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May 2008

ADR and RevPAR: Why do I care?

By Hugh A. Daniels, Ask Hugh Consulting

The bed and breakfast/country inn industry has grown and become significantly more professional over the last 25 years. We have moved from running the business out of our personal checkbooks to sophisticated accounting and reporting systems. Many innkeepers use QuickBooks or similar accounting software to track their income and expenses, prepare budgets and produce regular balance sheets and income statements, along with all the various reports the software provides. A successful inn relies just as much on back-of-the-house functions as it does on front-of-the-house duties.

Innkeepers like to think of themselves as a unique breed of people who can multitask on numerous levels and make it look seamlessly simple to the guests. Behind the scenes, though, a savvy innkeeper is watching and comparing his or her financial status by using all the tools available.

In addition to standard financial reporting used by any business, the lodging industry has specific key indicators that are just as applicable to the inn sector of the industry. Two of those indicators are Average Daily Rate (ADR) and Revenue Per Available Room (RevPAR). General managers and investors in the hotel/motel industry routinely use these two indicators to track performance. Many innkeepers have already started tracking their ADR, but I have found that far fewer are tracking their RevPAR. For many in the lodging industry, it is RevPAR that is the more important number, and more innkeepers should be tracking it.

The Average Daily Rate (ADR) is computed by taking your total gross room revenue and dividing it by the number of rooms occupied during the year. So, if you had 10 guest rooms and an annual (not seasonal) occupancy rate of 70%, you would have had 2,555 occupied room nights (10 rooms x 365 nights x 70% = 2,555). Assuming your gross room revenues were $255,500 for the year, your ADR would be $100 ($255,500 annual gross room revenues ÷ 2,555 occupied room nights = $100).

ADR averages out your year and does not take into consideration seasonality, different rate periods, or occupancy. It is still a good number to use to follow your own inn's trends and compare it to others in the bed and breakfast/country inn industry and the lodging industry overall.

Inns have shown a steady increase in ADR over the last five years, as shown in the latest edition of the Professional Association of Innkeepers International's (PAII) Industry Study of Operations and Finance 2007-2008 (known as the Industry Study). Further, inns tend to significantly exceed the ADRs of other segments of the lodging industry, as outlined in the PAII Industry Study. Below are the overall ADR numbers from that study for bed and breakfasts.


Average Rate (ADR) Statistics: Bed & Breakfast

  Change

2005/2006

2006 2005 2004 2003 2002
Overall Average Daily Rate 3.46% $166 $161 $144 $143 $137

Source: Professional Association of Innkeepers International, The Highland Group

This chart shows that the average ADR for all inns in the study was $166 in 2006. That compares to a figure of $97.31 for the overall lodging industry in the United States, according to Smith Travel Research.

The Revenue Per Available Room (RevPAR) is computed by taking your total gross room revenue for the year and dividing it by your total available room nights. So if you have 10 guest rooms, the total number of available room nights is 3,650 (10 rooms x 365 nights = 3,650). Assuming gross room revenues for the year were $255,500, your RevPAR would be $70 ($255,500 annual gross room revenues ÷ 3,650 available room nights = $70). Thus, using the figures in our example, the inn's ADR is $100, but its RevPar is only $70.

RevPAR is a more complete measurement of an inn's success because it gives you an overall picture of both room revenue and occupancy. In just one figure, RevPAR helps you understand how well your inn has filled its rooms both off-season when demand is low even though rates also are low, and in high-season, when demand is high and rates are high.

While PAII did not report RevPAR in its most recent Industry Study, The Highland Group, PAII's research partner, was able to produce those numbers based on the data supplied by the participants, and below are the overall RevPAR figures for bed and breakfasts.

Revenue Per Available Room (RevPAR) Statistics: Bed & Breakfast

  Change

2005/2006

2006 2005 2004 2003 2002
Overall Revenue

Per Available Room

5.73% $69.80 $65.80 $59.50 $56.92 $51.95

Source: Professional Association of Innkeepers International, The Highland Group

The average RevPAR for the lodging industry as whole (all sectors) in 2006 was $61.19, according to Smith Travel Research. While the RevPAR for our segment of the industry is higher, at $69.80, the difference is much smaller than the $166 versus $97.31 spread in ADR. Why the difference? The simple answer is occupancy, combined with room rates. The average occupancy rate for the B&B/country inn segment was 43% in 2006, according to the PAII Industry Study—a full 20 points below the average rate for the lodging industry as a whole, while average room rate was $62 higher. So, if you want a good one-shot comparison of your financial success with the motel down the street, or with other inns in your area or nationally, RevPAR gives you a better picture than ADR.

Another interesting statistic from the PAII study is that the RevPAR trend for inns shows even a better improvement over the past five years than the ADR trend. In the charts above, RevPAR rose 34% between 2002 and 2006, while ADR rose only 21%. The higher RevPAR figure reflected gains in occupancy, as well as in room rates, for our segment of the industry.

The standard use of RevPAR is to determine the combined performance of all your inn's rooms. But with good property management software (PMS), you can easily calculate the individual RevPAR for each room. Most PMS systems will provide you with a report detailing the revenue each room has generated, regardless of the varying rates for your rooms. You can take the annual gross room revenue for each room and divide it by 365, to see how the rooms compare. This is a good way to see which rooms are the best performers and which ones may need a little more work or an upgrade to improve your bottom line. The results may surprise you.

Determining the RevPAR for each room is also a good tool to help make management decisions. A recent client was thinking of converting rooms in a building next door to long-term rentals rather than nightly rentals—mainly to reduce stress and wear-and-tear on the staff. However, after comparing the RevPAR of these rooms to the inn as a whole and analyzing the rooms in the main house and what decreases would occur in a long-term environment, it became obvious that keeping nightly rental of the adjacent building was a key to the bottom line. In fact, doing so would potentially pay for additional staffing to meet the same goals.

The bottom line: RevPAR and ADR both are important key indicators to be used by owners, investors, lenders and buyers in evaluating the performance of an inn. These, along with your financial statements, cash flow analysis and budgeting, are paramount to keeping your inn financially healthy and providing you the tools to keep it so.

This article was originally published in Innkeeping Quarterly (IQ), the quarterly publication of the Professional Association of Innkeepers International (PAII) and reprinted by permission of PAII and the author. If you are not a PAII member, take the time to participate in these important industry studies that benefit the entire industry. Not yet a member? Contact them for more details at membership@paii.org or 800-468-7244.


Hugh A. Daniels, BS, MBA is a recently retired 22-year innkeeper with a degree in business and a head for numbers. Ask Hugh Consulting, LLC is Hugh's firm of seven years that helps small businesses, particularly in the hospitality industry, with finances, purchases, sales and operations. Hugh has finally perfected saying "no" to all requests to serve on any boards or any committees anywhere. Information about Hugh's background and services is at http://www.askhugh.com, or contact him at mail@askhugh.com or 435-645-3931.

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