The Key Metrics You Need to Understand About Hotel Real Estate
Hotel real estate is management intensive. While it can be risky there is also an exceptional opportunity for high rewards.
A lot goes into making a hotel real estate investment lucrative. Management involves everything from cleaning rooms and fresh linens to understanding local tourism and customer service.
With so much happening in a hotel, as a real estate investor, it can get tricky trying to figure out what areas are the most important to measure and keep track of.
You often don’t need to know every little detail of what is happening in your hotel investment. But there are some key metrics that you should keep an eye on. Operating costs, income, and ‘heads in beds’ are a few of the key metrics that will help you get a clear overall view of how your asset is performing.
By reviewing the key metrics you can minimize risks in your investment by making smart decisions. You will quickly be able to see where your hotel assets are performing well and where they are losing money and then adjust your strategy accordingly.
In this post, we cover three of the key metrics every hotel real estate investor needs to monitor. These will help you understand the performance of your assets and help you maximize the profitability of your hotel.
Net Operating Income
For any commercial real estate investment, the primary goal is profitability. One of the easiest ways to measure that is through your net operating income (NOI).
Your NOI is the amount of revenue that is left once you deduct all of the operating expenses.
You calculate this by taking the total income generated by the hotel and minus the expenses. However, you should remember that NOI does not include costs such as mortgage interest or taxes that are considered financial factors. By removing these costs from the equation you have a clearer picture of your hotel’s operational strength.
Operating expenses for hotel real estate, however, do include things that other areas of commercial real estate do not. For example, there is often a higher cost for hourly labour and credit card commissions have to be considered for when guests pay for their stay.
You can calculate your NOI daily, weekly, monthly, or even annually. Hotel real estate is often the only asset class in commercial real estate where it is useful to view your NOI daily, as there can be large variations in profits from day-to-day, depending on bookings.
Income will include all room sales. It should also include additional charges. This will be things such as room service, laundry, massages, vending machines etc.
There will be notable differences in what is included as income based on the service level of your hotel. For example, an economy hotel might have numerous vending machines that generate a nice profit. However, for a luxury hotel, you may make large amounts of revenue from food services for weddings.
By reviewing your areas of income you can see which are viable sources of revenue. For example, if you are not making profits from your spa perhaps you can further promote that amenity.
The second most important metric for hotel real estate investors to monitor is revenue per available room (RevPAR). You will specifically want to look at how the RevPAR increases or decreases over time.
Your RevPAR is a combination of two other metrics: Occupancy and ADR.
Occupancy is the number of used rooms and ADR is your average daily rate. By combining these two metrics, your RevPAR gives you an overview of the use of rooms and the room rates.
To calculate RevPAR you find the total room revenue and divide it by the total number of available rooms.
Your revenue in this metric only includes money earned from the room fee for an overnight stay. It does not include any additional spending from the guests such as laundry, mini bar purchases etc.
Occupancy is the number of rooms that were occupied by paying guests during a specified period. Occupancy should only include available rooms. Any rooms that are under construction or in some other way unsellable should not be included. It is also important to remember that if you have rooms that are not sold for sleeping (such as meeting rooms) that are paid for, this still counts towards your occupancy.
Your ADR is a calculation of the average rate paid for a room per day. To work out your ADR, you total the revenue for rooms sold and then divide it by the number of rooms sold.
This is an important metric to measure because your hotel will have different types of rooms that go for different rates. For example, you may have a double room that goes for a lower rate than an executive suite. It is also important to note that rooms can go for different rates based on the day. Rates will typically be higher when there are local events happening and weekday and weekend rates may vary.
By calculating the ADR, you get to see the average across all types of rooms and their varying rates which helps you understand the cash flow.
Target Property vs Competitive Set
Comparing your hotel to other similar properties is essential when contemplating a new hotel real estate investment, or when observing the performance of your existing investments.
This metric can be more difficult than the other two mentioned to measure because it relies on third-party data. To get a competitive set, you need to find information about other similar hotel properties.
You will want to compare your property with others around numerous metrics including RevPAR, occupancy rate, room rates and more.
Platforms such as CoStar, Loopnet, and numerous others provide such reporting making it simpler to make such comparisons. By using a reporting platform you save a lot of time that you would otherwise need to spend gathering and verifying data about other hotels.
You will often want to pick between 5 and 10 hotels that are similar in ways such as location, service level, size etc. Review how these properties perform as a group and then make the comparison to how your hotel investment property is performing.
The key is selecting true peers in which a meaningful comparison can be made. You do not want to simply pick the five or ten closest hotels to the one you have or plan to invest in. You need to ensure that there is a meaningful comparison also in the types of guests you will be competing for and the price of rooms.
The key to comparison is to ensure that your data is accurate and up-to-date. This is particularly important with the current tourism market. The COVID-19 pandemic has changed hotel investment. You don’t want to be looking back at data from five years ago, or even a year ago. You need to be reviewing the most up-to-date data to get a clear and accurate picture of the market.
To Sum Up
Investing in hotel property can be risky but it can also be very rewarding. The key to landing with an investment that is the latter is to look at the data.
Understanding the metrics around your hotel investment will help you make a smart investment and then continue to make smart investment choices. By reviewing metrics such as operating incomes, occupancy, RevPAR and also making comparisons of these metrics to other similar hotel properties allows you to gain valuable insights into a hotel’s performance.
By reviewing data, you can quickly spot patterns that will highlight areas of your hotel investment that are thriving or that are losing money and then make the necessary adjustments to your operation to ensure that your hotel is reaching maximum performance.