What is an Average Daily Rate - ADR
An average daily rate (ADR) is a metric widely used in the hospitality industry to indicate the average realized room rental per day. Average daily rate is one of the key performance indicators (KPI). Other KPIs are metrics such as occupancy rate and combined with ADR comprise revenue per available room (RevPAR), all of which are used to measure the operating performance of a lodging unit such as a hotel or motel.
BREAKING DOWN Average Daily Rate - ADR
The ADR can be measured against a hotel's historical performance. It can also be used as a measure of relative performance, since the metric can be compared to other hotels that have similar characteristics such as size, clientele and location. The formula is room revenue divided by rooms sold.
If a hotel has $50,000 in room revenue and 500 rooms sold, the ADR would be $100. Rooms used for house use such as those set aside for hotel employees and complimentary ones are excluded from the calculation.
Using ADR in Practice
Hotel operators seek to increase ADR by focusing on pricing strategies. This includes upselling, cross-sale promotions and complementary offers such as free shuttle service to the local airport. The overall economy is a big factor in setting prices, with hotels and motels seeking to adjust room rates to match current demand.
The ADR does not tell a complete story about a hotel’s revenue. For instance, it does not include the charges a lodging may charge if a guest does not show up. The figure also does not subtract items such as commissions and rebates offered to customers if there is a problem.
A property’s ADR may increase as a result of price increases. However, this provides limited information in isolation. Occupancy could have fallen, leaving overall revenue lower.
Real Life Examples
Marriott International Inc. (NASDAQ: MAR) reports ADR along with occupancy rate and RevPAR. In 2015, Marriott's ADR increased 4.1% to $152.30. This is on a constant currency basis, which eliminates the effects of currency translations. Occupancy was up 0.8% to 73.7%. Taking $152.30 times 73.7% equates to a RevPAR of $112.25, which is up 5.2% from 2014.
Marriott's management credited overall economic growth, including moderate gross domestic product (GDP) growth in North America, which improved pricing. In particular, the company noted strong demand for rooms with higher rates, reducing the needs for discounting. However, market conditions are monitored, and rooms are priced daily to try to reflect the current demand.
Hilton Worldwide Holdings Inc. (NYSE) reported ADR rose 3.6% in 2015 to $141.19. The company's occupancy rate rose 130 basis points to 75.4% Both metrics combined lead to a RevPAR increase of 5.4% to $106.51.