RevPAR

Definition of RevPAR

RevPAR, or Revenue Per Available Room, is a key performance metric used in the hospitality industry to measure a hotel's ability to generate revenue from its core inventory of rooms. In the realm of commercial mortgages, RevPAR is the gold standard for assessing the operational health, market positioning, and income-producing potential of a lodging asset.

How RevPAR is Calculated

RevPAR provides a snapshot of performance by combining both occupancy and pricing power. It is calculated using one of the following two formulas:

• Total Room Revenue / Total Available Rooms
• Average Daily Rate (ADR) x Occupancy Rate

By using this metric, lenders can see how effectively a property is being managed. For example, a hotel might have 100% occupancy but very low rates, or high rates with very few guests. RevPAR balances these two factors to show the actual revenue generated per room in the building, whether those rooms are occupied or not.

RevPAR in Commercial Mortgage Underwriting

When a borrower applies for a commercial mortgage for a hotel, the lender uses RevPAR as a primary data point for underwriting and risk assessment. Its importance in the lending process includes:

• Determining Debt Service Coverage: Lenders must ensure the property generates enough cash flow to pay the mortgage. Since RevPAR is a direct driver of Net Operating Income (NOI), it is the foundation for calculating the Debt Service Coverage Ratio (DSCR).
• Market Benchmarking: Lenders compare a property's RevPAR against its "Competitive Set" (Compset) via reports like Smith Travel Research (STR). If a property’s RevPAR Index is significantly lower than its competitors, the lender may view the loan as higher risk.
• Valuation and Loan-to-Value (LTV): Because the value of a hotel is typically based on its income stream, a declining RevPAR trend can lead to a lower appraisal, which in turn reduces the maximum loan amount a borrower can secure.
• Identifying Seasonality: Commercial lenders examine monthly RevPAR fluctuations to understand the property's cash flow volatility. This helps in structuring "interest-only" periods or debt service reserves to protect the lender during slow months.

Limitations for Lenders

While RevPAR is a vital metric, it is important to note that it does not account for operating expenses or other income. In full-service hotels, lenders will also look at TRevPAR (Total Revenue Per Available Room), which includes revenue from food, beverage, and spa services, as well as GOPPAR (Gross Operating Profit Per Available Room), which accounts for the expenses required to generate that revenue.

For a commercial mortgage professional, a consistent and growing RevPAR is the strongest indicator of a property's ability to remain profitable and meet its long-term financial obligations.