Profiling hotel profits: Occupancy or ADR?
 
Profiling hotel profits: Occupancy or ADR?
17 OCTOBER 2014 7:26 AM
Following are two analyses that explore correlation between occupancy or ADR and profitability.
BROOMFIELD, Colorado—In June, HNN’s sister company STR Analytics released the 2014 HOST Almanac, which included same-store income statement data for more than 5,400 hotels across the United States. We presented a summary of the data at the Hotel Data Conference in Nashville, Tennessee, in August, which included an analysis conducted in Tableau examining the relationship between occupancy and average daily rate to profitability. For those who did not attend, we have summarized the findings of this analysis. 
 
One question that frequently arises when examining hotel profitability is what factor most influences profitability: occupancy or ADR? This question has numerous factors to consider and is not easily answered. However, given more than 5,400 income statements for 2013, we are able to draw some general conclusions. 
 
The first step in making any conclusions was to input all the profitability data into Tableau as shown below:
 
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In this chart, we have plotted the occupancy and ADR for 2013 for all the HOST data providers in the luxury class. Each dot represents a single property, and the color of the dot reflects the profitability of that individual hotel. The darker the green, the greater profit margin (gross-operating-profit margin) that hotel achieved. The red dots illustrate hotels that posted losses. The median occupancy (73%) and ADR ($187) are also shown, in order to give a frame of reference for the performance of each property. 
 
Looking at this data is difficult to make any determinations about profitability. The properties with strong profit margins seem to be distributed across all four quadrants. As such, we decided to isolate the top performing assets, shown below:
 
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This chart shows the top-performing 20%, in terms of GOP profit margin, for the luxury class. In examining the chart above, we found that 46% of these properties had a greater-than-average ADR. So then, more than half of the top-performing properties had a lower ADR than the average for the class. 
ADR was not a strong indicator of profitability. However, looking at occupancy, we found 73% had a greater-than-average occupancy. So then, in the luxury class, occupancy seems to have played a greater role in profitability than ADR for 2013. 
 
We repeated this process for all the classes and found some interesting results. When looking at the upscale class for, example, we found that 85% of the most-profitable properties had a greater-than-average ADR. Many of these same properties had a greater-than-average occupancy as well, but it is easy to see that the vast majority of these properties had higher ADRs. 
 
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Here is a summary of our findings by class (the percentages represent the properties with greater than average occupancy or ADR):
  • Luxury: occupancy 73%, ADR 46%
  • Upper upscale: occupancy 72%, ADR 73%
  • Upscale: occupancy 70%, ADR 85%
  • Upper midscale: occupancy 85%, ADR 92%
  • Midscale/economy: occupancy 75%, ADR 54%

Another angle
Of course, this is only looking at the problem from one direction, so we also conducted an analysis from another angle. For the second analysis, we took the properties in each class with the greatest occupancies and the greatest ADRs and examined the profitability of each set.
 
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In the chart above, we see the properties in the luxury class with the greatest occupancies (top 20%) on the left and the properties with the greatest ADRs on the right. Occupancy and ADR are shown on the horizontal axis for each, with GOP margin on the vertical axis for both charts. When looking at these two sets, we see that the median profit margin for the properties with the greatest occupancies was 36% versus 31% for the properties with the greatest ADRs. So then, this data seems to support what we saw previously, that occupancy was more correlated to profitability in the luxury class than ADR for 2013. 
 
If we again look at the upscale class, we can see those results are supported by the second analysis as well. The charts below show that in the upscale class, the properties with the greatest occupancies had a median profit margin of 49%, while the properties with the greatest ADRs had a median profit margin of 54%. The properties with the greatest occupancies were unable to achieve a GOP margin of greater than 60%, while many properties with the greatest average rates easily surpassed this mark.
 
Click to enlarge.
 
While these two analyses imply some level of correlation between occupancy or ADR and profitability, we certainly cannot say, for example, that ADR drove profitability in the upscale class. We cannot say this because we have ignored many other factors that play a role in profitability, in order to simplify the problem. 
 
More accurately, we are simply characterizing the most profitable properties in each class in terms of occupancy and ADR, and examining profitability of the properties that achieved the greatest occupancies and ADRs. Of course, the conclusions reached by these analyses will most likely reverse for several of the classes when 2014 data is available. However, the data does present some interesting findings, both statistically and visually.
 

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