MCD Hotel Advisors

When building a hotel financial model, there can be up to hundreds of inputs and many KPIs to track. However, there are several that need to pass the sniff test of an investor before any additional due diligence work is done. Here are 5 key hotel financial modeling metrics to know and track closely in your models…

RevPAR

Clients are sometimes too focused on ADR and/or Occupancy %.  However, RevPAR (ADR * Occupancy) is the much more important metric to track. Because it represents the overall revenue picture. While you need to track ADR and OCC to understand what is driving RevPAR, maximizing RevPAR should be the goal instead of just maximizing one its components. Furthermore, you can also track TRevPAR if you have a lot of ancillary revenue streams. RevPAR is often a topic of debate for investors and where you really need to have validated your inputs.

Gross Operating Profit (GOP %)

This metric is key to understanding how well the hotel is being managed. It is the % of all revenue that flows down to NOI after operating expenses. The higher the GOP %, the more efficient the hotel management is doing at delivering the total revenue. It is a key metric in evaluating hotel profitability as it can be controlled. As opposed to the expenses that appear below this in the pro forma. Items below this like Property Taxes, Insurance, etc. are more fixed and out if the hotel operator’s control. This is often the metric used for calculating a hotel management company’s incentive fee per the HMA.

Net Operating Income (NOI %)

Similar to GOP %, this is a metric for hotel profitability. However, this is further down in the pro forma and accounts for all expenses both operating and non-operating. This metric is critical not only for looking at a hotel’s net profitability, but also because this is the metric used for calculating the hotel’s exit price in hotel financial modeling.

Levered IRR %

When the model is all set up and all the inputs are vetted, this is the metric that investors care about. What is the IRR % of the project assuming you are taking out a loan as part of the capital stack. Investors have different IRR % expectations, but whatever they are looking for in a return, this is the metric they look to as a Go/No Go decision.

Debt Service Coverage Ratio

Some type of loan will often be a part of your capital stack. And the project’s ability to make the loan payments will be of critical concern to any lender. So when modeling out your hotel financial analysis, you need to look at and ensure that the DSCR levels are high enough that the banks feel comfortable making a loan. It will vary by bank, but a typical DSCR range for a bank is 1.25-1.75x