By:
Elie Younes and Russell Kett
March
7, 2003
Hotel managers, operators, investors, and analysts typically now use RevPAR
as a basis for their hotel performance measure and analysis. This widely
used measure reflects the guest rooms revenue on a per room basis, thereby
monitoring the success or otherwise of the hotel�s rooms inventory management.
Hoteliers aim to maximise RevPAR by means of an occupancy and average rate
trade off. Rooms revenue makes up a large portion of total revenue. Typically,
full-service three- to five-star hotels derive about 50-65% of their revenues
from rooms. Budget and extended stay hotels with limited additional facilities
make up to 90% of their revenues from rooms.
While RevPAR is one of the most recognised and used performance measures
in the hospitality industry, providing general market trends and some revenue
indications, there are some pitfalls to be aware of when analysing a hotel�s
performance based solely on RevPAR.
This article shows the major pitfalls of RevPAR, and elaborates on the
advantages of using a complementary performance measure, GOPPAR (Goh-Par).
RevPAR
RevPAR, or rooms revenue per available room, is calculated by dividing
a hotel�s net rooms revenue (after discount and sales taxes and net of
breakfast or other meals) by the total number of available rooms or by
multiplying a hotel's average daily room rate (ADR) by its occupancy.
Rooms Revenue
(£) |
|
Number of Rooms |
|
Number of Days
per year |
|
RevPAR (£) |
|
|
|
|
|
|
|
2,555,000 |
/ |
100 |
/ |
365 |
= |
70 |
|
|
|
|
|
|
|
Average
Rate (£) |
|
Rooms
Occupancy |
|
RevPAR
(£) |
|
|
|
|
|
|
|
|
|
100 |
x |
70% |
= |
70 |
|
|
Pitfalls of RevPAR
Revenue Mix:
In some instances, rooms revenue accounts for no more than 50-55% of
total revenue. These include hotels with substantial food and beverage
operations. In such cases, RevPAR would only reflect a portion of a hotel�s
revenue performance, disregarding all other sources of incremental revenues.
This will result in an inaccurate analysis when comparing hotel performances.
For example, Hotel X has an average rate of £70, 70% occupancy, and
100 rooms. Other departmental revenues (including food and beverage and
other operated departmental revenues) for Hotel X are £500,000. On
the other hand, let�s assume that Hotel Y has the same size and average
rate as Hotel X, but an occupancy level of approximately 60% and other
departmental revenues of £1,000,000. While the RevPAR of Hotel X
is approximately 15% higher than that of Hotel Y (£49 compared to
£42), Hotel Y has a higher total revenue than Hotel X; £2.28
million for Hotel X compared to £2.5 million for Hotel Y. If the
two hotels have similar direct expenses (say 35% of revenues), and the
quantum of overheads is the same for the two hotels, Hotel Y would end
up making more money than Hotel X, despite having a poorer RevPAR;
Size:
RevPAR tends to penalise a larger hotel, when compared to a smaller
property. Common sense suggests that it is often easier to have higher
occupancy percentages in a 100-room hotel than in a 200-room hotel, especially
when there are seasonal peaks and troughs (or even fluctuation between
weekday and weekend occupancy levels). Consequently, the revenue per available
room of a large hotel is likely to be lower than that of a smaller hotel,
given similar market conditions. Therefore, hoteliers and potential investors
need to consider the size of a hotel property when comparing the RevPAR
performance of a specific hotel in relation to other hotel properties.
It is not improbable that, due to economies of scale and incremental revenues,
a large hotel has a healthier financial performance than a smaller hotel
with a higher RevPAR. After all, hoteliers do not take RevPAR or percentages
to the bank!
Value Implications:
Hotel values are typically based on net free cash flows rather than
total revenues. While RevPAR is somewhat related to a hotel�s value, it
is not necessarily adequately correlated to the income capitalisation value
of a hotel property. However, it can be said that changes in hotel
values are often highly correlated to changes in RevPAR (reflecting
an elastic relationship).
GOPPAR
GOPPAR, or gross operating profit per available room, is defined as
total gross operating profit (GOP) per available room per day, where GOP
is equal to total revenue less the total departmental and operating expenses.
The following table illustrates the computation of GOPPAR.
|
Hotel A
|
% Total
|
Hotel B
|
% Total
|
Hotel C
|
% Total
|
Hotel D
|
% Total
|
Number
of Rooms |
200 |
|
200 |
|
100 |
|
100 |
|
Number
of Days in Historic Period |
365 |
|
365 |
|
365 |
|
365 |
|
Number
of Rooms Available/Year |
73,000 |
|
73,000 |
|
36,500 |
|
36,500 |
|
Occupancy |
70% |
|
76% |
|
70% |
|
75% |
|
Average
Rate |
100 |
|
95 |
|
100 |
|
100 |
|
RevPAR |
70 |
|
72 |
|
70 |
|
75 |
|
Revenues |
|
|
|
|
|
|
|
|
Rooms |
5,110,000 |
64 |
5,270,600 |
72 |
2,555,000 |
67 |
2,737,500 |
65 |
Food
and Beverage |
2,000,000 |
25 |
1,200,000 |
16 |
750,000 |
20 |
1,000,000 |
24 |
Other
Departments |
850,000 |
11 |
900,000 |
12 |
500,000 |
13 |
500,000 |
12 |
Total
Revenue |
7,960,000 |
100 |
7,370,600 |
100 |
3,805,000 |
100 |
4,237,500 |
100 |
Departmental
Expenses |
|
|
|
|
|
|
|
|
Rooms |
1,022,000 |
20 |
1,054,120 |
20 |
638,750 |
25 |
684,375 |
25 |
Food
and Beverage |
1,200,000 |
60 |
720,000 |
60 |
487,500 |
65 |
650,000 |
65 |
Other
Departments |
400,000 |
47 |
423,000 |
47 |
250,000 |
50 |
250,000 |
50 |
Total
Departmental Expenses |
2,622,000 |
33 |
2,197,120 |
30 |
1,376,250 |
36 |
1,584,375 |
37 |
Total
Undistributed Expenses |
1,600,000 |
20 |
1,600,000 |
22 |
900,000 |
24 |
900,000 |
21 |
Gross
Operating Profit |
3,738,000 |
47 |
3,573,480 |
48 |
1,528,750 |
40 |
1,753,125 |
41 |
GOPPAR |
51 |
|
49 |
|
42 |
|
48 |
|
While GOPPAR does not indicate the revenue mix of a hotel property,
and therefore does not allow an accurate evaluation of the rooms revenue
department, it does provide a clear indication of a hotel�s profit potentials.
Furthermore, GOPPAR can, in most cases, better reflect the profitability,
management�s efficiency, and underlying value of hotel properties, as a
whole.
Advantages of GOPPAR
Revenue Mix:
Since GOPPAR reflects the underlying operating profit of a hotel,
it provides a clearer indication of the overall performance or cash flow
potentials of a hotel property. Hotel companies, investors, valuers and
developers can therefore evaluate hotel management�s performance based
not only on rooms revenue, but on total revenues and operating efficiency
on a per unit basis;
Size:
GOPPAR accounts for all operating expenses, most of which include both
fixed and variable portions. The fixed portion is mainly associated with
the size and requirements of a hotel, while the variable portion relates
to the volume of business attributed to the hotel. While a larger hotel
will undoubtedly incur higher operating expenses than a smaller hotel,
given similar market conditions, a smaller hotel is likely to have higher
expenses on a per available
room basis (due to the economies of
scale of a larger hotel). For example, if a 400-room hotel incurs energy
expenses of £175,000 per year (£437 per available room),
a 200-room hotel in the same city may typically incur energy costs of £100,000
(£500 per available room). GOPPAR provides excellent performance
measurements for hotels, regardless of size. While a smaller hotel can
sometimes benefit from a higher RevPAR (because it is more effective in
optimising occupancy and room rate), its operating expenses per
room are likely to be higher than those of a larger property;
Value Implications:
Hotel values are based on net free cash flows or EBITDA (earnings before
interest, taxes, depreciation and amortisation). GOPPAR has a greater and
more reliable correlation with a hotel�s value than RevPAR. We conducted
a linear regression analysis between a hotel�s value per room, RevPAR and
GOPPAR. On a random sample of 30 (profitable) hotels our analysis indicates
that, on a per room basis, GOPPAR has a direct correlation of between 85%
and 90% with a hotel value, while RevPAR has a correlation of approximately
70% to 75% with a hotel�s value. GOPPAR provides a more reliable measure
for hotel valuations when compared to RevPAR, and should therefore be used
as a more reliable basis for �quick and dirty� hotel investment analyses.
A high RevPAR does not necessarily imply a high bottom line and thus a
high value; while a high GOPPAR reflects a high bottom line as well as
a more reliable indication of value for the property.
The Trick!
It should be noted that GOPPAR is highly sensitive to any fluctuation
in RevPAR. The profit margin of the rooms department is significantly higher
than that of any other typical revenue generating department. Therefore,
a slight fluctuation in RevPAR can have a significant effect on GOPPAR
and, consequently, the underlying value of a hotel. In Table 2, we assume
a 5% decline in both occupancy and average rate for Hotel C, resulting
in a decline in RevPAR of approximately 10%. In addition, let�s assume
a decline of 2.5% in other revenues and that departmental expenses will
fluctuate in relation to the volume of business. The GOPPAR for Hotel C
therefore drops by approximately 16%, from £42 to £35.
|
Normal
|
% Total
|
10% Decline in RevPAR
|
% Total
|
% Change
|
Number
of Rooms |
100 |
|
100 |
|
� |
Occupancy |
70% |
|
66.5% |
|
-5 |
Average
Rate |
100 |
|
95 |
|
-5 |
RevPAR |
70 |
|
63 |
|
-10 |
Number
of Days in Historic Period |
365 |
|
365 |
|
|
Number
of Rooms Available/Year |
36,500 |
|
36,500 |
|
|
Revenues |
|
|
|
|
|
Rooms |
2,555,000 |
67 |
2,305,888 |
66 |
-10 |
Food
and Beverage |
750,000 |
20 |
727,500 |
21 |
-3 |
Other
Departments |
500,000 |
13 |
485,000 |
14 |
-3 |
Total
Revenue |
3,805,000 |
100 |
3,518,388 |
100 |
-8 |
Departmental
Expenses |
|
|
|
|
|
Rooms |
638,750 |
25 |
622,590 |
27 |
-3 |
Food
and Beverage |
487,500 |
65 |
472,875 |
65 |
-3 |
Other
Departments |
250,000 |
50 |
242,500 |
50 |
-3 |
Total
Departmental Expenses |
1,376,250 |
36 |
1,337,965 |
38 |
-3 |
Total
Undistributed Expenses |
900,000 |
24 |
900,000 |
26 |
0 |
Gross
Operating Profit |
1,528,750 |
40 |
1,280,423 |
36 |
-16 |
GOPPAR |
42 |
|
35 |
|
-16 |
The RevPAR conversion into GOPPAR is high (almost a one to one relationship),
so a slight fluctuation in RevPAR could have an even more significant effect
on GOPPAR. Therefore, analysts should not solely rely on one measure when
analysing a hotel property or a portfolio of hotels), and should regard
GOPPAR as a complement to RevPAR.
Conclusion
RevPAR indicates the performance of a hotel in terms of rooms inventory
management and provides some general market trends; however, it provides
no cost indication of a hotel property and therefore how much money it
is actually � or could be � making. On the other hand, GOPPAR provides
a deeper indication of a hotel�s profitability by taking into consideration
management control and efficiency, and eliminating, to a certain extent,
the potential advantage of a smaller hotel. In addition, GOPPAR offers
an overall more robust performance measure, especially when comparing the
financial performances of hotels with different sizes or in different markets.
Furthermore, GOPPAR has a significant correlation with a hotel�s bottom
line and thus its underlying value. The use of GOPPAR as a complement to
RevPAR for hotel performance analysis will therefore enable a more robust
basis for hotel investment appraisal than relying solely on RevPAR.
|