What is an Average Daily Rate in Hotel Finance?
Average Daily Rate, or ADR, is one of the most important metrics that hotels use to determine the income and profitability of a property. ADR is determined by dividing the entire rental income for a day by the number of occupied rooms on a property. For example, if a hotel makes $50,000 in one day, as a result of 100 rooms being rented, their ADR for that day is $500. To clarify, average daily rate does not include complimentary rooms or ‘house use’ rooms in its calculation.
What ADR Tells Us About Hotel Performance
In general, if the ADR of a property is increasing, a hotel is making more money per room— which is typically a good thing. If a hospitality property wishes to increase ADR, in most cases, they simply need to increase the price of rooms. ADR is often compared historically, to past seasons and past years, as well as to hotels in the area with similar characteristics.
Additionally an ADR index can be used to compare a hotel to a specific set of hotels in a specific market or submarket over a certain time period. An ADR index can be calculated like so:
(Hotel ADR / Aggregated set of hotels’ ADR) x 100 = ADR Index
If the hotel in question has an ADR index of score of less than 100, it’s generally less profitable per room than other hotels in the set, while, if it scores higher than 100, it’s generally more profitable per room than other properties in the set.
The Shortcomings of Average Daily Rate
While looking at a property's ADR is a good place to start, it doesn't tell the whole story. Most importantly, average daily rate does not look at occupancy (i.e. the number of rooms sold). For instance, the hotel in the example above might have an ADR of $500, but if it's only at 50% occupancy, it may not be profitable.
Revenue Per Available Room (RevPAR) Can Be a Better Metric for Hospitality Properties
To solve the shortcomings of ADR, many hotel operators investors use another metric, Revenue Per Available Room, or RevPAR, to better calculate a hotel's income and profitability. RevPAR takes a hotel property's ADR and multiplies it by the occupancy rate. In the example we just mentioned, the hotel would have a RevPAR of $250/day ($500 * 50%).
Average Daily Rate in Relation to Commercial Real Estate Loans
For owner-occupied hotel properties that want to refinance their debt, ADR, along with LTV, DSCR, debt yield, and other metrics, can be an effective way for a commercial lender to determine a property’s suitability or financing. For investors that lease their property out to a hotel company and want to refinance, or would like to acquire a property in which a hotel is currently the main tenant, average daily rate may also be important.
However, in either case, the larger the hotel company (and the better their credit), the less important factors like ADR are. This may not necessarily be the case with franchised hotels, where the credit of the franchisee becomes significantly more important.