There are no participation trophies when it comes to hotel profits.
BROOMFIELD, Colorado—The 2017 HOST Almanac was released in early May, and includes same-store profit-and-loss data for approximately 5,000 hotels across the nation.
The two most significant data points were the 2.6% increase in total revenue, and the 2.4% increase in gross operating profit for 2016. In examining the data in more detail, there are some interesting year-over-year trends when looking at specific departments and line items that we collect.
- For more insight into the HOST report, view this video by STR’s VP of Consulting and Analytics Stephen Hennis. (STR is the parent company of Hotel News Now.)
Because there are no participation trophies when it comes to hotel profits, the following is the third-annual HOST winners and losers based on 2016 P&L data. As always, this is from a hotel owner’s perspective.
Inflation-adjusted revenues: Big winner
U.S. hotel revenues set a new bar in 2016, as total revenues surpassed the previous overall peak on an inflation-adjusted basis. The previous peak for inflation-adjusted revenues occurred in 2000. In addition, 2016 real profits were greater than every other year except for 2000.
Miscellaneous income: Winner
Miscellaneous income increased 8.4% in 2016, which was the greatest increase of any revenue category.
Miscellaneous income includes revenues for anything that doesn’t have any corresponding direct expenses. This includes items such as attrition fees, cancellation fees, commissions from third parties, resort fees, and any leased retail or restaurants onsite.
Resort fees and cancellation fees have been driving miscellaneous income growth the past several years.
Limited-service segment sees minimal GOP growth: Loser
Full-service hotels achieved 2.9% GOP growth in 2016 versus only 0.8% GOP growth for limited-service hotels. Profit growth in the limited-service segment was muted by significant increases in rooms expense, marketing, management fees and property taxes. However, limited-service hotels are much more efficient with a GOP margin of 47.9% in 2016, which is still much greater than the 35.5% GOP margin for full-service hotels.
Utility costs in the U.S. hotel industry decreased for the second-straight year. Utility expense is a variable expense, which typically increases along with occupancy. While occupancy increased yet again, utility costs decreased in 2016. This decrease is clearly related to lower prices in the energy sector.
Management fees: Winner or loser?
Management fees realized a 5.2% increase in 2016. Management fees include both base management fees and incentive management fees. Base management fees are typically a percentage of total revenues, so these should increase at the same rate of revenues (+2.6%).
Consequently, the large increase in management fees is an indicator that incentive management fees continue to kick in for many properties. Incentive management fees are usually zero until a certain level of profits is attained. So while this increase hurts the bottom line, it is an indicator of large profits.
Property taxes: Loser
Property taxes were one of the expenses that showed the most growth in 2016. Property taxes are considered a fixed expense, so typically they don’t show much growth year-to-year.
Of course, many hoteliers were able to appeal their property tax assessments in 2009 through 2012, when revenues were much lower than today. For many areas, reassessments only take place every two or three years. So we’re still seeing assessed values and property taxes increase significantly throughout the industry, as revenues and valuations are as high as ever.
Insurance was another interesting category this year, in that it also decreased in 2016. Insurance is also a fixed expense, so you don’t expect much year-over-year change. It decreased in 2015 as well, so this expense has been very well controlled by hoteliers in recent years.
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.