In Trump economy, hotel profits up, but margins tight

San Francisco hotels have some of the highest hotel labor costs in the U.S. Photo credit: Sean Pavone (San Francisco skyline)

The Twitter bursts and tabloid bedlam that have been emblematic so far of the Donald Trump presidency are showing no signs of tripping up the hotel industry. Turns out, a Trump economy is having a propitious impact on hotel industry revenues, though profit margins continue to be a drag.

A new report from HotStats on U.S. hotel performance paints a healthy picture for full-service hotels, which recorded a 2.9-percent increase in profit per room in 2017 to $93.86. The report notes that growth came on the back of all revenue departments resulting in a 2.5-percent increase in total revenue per available room to $250.50.

Still, there is not too much on the bone for hotel owners. Margins continue to be slight showing a year-over-year 0.2-percentage-point uptick in 2017 to 37.5 percent. The single biggest culprit for the thin increase is payroll costs, noted Pablo Alonso, CEO of HotStats. "Revenues are going up and a huge amount of work is being done in terms of driving operational efficiencies," he said. "The main issue remains around the tremendous increase on payroll costs," which was up 1.7 percentage points in 2017.

In breaking down the room department versus the food-and-beverage department, labor is the largest cost, but more pronounced on F&B. Labor costs as a percentage of rooms revenue amounted to 16.2 percent in 2017, while labor costs as a percentage of total F&B revenue were 46.8 percent, a 3.8-percent jump over 2016.

"All efforts operators are making to add value to the owner and drive efficiencies are just basically to contain the raises in payroll costs, rather than to deliver additional value to those assets, allowing for margins to remain flat," Alonso continued.

Out of five cities that HotStats detailed, only Washington, D.C., on the back of the inauguration and the Women's March, saw palpable margin expansion of 1.3 percentage points, to 36.9 percent. Margins in Houston, New York and San Diego were all flat, while margins in San Francisco were down 2 percentage points to 36 percent. The city saw dips in most key performance indicators. RevPAR dropped 3.4 percent and total GOPPAR was down 6.8 percent to $112.58. Added supply and ongoing work on the Moscone Center were two variables identified to explain the relative dismal numbers for the city's hotel performance. Labor costs were also 41.2 percent of total revenue, higher than the national average and only slightly lower than New York, at 46.5 percent.


Rob Hays, co-president and chief strategy officer of Ashford Inc., which serves as the advisor to two REITs, Ashford Hospitality Trust and Ashford Hospitality Prime, after perusing the data was not shocked by the findings. "I didn't see anything out of the ordinary," he said, a popular refrain from executives in the hospitality industry who are now seemingly jaded or used to strong revenues mixed with high costs. "We are on the bullish side all things being equal. But there are still some question marks of exactly what that looks like," he said.

Hays pointed to positivity in the hotel market based on strong consumer spending, a robust stock market, home prices and the tax cuts. And while he argues that the consumer side has been strong, the reverse is true for corporations, specifically as it relates to corporate travel and spend. "The corporate side has been soft, particularly corporate group," he said. "The hope was that the recent tax cuts would be an impetus for some of these companies to start spending."

And while sentiment and confidence levels amongst companies are higher post the Trump tax cuts, it has not, according to Hays, converted into more travel and higher spend. "It hasn't translated materially yet into the outlook, or at least on the books of the broader industry," he said. "So when you talk about the hotel outlook, the U.S. hotel market's positive, but there is still a lot to be proven out."

Ashford's REITs invest primarily in full-service, upper-upscale to luxury hotels, and currently has a portfolio of around 140 hotels. Labor, then, is always a pressing issue, and while payroll costs are escalating, Hays sees it more of a turnover problem than an expense concern. "The best ways to keep labor costs down is to avoid turnover," Hays said. 

In order to limit employees leaving hotels, Ashford has tried to create an environment in order to make people less likely to leave because they appreciate the culture involved.

That doesn't always work, however, especially in an industry as itinerant as hospitality. "There are some markets where there is some wage pressure," Hays said. "In those, you have to be competitive where you need to be competitive, but you also have to be prudent." Hays mentioned ways to stay competitive on the labor front, including sharing costs across multiple properties.

According to HotStats, U.S. RevPAR climbed 2 percent in 2017 and forecasts for 2018 and 2019, among various forecasting agencies, is close to or around 2 percent. That makes keeping up with costs a difficult proposition for owners and operators. "Because we're in a 1- to 3-percent RevPAR environment, it is mathematically difficult to continue to maintain, much less expand margins, when you've got 2- to 4-percent cost creep."

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Costs aside, Ashford maintains a mantra of 50 percent or bust. A 50 percent flow-through rule meaning that for every dollar a hotel takes in, 50 cents should flow down to the bottom line. It's a measure of how Ashford's asset managers and general managers are compensated. (About two-thirds of Ashford's hotels are managed by Remington. Earlier this week, Ashford acquired Remington Project Management, which is owned by Ashford's CEO and his father.)

"We've always found that it's hard to manage to a certain margin," Hays said. "What's easier, from an operational standpoint, is to say, focus on trying to hit 50-percent flows."

City specific, Hays focuses on Houston, a city that is make or break on the back of energy. While 2017 was actually good for Ashford's hotels there, a credit to the Super Bowl and, on a sombe note, displacement caused by Hurricane Harvey, 2018 could be more challenging. 

"Energy went through a downdraft in 2015 and 2016, with oil prices dropping as much as they did," Hays said. "Now, the dollar's been a little bit weaker and oil prices have risen. They haven't been skyrocketing, but Houston is gonna be driven by energy. And when things are good, Houston can crank. And when things are bad, it shuts off."

Hays places Houston in a basket with cities such as Dallas, Atlanta, Denver and Nashville, "where developers will build even if it doesn't make sense."