REPORT FROM THE U.S.—The 2018 HOST Almanac, recently released by STR, parent company of HNN, summarizes our findings of national profitability for the entire United States, including same-store data for 5,200 hotels. While profitability growth continues to slow, we continued to see some growth in the industry with revenues increasing 1.9% and gross operating profit increasing 1% from the previous year.
Analyzing the data closely, we discovered some interesting trends from specific departments and line items to compile this list, from the owner’s perspective of the biggest booms and busts of hotel profitability for 2017.
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MVP: Miscellaneous income
For three years running, miscellaneous income showed the highest increase of any revenue item, growing 8.8% from the previous year. This largely has been driven by resort and cancellations fees over the past few years, and impact from the push in 2017 of many major brands to widen the cancellation window from 24 hours to 48 hours, and in some major cities or resort areas, to 72 hours. It’s important to note that miscellaneous income only contributes 2.6% of total revenues for this same-store set of hotels.
Boom
Luxury
While luxury hotels only saw slight increases in occupancy and average daily rates in 2017 from the previous year, the class did outperform all others in terms of revenues and the bottom line. Luxury reported the highest increases in room revenues (+2.9%), total revenues (+3.1%), departmental profit (2.8%), gross operating profit (+3.1%) and EBITDA (+4.1%), compared to all other classes. In 2017, luxury hotels sold seven out of 10 rooms each night at a price premium, both of which helped boost revenues for this class.
Insurance
For the third year in a row, insurance expense is once again on the decline, showing a 5.7% decrease since the previous year. This is the largest decrease we’ve seen in the past three years. Insurance is a fixed expense that hoteliers seem to have done a great job controlling; however, with the increased occurrence of natural disasters and security threats, that may change in 2018, as insurance premiums could rise.
Other operated departments
While expense growth (+3.8%) for this line item did exceed revenue growth (+2.7%), revenues have increased for the second year in a row, and expense growth was significantly lower this year compared to the last two years. Other operated departments includes revenues generated from garage and parking, guest laundry, golf and tennis, health club, spa, swimming pool, barber/beauty shop, gift shop, newsstand, etc., when operated by the hotel, but excludes casinos. The spa and parking departments accounted for most of the other operated department revenues, while golf brought in less revenues in 2017 than in 2016.
Bust
Utilities
After decreasing the previous two years, utilities expense is now on the rise, increasing 1.3% in 2017. This is no surprise, seeing as the average price of electricity and the average price of natural gas for the commercial sector both increased in 2017. Coupled with high occupancies and an increase in the amount of energy consumed, this could lead to higher utility costs becoming more of the norm.
Labor costs
Many in the industry have kept a close watch on labor costs, which continue to grow. In 2017, labor costs increased 3.2%, which for the second consecutive year exceeded revenue growth. Compared to other classes, midscale/economy hotels saw the greatest increase in labor costs (+4.2%). Labor costs will continue to be a challenge for hoteliers to manage, with minimum wage/living wage legislation, falling unemployment rates, a move to raise the overtime threshold and joint employer standards shifting and on the horizon.
Franchise fees
Franchise fees increased 4.3% over last year for the total U.S., which represents one of the largest expense increases. For full-service hotels, the increase was even higher (+6.5%), while limited-service hotels reported a 1.5% increase in this line item. Franchise fees can be one of the largest fees for hotel operators and are generally calculated based on a percentage of rooms revenue. One good piece of news here: Although this expense increase was one of the highest for the year, it is less of an increase than in the past few years.
Property taxes
Growing again (4.1% over 2016), property taxes have been living outside the norm the last three years, since this is a fixed expense and would typically not show growth year-to-year. With hotels being reassessed at higher market values, it makes sense that these expenses would continue to rise as the economy is relatively strong and consumers continue to travel. But expense growth is starting to level off, as this increase is less than what it was the previous three years.
Upscale and upper midscale
Compared to other classes, upscale and upper midscale showed the largest supply and demand growth in 2017. Upscale reported supply growth of 4.3% and demand growth of 5%, while the upper-midscale class saw supply growth of 4% and demand growth of 4.8%. However, that growth did not translate well into profits for the year. Both saw GOP decreases in 2017—the only two classes that did so—due to increases in departmental and undistributed operating expenses, particularly in rooms and marketing expenses. Both reported 0.3% declines in GOP from the previous year and saw some of the highest increases in total labor costs (+3.9% for both). Both also reported declines in earnings before interest, taxes, depreciation and amortization, with upscale class down 1.7% and upper midscale down 2.8%.
Boom or bust?
Management fees once again made a large jump in 2017, increasing 6.4% from the previous year, which is the highest increase since 2014. This line item is made up of the fees charged by management organizations for management services or supervision, and includes base and incentive fees. Typically a percentage of total revenues, they should increase around the same rate (+1.9%). However, that has not been the case the last few years, which shows incentive management fees have continued to kick in. While this consistently increasing expense is a burden to hoteliers and hurts the bottom line, the growth in this line item shows that hotels are maintaining profitable operations.
Raquel Ortiz is senior analytics manager at STR.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.