The hospitality sector uses certain key performance metrics to measure a hotel's profitability. One of those metrics is Adjusted RevPAR (ARPAR). To that end, below is an explanation of what adjusted RevPAR is and why it's important to both those in the hotel industry and real estate investors. Read on below to learn how to calculate this metric and how to increase it in order to increase your overall profits.
What is adjusted RevPAR (ARPAR) in the hospitality industry?
At its core, adjusted RevPAR is a key metric that's used to measure hotel performance in the hospitality industry. It measures the effect of average variable expenses per occupied room and the average additional income per occupied room from other revenue-generating sources on the adjusted daily rate.
As the name suggests, adjusted RevPAR is an offshoot of the revenue per available room (RevPAR) calculation. Though RevPAR helps predict how successful the hotel is at filling available rooms at its average daily rate (ADR), unfortunately, the calculation does have a few substantial flaws.
For one, RevPAR doesn't take into account the cost per occupied room. For another, it also leaves out any additional revenue that the hotel generates from sources other than occupancies, such as an on-site restaurant, bar, spa, or valet parking services.
Given these factors, adjusted RevPAR presents a comprehensive picture of a hotel's bottom line profit and, as such, is widely used by hoteliers and investors in order to see a much more accurate picture of the hotel's total revenue.
Why is adjusted RevPAR an important metric for real estate investment?
As was said above, adjusted RevPAR is a key number to keep in mind for revenue management. This is the metric that gives the clearest picture of a hotel's bottom line profit. Therefore, it's crucial for knowing where the hotel stands in terms of having the ability to increase its revenue and to cut back on costs. If the investor has already bought the hotel, those two factors will be important for learning how to maximize profits.
However, above all, adjusted RevPAR is a key performance indicator (KPI) for the hotel industry and is used along with a few different calculations to determine a particular hotel's level of growth potential and to help real estate investors compare the hotel's performance against its competitors.
That said, it's also worth noting that real estate investors can also use this equation, even if they aren't currently interested in buying a hotel. For instance, a real estate investor could use this equation to zero in on the profitability of a bed and breakfast or a vacation rental with multiple units.
How to calculate adjusted RevPAR
Now that you have a better idea of what adjusted RevPAR measures and why it's important to both hoteliers and real estate investors, the next step is to learn how to calculate it. ARPAR is found by dividing the total variable net revenues of a particular hotel by the total number of available rooms.
Notably, there are a couple of different ways to calculate adjusted revenue per available room:
- (Room Revenue/Number of occupied rooms) + (Other revenue/Number of occupied rooms) - Variable costs per occupied room) x Number of occupied rooms) / (Number of rooms in the hotel x Number of rooms in the period)
- (Room revenue + Other revenue - Variable costs per occupied room x Number of occupied rooms) / Number of rooms currently for sale
However, this is the most widely accepted version:
ARPAR = (Average daily rate (ADR) - Variable costs per occupied room + Additional revenues per occupied room) x Occupancy
Calculating ARPAR: A simplified example
For the purposes of this example, let's say a hotel with 300 rooms has a room revenue of $30,000. Two hundred of the rooms are filled. In addition, the variable costs per room is $10, and the additional revenue per room is $15. In that case, the equation for adjusted revenue per room would look like this:
ADR = Room revenue / Number of rooms sold
ADR = $30,000/300
ADR - $100
ARPAR = (ADR - Variable costs per occupied room + Additional revenues per occupied room) x occupancy
ARPAR = ($100 - $10 +15) x 200
ARPAR = $105 x 200
ARPAR = $21,000
Tips for increasing a property's ARPAR
Once you know how to calculate ARPAR, the next step is to learn how to increase it. In light of that, below are three tips to help you increase your adjusted revenue per available room while still making sure to maintain the highest possible occupancy rate.
Keep your ADR fairly high
Increasing your ADR is a balancing act. On one hand, a high ADR can indicate that the hotel is bringing in more revenue. However, on the other, if it gets too high, occupancy rates could start to wane. To that end, your goal should be to find a sweet spot between the two ends of the spectrum. To do that, you can try offering various packages and promotions, giving discounts to people who choose to upgrade their stay, and keeping a close eye on competitor pricing.
Increase your additional revenue per occupied room
In addition to making sure that the hotel has a solid ADR, hoteliers or investors can try to increase their additional revenue per occupied room. Hotels can do this by offering options to improve their guest's experience. For example, they could start offering room service, put in a hotel bar, or provide family-friendly movie and game options for rent.
Lower your costs per occupied room
If you can't increase your income any further, the other option is to cut costs. Generally, these costs include labor, cleaning supplies and amenities, laundry expenses, utilities, and any allocations toward refurbishment. If you can find ways to cut down on these costs while still maintaining the same level of the guest experience, you can increase your ARPAR.
The bottom line
In truth, no one metric will ever tell the whole story of a hotel's profitability. However, if your goal is to figure out bottom-line profitability, an adjusted revenue per available room calculation is likely to be your top choice. After all, ARPAR measures the effect of average variable expenses per occupied room and the average additional income per occupied room from other revenue-generating sources on the adjusted daily rate. With that said, hoteliers and investors alike should be sure to keep a close eye on this calculation.