In hotel underwriting, RevPAR carries significant weight. Whether you are reviewing a broker’s offering memorandum, analyzing a deal, or benchmarking performance in the hospitality industry, RevPAR is almost always one of the first metrics you come across.

This complete reliance is because RevPAR simplifies two critical variables viz pricing and demand into a single figure. But, this simplicity is also its biggest weakness. Relying on RevPAR alone in underwriting can lead to incomplete analysis and, in some cases, materially flawed investment decisions. Let’s dive deeper, and see why that is!

What Is RevPAR and Why is it Important?

RevPAR is calculated as:

RevPAR = ADR × Occupancy Rate

Or: Room Revenue ÷ Available Room Nights

In simpler terms, it signifies how much revenue is each room generating, whether occupied or not.

RevPAR gained prominence in the hotel industry mainly because of its ability to standardize performance comparisons. By comparing it with detailed benchmarking across markets, investors could quickly assess whether a hotel was outperforming or underperforming its peers.

Its appeal lies in its efficiency. Instead of analyzing pricing and demand separately, RevPAR compresses both into a single figure. A rising RevPAR suggests that either pricing power, occupancy, or both are improving. A declining RevPAR signals weakening demand or pricing pressure.

Why is RevPAR not Enough?

1. RevPAR Ignores Costs: The biggest limitation of RevPAR is that it measures revenue rather than profit. Hotels operate as full-fledged businesses with complex and often volatile cost structures. Operating expenses can consume a substantial portion of total revenue. This implies that two hotels generating identical RevPAR can produce vastly different levels of net operating income. From an underwriting perspective, this disconnect is crucial. This is why metrics like cost per occupied room (CPOR) are important. Without understanding costs, RevPAR alone cannot show whether a hotel is actually making money.
   
   
2. RevPAR Excludes Non-Room Revenue: RevPAR only looks at room revenue and ignores other income sources. In many hotels, especially full-service and resort properties, non-room revenue is also a big part of total earnings. Income from food and beverage, events, parking, and other services can contribute a sizeable portion of the total revenue. Ignoring this can understate a hotel’s real performance. For better analysis, TRevPAR (Total Revenue Per Available Room) is used, which includes all revenue streams and gives a better estimate.
   
   
3. RevPAR Doesn’t Reflect Profitability: RevPAR measures revenue efficiency, not profit. It does not tell how much money the hotel actually keeps after expenses. That’s where GOPPAR (Gross Operating Profit Per Available Room) becomes useful. It includes both revenue and costs, making it a better measure of real performance. For example, increasing occupancy through heavy discounts may keep RevPAR stable but reduce profits due to higher costs. GOPPAR helps show this difference.
   
   
4. RevPAR Can Be Manipulated: RevPAR can be improved through pricing strategies that don’t always create long-term value. A hotel might lower room rates to increase occupancy and maintain RevPAR. However, this can bring in price-sensitive guests and increase costs. On the other hand, raising rates may improve brand image but reduce occupancy. In both cases, RevPAR changes, but it doesn’t show whether the strategy is sustainable or beneficial in the long run.
   
   
5. RevPAR Ignores Market Positioning: RevPAR is more useful when compared to competitors, not as a standalone metric. Investors often use the RevPAR Index (RGI) to measure performance against similar hotels. A RevPAR of $120 may be strong in one market but weak in another, and without context, the number can be misleading.
   
   
6.  RevPAR Misses CapEx Risk: Hotels require regular investment to stay competitive. Rooms need upgrades, and brands often require periodic renovations. RevPAR does not account for these capital expenditures. A hotel may show strong revenue performance but still need significant future investment. Ignoring CapEx can overestimate returns; therefore, proper underwriting should always include those.
   
   
7.  RevPAR Doesn’t Account for Management Quality: RevPAR does not reflect how well a hotel is managed. However, management quality has a major impact on performance. If two hotels are operated differently, their returns will be different too. This is because good management improves pricing, controls costs, and enhances guest experience. That’s why investors must also evaluate management strength too.

What Metrics Should the Investor Use in Addition to RevPAR?

1. Net Operating Income: NOI shows what a hotel actually earns after all operating expenses are deducted. Unlike RevPAR, it provides an insight into profitability. Two hotels with similar RevPAR can have very different NOI due to cost differences. That’s why investors rely on NOI to understand true cash flow before financing.
   
   
2. Debt Service Coverage Ratio: DSCR measures how well a hotel’s NOI can cover its debt payments. Lenders typically require DSCR between 1.2x and 1.5x. Even with strong RevPAR, weak DSCR can make a deal risky, especially during downturns.
   
   
3. Gross Operating Profit Per Available Room: GOPPAR measures profit per room after operating expenses. It shows how efficiently revenue is converted into profit. Hotels with lower RevPAR can still outperform if they control costs better. This makes GOPPAR useful when comparing different hotel types.
   
   
4. Total Revenue Per Available Room: TRevPAR includes all revenue sources, not just rooms. This covers food and beverage, events, and other services. Hotels often rely heavily on non-room income. A property may look average on RevPAR but perform strongly on total revenue. Therefore, TRevPAR casts a complete estimate of how the hotel earns.
   
   
5. Cost Per Occupied Room: CPOR measures how much it costs to service each occupied room. It helps track how expenses change with occupancy. A hotel may grow RevPAR, but rising costs can reduce profits. When used with RevPAR and GOPPAR, it gives a better picture of cost control.
   
   
6. Free Cash Flow and CapEx: Free cash flow accounts for capital expenditures like renovations and upgrades, which hotels need routinely. Metrics like NOI don’t include these costs, which can lead to overestimating returns. By factoring in CapEx, investors get a more realistic view of actual returns and the cash available.

While RevPAR remains one of the most important metrics in the hotel industry, it tells only half the tale!

True estimate of a hotel’s performance is created by profitability, operational efficiency, and the ability to sustain and grow cash flow over time. These factors extend far beyond what RevPAR captures.

An effective underwriting approach recognizes this limitation and treats RevPAR as only a starting point.

Get your complete data-driven hotel underwriting that goes beyond the surface, write to us at info@therealval.com.