By Lorraine Mirabella and Jamie Smith Hopkins, The Baltimore Sun
10:32 PM EDT, June 11, 2013
The state-owned Hyatt Regency Chesapeake Bay resort in Cambridge continues to deplete a reserve fund to cover its semiannual debt payments because it is not making enough money.
The state withdrew $2 million from the reserve June 1, cutting the fund's balance nearly in half to $2.3 million, according to a June 4 letter to the Maryland Economic Development Corp., which owns the golf resort hotel and conference center on the Choptank River.
MEDCO financed the hotel's construction in 2002, issuing more than $120 million in tax-exempt revenue bonds, which are designed to be paid for out of the revenue a project creates.
The state helped build the 400-room, six-story hotel to shore up the economy in Cambridge and Dorchester County at a time when the community was reeling from the closure of manufacturing and seafood packing operations. Sprawling across 400 acres, the resort features an 18-hole golf course, marina and meeting space.
But the luxury resort, rated four diamonds by AAA, has struggled since the recession eroded corporate and leisure travel, acknowledged Robert Brennan, executive director of MEDCO, which promotes economic activity in Maryland.
The hotel's financial statements show it hasn't earned enough from operations to cover expenses, let alone cover its debt payments, for several years.
As a result, the Hyatt started drawing down its debt service reserve fund in December 2010 to make the semiannual payments, according to documents sent to bondholders. The reserve has dwindled to around 15 percent of the amount required by its bond covenants, leaving little cushion for future revenue shortfalls.
The next debt payment is due Dec. 1. The Hyatt could default on the debt if it continues to withdraw from the reserve fund, Brennan said.
Neither the state nor MEDCO would be required to cover the bonds, Brennan said. The revenue bonds have not been backed by the state since the project was refinanced in 2006, he said. The debt is secured by the hotel.
The depletion of reserves to make debt payments surprised Cambridge officials, who said they see the hotel as a success. Edwin Kinnamon, the city's clerk and treasurer, said he's heard only good news about the hotel's occupancy and events there. He noted that Presidents Barack Obama and George W. Bush used the complex for political events.
"I'm very proud to have it in our town," said Cambridge Mayor Victoria Jackson-Stanley. "They bring a lot of resources to our community."
The Hyatt posted an operating loss of $3 million in fiscal year 2012, which ended June 30, according to financial statements. The loss was somewhat smaller than losses in fiscal 2011 and 2010.
In a January presentation to bondholders, MEDCO projected that the hotel would be able to meet 92 percent of its debt service obligations for the 2013 fiscal year, which ends June 30. Projections developed for MEDCO by PKF Consulting USA suggest that the hotel will generate enough income to cover its debt obligations in each of the next four fiscal years.
As of May, the hotel's occupancy rate averaged 59 percent; and rates, which varied during the year, averaged $218 that month, according to a monthly report to bondholders. Both were down from May 2012 when occupancy was 75 percent and rates averaged $223. The revenue per available room fell to $129 in May from $168 a year earlier.
Yet Ted Kanatas, the Hyatt Chesapeake's general manager, said there's been an encouraging uptick in leisure business this year, compared with a year ago.
"The hotel is still enjoying a good start of the summer season, and it's business as usual here," Kanatas said.
The hotel's financial difficulties have affected the market for its bonds. They last sold in May for less than 62 cents on the dollar, according to the Municipal Securities Rulemaking Board. That discount increases the yield they pay the new buyer. The very high yield — especially for a tax-exempt bond — suggests that investors see them as risky, one analyst said.
"The marketplace is telling you there's a serious problem here," said Dick O'Brien, a municipal securities expert at brokerage firm Folger Nolan Fleming Douglas' Hunt Valley office. "They haven't generated the traffic that the feasibility study suggested that they would."
Brennan dismissed concerns about the project.
"It's nothing new. It's an issue that the bond investors are very much aware of," he said. "We believe and they believe strongly in the strength of the Hyatt Cambridge. They've supported the project in the past, and we expect them to [continue to] support us."
Even if a default were to occur, the Hyatt "would remain open and operating as we have for the last 13 years," Brennan said. "We know from historical operation that there's enough business out there in normal market conditions to satisfy all the obligations. Once we get back to normal market conditions, we'll be fine."
Timing finally may be on the resort's side, with economic conditions improving for the hospitality industry, said Jan D. Freitag , a senior vice president with Smith Travel Research.
"Things are definitely getting better overall for the nation," Freitag said. "We have healthy demand growth, selling more rooms than ever before, but not a lot of new hotels are being built, so occupancy [rates] are increasing."
Resort hotels in particular are benefiting, he said. Resort property occupancies grew more than 2 percent in the first four months of the year, to 64.7 percent. Average room rates increased 5.7 percent.
"That's fairly healthy," Freitag said, and those trends are likely to continue this year.
The Hyatt Chesapeake is not the first government-owned hotel in Maryland to run into financial difficulty.
The state poured millions of dollars into the money-losing Rocky Gap hotel and conference center in Western Maryland before turning the project over to a private company last year. Evitts Resort LLC has remade the lakeside golf resort as a casino, which opened in late May.
And in Baltimore, city officials were forced to dip into the general fund for $1 million to help the city-owned Hilton Baltimore Convention Center Hotel make its debt payments this year.
O'Brien wondered whether the Hyatt Chesapeake also might need to be sold or turn to gambling, which would require approval of state lawmakers. He said bondholders can form a protective committee and negotiate with MEDCO about restructuring the debt or selling the hotel.
"There's no quick fix here that I see," O'Brien said. "It appears to me that the long-term answer needs to be some other revenue source, and that smells to me like it's gambling. ... In the Eastern Shore parlance, it's time to fish or cut bait. The issues need to be dealt with because they're not going to go away."
Brennan said MEDCO is not considering selling the hotel.
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