Revenue Per Available Room

What is Revenue Per Available Room (RevPAR)?

Revenue Per Available Room (RevPAR) is a key performance indicator (KPI) in the hotel industry, used to measure a hotel's ability to fill its available rooms and generate revenue from them. It is calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate, or by dividing total room revenue by the total number of available rooms in a given period. RevPAR provides a comprehensive view of a hotel's operational efficiency and financial health, making it an indispensable metric for real estate investors evaluating hotel properties.

Unlike metrics that only consider room rates or occupancy in isolation, RevPAR combines both, offering a more holistic picture of a hotel's revenue-generating capabilities. A higher RevPAR indicates better performance, suggesting that the hotel is effectively managing its pricing strategies and attracting a sufficient number of guests. For investors, understanding RevPAR is crucial for assessing potential returns, comparing properties, and making informed acquisition or disposition decisions in the hospitality sector.

How RevPAR Works: Calculation and Components

RevPAR can be calculated in two primary ways, both yielding the same result. The first method involves multiplying the Average Daily Rate (ADR) by the Occupancy Rate. The second method involves dividing the total room revenue by the total number of available rooms. Both approaches highlight the interplay between pricing and demand in determining a hotel's overall revenue efficiency.

Key Components of RevPAR

• Average Daily Rate (ADR): This is the average rental income earned from an occupied room per day. It is calculated by dividing the total room revenue by the number of rooms sold. ADR reflects the hotel's pricing strategy and its ability to command higher rates.
• Occupancy Rate: This metric represents the percentage of available rooms that were sold over a specific period. It is calculated by dividing the number of rooms sold by the total number of available rooms. Occupancy rate indicates the hotel's ability to attract guests and fill its capacity.

Step-by-Step RevPAR Calculation

To accurately calculate RevPAR, follow these steps using either the ADR and Occupancy Rate method or the total revenue and available rooms method.

1. Determine the Total Number of Available Rooms: Identify the total number of rooms a hotel has for sale during the period being analyzed. For example, a hotel with 100 rooms available for 30 days has 3,000 available room nights.
2. Calculate Total Room Revenue: Sum all revenue generated solely from room sales during the specified period. Exclude revenue from food and beverage, spa services, or other amenities.
3. Calculate the Number of Rooms Sold: Count the actual number of rooms that were occupied and paid for during the period.
4. Calculate Average Daily Rate (ADR): Divide the Total Room Revenue by the Number of Rooms Sold. For example, $150,000 revenue / 1,000 rooms sold = $150 ADR.
5. Calculate Occupancy Rate: Divide the Number of Rooms Sold by the Total Number of Available Rooms. For example, 1,000 rooms sold / 1,500 available rooms = 66.67% occupancy.
6. Calculate RevPAR: Using Method 1, multiply ADR by Occupancy Rate ($150 ADR * 0.6667 = $100 RevPAR). Using Method 2, divide Total Room Revenue by Total Available Rooms ($150,000 revenue / 1,500 available rooms = $100 RevPAR).

Real-World Examples of RevPAR in Action

Let's illustrate RevPAR with two practical scenarios for hotel investors.

Example 1: Stable Boutique Hotel

Consider a boutique hotel with 50 rooms. Over a month (30 days), it has 50 rooms * 30 days = 1,500 available room nights. In this month, the hotel sold 1,200 rooms, generating a total room revenue of $180,000.

• Number of Rooms Sold: 1,200
• Total Available Rooms: 1,500
• Total Room Revenue: $180,000

First, calculate ADR and Occupancy Rate:

• ADR = Total Room Revenue / Number of Rooms Sold = $180,000 / 1,200 = $150
• Occupancy Rate = Number of Rooms Sold / Total Available Rooms = 1,200 / 1,500 = 0.80 or 80%

Now, calculate RevPAR using both methods:

• Method 1: RevPAR = ADR * Occupancy Rate = $150 * 0.80 = $120
• Method 2: RevPAR = Total Room Revenue / Total Available Rooms = $180,000 / 1,500 = $120

Example 2: Seasonal Resort Hotel

A resort hotel with 150 rooms operates for 90 days during its peak season. Total available room nights are 150 rooms * 90 days = 13,500. During this period, it sold 10,800 rooms, generating $2,700,000 in room revenue.

• Number of Rooms Sold: 10,800
• Total Available Rooms: 13,500
• Total Room Revenue: $2,700,000

Calculate ADR and Occupancy Rate:

• ADR = $2,700,000 / 10,800 = $250
• Occupancy Rate = 10,800 / 13,500 = 0.80 or 80%

Calculate RevPAR:

• RevPAR = $250 * 0.80 = $200

Interpreting RevPAR and Its Limitations

RevPAR is a powerful metric, but its interpretation requires context. It's most valuable when compared against historical data for the same property, against competitors (competitive set or 'comp set'), or against industry benchmarks. A rising RevPAR generally indicates improved performance, while a declining trend may signal issues with pricing, marketing, or market demand.

Importance for Investors

• Performance Benchmark: RevPAR allows investors to quickly gauge a hotel's revenue-generating efficiency and compare it against similar properties or market averages.
• Valuation Tool: Higher RevPAR often translates to higher property valuations, as it indicates stronger income potential. It's a critical input for hotel valuation models.
• Operational Insight: By analyzing the components of RevPAR (ADR and Occupancy), investors can identify whether revenue growth is driven by higher prices or increased demand, informing strategic decisions.

Limitations to Consider

• Excludes Other Revenue Streams: RevPAR only considers room revenue. It does not account for income from food and beverage, meeting spaces, parking, or other ancillary services, which can be significant for full-service hotels.
• Ignores Costs: RevPAR is a top-line metric and does not factor in operational expenses. A hotel could have a high RevPAR but still be unprofitable due to high operating costs. Metrics like Gross Operating Profit Per Available Room (GOPPAR) address this limitation.
• Market Specificity: What constitutes a good RevPAR varies significantly by market, property type, and economic conditions. Direct comparisons without context can be misleading.