If hotels like presidents had approval ratings, then properties in the District of Columbia, Maryland and Virginia would be in search of a needed bounce.
That’s according to data from HotStats, which showed that hotel performance—particularly on a profit basis—in the DMV has been negative to flat over the past 12 months and more, a disconcerting trend for owners and operators that highlights the importance of operational efficiency.
Meanwhile, the broader U.S. in the past 12 months has displayed a month-over-month uptick both in occupancy, average daily rate and revenue per available room, equating into a trailing 12-month RevPAR increase of 3.5 percent, driven primarily by ADR growth of 2.9 percent. TRevPAR, which takes into account a hotel’s total revenue on an available room basis, saw a 24-month moving average surge of 6.6 percent between June 2016 and June 2018. However, and concurrently, the uptick was coupled with a flattish to a depressed GOP margin, as expense creep weighed heavily on hoteliers’ ability to funnel revenue to the bottom line.
The numbers specific to Maryland and Virginia were not as rosy or upbeat. In fact, the DMV as a whole has experienced some of the largest drops in occupancy and RevPAR in the U.S. over the course of the past 12 months.
Maryland hotels had a 24-month moving average decline in TRevPAR of 1.5 percent between June 2016 and June 2018, coupled with a decline in GOP margin of 0.8 percentage points. Focusing on the rooms department, hotels have dealt with drops in net RevPAR and rooms profit conversion, -$3.18 and -1.6 percentage points between June 2016 and June 2018, respectively.
In Virginia, the story is slightly better. While January 2018 showed a year-over-year precipitous drop in occupancy and ADR, a result of a tough comp versus January 2017 and the Presidential Inauguration and the Women’s March, Virginia, notwithstanding, had a positive to middling year. Overall, the state showed flattish RevPAR growth of 0.3 percent with a 1.1-percentage-points decline in occupancy and a 1.7-percent increase in ADR.
Meanwhile, TRevPAR on a 24-month moving average grew 4.7 percent between June 2016 and June 2018, combined with a slight increase in GOP margin of 0.8 percentage points. For comparison, GOP margin in June 2016 was 36.1 percent; in June 2018 it was 36.8 percent.
No different than other states in the U.S., D.C., Maryland and Virginia are all contending with ballooning expenses that are having a negative bottom-line impact. No place is this more evident than in payroll, which as a percentage of total revenue has increased in the U.S. 1.8 percentage points from June 2016 to June 2018 to 35.9 percent. Payroll increases have been even higher in Maryland and Virginia at +2.0 percentage points and +1.1 percentage points, respectively, over the same time period.
With unemployment at record lows, competing for talent has become that more difficult. No longer are hotels only competing against themselves for employees, they are competing against adjacent industries. Consider retail: In January, Walmart, on the back of U.S. tax reform, raised its hourly minimum wage to $11. In March, Target raised its minimum wage for workers for the second time in less than a year, hiking it to $12 per hour. The big-box retailer said it planned to further raise starting hourly pay to $15 an hour by 2020. In the U.S., labor costs as a percentage of total cost comes to 56.4 percent, according to HotStats data.
The bottom line: While total revenue has shown growth over the last 24 months in the U.S., profit conversion has remained unmoved. Generally, hotel budgets include 3-percent expense growth. Therefore, if a hotel projects less than 3-percent TRevPAR or revenue growth, then the budget will show profit-margin erosion.
Aside from fixed costs, there are measures hotel operators can take to drive each incremental dollar earned to the bottom line or save when revenue decreases relative to budget. How effectively an operator can flex/flow revenue will decide their profitability fate.