City-owned Hilton Struggles In First Year

Convention Hotel Falls Short In Per-room Revenue, A Key Measurement

August 22, 2009|By Lorraine Mirabella | Lorraine Mirabella,

Baltimore's city-owned convention hotel opened to much fanfare and high expectations last August, with white-gloved waiters serving champagne in the blue-and-rust lobby, a jazz ensemble playing and the first guests marveling at the ballpark views. Tourism and government leaders praised the $301 million, publicly financed project as the much-needed ingredient to bolster convention business and elevate the city as a destination.

But within months, the bottom fell out of the economy, weakening demand in the lodging and convention industries.

Faced with the worst economy in decades as it completes its first year, the Hilton Baltimore Convention Center Hotel has failed to live up to rosy predictions made in more robust times. The 757-room hotel, a block north of Camden Yards, has fallen short in a key measure of a hotel's performance - revenue earned per room. And city officials are less certain the hotel will turn a profit in the three- to five-year time frame originally projected.

Despite the struggling lodging and convention industry, the West Pratt Street hotel has succeeded in meeting other goals, city officials say. It has persuaded convention groups that would have gone elsewhere to come to Baltimore. And it has paid its bills and met its debt payments without dipping into reserves.

"We wanted to pay our bills without having to go outside what the hotel brings in," said Irene Van Sant, hotel project manager for Baltimore Development Corp., the city's economic development arm.

During the first annual reporting period, which ended Dec. 31, 2008, and includes only 132 days of operation, the hotel reported a $17.1 million loss, with $18.1 million in revenue and $35 million in expenses, according to financial statements prepared by Clifton Gunderson LLP. Van Sant notes that much of the expenses were funded not with revenue but with bond proceeds designed to cover one-time opening costs, which must be charged as expenses under accounting rules.

But the hotel falls short in revenue per available room, which is average daily room rate multiplied by occupancy rate. City and hotel officials won't disclose the Hilton's revenue per room, occupancy or average room rates. But a calculation using the hotel's reported room revenue of $6.8 million for 2008 and the number of days open last year shows revenue per available room of $68.46. That's well below the $112.57 projected for the Hilton for 2008 by consultants, based on projected occupancy levels of 62 percent and an average rate of $181.56. It's also below Baltimore's average hotel revenue per available room of $82.55 as of midyear, according to Smith Travel Research.

City officials, who planned for a hotel at a time when the top downtown hotels enjoyed some of the highest occupancy rates around, say they couldn't have anticipated how much demand would wane for business and leisure travel. City leaders long advocated for a large hotel connected to the city's convention center that would reserve room blocks for conventioneers. It would allow Baltimore to compete regionally and nationally by pulling in larger convention groups, boosting center business and spreading bookings among downtown hotels.

"We built the right asset at the right location," said M.J. "Jay" Brodie, development corporation president. Now, "we all wish the recession would end."

The downturn has taken its toll on hotel occupancy, which has plummeted in Baltimore and elsewhere through midyear. Baltimore's average hotel occupancy fell 7.1 percent to 58 percent, while average daily rates fell 8.5 percent, to $142.34, compared with mid-2008, according to Smith Travel Research. Hoteliers and convention center operators across the country have been left to scramble for business by cutting rates and offering deals.

"The hotel industry is in the worst downturn in the last 20 years," said Rod Petrik, a managing director at Stifel Nicolaus & Co., who follows the lodging industry. "Obviously, it closely tracks the economy. You're seeing all segments, whether leisure, business, groups and conventions, weak across the board."

The Hilton also has had to contend with the ramp-up time typical for any new hotel during a year when the city added more than 1,200 rooms within a one-mile radius of Pratt and Light streets, according to data from Downtown Partnership of Baltimore.

Officials say they are heartened by the hotel's ability to pay its bills and meet its debt payments. The city sold $301.7 million worth of revenue bonds to finance the project, including $230 million in construction costs, and set up a series of backup sources to pay debt service in case hotel revenue and tax increment financing falls short. Reserves include a $9 million fund, Hilton's hotel occupancy tax, citywide hotel occupancy taxes and a pledge of up to $25 million from Hilton's corporate office.

The city will make its debt service payment in September without dipping into reserves and expects to do so when the March payment comes due, Van Sant said.

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