June 30, 2013–All options are on the table, including a sale, as Baltimore officials review ways to improve the finances of the city’s money-losing convention center hotel — and brace for the likelihood of tapping the city’s general fund to cover debt payments next year.
The city hired an investment advisory firm to look into all aspects of the 757-room Hilton Baltimore, from operations to the debt structure, said Harry E. Black, director of the city’s Department of Finance.
The hotel itself is performing better than most of the city’s private hotels, based on occupancy and room rates. It’s generating enough business to more than cover its operating expenses but not enough to cover its large debt payments.
Earlier this year, the hotel’s overseers withdrew about $1 million from reserves and $1.5 million from a hotel occupancy tax account to cover its bond payments. In September 2014, Black said, he expects the city will need to go one step further and draw on revenue from hotel occupancy taxes that were not generated at the Hilton Baltimore — a first.
“It’s likely we’ll tap into the general fund in 2014,” Black said in an interview. “I … suspect it will be very minimal. But what’s important to keep in mind is that trend will now have begun.”
The city-owned hotel lost about $11.2 million in 2012, modestly less than the year before. Black said the problem is the debt — $18 million due over the 12 months ending in September, with incremental annual increases afterward.
The city’s consultant — Davenport & Co. — will explore a range of possibilities, including changing the debt structure or selling the hotel, he said. Black hopes to have the analysis in hand by late August.
“The goal is to develop a strategy that minimizes financial risk to the city,” he said.
Though the Hilton’s occupancy rate is higher than the Baltimore-area average, it falls substantially short of projections that city officials relied on when they issued about $301 million in tax-exempt municipal bonds in 2006 to finance its development.
The forecast for 2012 called for an occupancy rate of 74 percent. Instead, the rate was 64 percent. The average daily room rate was lower, too — about $171, compared with a projection of nearly $215.
The hotel took on more debt than it cost to build to establish a reserve fund, pay bond insurance and fees, and cover interest payments during two-and-a-half years of construction.
The way out of the debt problem is to increase occupancy, room rates or both, and the way to do that is to attract more conventions, said Dick O’Brien, a municipal securities expert. But that’s much easier said than done.
“That is an extremely competitive market,” said O’Brien, who retired Friday from brokerage firm Folger Nolan Fleming Douglas’ Hunt Valley office.
It’s a supply-and-demand problem, said Heywood T. Sanders, a professor of public administration at the University of Texas at San Antonio. Convention center space increased by 36 percent nationwide from 2000 to last year, he said. Convention attendance, by contrast, rose 1 percent, according to the Center for Exhibition Industry Research.
That’s put convention centers — and the spate of publicly owned or subsidized convention-center hotels — in a bad position. In 2009, the bondholders of the St. Louis convention center hotel foreclosed on the property and took it over.
And the space problem isn’t getting better. Nashville, Tenn., opened a new convention center in May. Cleveland opened one in June.
“What’s going on in the national market and has been for some time is that things are overbuilt,” said Sanders, who warned of problems facing convention hotels before Baltimore built its own. “Convention centers from one end of the country to the other are literally giving away their space for free in an effort to try and get business.”
Visit Baltimore, the city’s tourism and convention bureau, couldn’t provide on Friday the number of room nights used by people attending Baltimore conventions before and after the hotel was built. But the bureau said room nights booked in the 2012 fiscal year for future Baltimore Convention Center events were up 6 percent from the 2008 fiscal year, just before the hotel opened, and up 25 percent from 2007.
It’s not an easy environment for hotels in general. Average occupancies in the Baltimore area have been slipping, falling to 60.8 percent this year through May from 61.4 percent during the first five months of last year, according to data from Smith Travel Research.
That’s below the Hilton Baltimore’s occupancy rate. But room rates in the Baltimore area have been inching up, Smith Travel said.
“The bleeding has stopped,” said Jan D. Freitag, senior vice president of Smith Travel. “We’re no longer discounting as much as we did at the height of the recession.”
Black, the city finance director, blamed the recession — in addition to the competitive convention market — for the hotel’s woes.
“The hotel is operating at a high level of efficiency, and it’s very competitive in terms of other hotels in the city,” he said. “The issue is not performance. The primary dilemma is the hotel is saddled with having to meet debt requirements which are predicated on a pre-2008 financial forecast. …In 2008, when the recession kicked in, the world changed. Unfortunately, the debt structure didn’t change.”
Baltimore Sun reporter Steve Kilar contributed to this article.
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