Some of the terminology used in real estate can be confusing. Because Foolish investors always strive to be in the know, we'll take a closer look here 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 a hotel's operations. It's calculated by simply multiplying the average daily room rate by the hotel's occupancy percentage, and it's expressed in dollar terms.

Mathematical calculations don't get much more straightforward than this. For example, during the first quarter of 2006, 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, marking a 13.7% increase over the previous year's first quarter.

Looking at the most recent quarter, here are RevPAR calculations for some other hotel operators:




Hospitality Properties Trust (NYSE:HPT)




Strategic Hotels (NYSE:BEE)




Starwood Hotels (NYSE:HOT)




RevPAR is an important metric because it provides a quick, simple overview of a 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 few additional expenses 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.

When evaluating a hotel company, be it an operator or a REIT, make sure to keep an eye on RevPAR, especially 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.

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This article was originally published on May 11, 2006. It has been updated by Fool sector editor Joey Khattab, who does not own any of the shares mentioned. The Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.