Hotels & EBITDAR: A Smarter Way to Analyze Profits

Many hoteliers rely on traditional metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to assess profitability. But what if I told you there’s a better way to understand the true earning potential of your hotel?

Enter EBITDAR—a lesser-known but highly effective financial metric that provides a clearer picture of a hotel's operational performance.

Unlike EBITDA, EBITDAR accounts for one of the biggest expenses in the hospitality industry—rent. Since many hotels lease their properties, ignoring rent costs can give a misleading picture of actual profits.

In this blog, we’ll uncover: - What EBITDAR is and how to calculate it - Why it’s a game-changer for hotels that lease their properties - How it helps investors evaluate a hotel’s profitability - How to use EBITDAR to make smarter financial decisions

If you're a hotel owner, operator, investor, or financial analyst, this guide will change how you measure profitability forever.

1. What is EBITDAR? (And Why Should Hotels Care?)

Understanding EBITDAR: The Hidden Profit Metric

EBITDAR stands for:

• Earnings – Total revenue generated by the hotel.
• Before – Meaning that certain costs are excluded for better clarity.
• Interest – The cost of borrowed funds, such as bank loans or financing.
• Taxes – Government-imposed charges on earnings.
• Depreciation – The gradual reduction in the value of tangible assets, such as buildings and furniture.
• Amortization – Similar to depreciation but for intangible assets like branding or franchise fees.
• Rent – Expenses related to leasing hotel properties, equipment, or land.

Why EBITDAR is a More Accurate Measure for Hotels

Imagine this: Two luxury hotels in the same city, offering nearly identical services, amenities, and occupancy rates. Both have exceptional guest reviews, a strong brand presence, and a solid management team.

Yet, when you look at their financial reports, one hotel seems far more profitable than the other.

Why?

It’s not because one hotel is better managed. It’s not because it has more guests. It’s simply because of how rent is factored into the equation.

This is where EBITDAR comes into play—a metric that levels the playing field between hotels that lease their properties and those that own them outright.

The Problem with EBITDA in the Hotel Industry

Most hoteliers and investors look at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) when evaluating a hotel’s profitability. While useful, EBITDA doesn’t tell the whole story.

Here’s why:

- Many Hotels Lease Their Properties Instead of Owning Them Hotels operate under different business models. Some own their properties, while others lease the land, building, or both.

For example:

• A Hilton-owned resort in Miami will have higher EBITDA because it doesn’t pay rent—it owns the property.
• A Marriott-managed hotel in New York might show a much lower EBITDA, but only because it leases its property at a high rental cost.

If we only look at EBITDA, the Hilton resort appears to be the more successful business. But is that really true?

- Rent is a Fixed Cost That Can Distort Profitability In major cities, lease costs can eat up 20-30% of a hotel's total revenue. That means two identical hotels with the same revenue and operational efficiency could appear drastically different in profitability, just because one leases its property while the other owns it.

- EBITDAR Eliminates the "Rent Distortion" To truly compare apples to apples, we need a metric that removes the impact of rent and focuses purely on how well the hotel operates.

That’s exactly what EBITDAR does.

2. How to Calculate EBITDAR in 10 Seconds

Hotels can use two simple formulas:

EBITDAR Formula from Net Income

If you’re starting from net income (the final profit figure after all expenses), use this formula:

2.2 Shortcut Formula if EBITDA is Already Known

Many hoteliers already have EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) in their reports. If you do, no need to start from scratch!

Simply add rent expenses back into EBITDA:

2.3 Example Calculation (Let’s Keep It Real!)

Let’s break this down with real numbers to make it easier to understand.

Imagine you own a 150-room boutique hotel in Los Angeles. Your financial report shows:

• Net Income: $5 million
• Interest on Loans: $1.2 million
• Taxes: $800,000
• Depreciation on Assets (Building, Furniture, Equipment, etc.): $3 million
• Amortization of Intangible Assets (Branding, Franchise Fees, etc.): $500,000
• Annual Rent Payment for Leasing the Hotel Property: $4 million

Now, let’s plug these numbers into the formula:

EBITDAR=5M+1.2M+0.8M+3M+0.5M+4M\text{EBITDAR} = 5M + 1.2M + 0.8M + 3M + 0.5M + 4MEBITDAR=5M+1.2M+0.8M+3M+0.5M+4M EBITDAR=14.5M\text{EBITDAR} = 14.5MEBITDAR=14.5M

That means the true operational profitability of your hotel—excluding rent and financing costs—is $14.5 million.

3. Why EBITDAR Matters in the Hotel Industry

Standardized Profitability Comparisons Across Hotels

Hotels operate under varied business models—some own their buildings, while others lease.

EBITDAR allows for fair financial comparison, regardless of lease agreements.

Example:

• Hotel A (Owns Property): EBITDA = $10M
• Hotel B (Leases Property): EBITDA = $6M, Rent = $4M
• EBITDAR for both hotels = $10M, meaning they have identical operational performance.

Uncovering the True Profitability of a Hotel

• EBITDA might underestimate the success of a leased hotel.
• EBITDAR ensures hotels are evaluated based on operational strength, not lease obligations.

Real-World Example: A luxury boutique hotel in Manhattan may have higher rent costs than a similar hotel in a secondary market like Austin, Texas.

If you only look at EBITDA, the Austin hotel appears more profitable. But when EBITDAR is calculated, the Manhattan hotel could actually have better operational margins despite higher rent.

Key Metric for Investors & Hotel Valuations

Investors use EBITDAR to:

• Compare hotels operating under different business models.
• Assess a hotel's profitability before making purchase decisions.
• Evaluate a hotel's ability to sustain its lease payments.

4. EBITDAR vs. EBITDA: Which One Should You Use?

• If your hotel leases its property, EBITDAR is a better metric because rent is a major expense that must be factored in.

5. The Limitations of EBITDAR (It’s Not Perfect!)

EBITDAR Can Paint an Overly Optimistic Picture

One of the biggest criticisms of EBITDAR is that it removes rent from the equation. While this is useful for comparing hotels fairly, it can also create a misleading sense of profitability.

Let’s say a hotel has a high EBITDAR, suggesting strong operations, but its actual net profit is low. Why? Because rent is a real, recurring expense that must be paid no matter what—and EBITDAR ignores it completely.

Example:

Imagine two hotels in the same city:

 Hotel A (Leased Property)

• Revenue: $50M
• EBITDAR: $20M
• Rent: $10M
• Net Profit (After Rent): $5M

 Hotel B (Owned Property)

• Revenue: $50M
• EBITDAR: $20M
• Rent: $0M
• Net Profit (After Expenses): $15M

If we only look at EBITDAR, both hotels appear equally successful at $20M EBITDAR. But in reality, Hotel A’s rent eats up half its profit, making it significantly less profitable than Hotel B.

Why This Is a Problem: EBITDAR removes an essential fixed cost that hotels have no choice but to pay. This can inflate profitability estimates and mislead hotel owners into thinking they are financially healthier than they actually are.

 Solution: EBITDAR should always be compared alongside EBITDA and net income. This helps create a more balanced financial picture by factoring in rent expenses.

EBITDAR Is Not a GAAP-Compliant Metric (So Be Careful!)

Unlike EBITDA, EBITDAR is not officially recognized under Generally Accepted Accounting Principles (GAAP). This means that different hotels may calculate EBITDAR differently, making direct comparisons tricky.

Because EBITDAR is not standardized, some hotels might include additional adjustments, while others might interpret certain costs differently. This can create inconsistencies, making it hard to compare hotels accurately across different brands, regions, or financial reports.

Why This Matters:

• One hotel might exclude certain operational costs, while another includes them—leading to misleading EBITDAR comparisons.
• Investors relying on EBITDAR may overestimate profitability if a hotel modifies its calculation methods to appear stronger.
• Hotel chains that report EBITDAR in different ways could confuse stakeholders when benchmarking performance.

Example: A luxury resort chain in Florida might calculate EBITDAR differently from a budget hotel brand in New York. If their calculations aren’t aligned, it becomes impossible to make fair profitability comparisons between them.

Solution:

• When comparing EBITDAR across hotels, always verify the calculation method used.
• Ensure financial consistency by applying the same EBITDAR formula across all properties in your portfolio.
• Use EBITDAR alongside other financial metrics like net profit, EBITDA, and gross operating profit (GOP) to get a well-rounded financial analysis.

6. Actionable Takeaways for Hoteliers

Understanding EBITDAR is one thing—using it to improve your hotel's profitability is another. Hoteliers who leverage this metric strategically can gain valuable insights into financial performance, identify inefficiencies, and make data-driven business decisions.

Here are three practical ways to apply EBITDAR to strengthen your hotel’s financial health and long-term growth.

Benchmark EBITDAR Against Industry Standards

Numbers mean nothing unless you compare them to the right benchmarks. EBITDAR can reveal how efficient your hotel is—but only if you stack it up against similar properties.

 How to Do It:

1. Compare EBITDAR across hotels of the same size, location, and service level.
   • A 5-star hotel in New York will naturally have a higher EBITDAR than a 3-star property in rural Texas.
   • The key is to compare apples to apples—hotels in similar markets and segments.

2. Use industry reports and financial databases to find EBITDAR averages.
   • Resources like STR Reports, CBRE, and hotel financial statements provide EBITDAR benchmarks for different hotel types.
   • If your EBITDAR is significantly lower than the industry average, it may indicate inefficiencies in operations, revenue management, or lease agreements.

3. Assess EBITDAR trends over time.
   • A declining EBITDAR could signal rising operating costs, inefficiencies, or over-reliance on costly distribution channels.
   • A steadily increasing EBITDAR suggests strong financial management and operational improvements.

Takeaway: If your hotel’s EBITDAR is below industry benchmarks, it’s time to analyze expenses, improve revenue strategies, and optimize operations.

Use EBITDAR to Negotiate Lease Terms

Many hotel owners and operators accept lease agreements at face value without considering how they impact long-term profitability. However, EBITDAR can be a powerful tool in lease negotiations.

Why This Matters:

• A high EBITDAR but low EBITDA means that rent is consuming a significant portion of revenue.
• If EBITDAR is healthy but EBITDA is weak, it signals that your operations are strong, but the lease terms may be unfavorable.

 How to Use EBITDAR in Lease Negotiations:

1. Show landlords the EBITDAR-to-rent ratio.
   • If EBITDAR is strong but net income remains low, landlords may be willing to adjust lease terms to ensure long-term stability.
   • Data-backed negotiations are far more effective than simply asking for a rent reduction.
2. Negotiate performance-based rent structures.
   • Some hotel leases have fixed rental rates, while others allow for variable rent based on revenue.
   • By demonstrating strong EBITDAR trends, hoteliers can request more flexible lease terms that align rent payments with business performance.
3. Consider lease restructuring options.
   • If EBITDAR is under pressure due to rising lease costs, explore options like: Extending lease terms in exchange for lower annual rent increases. Switching to a revenue-sharing lease model. Negotiating landlord contributions for property renovations or upgrades.

Takeaway: EBITDAR isn’t just a financial metric—it’s a negotiation tool. If rent is eating into profits, use EBITDAR data to make a case for better lease terms.

Monitor EBITDAR Trends for Business Expansion

Thinking about opening another hotel? Planning to renovate and upscale your property? Your EBITDAR trends can tell you if the timing is right.

 How to Use EBITDAR for Expansion Decisions:

1. Look for consistent EBITDAR growth over time.
   • A rising EBITDAR trend suggests that your hotel's operations are becoming more profitable, making expansion a low-risk opportunity.
   • If EBITDAR fluctuates wildly or declines, it’s a sign to stabilize current operations before considering expansion.
2. Use EBITDAR to secure financing for new projects.
   • Investors and lenders prefer EBITDAR over EBITDA when evaluating hotel expansion loans.
   • A strong EBITDAR indicates that your hotel generates high operational earnings, even before factoring in lease obligations.
3. Assess potential EBITDAR for new locations.
   • If considering opening another hotel, forecast the expected EBITDAR using industry data and financial projections.
   • Compare EBITDAR estimates across different cities, markets, and property types to find the most financially viable expansion option.

Takeaway: EBITDAR should be a key factor in deciding when and where to expand. A strong and growing EBITDAR means your hotel is financially ready to scale.

Conclusion: Why EBITDAR Should Be on Every Hotelier’s Radar

EBITDAR isn’t just another financial metric—it’s a game-changer for understanding a hotel’s true operational performance. Unlike EBITDA, it accounts for rent, making it the most accurate profitability measure for leased hotels.

For hoteliers, investors, and financial analysts, EBITDAR provides critical insights that: - Allow fair comparisons between owned and leased properties - Highlight true operational profitability without rent distortions - Serve as a powerful tool for lease negotiations and expansion planning

While EBITDAR isn’t a perfect metric, using it alongside EBITDA and net income gives a well-rounded financial picture. If you’re not tracking EBITDAR, you could be missing key insights into your hotel's actual earning potential.