We're going to change things up a bit today and write directly to all the hotel owners out there. So all you GM and revenue managers – or all of you who don't want to own the place someday – go ahead and put this down, or minimise this window.

Oh, everyone's still here? OK, let's get to it then.

We want to talk about RevPAR – revenue per available room (no surprise there), but specifically how it pertains to the capitalisation rate of the property. Everyone knows how important RevPAR is to cash flow, and to the net income of the operation, but too often RevPAR's inextricable link to cap rate is overlooked. And this is unfortunate, because in hotels, even moderate increases in RevPAR can translate into spectacular increases in cap rate; if we take, for example, a 10 per cent increase in RevPAR at a $50 million (Dh183.5m) in revenue hotel can yield a 50 per cent gain in cap rate or more.

An asset – like the real estate and the physical plant of a hotel – is value based on not only its natural appreciation, but also on the revenue it produces on an annual basis. The basic measure of this revenue production to the original price the asset was purchased at, is its cap rate.

Capitalisation rate, in specific terms, is defined as the ratio between the net operating income produced or earnings before interest and taxes (Ebit) typically by an asset and its capital cost (the original price paid to buy the asset).

The current market value of the asset can also be used as an alternate computation of cap rate. Because of the net operating income aspect of the metric, cap rate often doesn't figure into the valuation of less dynamic assets, but for hotels it figures quite prominently.

And increasing RevPAR is the most direct way to increase cap rate.

On the surface, this is common sense. After all, hotels are developed on a given piece of real estate in order to establish a reliable revenue stream – more reliable than that generated by residential or retail units (something we all learned playing monopoly).

The link between the revenue generated by the property itself and RevPAR is easily understood as well. But the connection between RevPAR and cap rate does not seem to receive as much emphasis as other financial measures. The fact is, an increase in RevPAR directly correlates to an increase in equity and the value of the property.

This correlation is based in the outsized influence RevPAR has on a hotel's net operating income. Because of the negligible cost of goods sold associated with room sales, and because room sales can represent as much as 90 per cent of total revenues for a hotel, revenue generated per available room is the single most important contributing factor to a hotel property's net operating income or profit such as F&B.

To put that into real dollar figures, consider a 300-room hotel with $7.5m in annual revenue and $1m in annual profits. This property, originally valued at $10m, has a cap rate of 10 per cent, which implies the hotel has a RevPAR of $68.49. The next year, this hotel institutes a programme that increases RevPAR by five per cent (an increase that is legitimately attainable through the use of a sophisticated revenue management programme), which, in turn, increases annual revenues to $7.875 million.

Let's assume this hotel runs with a typical variable average room costs and converts every incremental $1 into $0.6 of profit or a 60 per cent conversion of increased revenue into profits. If you were to increase ADR by five per cent, your variable cost increase would be minimal and your increase would almost convert into profit at 100 per cent. This increase will correspond to a bump in annual profits of around $225,000 (375,000 x 60 per cent = 225,000).

The profit for the property this year goes up by 22.5 per cent to $1.225m; in other words, the five per cent increase in RevPAR translates to a 22.5 per cent increase in profits, which, at a 10 per cent cap rate, increases the hotel value to $12.25m.

A general rule is that every 10 per cent increase in RevPAR translates into a 45 per cent gain in the value of the hotel and its profits.

- The author is CEO and co-founder of RevPAR Guru. The views expressed are his own