The lodging industry has long used the general rule that a hotel should be able to command an average ADR of $1.00 for every $1,000 per room in property value. A new analysis of this rule, published in the Cornell Hotel and Restaurant Administration Quarterly, confirms that this convention remains remarkably accurate for many types of hotels. Moreover, the analysis by John W. O’Neill, a professor at Pennsylvania State University, confirms that a hotel’s valuation is driven primarily by its ability to bring in gross revenue, rather than its net income. O’Neill points out, however, that some hotel classes—notably, aging mid-market properties—are unable to achieve the dollar-per-thousand standard.
As explained in the August 2003 Cornell Quarterly, the key attributes that drive how closely a hotel’s valuation fits the dollar-per-thousand standard are the number of guest rooms, occupancy levels, ADR, and age of the facility. The dollar-per-thousand rule is most accurate for hotels that have relatively few guest rooms, high occupancies, high ADRs, and new physical plants. On the other hand, large, old properties frequently fail to achieve the dollar-per-thousand standard. Also falling short of the dollar-per-thousand convention are economy properties.
Using his own proprietary database of hotel transactions from 1990 through 2002, O’Neill examined 327 hotel sales in the following five segments: economy, midscale, full-service, all-suite with food and beverage, and all-suite without F&B. For the entire sample, he found that ADR was a better predictor of a hotel’s sale price than was net operating income (NOI), and both of those statistics were overwhelmingly superior to occupancy or age of the property.
On average, the ratio for the entire 327-property sample was $1 of ADR for every $800 in room value, a bit short of the dollar-per-thousand convention. Examining the segments, the all-suite properties without F&B hit the dollar-per-thousand standard, while full-service (business-class) hotels and all-suite properties with F&B came close, by drawing $1 in ADR per $900 in value (rounded) per room. The ratio for economy hotels is $1 in rate per $700 in value, and midscale hotels struggled to an average of $1 in ADR for $600 in room value.
O’Neill observes that the relatively low ratio for midscale hotels reflects the fact that the median age of this segment’s properties is the highest of all five segments in his sample, and the expense of running F&B and meeting space “results in a relatively inefficient business model.” To examine the valuation difficulties for midscale hotels in a different light, O’Neill calculated the average ADR that each hotel would need to get on an equal footing in valuation. In that calculation, all-suite hotels generate a mean of $1.05 in ADR per thousand dollars of room valuation, while midscale hotels must generate nearly twice that amount, $1.99 in ADR per thousand dollars in room valuation.
The full article is available in the August 2003 issue of the Cornell Hotel and Restaurant Administration Quarterly and is available on The Center for Hospitality Research web site (www.chr.cornell.edu