JUNE 2011
RevPAR- ADJUSTED BUDGETS:
THE ONLY ONES WORTH LOOKING AT
(PART 3 OF 3)
Miguel Rivera
Senior Vice President,
HVS Asset Management & Advisory
www.hvs.com
HVS Asset Management & Advisory
100 Bush Street, Suite 750, San Francisco, CA 94104 USA
Budgets are a good planning tool for hotel operators, owners, and other stakeholders. However, it is
inappropriate to use them as benchmarks to measure a manager’s performance. It is intriguing then
that so many people in the industry use them as targets to measure and reward performance.
Perversely, this very fact makes budgets even less reliable, as it gives everyone involved in the
budgeting process strong incentives to sway the numbers to their own advantage. Budgets are, at best,
educated guesses of future performance, but they are not a substitute for indicators of actual
performance against the rest of the market. One of the best ways to make budgets relevant is to adjust
them using actual RevPAR indexes as the year progresses. This article describes a way to make these
adjustments.
PART III
This article is the third of a three-part series that explores the rationale, methodology and results related to
RevPAR-adjusted budgets. Adjusting budgets for a market’s RevPAR performance is proposed as a far
superior tool to measure management’s performance, compared with unadjusted budgets. This third article
covers the last three steps required to perform the necessary adjustments, based on an example that was
introduced in the previous article (the link to the first two article of this series are
http://www.hvs.com/article/5229/revpar-adjusted-budgets-the-only-ones-worth-looking-at/, and
http://www.hvs.com/article/5241/revpar-adjusted-budgets-the-only-ones-worth-looking-at/)
In the previous part of this series, we presented the 2010 Budget for a hypothetical hotel and identified
four steps required to restate the budget, adjusting for actual market performance. The four steps are restated below.
1.
Adjust the budgeted occupancy and ADR (and, therefore, RevPAR) for actual market performance
using penetration indexes.
2.
Adjust other departmental revenue based on the revised RevPAR assumptions.
3.
Adjust departmental expenses based on new revenue levels.
4.
Adjust undistributed operating expenses, and fixed expenses based on adjusted RevPAR.
The previous article covered the first of these four steps. The remainder of this article will explain the last
three steps. For convenience, the unadjusted budget for our hypothetical hotel is restated below.
REVPAR- ADJUSTMENT BUDGETS: (PART 3 OF 3) | PAGE 2
TABLE 1: HYPOTHETICAL 2009 ACTUAL AND BUDGETED 2010 RESULTS
2009 Actual
Number of Rooms:
Days Opened
Available Rooms
Occupied Rooms:
Occupancy:
Average Rate:
RevPAR:
RevPAR Penetration:
REVENUE
Rooms
Food & Beverage
Other Operating Depts
Other Income
Total
DEPARTMENTAL EXPENSES
Rooms
Food & Beverage (Hotel)
Other Operating Depts
Other Expenses
Total
DEPARTMENTAL INCOME
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General
Marketing
Prop. Operations & Maint.
Utilities
Total
HOUSE PROFIT
Management Fee
INCOME BEF FIXED EXPENSES
FIXED EXPENSES
Property Taxes
Insurance
Reserve for Replacement
Total
NET INCOME
Mgmt Fee as % of Owner CF
200
365
73,000
45,260
62.0%
$143.00
$88.66
141.8%
2010 Budget
% of
Gross
%
Actual
Market
2009
60.0%
$130.00
$78.00
POR/PAR
200
365
73,000
45,990
63.0%
$135.85
$85.59
144.6%
$143.00
52.57
10.51
4.21
210.29
$6,248
2,173
453
181
9,055
69.0
24.0
5.0
2.0
100.0
40.04
41.01
8.41
2.10
91.56
118.73
1,878
1,924
395
99
4,295
4,760
30.1
88.5
87.2
54.5
47.4
52.6
% of
Gross
POR/PAR
$6,472
2,379
476
190
9,518
68.0
25.0
5.0
2.0
100.0
%
$135.85
47.25
9.84
3.94
196.88
1,812
1,856
381
95
4,144
5,374
28.0
78.0
80.0
50.0
43.5
56.5
857
666
476
476
2,475
2,899
286
2,614
9.0
7.0
5.0
5.0
26.0
30.5
3.0
27.5
4,283
3,331
2,379
2,379
12,373
14,496
1,428
13,068
874
680
485
485
2,524
2,235
272
1,964
9.6
7.5
5.4
5.4
27.9
24.7
3.0
21.7
4,369
3,398
2,427
2,427
12,621
11,177
1,358
9,819
381
143
286
809
4.0
1.5
3.0
8.5
1,904
714
1,428
4,045
388
146
272
806
4.1
1.5
3.0
8.5
1,942
728
1,358
4,028
1,805
19.0
%
9,023
1,158
12.2
%
21.1
%
33.5
%
40.84
41.83
8.58
2.15
93.39
103.49
5,791
REVPAR- ADJUSTMENT BUDGETS: (PART 3 OF 3) | PAGE 3
Step 2: Departmental Revenue Adjustments
There are two ways in which departmental revenue can reasonably be adjusted, using a POR adjustment, or
a percentage of revenue adjustment.
To use a POR adjustment, take the budgeted revenue POR for each department other than rooms, and
multiply it by the new number of occupied rooms implied by the adjusted occupancy percentage. For
example, the budget contemplated Food & Beverage (F&B) revenue of $47.25 POR in 2010. The adjusted
2010 occupancy for our hotel is 65.3%, implying 47,634 occupied rooms (65.3% X 200 rooms X 365 days).
Thus, the adjusted F&B budget revenue for 2010 is $2,346,684, compared with the $2,173,000 budgeted.
To use a percentage of revenue adjustment, adjust the revenue for each department to match the
percentage of total revenue indicated by the budget. For example, to calculate the adjusted F&B revenue,
take the adjusted Rooms Revenue of $6,743,842 and divide by 69.0% to get the total revenue that is
consistent with the budget expectation that Rooms Revenue would account for 69.0% of total revenue. The
result is $9,774,684. Take that number and multiply it by 24.0%, the budgeted F&B Revenue percentage of
total revenue. The result is $2,345,684.
There are several factors to consider in deciding which of the two adjustment approaches to use. If, for
instance, actual market RevPAR turned out to be better than expected primarily because occupancy was
greater than anticipated, it may make more sense to use a POR adjustment. If market ADR turned out to be
higher than estimated (possibly as an indication that guests are becoming less price sensitive), a
percentage of revenue adjustment may be more appropriate. It is, of course, possible that both occupancy
and ADR turn out to be significantly different than projected. Attention should be paid as to whether
market segmentation changed significantly, as some segments tend to spend more throughout the hotel
than others. For instance, groups tend to consume more F&B (through catering events) than individual
travelers. There is no single perfect adjustment, but making one simple adjustment that is reasonable is a
good starting point. In any case, the result should provide a more relevant comparison than the unadjusted
budget.
Step 3: Departmental Expense Adjustments
Adjusting departmental expenses can be done based on POR or departmental expense percentages. For the
Rooms department, using the same expense POR as the original budget usually makes the most sense. For
other departments, adjusting the dollar amounts to keep the same expense ratios as the original budget is
generally the best policy.
Departmental expense ratios tend to decrease—i.e., get better—as related revenue increases (because
fixed expenses logically stay the same while only variable expenses increase). However, determining the
exact ratio of fixed to variable expenses can be somewhat subjective. In order to avoid introducing such
subjectivity, we favor a simplistic approach. Individual cases may warrant different treatment.
Step 4: Undistributed and Fixed Expense Adjustments
Undistributed operating expenses and fixed expenses tend to be more fixed than departmental expenses.
Hence, keeping them more in line with the original budget tends to make the most sense.
In our example, we kept Marketing, Property Operations & Maintenance (POM), and Utilities expenses the
same as the original budget. We also kept Administrative & General expense the same, but we introduced a
REVPAR- ADJUSTMENT BUDGETS: (PART 3 OF 3) | PAGE 4
small adjustment for credit card commissions. We added 2.5% of the difference in total revenue between
the adjusted and original budgets.
In cases where there are wide differences in occupancy between the adjusted and original budgets,
adjusting POM and Utilities expenses in the adjusted budget to match the original budget’s percentages of
total revenue or POR amounts could be warranted.
With the exception of Reserve for Replacement, fixed expenses do not vary with changes in revenue. In our
example, we kept Property Taxes and Insurance the same as in the original budget. We assumed Reserve
for Replacement would remain at a constant 3.0% of total revenue.
Financial Pro Forma Review
Table 5 on the following page shows the 2010 budget adjusted for actual market performance, as well as
the hypothetical 2010 actual performance. We added two variance columns, one comparing the percentage
differences between 2010 actual and the original budget, and a second one comparing actual results
against the adjusted budget.
As can be seen, had our hotel maintained the same occupancy and ADR penetration levels it held in 2009, it
should have been able to produce income of $1.7 million, compared with the $1.3 million that was actually
generated and the $1.2 million that was budgeted. The difference between the originally budgeted $1.2
million and the adjusted $1.7 million can be attributed primarily to a more favorable market than the
budget anticipated. While management produced actual net income that was 8.0% better than budgeted,
this result fell 24.8% below where it should have been had the hotel’s competitiveness been maintained.
As with any financial review, it is important to look at more than one point of comparison. Reviewing
previous-year performance and longer-standing historical trends should also be part of a thorough
financial evaluation.
Management’s job is to maximize both cash flow and long-term asset value. Customer and employee
satisfaction, service delivery, life and safety issues, physical maintenance, and community development are
only some of the additional elements that can play an important part in building an asset’s long-term value.
Focusing on short-term financial results, while important, should not be the only measure to evaluate
management’s performance.
REVPAR- ADJUSTMENT BUDGETS: (PART 3 OF 3) | PAGE 5
TABLE 5: HYPOTHETICAL 2010 ADJUSTED BUDGET AND ACTUAL RESULTS
2010 Budget
Adjusted for
Actual Market
Performance
Number of Rooms:
Days Opened
Available Rooms
Occupied Rooms:
Occupancy:
Average Rate:
RevPAR:
RevPAR Penetration:
REVENUE
Rooms
Food & Beverage
Other Operating Depts
Other Income
Total
DEPARTMENTAL EXPENSES
Rooms
Food & Beverage (Hotel)
Other Operating Depts
Other Expenses
Total
DEPARTMENTAL INCOME
UNDISTRIBUTED OPERATING EXPENSES
Administrative & General
Marketing
Prop. Operations & Maint.
Utilities
Total
HOUSE PROFIT
Management Fee
INCOME BEF FIXED EXPENSES
FIXED EXPENSES
Property Taxes
Insurance
Reserve for Replacement
Total
NET INCOME
Mgmt Fee as % of Owner CF
200
365
73,000
47,634
65.3%
$141.58
$92.38
127.2%
Variance
vs.
Adjusted
Budget
1.2%
1.2%
0.9%
2.1%
-2.3%
-2.3%
-3.2%
-5.4%
$137.07
47.68
9.93
3.97
198.65
2.1%
2.1%
2.1%
2.1%
2.1%
-5.4%
-5.4%
-5.4%
-5.4%
-5.4%
2010 Actual
POR/PAR
200
365
73,000
46,558
63.8%
$137.07
$87.42
144.6%
$141.58
49.24
10.26
4.10
205.18
$6,382
2,220
462
185
9,249
69.0
24.0
5.0
2.0
100.0
% of
Gross
%
Variance
vs.
Budget
Actual
Market
2010
63.1%
$128.71
$81.27
POR/PAR
% of
Gross
$6,744
2,346
489
195
9,774
69.0
24.0
5.0
2.0
100.0
%
1,945
1,992
409
102
4,449
5,325
28.8
84.9
83.6
52.3
45.5
54.5
40.84
41.83
8.58
2.15
93.39
111.79
1,939
1,947
399
100
4,386
4,864
30.4
87.7
86.4
54.0
47.4
52.6
41.64
41.83
8.58
2.15
94.19
104.46
3.2%
1.2%
1.2%
1.2%
2.1%
2.2%
-0.3%
-2.3%
-2.3%
-2.3%
-1.4%
-8.7%
892
680
485
485
2,542
2,783
293
2,490
9.1
7.0
5.0
5.0
26.0
28.5
3.0
25.5
4,369
3,398
2,427
2,427
12,711
13,914
1,466
12,448
874
680
485
485
2,524
2,339
277
2,062
9.4
7.3
5.4
5.4
27.3
25.3
3.0
22.3
4,369
3,398
2,427
2,427
12,621
11,697
1,387
10,309
0.0%
0.0%
0.0%
0.0%
0.0%
4.7%
2.1%
5.0%
-2.0%
0.0%
0.0%
0.0%
-0.7%
-15.9%
-5.4%
-17.2%
388
146
293
827
4.0
1.5
3.0
8.5
1,942
728
1,466
4,136
388
146
277
811
4.2
1.5
3.0
8.5
1,942
728
1,387
4,057
0.0%
0.0%
2.1%
0.7%
0.0%
0.0%
-5.4%
-1.9%
$1,662
17.5
%
$8,312
$1,250
13.1
%
$6,252
8.0%
-24.8%
23.4
%
31.1
%
REVPAR- ADJUSTMENT BUDGETS: (PART 3 OF 3) | PAGE 6
CONCLUSION
The purpose of the analysis presented in this three-part series was to make a distinction between results
that are the consequence of market performance—and beyond management’s control—and those that are
the result of management skill. The approach advocated takes a simplified approach to making many of the
individual adjustments required. The overall result is not meant to perfectly represent the net income that
could have been generated at a higher/lower level of rooms revenue. It is, however, meant to show
objectively what net income could have been more realistically than an unadjusted budget, making morerelevant comparisons possible.
REVPAR- ADJUSTMENT BUDGETS: (PART 3 OF 3) | PAGE 7
About HVS
About the Author
HVS is the world’s leading consulting and
services organization focused on the hotel,
restaurant, shared ownership, gaming, and
leisure industries. Established in 1980, the
company performs more than 2,000 assignments
per year for virtually every major industry
participant. HVS principals are regarded as the
leading professionals in their respective regions
of the globe. Through a worldwide network of 30
offices staffed by 400 seasoned industry
professionals, HVS provides an unparalleled
range of complementary services for the
hospitality industry. For further information
regarding our expertise and specifics about our
services, please visit www.hvs.com.
Miguel Rivera is SVP of Asset Management &
Strategic Advisory at HVS. He advises clients on
maximizing real estate value and aligning a
property's operations with its investment goals.
He has more than 14 years of experience in real
estate finance, including asset management,
brokerage, financing, credit ratings, and
appraisals. Prior to joining HVS, he was SVP at
Jones Lang LaSalle Hotels, where he worked on
more than $880-million worth of hotel real estate
transactions while leading that group’s Latin
American operations. He
holds an MBA from Yale
and a BS in Hotel
Administration from
Cornell.
For further information, Mr. Rivera can be
contacted at:
HVS Asset Management & Advisory
100 Bush Street, Suite 750
San Francisco, California 94104
United States of America
Tel: +1 (415) 268-0368
Fax: +1 (415) 896-0516
mrivera@hvs.com
REVPAR- ADJUSTMENT BUDGETS: (PART 3 OF 3) | PAGE 8