessons are always learned during difficult times.

 


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