High occupancy attracts attention. It does not, on its own, establish a hotel’s profitability. A useful analysis follows money from the booking through collection, operating expenses and the cash left available.
This approach complements our article on how hotel operations change a property investment. It is an analytical framework, not the results or forecasts of a particular property.
Read three indicators together
ADR, or average daily rate, divides room revenue by room nights sold. Occupancy compares room nights sold with room nights available. RevPAR divides the same room revenue by available capacity, combining pricing and occupancy.
These definitions, used by STR, require a consistent period and scope. One room available for thirty nights represents thirty room nights, rather than one unit.
RevPAR measures accommodation revenue per available room night. It is neither hotel profit nor the income paid to an investor.
A worked example
Consider a fictional twenty-room hotel open for thirty nights. It has six hundred available room nights. With three hundred and sixty nights sold and room revenue of €64,800, the indicators are:
- Occupancy: 360 ÷ 600, or 60%.
- ADR: €64,800 ÷ 360, or €180.
- RevPAR: €64,800 ÷ 600, or €108.
In a second illustration, ADR rises to €200, but only three hundred room nights are sold. Room revenue falls to €60,000 and RevPAR to €100. The average price has increased while total revenue has declined.
These figures are educational examples only. They are not performance targets or market estimates.
Move from revenue to cash
The next step is a documented reconciliation between revenue and cash outflows. A useful presentation separates:
- Accommodation receipts from restaurant, event and other service activities.
- Distribution commissions, discounts and refunds.
- Operating expenses: staff, routine maintenance, utilities, laundry, insurance and management.
- Capital expenditure: furniture replacement, refurbishment, equipment and building work.
- Financing, taxes and amounts retained for future needs.
The reporting should specify whether figures exclude taxes and whether they are collected or merely recognised in the accounts. A future booking, an advance payment and a completed stay represent different stages.
Repaying loan principal uses cash without being an operating expense. Conversely, some accounting items do not involve a cash payment during the period. Profit and the bank balance therefore need separate explanations.
Compare genuinely comparable periods
Comparing peak season with a quiet month rarely produces a useful conclusion. Our suggested presentation shows the month, the year to date and the corresponding period of the previous year, with explanations of material differences.
Capacity also needs explanation. Where rooms are closed for renovation, the report should state how many are affected and how available capacity has been calculated. An apparent improvement may reflect a smaller denominator.
Sales mix deserves similar attention: direct bookings, intermediaries, groups and promotions. Two periods with identical revenue may leave different amounts after commissions and servicing costs.
What a hotel report should let you verify
Five reconciliations help before drawing a conclusion:
- Open capacity, room nights sold and accommodation revenue.
- Revenue invoiced and cash actually collected.
- Original budget, actual performance and explanations of major differences.
- Routine spending, capital works and replacement reserves.
- Operating cash and amounts potentially transferable to the investment vehicle.
Any distribution then depends on contracts, operating needs, debt obligations and the appropriate decisions. A strong trading month does not establish, by itself, that a payment can be made.
Our guide to the different cash flows of a private investment develops the next stage of this analysis. Every figure should have a defined meaning, a reporting date and a clear connection to the underlying transaction.