ADR - Average Daily Rate

Definition of Average Daily Rate (ADR)

In the context of commercial real estate and hospitality-backed mortgages, Average Daily Rate (ADR) is a key performance indicator (KPI) used to calculate the average rental income earned for an occupied room on a given day. ADR is one of the most critical metrics used by lenders and investors to assess the operational efficiency and revenue-generating potential of a lodging property, such as a hotel, motel, or resort.

How ADR is Calculated

The formula for ADR is straightforward, focusing strictly on rooms that have been sold. It does not account for vacant rooms or income generated from other sources like food and beverage or spa services. The calculation is as follows:

ADR = Total Room Revenue / Number of Rooms Sold

The Importance of ADR in Commercial Mortgages

When a borrower applies for a commercial mortgage for a hospitality property, the lender performs a deep dive into the property's financial health. ADR plays a vital role in this process for several reasons:

• Revenue Analysis: ADR helps lenders understand the pricing power of the property. A rising ADR indicates that a property can command higher prices over time, which suggests strong market demand and effective management.
• Debt Service Coverage Ratio (DSCR): Lenders use ADR to project the property’s future cash flow. This cash flow is the primary source for making mortgage payments. A stable or increasing ADR contributes to a healthier Debt Service Coverage Ratio, making the loan less risky for the lender.
• Valuation and Underwriting: Commercial appraisals for hotels often rely on the Income Capitalization Approach. Because ADR is a primary driver of Net Operating Income (NOI), it directly impacts the appraised value of the property and, consequently, the Loan-to-Value (LTV) ratio.
• Market Benchmarking: Lenders compare a property's ADR against its "Competitive Set" (similar hotels in the same geographic area). If a property’s ADR is significantly lower than its peers, the lender may view it as underperforming or poorly managed, which could result in more stringent loan terms or higher interest rates.

ADR vs. RevPAR

While ADR is a crucial metric, it is rarely viewed in isolation during the mortgage underwriting process. Lenders also look at RevPAR (Revenue Per Available Room). While ADR only measures the price of rooms actually sold, RevPAR accounts for the property's total inventory, including vacant rooms. A high ADR is positive, but if it comes at the expense of very low occupancy, the property's total revenue may not be sufficient to support a commercial mortgage.

Factors Influencing ADR for Borrowers

Borrowers seeking commercial financing should be prepared to discuss the factors that influence their ADR, as these will be scrutinized during the due diligence phase:

• Seasonality: Fluctuations in rates based on peak and off-peak travel seasons.
• Property Quality: The physical condition and "star rating" of the hotel.
• Economic Conditions: How broader economic trends affect consumer and corporate travel spending.
• Management Strategy: Use of dynamic pricing models and yield management software to maximize daily rates.