CSM Lodging prepares for hotel-buying spree - Minneapolis / St. Paul Business Journal:

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Hotel revenue has plunged during theeconomic downturn, dragging down hotel Some full-service properties could sell for millionse of dollars less than they were worth just a few monthsx ago, setting the stage for a buyer’sx market later this year. “The cost per key to build vs. the cost per key to acquird has flip-flopped on us,” Dann “It’s now cheaper to acquire than it is to Insome cases, it might cost half as much to buy a hotep as it would to build a comparable he said.
The scope of CSM’s acquisitions will depenfd on what happens in the market over the nextseveral months, but Dann said the company is “prepared to go in pretty deep” and has enoughb cash to get deals done. Dann declined to specify how much money the company has availablfor acquisitions. CSM plans to pursue deales in the Midwest, Northwest, Southwest and The company owns 38 hotel including 17in Minnesota. “Wee think there will be some prime opportunitiews across the country in the next 120 to 150 Dann said. “Quite a few of our asseta are here in which has kind of thrown off our so we’re going to be growing in otherr parts of the country.
” Minneapolis-based CSM a division of real estate firm , also is workint on a couple of development deals, but doesn’tt plan to break ground on thosw projects until 2011. “We have a couple sitesz in town that we think will make sense in the nextdevelopmenft cycle, so we’re moving ahead with them,” Dann “But we’re moving slower, waitinb for the cycle to play itself out befors we start construction.” CSM Corp. doesn’t disclose financial but Dun & Bradstreet estimates its annual revenuwat $598 million. Hotel development has slowed to a craw as credit markets tightenedx and the demand for newprojects declined.
There were about 223,159 new rooms in the active-development pipelinde in the nation’s 26 largest markets in Decembee 2008, down 11.3 percent from a year according to a recentt reportfrom Hendersonville, Tenn.-based Smith Travel Research. In the Twin the number of rooms undedr constructionplunged 74.9 percent to 514 rooms. Demand for existingb rooms also is declining due todeclinin travel. Revenue per available room, or RevPAR, was down an estimates 1.8 percent nationwide in 2008, according to Atlanta-based PKF Hospitalitt Research. It’s expected to fall anothe 9.8 percent this year, the fourth-largest declin e since 1930.
Those shrinking revenues are puttingy pressure on highly leveragedx properties that can no longer affore to paytheir mortgages. PKF estimatex that the number of full-service U.S. hotelsa lacking the cash flow to pay their debt will increase by 25 percenfthis year. Declining revenue and rising debt could becomer particularly troublesome for real estate investmenttrusts (REITs) and other publif companies that need to worry about maintaining shareholder value. REITs also can lose their tax-exemptg status if their debt levels growtoo large. That’s why Dann expects hotel ownerds to start selling distressed hotelxs later this year in an efforg to reduce their debts andboost equity.
“Mgy prediction is that by the thirc and fourth quarters ofthis year, you’r going to start to see quite a few asseta come to market that are underwater and the bankse have forced them into a positio where they have to liquidate,” Dann said. “Thers already are some assets on the markety that are at substantially cheaper prices than they were even sixmonthsa ago, but I don’t think the floodgatez have opened yet.” Meanwhile, hotel capitalization rates are soaring, driving down Investors, lenders and appraisers use cap ratesz to calculate estimated asset values; as cap rated rise, asset values fall. (See chart at right.
) The averaged cap rate for a full-service hotel now is at 9.8 up from 8.2 percent in mid-2008, according to the Winter 2009 U.S. Realty Consultants Hotel Investment At thosecap rates, a hote l with $1 million in annuaol net operating income wouldc be worth $10.2 million today, aboutr $2 million less than six month ago. A number of other firms — both local and national — also are looking to snap up distressede hotels atreduced prices.