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.
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.
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