Budget Accuracy Benefits All

by: Robert Mandelbaum and Viet Vo

Since 2001, PKF Hospitality Research, a CBRE Company (PKF-HR), has assessed the accuracy of hotel budgets. Over the past 14 years, one trend has become very predictable. During times of industry prosperity, hotel budgets are extremely accurate.
During the depths of the 2001 and 2009 industry recessions, hotel managers underestimated their revenue levels by an average of 10.4 percent, while the profit deficits averaged 23.4 percent. Conversely, when the industry has been in periods of growth, the budget variance for revenues has been a positive 0.6 percent on average, while profit goals were exceeded by 1.4 percent. For the purpose of this analysis, profits are defined as net operating income (NOI) before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization.
This trend of budget accuracy during periods of prosperity was demonstrated once again in 2014, another strong year for U.S. hoteliers. Comparing 2014 budgeted to actual performance, hotel managers missed their total revenue and profit targets by just 0.4 percent.
The analysis of hotel budget accuracy is consistent with PKF-HR’s self-analysis of the accuracy of our Hotel Horizons® forecasts of U.S. lodging industry performance. Our accuracy assessments have consistently shown that forecasts of lodging performance are most accurate during the growth periods of the business cycle. PKF-HR’s latest forecasts call for continued real RevPAR gains through 2018. This implies that industry forecasts, as well as property-level budgets, will continue to be accurate for the foreseeable future.
For participants in the lodging industry, accurate budgets and forecasts provide predictability. For investors and lenders, predictability implies less risk. For owners, predictability leads to better management of cash flows and investments. For operators, predictability (in theory) means fewer headaches.
As general managers, controllers, and directors of sales prepare their budgets and marketing plans for 2016, we present the results of our most recent look at the budgeting accuracy of U.S. hotel operators. From PKF-HR’s Trends® in the Hotel Industry database, we identified 495 operating statements that contained both actual and budgeted data for 2014. Using these statements, we compared the revenues and expenses projected for 2014 with what was actually earned and spent during the year.


Occupancy Overcomes ADR

In 2013, while hotel managers were preparing their budgets for 2014, the U.S. lodging industry was on its way to achieving an annual occupancy level of 62.2 percent. This would be the first time the annual occupancy level would exceed the long-run average since the depths of the 2009 recession. After such a lofty accomplishment, hotel managers expected that they would be empowered to raise their room rates more aggressively in 2014. Accordingly, they budgeted for a strong 5.2 percent increase in average daily room rates (ADR) for the year. Unfortunately, ADR at the hotels in the study sample fell a little short of the budgeted mark and grew just 5.0 percent in 2014.
Missing ADR growth was somewhat perplexing given the fact that the subject hotels were able to accommodate more guests than anticipated. In 2014, occupied rooms for the sample grew by 2.0 percent. This is greater than the budgeted increase of 1.5 percent. Underestimating occupancy gains, but overestimating ADR growth, has been a consistent pattern since 2010.
The net result was a rooms revenue (RevPAR) excess of 0.3 percent compared to budget. Concurrently, total hotel revenue exceed budget by 0.4 percent. This implies that the combined growth in revenue from food and beverage, other operated departments, and rentals and other income exceeded the budget as well.


Revenue Overcomes Expenses

By accommodating more rooms than budgeted, the hotels in our sample incurred greater expense growth than planned. During 2014, expenses at the properties in the study sample increased by 4.1 percent. This is 0.5 percentage points more than the budgeted expense growth rate of 3.6 percent.
Fortunately for hotel operators, and their owners, the greater than expected revenue growth was more than sufficient to cover the expense overage and allowed these properties to surpass their budgeted profit levels. On average, the hotels in our sample actually exceeded their 2013 budgeted NOI goals by 0.5 percent.


What To Budget for 2016

According to the June 2015 edition of Hotel Horizons®, PKF-HR is projecting that a 6.8 percent increase in RevPAR will lead to a 6.6 percent gain in total hotel revenues for 2016. Concurrently, operating expenses are forecast to rise by 3.8 percent. This should result in a 12.9 percent improvement in profits.
Given this positive market forecast, historical trends indicate that the odds are favorable for U.S. hotels to achieve their budgeted targets once again in 2016.
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Robert Mandelbaum and Viet Vo work in the Atlanta office of PKF Hospitality Research, a CBRE Company (PKF-HR). PKF-HR offers hotel managers several tools and reports to assist them in the preparation of their 2016 budgets. For more information, please visit store.pkfc.com, or call (855) 223-1200. This article was published in the September 2015 edition of Lodging.