Finance & DevelopmentMarket ReportsThe Top and Bottom Lines

The Top and Bottom Lines

Developers are attracted to extended-stay (ES) hotels because of the relative simplicity of their operations and their high profit margins. Low levels of staffing combined with limited offerings of services and amenities allow for a significant portion of topline revenues to extend to the bottom line. Before the recession, properties in this segment would achieve net operating income ratios to revenue between 45 and 50 percent. During the depths of the recession, profit margins never dropped below 25 percent and are now on their way back to the 40 percent mark. (Note: for the purposes of this article, profits are defined as net operating income before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization.)

To gain a better understanding of the financial performance of extended-stay hotels, we analyzed operating data from a same-store sample of 278 upper-tier (think Residence Inn, Homewood Suites, or Staybridge Suites) and 125 lower-tier (such as Candlewood Suites, TownePlace Suites, or MainStay Suites) extended-stay properties that participated in our Trends in the Hotel Industry survey each year from 2007 through 2011. We made our 2012 estimates based on preliminary data from our 2013 Trends survey, though we excluded lower-tier ES properties for confidentiality reasons.

When we compared the revenue per available room (RevPAR) levels of extended-stay properties to a sample of all hotels in the United States, we found extended stay to be less than the blended average. This is primarily because of the low average daily rates (ADRs) achieved by these properties as a result of all the rooms sold at discounted weekly rates. Over the six-year period analyzed, the RevPAR levels of the mid-tier ES properties averaged 50 percent of the RevPAR achieved by all hotels, while the upper-tier ES properties averaged 88 percent. Indicative of the limited levels of amenities and services offered at extended-stay hotels, nearly 98 percent of the extended-stay category’s total revenue comes from the rental of rooms.

In general, extended-stay hotel RevPAR levels moved in sync with the rest of the industry during the recent recession (2008–2009) and recovery (2010–2011). However, we did observe distinct differences between the annual changes in RevPAR experienced by mid-tier and upper-tier ES properties during these periods. In 2009, RevPAR levels at the mid-tier ES hotels fell by 22 percent, which was more than both the declines suffered by upper-tier ES properties (–16 percent) and by the U.S. hotel average (–19 percent). Conversely, during the recovery, the RevPAR rebound was greater for the mid-tier ES properties (9 percent) compared to the upper-tier ES sample (5.5 percent) and all hotels (6.9 percent). This indicates a greater degree of volatility for the mid-tier ES lodgings, and the relative consistency of upper-tier ES properties, during changes in the economic cycle.

Low Levels Of Labor

The primary reason for the high profit margins achieved by extended-stay hotels is the low level of staffing required. At the typical hotel in our sample, the combined expenditures for salaries, wages, and benefits equaled 45.5 percent of total operating expenses during the period 2007 through 2012F. For the mid-tier ES hotels, labor costs averaged just 36.9 percent of total expenses. At 36.3 percent, the ratio was even lower at the upper-tier ES properties.

When we analyzed labor costs as a percent to total revenue, we learned something about the ability of extended-stay managers to control labor. During the six-year period of analysis, labor costs at the mid-tier ES properties ranged from a low of 20.9 percent of total revenue in 2007 to a high of 27.4 percent in 2011. For the upper-tier ES sample, the same labor cost ratio ranged from 20.8 percent (2012F) to 24 percent (2009).

Upper-tier ES properties have greater levels of staffing because they provide more frequent housekeeping services and a higher degree of complimentary food and beverage products. The relatively tight range of labor cost ratios at the upper-tier ES hotels implies that management at these hotels has a greater ability to adjust staffing levels as revenue fluctuates.

On the other hand, staffing levels are so minimal at mid-tier hotels that it can be a challenge for management to make any adjustments at all. Accordingly, the labor cost ratio at these properties rises as revenues decline but falls during periods of prosperity.

While total revenue at extended-stay hotels is 48 percent below the average for all hotels in the Trends sample, extended-stay profits are just 25 percent of the overall mark. From 2007 through 2012F, mid-tier ES hotels achieved profits 56 percent less than the overall average of the sample. Upper-tier ES profits were off by just 13 percent during the same period.

As with revenues, we find greater levels of volatility in the profits of mid-tier ES hotels versus the upper-tier ES properties. Mid-tier ES hotels saw their profits decline to a greater degree during the recession but bounce back stronger during the recovery.

Owners of both mid-tier and upper-tier ES hotels benefit from the profit efficiencies of this property type. For owners in the mid-tier extended-stay segment, revenues and profits are more volatile, while upper-tier extended-stay properties are regular in their performance.

Robert Mandelbaum is the director of Research Information Services with PKF Hospitality Research LLC (