It’s time to throw away the Ouija boards. Apparently, predicting the performance of U.S. hotels has become easy for managers. For the third consecutive year, management’s projections of revenues, expenses, and profits contained in their budgets have been extremely accurate. In 2013, U.S. hoteliers overestimated their total property revenues by just 0.04 percent. However, by hotels accommodating fewer rooms than anticipated, the amount spent to operate hotels was 0.07 percent less than anticipated, thus allowing for profits 0.07 percent in excess of the budgeted amount. For the purpose of this analysis, profits are defined as net operating income (NOI) before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization.
As general managers, controllers, and directors of sales prepare their budgets and marketing plans for 2015, we at PKF Hospitality Research (PKF-HR) present the results of our most recent look at the budgeting accuracy of U.S. hotel operators. From PKF-HR’s Trends in the Hotel Industry database, we identified 545 operating statements that contained both actual and budgeted data for 2013. Using these statements, we compared the revenues and expenses projected for 2013 with what hotel’s actually earned and spent during the year.
Unlike in recent years, hotel managers overestimated the number of rooms they would rent in 2013. In their budgets, operators anticipated a 1.5 percent increase in occupied rooms. At the end of the year, these same hotels achieved a 1.4 percent gain in occupancy rooms. Accommodating fewer rooms led to slightly less pricing power. The hotels in our sample anticipated a 4.3 percent rise in average daily rate (ADR) in 2013 but achieved only a 4.2 percent increase.
The net result was a rooms revenue (RevPAR) shortfall of 0.24 percent. Concurrently, total hotel revenue was off budget by only 0.04 percent. This implies that the combined growth in revenue from food and beverage, other operated departments, and rentals and other income exceeded the budget. The growth in revenue sources other than the rooms department was welcome news.
Facing a revenue deficit relative to budgeted expectations, hotel managers were forced to take corrective actions in order to achieve their profit objectives. During 2013, expenses at the properties in the study sample increased by 3.9 percent. This is 0.1 percentage point less than the budgeted expense growth rate of 4.0 percent.
Fortunately for hotel operators and their owners, the 3.9 percent growth in expenses was sufficient to allow these properties to surpass their budgeted profit levels. On average, the hotels in our sample exceeded their 2013 budgeted NOI goals by 0.07 percent.
The Benefits of Accuracy
The analysis of hotel budget accuracy is consistent with PKF-HR’s self-analysis of the accuracy of our Hotel Horizons forecasts of U.S. lodging industry performance. Our accuracy assessments have consistently shown that forecasts of lodging performance are most accurate during the growth periods of the business cycle. PKF-HR’s latest forecasts call for continued real RevPAR gains through 2017. This implies that industry forecasts, as well as property-level budgets, will continue to be accurate for the foreseeable future.
For participants in the lodging industry, accurate budgets and forecasts provide predictability. For investors and lenders, predictability implies less risk. For owners, predictability leads to better management of cash flows and investments. For operators, predictability (in theory) means fewer headaches.
According to the June 2014 edition of Hotel Horizons, PKF-HR is projecting that a 7.1 percent increase in RevPAR will lead to a 6.9 percent gain in total hotel revenues for 2015. Concurrently, operating expenses are forecast to rise by 3.9 percent. This should result in a 14.1 percent improvement in profits. Given this positive market forecast, historical trends indicate that the odds are favorable for U.S. hotels to achieve their budgeted targets once again in 2015.
Robert Mandelbaum works in the Atlanta office of PKF Hospitality Research (PKF-HR). PKF-HR offers hotel managers several tools and reports to assist them in the preparation of their 2015 budgets. For more info, visit www.pkfc.com/store.
