Underperforming hotels in 2018 saw less revenue and higher expenses, pushing their gross operating profits into a 3.2 percent decline.

WHILE MANY U.S. hotels saw a continued increase in occupancy in 2018, more than a third of hotels in a study by CBRE Americas Hotels Research under-performed in that metric.

Robert Mandelbaum, director of research information services at CBRE, said, while the long-run average occupancy of U.S. hotels is 62.5 percent, a significant number of properties stayed under 60 percent last year, and therefore saw less revenue than others in the study set. The under-performing hotels comprise 37.5 percent of the hotels in the study.

CBRE forecasts overall occupancy to average 66.2 percent this year. It will be the sixth consecutive year U.S hotels managed occupancy levels above the long-run average of 62.5 percent, according to CBRE.

“If you have attended any hotel investment conference or read the trade publications in the past five years, the focus of discussion has clearly been biased towards record occupancy levels, and the highest profit margins since 1960,” Mandelbaum wrote. “Very little attention has been paid to over one-third of the U.S. lodging inventory that have failed to ‘rise with the tide’. Yet, these 12,590 properties have owners that like all others, seek a return on their investment.”

The majority of the poor performing properties were over 30 years old and categorized as economy and midscale hotels. In 2017, the sample averaged 135 rooms in size, with occupancy of 49.3 percent and an ADR of $85.

The hotels in the poor performing sample recorded a RevPAR compound annual growth rate of just 0.7 percent from 2007 to 2017. The occupancy rate for the poor performers declined from 51.5 percent in 2007 to 49.3 percent in 2017, said Mandelbaum.

The ADR for the sample increased 1.1 percent concurrently, which is roughly half of the national average. From 2007 through 2017, labor costs for both poor performers and all hotels grew 1.6 percent, implying that the operators of the properties in both samples were equally adept at controlling labor costs.

In 2017, rooms revenue comprised 80.2 percent of total revenue at the average poor performing hotel. With RevPAR increasing at 0.7 percent in the past 11 years, total revenue increased by just 0.6 percent.

The poor performing hotels also suffered a 3.2 percent compound annual decline in GOP during these 11 years. Despite profit declines, the poor performing hotels achieved an average GOP margin of 27.1 percent during the past 11 years.

“While this is considerably less than the 35.8 percent margin for the overall sample, it does indicate that even poor performing hotels do generate a cash flow from operations,” Mandelbaum said. “Given the presence of a cash flow, this does allow for the possibility of a return on investment. The key is to purchase poor performing hotels at an appropriate pricing, and then finance the acquisition accordingly.”

In May, Mandelbaum wrote about the effects of cancellation fees in mitigating losses for hotels in the U.S.