In real estate, some of the terminology used can be confusing. And because Foolish investors always strive to be in the know, we'll 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 it's expressed in dollar terms.
Now, as far as mathematical calculations go, they don't come much more straightforward than that. For example, during the second quarter, hotel real estate investment trust Host Hotels & Resorts (NYSE:HST) reported an average daily room rate (ADR) of $189.37 and an average portfolio occupancy of 76.8%, equaling a first-quarter RevPAR of $145.52. In other words, the company generated revenue of $145.52 per night for every room in its portfolio during that time. Here is RevPAR for other hotel REITS in the most recent quarter:
|
Occupancy |
ADR |
RevPAR | |
|---|---|---|---|
|
DiamondRock Hospitality (NYSE:DRH) |
76.8% |
$169.91 |
$130.44 |
|
LaSalle Hotel Properties (NYSE:LHO) |
79.2% |
$196.09 |
$155.39 |
|
Ashford Hospitality Trust (NYSE:AHT) |
77.8% |
$112.28 |
$87.38 |
|
Equity Inns (NYSE:ENN) |
75.6% |
$96.38 |
$72.87 |
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 don't 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.
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. Lead analystMathew Emmert, who recommended the stock to the newsletter, shows you how you can get paid to invest.
See what other investors are saying about real estate investment trusts and Equity Inns on the Fool discussion boards.
This article was originally published on May 11, 2006. It has been updated.
Fool sector head Joey Khattab , who updated this article, does not own shares of the companies mentioned.
