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Ask your administrator if you think this is wrong. ====== Revenue Per Available Room (RevPAR) ====== ===== The 30-Second Summary ===== * **The Bottom Line:** **RevPAR is the hotel industry's vital sign, a single number that reveals a hotel's power to both fill its rooms and command a profitable price for them.** * **Key Takeaways:** * **What it is:** A performance metric calculated by multiplying a hotel's Average Daily Rate (ADR) by its Occupancy Rate. * **Why it matters:** It provides a far more insightful view of a hotel's core operational health than looking at room price or fullness in isolation, which is crucial for assessing its [[economic_moat|economic moat]]. * **How to use it:** To compare the operational efficiency of similar hotel companies or to track a single company's performance through different economic seasons. ===== What is Revenue Per Available Room (RevPAR)? A Plain English Definition ===== Imagine you own a small apple orchard with 100 trees. Your goal is to make as much money as possible from these 100 trees. You could focus on two things: 1. **The price per apple:** How much you charge for each apple you sell. 2. **The yield:** How many apples each tree produces. Focusing on just one of these can be misleading. You could charge a fortune for each apple, but if your trees only produce a handful, you won't make much money. Conversely, you could have trees overflowing with apples, but if you have to give them away for pennies, you're also not building a successful business. The smart approach is to combine these two ideas. You want to know the **total revenue generated //per tree//**. This single number would tell you how effective your entire orchard operation is. In the hotel world, **RevPAR (Revenue Per Available Room)** is that powerful, combined number. A hotel's "trees" are its rooms. And just like the orchard owner, a hotel manager has two main levers to pull: * **Average Daily Rate (ADR):** This is the average price paid for rooms that were actually sold. It's the "price per apple." * **Occupancy Rate:** This is the percentage of available rooms that were sold. It's the "yield." RevPAR elegantly braids these two metrics together. It tells you the total room revenue spread across //all// available rooms, including the empty ones. It answers the crucial question: "For every single room we have in our hotel, both full and empty, how much revenue did we earn yesterday?" For example, a 100-room hotel that sells 80 rooms (80% occupancy) at an average price of $150 (ADR) has a RevPAR of $120 ($150 ADR x 80% Occupancy). This means that on average, every single one of the 100 rooms in the building, from the presidential suite to the broom closet-sized room by the ice machine, generated $120 in revenue. This is a far more honest and insightful metric than simply saying "Our rooms go for $150" or "We were 80% full." > //"Price is what you pay. Value is what you get." - Warren Buffett. RevPAR helps an investor see the value a hotel company is actually //getting// from its pricey real estate assets.// ===== Why It Matters to a Value Investor ===== For a value investor, who seeks to understand a business's long-term health and [[intrinsic_value|intrinsic value]], RevPAR isn't just another piece of industry jargon; it's a critical diagnostic tool. It cuts through management fluff and gets to the heart of operational performance. * **A Litmus Test for Management Skill:** Any hotel can achieve a high occupancy rate by slashing prices. Similarly, any hotel can boast a high average room rate by only selling a few rooms to wealthy clients. The true art of hotel management lies in finding the perfect balance—the price point that maximizes total revenue. A consistently rising RevPAR is a strong signal that management is skilled at pricing, marketing, and managing its brand. It shows they are not just filling rooms, but filling them profitably. * **Revealing an Economic Moat:** A durable competitive advantage, or [[economic_moat|economic moat]], is the holy grail for a value investor. In the hotel industry, a moat can come from a powerful brand (like The Ritz-Carlton), a unique location (a resort with the only private beach), or a superior loyalty program (like Marriott Bonvoy). How does this moat show up in the numbers? Through superior and stable RevPAR. A company that can maintain or grow its RevPAR during economic downturns, while competitors are forced to discount heavily, demonstrates a powerful moat that customers are willing to pay a premium for. * **An Economic Barometer:** The hotel industry is famously cyclical. When the economy is booming, business travel is up, families go on vacation, and RevPAR soars. When a recession hits, travel is one of the first expenses to be cut, and RevPAR plummets. A value investor can use RevPAR as a real-time gauge of the economic climate. More importantly, this cyclicality creates opportunities. By tracking RevPAR trends, an investor can identify when the market is overly pessimistic about the hotel sector, allowing them to purchase shares in excellent, well-run companies at a significant [[margin_of_safety|margin of safety]], patiently waiting for the inevitable economic recovery to boost RevPAR and, in turn, the stock price. * **Focus on the Core Business:** Hotels are complex businesses with revenue from restaurants, spas, conference centers, and more. While important, the primary engine of a hotel is its rooms. RevPAR isolates this core engine and allows an investor to assess its performance directly, without the noise of other operations. It answers the most fundamental question: how good is this company at its primary job of renting rooms? ===== How to Calculate and Interpret RevPAR ===== === The Formula === There are two common and mathematically equivalent ways to calculate RevPAR. A company's financial report might give you the data for either one. `**Formula 1: The Multiplier Method**` This is the most intuitive way to think about RevPAR, as it clearly shows the two levers management can pull. > RevPAR = Average Daily Rate (ADR) x Occupancy Rate * **Average Daily Rate (ADR):** Calculated as `Total Room Revenue / Number of Rooms Sold`. * **Occupancy Rate:** Calculated as `Number of Rooms Sold / Total Number of Available Rooms`. `**Formula 2: The Division Method**` This method is more direct if you already have the total revenue figures. > RevPAR = Total Room Revenue / Total Number of Available Rooms ((Over a specific period, e.g., a day, quarter, or year.)) Both formulas will always yield the exact same result. === Interpreting the Result === A RevPAR figure in isolation is almost meaningless. Is a RevPAR of $95 good or bad? It's impossible to say without context. The real power of RevPAR comes from comparison. * **Compare to Itself (Trend Analysis):** The most important comparison is against the company's own historical RevPAR. Is it growing, stagnant, or declining? A positive year-over-year RevPAR growth is a healthy sign. A value investor should look for a consistent, multi-year track record of stable or growing RevPAR, not just one good quarter. * **Compare to Competitors (Peer Analysis):** How does Hilton's RevPAR in North America compare to Marriott's? This is where the metric shines. It provides a standardized yardstick to measure who is operating more efficiently in a given market. **Crucially, you must compare apples to apples.** A luxury hotel's RevPAR (like Four Seasons) should be compared to other luxury hotels, not budget motels (like Motel 6). The comparison must be within the same market segment and, ideally, the same geographic location. * **Deconstruct the Growth:** If RevPAR is growing, it's vital to understand why. * **Occupancy-driven growth:** The hotel is filling more rooms. This is good, but could it be a sign that they are under-priced or offering heavy discounts, which could harm [[profit_margin|profit margins]]? * **ADR-driven growth:** The hotel is charging more per room. This often indicates strong branding and pricing power—a very positive sign for a value investor. However, if ADR rises too quickly, it could lead to falling occupancy in the future as customers seek better value elsewhere. * **Balanced growth:** The ideal scenario is a healthy, sustainable increase in both occupancy and ADR. This demonstrates strong demand and skilled revenue management. ===== A Practical Example ===== Let's analyze two hypothetical hotel companies to see how a value investor might use RevPAR as a starting point for their research. Our companies are "Royale Resorts International" (a luxury chain) and "Roadside Rest Inns" (a budget chain). ^ **Metric** ^ **Royale Resorts Int'l** ^ **Roadside Rest Inns** ^ | Market Segment | Luxury / Upscale | Economy / Budget | | Total Available Rooms (for the year) | 1,000,000 | 5,000,000 | | Total Rooms Sold (for the year) | 750,000 | 4,500,000 | | Total Room Revenue (for the year) | $225,000,000 | $360,000,000 | First, let's calculate the key performance indicators for each. **Royale Resorts International:** * **Occupancy Rate:** (750,000 / 1,000,000) = **75%** * **Average Daily Rate (ADR):** ($225,000,000 / 750,000) = **$300** * **RevPAR:** ($300 ADR x 75% Occupancy) = **$225** **Roadside Rest Inns:** * **Occupancy Rate:** (4,500,000 / 5,000,000) = **90%** * **Average Daily Rate (ADR):** ($360,000,000 / 4,500,000) = **$80** * **RevPAR:** ($80 ADR x 90% Occupancy) = **$72** **Investor's Analysis:** At first glance, Roadside Rest looks impressive with its 90% occupancy and higher total revenue. A superficial analysis might stop there. But the value investor, using RevPAR, sees a different story. Royale Resorts' RevPAR of $225 is more than three times higher than Roadside Rest's $72. This indicates that for every room in its portfolio, Royale is generating vastly more revenue. This points to immense **pricing power**, a hallmark of a strong brand and a potential [[economic_moat]]. Their customers are willing to pay a significant premium. Roadside Rest's business model is clearly built on volume. They have to keep their rooms almost completely full to make their model work, suggesting they operate in a highly competitive, price-sensitive market. RevPAR doesn't tell us which company is the "better" investment, but it directs our next questions: * **Profitability:** Does Royale Resorts' high RevPAR translate into higher [[profit_margin|profit margins]] and [[return_on_assets_roa|return on assets]]? Or do their luxury amenities come with massive costs that eat up the extra revenue? * **Resilience:** Which company would fare better in a recession? Roadside Rest's budget-conscious customers might be more resilient, while Royale's high-end corporate and leisure travel could dry up quickly. * **Growth:** Which company is growing its RevPAR faster? A 5% RevPAR growth at Royale is much more impactful in absolute dollar terms than a 5% growth at Roadside. RevPAR is the thread you pull to begin unraveling the entire business story. ===== Advantages and Limitations ===== ==== Strengths ==== * **Holistic Performance Metric:** It masterfully combines the two most critical drivers of room revenue—price and volume—into a single, easy-to-understand figure, preventing the misleading conclusions that can arise from looking at either metric alone. * **Industry Standard for Comparison:** RevPAR is the universal language of the hotel industry. This standardization makes it an invaluable tool for conducting an apples-to-apples comparison of the core operational performance between competitors like Hilton, Marriott, and Hyatt. * **Excellent Trend Indicator:** By tracking a company's RevPAR over several years, an investor can clearly see the trajectory of the business, assess management's effectiveness, and understand how the company performs throughout an entire [[cyclical_stock|economic cycle]]. ==== Weaknesses & Common Pitfalls ==== * **Ignores Other Revenue Streams:** This is RevPAR's biggest blind spot. It only measures room revenue. It completely ignores potentially massive and high-margin revenue from food and beverage, conference and banqueting facilities, spas, casinos, and parking. A resort with a world-class convention center might have a mediocre RevPAR but be a cash-generating machine. An investor must look beyond RevPAR to see the full picture. * **Revenue, Not Profit:** RevPAR tells you nothing about profitability. A hotel could increase its RevPAR by spending a fortune on advertising or by offering costly complimentary services. This would boost the top line (revenue) while potentially crushing the bottom line ([[net_income|profit]]). Always analyze RevPAR in conjunction with profitability metrics like Gross Operating Profit Per Available Room (GOPPAR) or by carefully examining the [[income_statement]]. * **Doesn't Account for Scale:** RevPAR is a "per room" metric. A small, 50-room ultra-luxury boutique hotel might have a spectacular RevPAR of $800, but its total profit will be a tiny fraction of a 2,000-room mid-range hotel with a "good" RevPAR of $150. Always consider the total size and scale of the operation. ===== Related Concepts ===== * [[average_daily_rate_adr]] * [[occupancy_rate]] * [[economic_moat]] * [[profit_margin]] * [[cyclical_stock]] * [[margin_of_safety]] * [[return_on_assets_roa]]