Average Daily Rate (ADR)

• The Bottom Line: Average Daily Rate (ADR) is the hotel industry's “price tag”—it measures the average price paid for a room on any given night, serving as a powerful indicator of a hotel's brand strength and pricing power.
• Key Takeaways:
• What it is: A simple calculation of total room revenue divided by the total number of rooms sold.
• Why it matters: It directly reflects a company's ability to command high prices, which is a core component of a durable economic_moat. A rising ADR often leads to higher profitability.
• How to use it: Analyze its trend over many years and compare it to direct competitors in the same market segment to gauge a hotel's competitive position and operational health.

Imagine you run a popular apple orchard stand. At the end of the day, you've sold 100 apples and your cash register shows $200. You didn't sell every apple for exactly $2; some were premium Honeycrisps that went for $3, while others were slightly bruised Galas you sold for $1 to clear them out. Your average price per apple was $2 ($200 / 100 apples). That, in a nutshell, is the Average Daily Rate (ADR). In the hotel world, ADR is a crucial metric that tells you the average rental income per occupied room for a given period. It's the most common yardstick for measuring how effectively a hotel is pricing its rooms. It answers the simple question: “On average, how much are we getting for each room we sell?” It's important to know what ADR isn't. It is a pure measure of room price. It deliberately excludes all other revenue sources. The money a guest spends at the hotel bar, the five-star restaurant, the spa, or on parking doesn't count towards ADR. This laser focus is its strength; it isolates the core pricing power of the hotel's primary product: the room itself. For investors analyzing hotel companies like Marriott, Hilton, or Hyatt, ADR is one of the first numbers they look at to understand the health and premium nature of the business.

“The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business.” - Warren Buffett

While Buffett wasn't speaking specifically about ADR, the metric is a direct, quantifiable measure of the very pricing power he values so highly.

A value investor seeks to buy wonderful businesses at fair prices. ADR is a fantastic tool for identifying those “wonderful businesses” in the hospitality sector. It helps you look past the stock price fluctuations and focus on the underlying fundamentals of the company.

• A Window into Pricing Power and Economic Moats: A consistently high and/or rising ADR is a clear sign of a strong economic_moat. It tells you that customers are willing to pay a premium for the hotel's brand, location, service, or experience. A luxury hotel like The Ritz-Carlton can command a $700 ADR because its brand signifies quality and prestige. A generic motel off the highway cannot. This sustained ability to charge more than competitors is the essence of a durable competitive advantage.
• Indicator of Brand Health: A brand is an intangible asset, but its strength is reflected in tangible numbers. If a hotel chain successfully builds a beloved brand, it will show up in a superior ADR compared to its peers. If you see a company's ADR stagnating or falling while its competitors' rates are rising, it could be an early warning sign that its brand is tarnishing or that it's losing its competitive edge.
• Driver of Profitability: All else being equal, a higher ADR flows directly to the bottom line. The cost of cleaning a room or running the front desk doesn't change much whether the room is sold for $150 or $250. That extra $100 is almost pure profit. For a value investor focused on long-term free_cash_flow generation, a business that can consistently increase its ADR without a proportional increase in costs is an attractive investment.
• A Check on Management's Strategy: Tracking ADR over time tells a story about management's effectiveness. Are they successfully investing in renovations to justify higher prices? Are their marketing campaigns strengthening the brand? Or are they resorting to constant discounting to fill rooms, thereby eroding the brand and long-term profitability? ADR provides a scorecard for these strategic decisions.

A value investor doesn't just look at the number; they ask why the number is what it is. ADR is a starting point for a deeper investigation into the quality and durability of a hotel business.

The formula for ADR is beautifully simple and can be calculated for a single hotel, a regional group, or an entire global chain. `Average Daily Rate (ADR) = Total Room Revenue / Number of Rooms Sold` Let's break down the two components:

• Total Room Revenue: This is the money generated only from renting hotel rooms. It's the gross revenue before deducting any expenses. ¹⁾
• Number of Rooms Sold: This is the simple count of rooms that were paid for and occupied during the period. It is also referred to as “demand.” ²⁾

A single ADR number in isolation is like a single note in a symphony—it doesn't tell you much. The real insight comes from context and comparison.

• 1. Trend Analysis (Looking Backwards): The most important analysis for a value investor is to look at a company's ADR over a long period (5-10 years). Is it consistently trending upwards? A steady incline demonstrates enduring pricing power and a resilient brand. If it's volatile or declining, you must investigate why. Is the company facing new competition? Is there a recession impacting travel budgets?
• 2. Peer Comparison (Looking Sideways): Compare a company's ADR to its direct competitors. It's useless to compare a luxury brand like Four Seasons to a budget brand like Motel 6. Instead, compare Four Seasons to St. Regis, or compare a Holiday Inn Express to a Hampton Inn. A company that consistently maintains a higher ADR than its direct peers likely has a stronger brand or better locations, which are key elements of an economic_moat.
• 3. The Relationship with Occupancy: ADR tells you the price, but it doesn't tell you how full the hotel is. A hotel could achieve a massive $1,000 ADR by selling just one suite, leaving 299 other rooms empty. This is not a successful business. This is why ADR should always be viewed alongside the occupancy_rate (the percentage of available rooms that were sold). The combination of these two metrics gives you an even more powerful indicator: Revenue Per Available Room (RevPAR).

Let's analyze two fictional hotel chains to see ADR in action: “Prestige Palace Hotels” (PPH) and “Roadside Rest Inns” (RRI). They operate in different market segments. PPH is a luxury brand known for its prime city-center locations and impeccable service. RRI is a mid-scale brand focused on providing clean, reliable lodging for business travelers and families near highways and airports. Here are their results for the last quarter:

Initial Analysis: At first glance, PPH's ADR of $500 is five times higher than RRI's $100. This doesn't make PPH “better,” it simply confirms their different business models. PPH operates in the high-margin luxury segment, while RRI operates in the high-volume mid-scale segment. A value investor would expect this. Deeper Insight (The Value Investor's Questions): Now, let's add a trend. Last year, PPH's ADR was $450 and RRI's was $105.

• For Prestige Palace Hotels (PPH): Their ADR jumped from $450 to $500, an 11% increase. This is a very strong sign. It suggests their brand is strengthening, allowing them to pass on inflation costs and then some. The investor should now ask: Is this increase sustainable? Did they complete major renovations that justify the price hike? Are they gaining market share from other luxury competitors?
• For Roadside Rest Inns (RRI): Their ADR fell from $105 to $100, a nearly 5% decrease. This is a potential red flag. The investor must dig deeper: Is a new, more modern competitor opening up locations nearby? Is the general economy for business travel weakening? Is management panicking and cutting prices to maintain occupancy_rate? This decline, while seemingly small, could signal an erosion of their competitive position.

This example shows how ADR isn't just a number to be calculated, but a powerful diagnostic tool to understand the story of a business.

• Simplicity and Focus: It is an unambiguous and easy-to-calculate metric that provides a clear snapshot of a hotel's room pricing.
• Excellent Proxy for Pricing Power: It's one of the best quantitative measures of the qualitative strength of a hotel's brand and its ability to command a premium over competitors, a key aspect of a company's economic_moat.
• Effective for Direct Comparison: ADR is invaluable for comparing the performance of similar hotels or brands within the same segment (e.g., luxury, mid-scale, budget).

• Ignores Occupancy: As shown in the example, ADR tells you nothing about how many rooms are empty. A high ADR is meaningless if the hotel is mostly vacant. This is why it must be analyzed in conjunction with occupancy_rate to get a complete picture.
• Excludes Other Revenue Streams: For large resorts, casinos, or conference hotels, revenue from food, beverages, gaming, and events can be a massive part of the business. ADR completely ignores this, potentially understating the overall health and revenue-generating power of the property.
• Can Be Misleading Across Different Segments: Comparing the ADR of a budget hotel with a luxury resort is a classic apples-to-oranges mistake. It leads to no useful conclusions. The analysis must be done within a peer group of similar properties.
• Doesn't Reflect Profitability: ADR is a revenue metric, not a profit metric. A hotel might raise its ADR, but if it spent a fortune on marketing or amenities to achieve it, its profits could actually decrease. An investor must always look further down the income statement to see if revenue growth is translating into actual profit.

• RevPAR (Revenue Per Available Room)
• occupancy_rate
• pricing_power
• economic_moat
• Key Performance Indicators (KPIs)
• hospitality_industry
• intrinsic_value