In real estate, some of the terminology used can be confusing. And because Foolish investors always strive to be in the know, we will take a closer look at the primary operating metric for hotel companies: revenue per available room, or RevPAR.
RevPAR is an easily calculated number that provides a wealth of information about the operations of a hotel. It's calculated by simply multiplying the average daily room rate by the hotel's occupancy percentage, and is expressed in dollar terms.
Now as far as mathematical calculations go, they don't come much more straightforward than that. For example, during the first quarter, hotel real estate investment trust LaSalle Hotel Properties (NYSE: LHO ) reported an average daily room rate (ADR) of $170.76 and an average portfolio occupancy of 68.1%, equaling a first-quarter RevPAR of $116.33. In other words, the company generated revenue of $116.33 per night for every room in its portfolio during that time, which was a 13.7% increase over last year's first quarter.
RevPAR is an important metric because it provides a quick, simple overview of the company's top-line operations in a form that incorporates both room rates and occupancy. By checking trends in a company's RevPAR, an investor can see where a company's operations are headed. The metric also allows comparisons within a company's portfolio, on either a brand-specific or a geographic basis.
RevPAR stats also enable investors to make comparisons among different companies, to see which ones are generating the best growth from their property.
As you can see from the equation, you can grow RevPAR by boosting either occupancy or room rates. However, while increases in either of these measures will boost a company's RevPAR, they do not affect the bottom line equally.
Growth in average daily room rates will always have a more significant impact on profits because there are few additional expenses that are related to increases in ADR. While manager bonuses and tax expenses may be increased, the vast majority of increases in room rates fall directly to the bottom line. Increases in occupancy, on the other hand, come with additional costs, such as housekeeping, laundry, and utility expenses.
For a real-life comparison, we turn to Equity Inns (NYSE: ENN ) and WinstonHotels (NYSE: WXH ) . During the first quarter, Equity Inns and Winston Hotels reported RevPAR gains of 10.2% and 10.4%, respectively. Upon examining those gains, we see that Winston's occupancy increased 2.3 percentage points and its ADR rose 6.7%, while Equity Inns' occupancy increased 1.3 percentage points and its ADR rose 8.1%. So while Winston posted a slightly higher RevPAR percentage gain, the increase for Motley Fool Income Investor pick Equity Inns was likely a more profitable one because of the larger increase in ADR.
So, when evaluating a hotel company, be it an operator or a REIT, make sure to keep an eye on RevPAR, and in particular the trends in its recent results. Compare the company's RevPAR growth with that of its competitors, both on an absolute basis and in how the RevPAR numbers were generated. And rest easy knowing that you've got a handle on the company's top-line operations.
For related Foolishness:
You can learn more about Equity Inns in Motley Fool Income Investor. Mathew Emmert recommended it, and he shows you how you can get paid to invest.
Fool contributor Sean P. Smith is a freelance writer and analyst living in St. Louis. At the time of publication he owned shares of Equity Inns, but none of the other companies mentioned.