Miscellaneous, ancillary revenue reign over 2018 P&L
 
Miscellaneous, ancillary revenue reign over 2018 P&L
03 JUNE 2019 7:57 AM

Research from STR’s HOST Almanac reveals the winners and losers in terms of total profitability for the U.S. hotel industry in 2018.

BROOMFIELD, Colorado—The 2019 HOST Almanac, released by STR, parent company of HNN, shows that while U.S. hotel industry profitability continues to slow, growth in rate helped boost total revenues (+2.9%) and gross operating profit (+2.8%) in 2018.

Every year in analyzing the data, STR uncovers some interesting trends from specific departments and line items. Here are the 2018 booms and busts of hotel profitability from the owner’s perspective.

Reigning MVP: Miscellaneous income
Much like Peyton Manning, Barry Bonds or Kareem Abdul-Jabbar in the pro sports world, miscellaneous income is in the record books as the most valuable player of hotel profitability for several years running. Miscellaneous income contributed the largest revenue increase for U.S. hotels for the fifth year in a row, with 11.4% year-over-year growth. On average in 2018, hotels received $211 more from miscellaneous income on a per-available-room basis.

Since this income has no direct expense, its popularity has grown significantly. Initially the fees were for resort-type properties, but the pure revenue boost has encouraged other types of hotels to add the fees and name them as destination, amenity, urban or facility fees. As more and more hotels implement these fees, we can expect the growth of this revenue steam to continue. However the more money made here, the more visible it becomes, and others might start to wonder if they are missing out on their cut of the revenues (i.e. online travel agencies and government agencies).

Booms
Food, beverage and other operated revenue
With expenses consistently increasing, hoteliers have focused on driving rate through ancillary revenues. Growth in group demand and rates through 2018 boosted F&B and other operated department revenues. Food-and-beverage revenue was up 2.9%, outpacing F&B expenses, which only grew 2.3%. Other operated department revenues experienced even higher growth, rising 5.2%, while expenses in this category increased 3.8%. With revenues outpacing expenses, these two departments saw profits increase on a per-available-room basis of 4.2% and 9.8% respectively. With group growth rates slowing thus far into 2019, it will be interesting to see if hotels will be able to continue to drive revenue from these departments.

Luxury class
Once again, the luxury class outpaced all other classes in terms of profit growth. On a same-store basis, total revenue per-available-room for the luxury class increased 4.1% in 2018. Total department profits for the class were up 4.9% from the previous year, which led to an overall gross operating profit per-available-room of 5.3%. The luxury class also did a better job at controlling increases in labor expenses compared to other classes, with labor expenses growing 4.1%, less than both the midscale/economy and upscale classes.

Secondary and tertiary markets
Over the last few years, secondary and tertiary markets have been dominating the top 10 markets in terms of revenue per-available-room and gross operating profit per-available-room growth, and even out-performing top 25 markets. Investors and lenders have been casting wider nets into secondary and tertiary markets in recent years and have been able to drive rates and occupancies in these markets. Those growth rates have continued to remain strong, especially in oil and gas markets. This year, the top market for both RevPAR and GOPPAR was the Texas West market, which saw a 21.5% growth in RevPAR and a 40.8% growth in GOPPAR—the highest GOPPAR growth we have seen in five years. A few other top secondary and tertiary markets include Texas North, Oklahoma Area, Florida Central, North Dakota and New Mexico North.

Busts
Insurance
Over the last two years, insurance costs have been surprisingly decreasing, but as predicted, that all changed in 2018. In 2018, insurance costs increased 5.8% on a same-store basis, which was the largest increase of any expense. For limited-service hotels, the growth was even higher, increasing 13% versus only 4% growth for full-service hotels, although full-service hotels have four times the insurance costs of limited-service hotels. Resort hotels saw the largest insurance expense growth of any other segment with an increase of 13%.

Since resort hotels tend to be in coastal or scenic areas, they tend to be at a higher risk of natural threats and are thus seeing the largest growth in insurance costs. Furthermore, the growth in costs suggests that insurance companies are raising premiums in general as a way to protect themselves from any future payouts related to natural disasters and security threats.

Labor
Labor continues to be a closely watched expense as these costs continue to rise. In 2018, total lodging industry labor costs hit an estimated $70 billion, with a third of these costs coming from top 10 markets and 80% of costs coming from non-union hotels. Independents are seeing the bulk of labor expenses with an estimated cost of $25 billion, more than the luxury and upper upscale chain scales combined. Full-service hotels continue to see higher labor costs than limited-service hotels, with the median labor costs as a percentage of total revenues at 30% for full-service versus only 22% for limited-service hotels. Looking at same-store growth rates, labor grew 4% in 2018 compared to 2017, and the midscale/economy class segment saw the highest growth of 6.7%, which suggests these hotels have to offer higher wages as a means of enticing hourly workers.

A&G, Marketing, & POM
Undistributed operating expenses play a vital role in the operation of a hotel and are overhead expenses needed to support the overall hotel. Administrative and general expenses increased 4.2%, marketing costs (excluding franchise fees) increased 3%, and property operations and maintenance costs grew 3.6% year over year. These departments saw much stronger growth in 2018 than the previous year. The largest expense increases within these departments were due to labor costs. The department that saw the largest increase in these two categories was the A&G department, which saw salaries and wages increase 5.1% and payroll taxes and benefits increase 7.6% on a same-store per-available-room basis. These increases show that higher hourly pay isn’t the only factor playing a role in the total increase in labor costs; salaried employees, payroll taxes and employee benefits are costs also adding to the dilemma.

The 2019 HOST Almanac is available for purchase from STR.

Raquel Ortiz is assistant director of financial performance 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.

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