Understanding the numbers
As an owner, you oversee decisions. Understanding the terminology is key to asking the right questions and weighing in on the discussions at a high level. Your employees and advisors will do additional analysis and make the day-to-day operating decisions.
As an owner, there are two categories of numbers that are vital to grasp: market numbers and financial numbers.
Market numbers: These numbers include Key Performance Indicators (KPI) like occupancy, average daily rate and Revenue Per Available Room (RevPar). Other market metrics are the market mix, length of stay, business pick-up called pace, channel delivery, group bookings, repeat business, top customer production, and any other information related to the hotel’s revenue.
Financial numbers: include the Profit or Loss Statement, also called Income Statement (P&L and I/S), and its sub-statements for each department category. You will also weigh in on cash flow statements, budgets and projections, as well as your balance sheet.
Hotels are a data-rich environment. Compared to other real estate, they have a high volume of transactions that make up daily rents as opposed to monthly or annual rents like that of multifamily, office or industrial, as an example. Office leases may be one contract for five years and multifamily may lease to a renter for one year. Hotel owners and managers are renting rooms on a daily basis. The goal is the same for each real estate class: 100% utilization at the highest and best rate possible. This means that hotels are more operationally intensive than other real estate segments. Larger hotels have the additional responsibility of other outlets besides just guest rooms, such as banquet halls, restaurants, lounges, parking, recreational businesses, business center, convention services, shops, etc.
Owners contract to lease rental houses for 365 days and offices for 1,825 days (5 years) but you want to rent each hotel room every night and one hotel may have a hundred to a thousand rentals on that night depending on the number of rooms at the property. Large hotels also are an umbrella for collections of operating businesses including room rentals, banquets, restaurants, lounges, parking, recreational businesses, business center, convention services, shops, etc.
Just as hotels have higher turnover than other real estate like office buildings, they have low transaction volume compared to retail businesses like grocery stores. But those transactions respond to many variables from weather to construction trends to convention cycles to airline volume. Thirty years ago, hoteliers made operating decisions based on a “feel” for the business. Today, that experience-based “feel” is important but it is informed by collecting and analyzing volumes of data on historic transactions, competitors, and market variables.
A glossary of these and other hotel terms is at: https://str.com/data-insights/resources/glossary
KPIs (Key Performance Indicators)
The most commonly used KPIs for hotels are occupancy, ADR and RevPar, defined below. As you get more experience as an owner, you will add other metrics to your tool kit. However, you will always rely on these metrics. You can calculate KPIs for last night, last week, last month, last year or any other time frame you choose.
Occupancy: is the number of rooms occupied divided by the number of rooms available (rooms occupied/rooms available). For one night, the calculation is (rooms occupied last night / rooms in the hotel). For the year, the calculation is (rooms occupied last year) / (rooms in the hotel times 365 nights). Occupancy tells you how full the hotel was and how much extra capacity the hotel did not sell. Hotel inventory is perishable. If you didn’t sell last night’s inventory, it’s gone.
|KPIs Occupancy %|
|Rooms (in the hotel)||200|
|Occupancy calculation||Room nights available||Room nights occupied||Occupancy % calculation|
|Annual||200 x 365 = 73,000||48,000||48,000 / 73,000 = 65.8%|
|Month||200 x 30 = 6,000||5,550||5,550 / 6,000 = 92.5%|
|Night||200||150||150 / 200 = 75%|
For each KPI, you will also see a correlating index metric. These are ratios comparing your KPIs to your competitive set (comp set), budget or other benchmark. Indexes are most widely used to compare time periods.
|KPIs Occupancy Index|
|Hotel occupancy||Market occupancy||Penetration Index|
Market penetration, or occupancy index, compares your hotel’s occupancy to the property’s market or competitive set. If your penetration is above 100, you are capturing more than your fair share. Below 100 means your performance is weak, below fair share.
If your occupancy is 66 percent and the market is at 61 percent, your penetration is 1.08 (108 percent) and is better than average.
ADR (Average Daily Rate): is room revenue divided by rooms occupied. This is a measure of how effectively your team is selling the value of your rooms. Higher ADR means that customers on average are paying more which creates more potential profit. However, if higher ADR pushes occupancy down, that means that some guests are choosing other hotels that offer more value for the money. There is always a balance between occupancy and ADR.
|KPIs Average Daily Rate (Average Rate or ADR)|
|Rooms (in the hotel)||200|
|ADR calculation||Room nights occupied||Room Revenue||ADR|
|Annual||200 x 365 x 65.8% = 48,180||$7,200,000||$7,200,000 / 48,180 = $149.44|
|Month||200 x 30 x 65.8% = 3,948||$671,160||$671,160/ 3,948 = $170|
|Night||200 x 1 x .75 = 150||$19,500||$19,500 / 150 = $130|
If your revenue was $15,000 last night and you rented 100 rooms, then your average rate is $150 ($15,000/100) or if your revenue was $5.5 million last year and you rented 36,500 room nights, then your average rate is $150 ($5,500,000/36,500 = $150).
Average rate index compares your ADR to your comp set or benchmark. If your index is above 100 percent, you are winning a higher ADR than your comp set, below 100 percent means your rate averages below your comp set.
|KPIs ADR Index|
|Hotel ADR||Market ADR||ADR Index|
|$170||$150||113% (or 1.13)|
If your ADR is $150 and your comp set is $160 then your rate index is 94 percent ($150/$160 = 94%) or below the competition.
RevPar (Revenue Per Available Room) is room revenue / rooms available. It can also be calculated as ADR x Occupancy. RevPar combines occupancy and ADR to reflect the balance between the benefit of selling rooms at a higher price and the offset of some customers choosing other hotels.
|KPIs RevPar (Revenue per Available Room)|
|Rooms (in the hotel)||200|
|RevPar calculation||Room nights available||Room Revenue||RevPar|
|Annual||200 x 365 = 73,000||$7,200,000||$7,200,000 / 73,000 = $98.63|
|Annual||65.8%||$149.44||65.8% x $150 = $98.70|
RevPar index compares your hotel RevPar to the comp set.
|KPIs RevPar Index|
|Hotel RevPar||Market RevPar||RevPar Index|
|$98.70||$105||94% (or 0.94)|
|$98.70||$91.50||108% (or 1.08)|
Owners commonly check last night’s KPIs every morning. You will study last week’s KPIs compared to the other hotels in your market every week and every month when you get the STAR report showing your performance compared to your competitive set. You will assess last month’s and last year’s KPIs at the end of every month as part of your financial review.
STAR Reports and Comp Sets
STAR Reports benchmark your hotel’s KPIs to average KPIs for other sets of hotels. They are standard throughout the industry, produced by Smith Travel Research, commonly referred to as “STR” (www.STR.com). STR has a wide database and works with virtually every brand and franchise company as well as management companies and independent hotel operators. Their data includes a vast majority of hotels in the United States as well as hotels throughout the world. Most of their data is fed directly from the brands so it includes data produced by your property management system and the systems of the other hotels around yours.
Each STAR Report shows your KPIs and then a comparison to your comp set and your market. Your comp set is a group of hotels that you select. It should include your direct competitors because you use it to measure your pricing and your occupancy against other hotels that your customers might consider. Each comp set (for hotels across the US) preserves confidentiality for the participating hotels by requiring a minimum number of properties in the average and restricting how much of the sample can be from one brand or management group. STAR Reports compare your KPIs by week, month, year and day of week. Monthly STAR Reports also provide information about total hotel supply and demand in an area.
Franchise companies and brands provide STAR Reports to all franchisees as part of their service. Brokers and sellers will provide you with STAR Reports as part of your due diligence. Appraisers and lenders will use STAR Reports from the hotel. As an owner, you will also review STAR Reports with your management team.
STR runs periodic training webinars about using STAR Reports. You may also find training through Fortuna’s Table, through your brand as an owner, at conferences and elsewhere.
How to read a STAR report https://www.youtube.com/watch?v=xzDZvCKGEk4&feature=youtu.be
Choosing a comp set https://insights.ehotelier.com/insights/2019/01/18/defining-your-hotels-competitive-set/
Other Business Intelligence Tools
In addition to STAR reports, there are a variety of other statistical reports available from your hotel’s Property Management System (PMS), services that compile data from the Internet, brand reports and other services. Your regional manager/sales director, general manager, revenue manager, front office manager and sales representatives will use different reports throughout each period to optimize hotel performance. As owner, you can be introduced to the various reports and decide which you want to see daily (your daily report will be in your email inbox each morning) and which you want to hear about at periodic staff meetings.
- HotelIQ: forecasting and data management software analyzes pickup, pace, market mix, channels, feeder market, room type, and other intelligence
- Rate Shoppers: are services that provide detail about the pricing your competitors offer through different channels; they are used to inform rate setting strategies
- Customer Satisfaction Reports: are generated by the brand from customer surveys and are often part of your quality control review; there are also customer reviews and satisfaction reports on booking websites
- Brand Ranking Reports: are generated by the brand and show how you compare to other hotels in the system; if your hotel has a management company, they may also show you how your property ranks compared to others in their system
- Medallia Reports: use text analysis to report on customer experience
- Reputation Management Reports: provided through brand portals aggregate reports from online travel agencies such as Expedia, social and other sites such as TripAdvisor so you can manage your reputation as reported in consumer reviews
- HotStats: is a service that benchmarks departmental revenue, cost of sales, payroll expense and profitability trends against comp sets
- HIPO (Hotel Industry Performance Overview): is a service from Kalibri Labs that compares your hotel on metrics including length of stay, booking lead time, loyalty contribution, booking costs and global review index; metrics are broken down by channel, chain scale, property size and major markets and quantify demand by channel
- Star Reports: from Smith Travel Research benchmark your hotel’s KPI performance against a comp set that you choose, and against hotels in your city and region by class of hotel (such as economy, mid-scale, upper upscale, etc.)
- Host Reports: from Smith Travel Research benchmark your hotel’s Statement of Income and Expense against similar properties
- CBRE Hotel Horizons: are quarterly reports analyzing historical and expected performance of 65 US lodging markets
- AirDNA: tracks performance in the short-term rental market (AirBNB and VRBO)
- Property Management System Reports (PMS) and Property Marketing System Reports: are provided through your brand and provide enormous detail on rates, market segments, key accounts, key customers, length of stay, point of origin and much more
- Credit Card Processor reports: provide information on spending by your guests and point of origin