EBITDAR for Better Hotel Financial Decision-Making

How EBITDAR and Cash Flow Analysis Can Improve Financial Decision-Making for Hotels

How EBITDAR and Cash Flow Analysis Can Improve Financial Decision-Making for Hotels
Article by
Bram Haenraets
Article update
February 28, 2024
Category
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Table of Contents

The hotel industry is complex and requires a clear understanding of a hotel's financial performance to make informed investment decisions. One widely used financial metric in the hotel industry is EBITDAR and EBITDARM. EBITDA measures a company's operating profitability before non-operating expenses, while EBITDAR adds back rent and lease expenses to provide a more comprehensive picture of a hotel's operating profitability. EBITDARM goes one step further by adding management fees to EBITDAR. These metrics are essential in evaluating a hotel's financial health, making investment decisions, and comparing performance across different hotels or brands. In this article, we delve into the importance of EBITDAR and EBITDARM for the hotel industry and how they are calculated. We also explore other financial metrics that hotel owners and investors should consider.

EBITDA, EBITDAR and EBITDARM

EBITDA is a commonly used financial metric that measures a company's operating profitability before accounting for non-operating expenses such as interest, taxes, depreciation, and amortization. While EBITDA provides a good indication of a hotel's operational efficiency, it does not take into account the impact of rent and other occupancy costs.

EBITDAR, on the other hand, adds back rent and lease expenses to EBITDA, providing a more comprehensive picture of a hotel's operating profitability. By including rent and lease expenses, EBITDAR accounts for the cost of the hotel's physical space and provides a better understanding of the hotel's operating expenses. EBITDAR can be particularly useful for comparing the performance of hotels that have different rent structures, such as owned versus leased properties.

EBITDARM goes one step further by adding management fees to EBITDAR. This additional adjustment provides a more accurate picture of a hotel's overall operating profitability by taking into account the impact of management fees on the hotel's financial performance. EBITDARM is especially relevant for hotels that are managed by third-party management companies, as management fees can significantly impact a hotel's profitability.

The importance of EBITDAR and EBITDARM for the hotel industry

EBITDAR and EBITDARM are important financial metrics in the hotel industry because they provide insights into a hotel's operating performance and profitability. These metrics are used by hotel owners, investors, and analysts to evaluate a hotel's financial health, compare performance across different hotels or brands, and make investment decisions.

Here are some specific reasons why EBITDAR and EBITDARM are important for the hotel industry:

They provide a more accurate measure of a hotel's operating performance

EBITDAR and EBITDARM provide a clearer picture of a hotel's operating performance by excluding non-operating expenses and non-cash expenses. By doing so, these metrics provide a more accurate measure of a hotel's true operating profitability.

For example, a hotel's net income may be impacted by interest payments, taxes, depreciation, and amortization expenses that are not directly related to the hotel's operating performance. By using EBITDAR or EBITDARM, these expenses are excluded from the calculation, providing a more accurate measure of the hotel's operating profitability.

They help hotel owners and investors evaluate a hotel's financial health

EBITDAR and EBITDARM are commonly used by hotel owners and investors to evaluate a hotel's financial health. These metrics provide a snapshot of a hotel's operating profitability, which is an important factor in determining the hotel's overall financial health.

Hotel owners and investors can use EBITDAR and EBITDARM to compare the performance of different hotels or brands, identify areas for improvement, and make investment decisions.

They are useful for evaluating management contracts

EBITDARM is particularly useful for hotels that operate under a management contract. Management fees can be a significant expense for these hotels, and EBITDARM provides a more accurate reflection of the hotel's true operating performance by including these fees in the calculation.

Hotel owners can use EBITDARM to evaluate the performance of a hotel under a management contract, compare the performance of different management companies, and negotiate management

A mathematical example of EBITDAR and EBITDARM

To calculate EBITDAR, we should include rent and lease expenses as operating expenses, and exclude other non-operating expenses like taxes, interest, depreciation, and amortization.

Here is the correct example:

Let's say that a hotel has annual revenue of $10 million. Its operating expenses (including rent, lease, and other operating expenses but excluding taxes, interest, depreciation, and amortization) are $8 million, and its rent and lease expenses are $1.5 million.

To calculate EBITDAR, we would add back the rent and lease expenses to the hotel's operating income:

EBITDAR = $10 million - $8 million + $1.5 million

EBITDAR = $3.5 million

In this example, the hotel's EBITDAR is $3.5 million, which represents the hotel's earnings before interest, taxes, depreciation, amortization, and rent.

Let's say that a managed hotel has annual revenue of $10 million. Its operating expenses (including rent, lease, management fees, and other operating expenses but excluding taxes, interest, depreciation, and amortization) are $8 million, and its rent and lease expenses are $1.5 million, and management fees are $500,000.

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To calculate EBITDARM, we would add back both the rent and lease expenses and management fees to the hotel's operating income:

EBITDARM = $10 million - $8 million + $1.5 million + $500,000

EBITDARM = $4 million

In this example, the managed hotel's EBITDARM is $4 million, which represents the hotel's earnings before interest, taxes, depreciation, amortization, rent, and management fees.

Other important financial metrics for hotels

In addition to EBITDAR and EBITDARM, there are several other financial metrics that are important for hotel owners and investors to take into account:

  • Occupancy Rate: This metric measures the percentage of hotel rooms that are occupied during a specific period of time, such as a day, week, or month. A high occupancy rate indicates that the hotel is doing well in terms of attracting guests, while a low occupancy rate could indicate problems with marketing or operations.
  • Average Daily Rate (ADR): This metric measures the average price paid for a hotel room during a specific period of time. A higher ADR typically indicates that the hotel is able to charge more for its rooms, while a lower ADR could indicate a need for price adjustments or marketing efforts.
  • Revenue per Available Room (RevPAR): This metric combines both occupancy rate and ADR to provide a more comprehensive measure of a hotel's financial performance. It calculates the revenue generated per available room during a specific period of time, and is a useful indicator of overall demand for the hotel.
  • Gross Operating Profit per Available Room (GOPPAR): This metric takes into account all revenue and expenses associated with running the hotel, including fixed costs such as rent and variable costs such as labor and utilities. It provides a more accurate picture of the hotel's profitability than EBITDA or EBITDAR alone.
  • Return on Investment (ROI): This metric measures the return on investment for the hotel owner or investor, taking into account both the initial investment and any ongoing expenses or revenue generated. It is a useful tool for evaluating the overall financial viability of a hotel investment.
  • Net income: Net income represents the total revenue minus all expenses, including interest, taxes, and depreciation. It provides a comprehensive view of a hotel's profitability and is a key metric for evaluating the financial health of the business.
  • Cash flow: Cash flow, on the other hand, represents the inflow and outflow of cash over a specific period of time. It takes into account all sources of revenue and all expenses, including investments in property, equipment, and other assets. A positive cash flow indicates that the hotel is generating more cash than it is spending, while a negative cash flow may indicate financial difficulties.

Overall, hotel owners and investors should consider a range of financial metrics when evaluating the performance of a hotel. By using multiple metrics and taking a comprehensive view of the hotel's financial health, they can make more informed decisions about investment, operations, and strategy.

Concluding

In conclusion, EBITDAR and EBITDARM are important financial metrics for evaluating the operating performance and profitability of hotels. These metrics provide a clearer picture of a hotel's financial health and can be useful for making investment decisions, comparing the performance of different hotels or brands, and evaluating management contracts.

By including rent, lease expenses, and management fees in the calculation, EBITDAR and EBITDARM provide a more accurate measure of a hotel's true operating profitability. Hotel owners and investors can use these metrics to identify areas for improvement and make informed investment decisions.

However, it is important to note that EBITDAR and EBITDARM should not be the only metrics used to evaluate a hotel's financial health. Other metrics such as occupancy rate, average daily rate, and revenue per available room should also be considered.

Overall, a combination of financial metrics and a thorough understanding of a hotel's operations is essential for making informed decisions and ensuring long-term financial success in the hotel industry.

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Frequently Asked Questions

01

What is the difference between EBITDA, EBITDAR, and EBITDARM?

EBITDA measures operating profitability excluding non-operating expenses. EBITDAR adds rent and lease expenses, while EBITDARM further includes management fees, offering a comprehensive view of a hotel's operating performance.

02

Why are EBITDAR and EBITDARM important for the hotel industry?

These metrics provide a clearer picture of a hotel's operating profitability by accounting for costs like rent and management fees, crucial for making investment decisions and comparing hotel performance.

03

Besides EBITDAR and EBITDARM, what other financial metrics should hotel owners consider?

Hotel owners should also consider Occupancy Rate, Average Daily Rate (ADR), Revenue per Available Room (RevPAR), Gross Operating Profit per Available Room (GOPPAR), Return on Investment (ROI), Net Income, and Cash Flow to fully evaluate a hotel's financial health and operational efficiency.