Morgans Hotel Group Reports Third Quarter 2011 Results

NEW YORK, Nov. 7, 2011 /PRNewswire/ -- Morgans Hotel Group Co. (NASDAQ: MHGC) ("MHG" or the "Company") today reported financial results for the quarter ended September 30, 2011.

• Adjusted EBITDA was $4.9 million in the third quarter of 2011. Excluding the impact of asset sales, assets held for sale and Hard Rock, Adjusted EBITDA increased by $1.0 million from the comparable period in 2010.

• Revenue per available room ("RevPAR") for System-Wide Comparable Hotels increased by 9.3%, or 8.4% in constant dollars, in the third quarter of 2011 from the comparable period in 2010, driven primarily by a 6.3% increase in average daily rate ("ADR") (5.4%  in constant dollars).  

• Excluding the impact of Hurricane Irene, EBITDA from Owned Comparable Hotels increased by 15.3% in the third quarter of 2011 as compared to the same period in 2010, driven by an 8.8% RevPAR increase.

• Excluding the impact of Hurricane Irene, operating margins at Comparable Owned Hotels increased by 190 basis points.

• In August 2011, the Company entered into a hotel management and residential licensing agreement for a 310-room Mondrian-branded hotel, to be the lifestyle hotel destination in the 1,000 acre destination resort metropolis, Baha Mar Resort, in Nassau, The Bahamas.  

• During the quarter, the Company transformed its balance sheet by adding liquidity through a new $100 million credit line, reducing its debt, and eliminating all near-term consolidated maturities. The Company has retired approximately $240 million of debt in 2011, has no consolidated debt maturities until 2014, and has pro forma liquidity, assuming the completion of the sale of the London joint venture, of approximately $163 million.    

• In October 2011, the Company and Walton Street, the 50/50 partners in the joint venture that owns the Sanderson and St Martins Lane hotels, entered into an agreement to sell the joint venture for 192 million pounds Sterling, or approximately $308 million based on today's exchange rate.  The Company expects to receive net proceeds of approximately $70 million on closing of the transaction, which is expected to occur in the fourth quarter of 2011.  

Michael Gross, CEO of the Company, said: "Our hotels continued to perform well in the quarter and we made significant progress in positioning the company for growth.  We have further reduced our leverage, eliminated all near-term consolidated debt maturities and improved our liquidity position.  We are now focused on enhancing our status as a global leader in lifestyle hospitality management.  We are excited about the opportunity to add more contracts and expand our Hudson, Mondrian and Delano brands around the world."

Third Quarter 2011 Operating Results

Adjusted EBITDA for the third quarter of 2011 was $4.9 million, a decrease of 56.1% from the same period in 2010.  Excluding the EBITDA contribution from the three hotels MHG sold in May 2011, EBITDA from the London hotels, which are held for sale, and from Hard Rock Hotel & Casino in Las Vegas, which the Company managed and partially owned until March 2011, Adjusted EBITDA increased by $1.0 million from the third quarter of 2010, or 56.5%.  This increase was due to strong operating results at Delano and the strong ramp-up at our new Mondrian hotel in New York's SoHo neighborhood.

RevPAR at System-Wide Comparable Hotels increased by 9.3% (8.4% in constant dollars) in the third quarter of  2011 compared to the third quarter of 2010, driven primarily by gains in ADR, which increased by 6.3% (5.4% in constant dollars).  

Results were led by MHG's South Beach hotels, which continue to benefit from both strong domestic and international travel.  At MHG's key EBITDA contributors, Delano's RevPAR increased by 18.3% and Hudson's RevPAR increased 4.0% (6.0% excluding the impact of cancellations due to Hurricane Irene).  Mondrian SoHo, our newest hotel in New York City, posted an occupancy rate of 79.5% during the three months ended September 30, 2011 and ADR of $298.95.  

Primarily as a result of the sale in May 2011 of Mondrian Los Angeles, Royalton and Morgans, MHG recorded a decrease of 18.6% in total hotel revenues during the third quarter of 2011 as compared to the same period in 2010.  At MHG's Comparable Owned Hotels, which includes Hudson, Delano and Clift, RevPAR increased 7.7% in the three months ended September 30, 2011 as compared to the same period in 2010.  

The Company also recorded decreases in total operating expenses and depreciation and amortization expense during the third quarter of 2011 as a result of the May 2011 sale of these three hotels.  MHG continues to manage these hotels pursuant to long-term management agreements, and as a result, the gains on sales are deferred and recognized over the initial term of the respective management agreements.  During the three months ended September 30, 2011, the Company recorded $1.1 million of this gain as income.  

Operating margins at Comparable Owned Hotels increased by 80 basis points in the third quarter of 2011 compared to the same period last year.  Excluding the impact of cancellations and direct costs due to Hurricane Irene, operating margins at Comparable Owned Hotels increased by 190 basis points in the third quarter of 2011 compared to the same period last year.  The margin expansion was driven by increases in ADR which accounted for virtually all of the RevPAR growth at the Company's Comparable Owned Hotels. Operating margins at Comparable Owned Hotels were also adversely affected by higher real estate taxes at Hudson, which are currently under appeal.

Based on the uncertain economic environment and the upcoming joint venture debt maturity in October 2012, the Company wrote down its investment in Ames Boston in September 2011 and recorded a $10.6 million non-cash impairment charge through equity in loss of unconsolidated joint ventures.  

MHG recorded a net loss of $24.8 million in the third quarter of 2011 compared to a net loss of $37.1 million in the third quarter of 2010 primarily due to decreases in other non-operating expenses related to the non-cash charge for the change in the fair value of warrants issued to Yucaipa in 2010.  

Balance Sheet and Liquidity

During the third quarter, MHG transformed its balance sheet by increasing liquidity, reducing debt and eliminating near-term maturities.  During 2011, the Company has reduced its consolidated debt by approximately $240 million.

In July 2011, the Company entered into a new $100 million senior secured revolving credit facility with additional borrowing capacity up to $110 million. The facility's interest rate is LIBOR plus 4.0%, subject to a LIBOR floor of 1.0%.  The facility matures in three years and is secured by Delano in South Beach.  The credit facility contains standard financial covenants, including a minimum fixed charge coverage ratio of 1.05x in the first year and 1.10x thereafter.  

In August 2011, MHG refinanced the Hudson mortgage and mezzanine debt of $227.7 million, which was scheduled to mature in October 2011.  The Company retired the mortgage and mezzanine debt with net proceeds of a new $135.0 million non-recourse mortgage loan agreement secured by Hudson, along with cash on hand and in escrow.  Under the terms of the new Hudson mortgage agreement, $115.0 million was drawn at closing with the remaining $20.0 million available to be drawn based on the hotel achieving certain levels of cash flow.

In October 2011, the Company as operator and 50% owner of the London joint venture that owns Sanderson and St Martins Lane announced that the joint venture partners have entered into a definitive agreement to sell their interests in the Sanderson and St Martins Lane hotels for 192 million pounds, or approximately $308 million based on today's exchange rate. The sales price for the two hotels represents a value of approximately 542,000 pounds, or $870,000, per room.  MHG will continue to operate the hotels under long-term management agreements. The terms of the management agreements, including extension options, have been extended to 2041 from 2027.  The joint venture partners will use the sales proceeds, along with cash in escrow, to retire the approximately 99.5 million pounds of outstanding mortgage debt, which is secured by the two hotels.  MHG's 50% portion of the net proceeds, after the repayment of debt and closing costs, is expected to be approximately $70 million.  

The Company also sold its investment in Mondrian Los Angeles' food and beverage business to an affiliate of Pebblebrook, the owner of Mondrian Los Angeles, for $2.5 million during the third quarter of 2011.  

As a result of the Hudson refinancing, MHG's total consolidated debt at September 30, 2011, excluding the Clift lease, was $346.8 million with a weighted average interest rate of 4.3%. At September 30, 2011, MHG had $12.8 million of cash and cash equivalents and $80 million available under the revolving credit facility, after $10.0 million of borrowings and $10.0 million of letters of credit against the facility.  As of September 30, 2011, total restricted cash was $7.1 million.

MHG's total pro forma liquidity as of September 30, 2011, giving effect to the closing of the sale of the joint venture that owns the London hotels as if it had closed on September 30, 2011, would have been approximately $162.8 million.

MHG currently has approximately $170 million of remaining tax net operating loss carry forwards to offset future income, including gains on future asset sales.  

Development Activity

In August, MHG entered into a hotel management and residential licensing agreement for a 310-room Mondrian-branded hotel, to be the lifestyle hotel destination in the 1,000 acre destination resort metropolis, Baha Mar Resort, in Nassau, The Bahamas. This hotel is expected to represent the fifth Mondrian hotel in the expansion of the Company's iconic brand.   Upon completion and opening of the hotel, MHG will operate Mondrian at Baha Mar pursuant to a 20-year management agreement.  The hotel is scheduled to open in late 2014.  MHG is required to fund approximately $10 million of key money just prior to and at opening of the hotel.  As of September 30, 2011, the Company has outstanding a $10 million standby letter of credit related to this obligation.  

At its owned hotels, MHG intends to spend approximately $8 to $10 million on projects at Delano, and $18 to $20 million at Hudson, all of which are expected to have positive EBITDA impacts.  At Delano, MHG plans to upgrade Delano's exclusive bungalows and suites, improve the public areas, including the pool, restaurant and bar space, and create additional meeting space.  This work was begun in the third quarter of 2011 and will continue into early 2012.  At Hudson, the Company intends to convert a minimum of 23 SRO units into guest rooms at a cost of approximately $130,000 per room, significantly below recent trading prices of hotel rooms in New York City. Additionally, MHG plans to upgrade the Hudson room product with new furnishings, lighting and technology, and a complete corridor renovation.  The Company anticipates the renovation work will commence during New York's seasonally slow first quarter of 2012 continuing through mid-year.  

2011 Outlook

MHG's outlook is based on trends in its markets, although various factors, including uncertainty in the economy and volatility in travel and weather patterns, could result in changes to this outlook.

MHG expects that the RevPAR increase at System-Wide Comparable Hotels for 2011 compared to 2010 should be 8% to 10%, above our previous range of 7% to 9%.  MHG is confident in its ability to generate strong flow-through to EBITDA, although the Company is not providing further detail on projected EBITDA at this time, given the transitional nature of this year and multiple moving parts as it moves toward a brand and management focused business model.  

Conference Call

MHG will host a conference call to discuss the third quarter financial results today at 5:00 PM Eastern Time.

The call will be webcast live over the Internet at 5:00 PM Eastern Time and can be accessed at www.morganshotelgroup.com under the About Us, Investor Overview section. Participants should follow the instructions provided on the website for the download and installation of audio applications necessary to join the webcast.

The call can also be accessed live over the phone by dialing (888) 802-8577 or (973) 935-8754 for international callers; the conference ID is 19681217. A replay of the call will be available three hours after the call and can be accessed by dialing (855) 859-2056 or (404) 537-3406 for international callers; the conference ID is 19681217. The replay will be available from November 8, 2011 through November 14, 2011.

Definitions

"Owned Comparable Hotels" includes all wholly-owned hotels operated by MHG except for hotels under major renovation during the current or the prior year, development projects and discontinued operations.  Owned Comparable Hotels for the three and nine months ended September 30, 2011 and 2010 includes Hudson in New York, Delano in South Beach and Clift in San Francisco.  

"System-Wide Comparable Hotels" includes all hotels operated by MHG except for hotels added or under major renovation during the current or the prior year, development projects and discontinued operations.  System-Wide Comparable Hotels for the three and nine months ended September 30, 2011 and 2010 excludes the Hard Rock Hotel & Casino in Las Vegas ("Hard Rock"), which MHG no longer manages effective March 1, 2011, Mondrian Scottsdale, which effective March 16, 2010 was no longer owned or managed by MHG, Mondrian SoHo, which opened in February 2011, the San Juan Water and Beach Club, which was no longer managed by MHG effective July 13, 2011, and Hotel Las Palapas, which is a non-MHG branded hotels.

"Adjusted EBITDA" is adjusted earnings before interest, taxes, depreciation and amortization as further defined below.

About Morgans Hotel Group

Morgans Hotel Group Co. (NASDAQ: MHGC) is widely credited as the creator of the first "boutique" hotel and a continuing leader of the hotel industry's boutique sector.  Morgans Hotel Group operates Morgans, Royalton and Hudson in New York, Delano and Shore Club in South Beach, Mondrian in Los Angeles, South Beach and New York, Clift in San Francisco, Ames in Boston, Sanderson and St Martins Lane in London, and a hotel in Playa del Carmen, Mexico.  Morgans also owns, or has ownership interests in, several of these hotels.  Morgans Hotel Group has other property transactions in various stages of completion including a Delano in Cabo San Lucas, Mexico, a Delano in Turkey, a Mondrian in Doha, Qatar, and a Mondrian in Nassau, The Bahamas, and a hotel in New York to be branded with one of MHG's existing brands. For more information please visit www.morganshotelgroup.com.

Forward-Looking and Cautionary Statements

This press release may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs and prediction of certain future other events. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" "believe," "project," or other similar words or expressions. These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results or other future events to differ materially from those expressed in any forward-looking statement. Important risks and factors that could cause our actual results to differ materially from those expressed in any forward-looking statements include, but are not limited to economic, business, competitive market and regulatory conditions such as: a sustained downturn in economic and market conditions, particularly levels of spending in the business, travel and leisure industries; continued tightness in the global credit markets; general volatility of the capital markets and our ability to access the capital markets; our ability to refinance our current outstanding debt and to repay outstanding debt as such debt matures; our ability to protect the value of our name, image and brands and our intellectual property; risks related to natural disasters, such as earthquakes, volcanoes and hurricanes; hostilities, including future terrorist attacks, or fear of hostilities that affect travel; and other risk factors discussed in Morgans' Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and other documents filed by Morgans with the Securities and Exchange Commission from time to time. All forward-looking statements in this press release are made as of the date hereof, based upon information known to management as of the date hereof, and Morgans assumes no obligations to update or revise any of its forward-looking statements even if experience or future changes show that indicated results or events will not be realized.

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA

We believe that earnings before interest, income taxes, depreciation and amortization (EBITDA) is a useful financial metric to assess our operating performance before the impact of investing and financing transactions and income taxes. It also facilitates comparison between us and our competitors. Given the significant investments that we have made in the past in property and equipment, depreciation and amortization expense comprises a meaningful portion of our cost structure. We believe that EBITDA will provide investors with a useful tool for assessing the comparability between periods because it eliminates depreciation and amortization expense attributable to capital expenditures.

The Company's management has historically used adjusted EBITDA (Adjusted EBITDA) when evaluating the operating performance for the entire Company as well as for individual properties or groups of properties because we believe the Company's core business model is that of an owner and operator of hotels, and the inclusion or exclusion of certain items is necessary to provide the most accurate measure of on-going core operating results and to evaluate comparative results period over period.  As such, Adjusted EBITDA excludes other non-operating expenses (income) that do not relate to the on-going performance of our assets and excludes the operating performance of assets in which we do not have a direct or indirect fee simple ownership interest.  We exclude the following items from EBITDA to arrive at Adjusted EBITDA:

• Other non-operating expenses (income), such as executive terminations not related to restructuring initiatives, costs of financings, litigation and settlement costs and other items such as proceeds from the sale of condominium units and related costs that relate to the financing and investing activities of our assets and not to the on-going operating performance of our assets, both consolidated and unconsolidated, changes in fair market value of the warrants issued to investors in the Company, and non-cash impairment charges recognized by unconsolidated joint ventures in which the Company is an equity investee;

• Restructuring, development and disposal costs: these charges primarily relate to losses on asset disposals as part of major renovation projects, the write-off of abandoned development projects resulting primarily from events generally outside management's control such as the tightening of credit markets, and severance costs related to restructuring initiatives.  We believe that these charges do not relate to the ongoing operating performance of our assets as measured by Adjusted EBITDA.

• Impairment loss on development projects and hotels and receivables from unconsolidated joint ventures: these charges do not relate to the ongoing operating performance of our assets as measured by Adjusted EBITDA.  To the extent that economic conditions do not continue to improve, we may incur additional non-cash impairment charges related to our assets under development, wholly-owned assets, or our investments in joint ventures.  We believe these adjustments are necessary to provide the most accurate measure of core operating results as a means to evaluate comparative results.  

• The EBITDA related to leased hotels to more accurately reflect the operating performance of assets in which we have a direct or indirect fee simple ownership interest;

• The EBITDA related to hotels reported as discontinued operations to more accurately reflect the operating performance of assets in which we expect to have an ongoing direct or indirect ownership interest; and

• Stock-based compensation expense, as this is not necessarily an indication of the operating performance of our assets.

We also make an adjustment to EBITDA for hotels in which our percentage ownership interest has changed to facilitate period-over-period comparisons and to more accurately reflect the operating performance of assets based on our actual ownership.   In this respect, our method of calculating Adjusted EBITDA has changed from prior quarters, and calculations of Adjusted EBITDA will continue to vary from quarter to quarter to reflect changing ownership interests.

We believe Adjusted EBITDA provides management and our investors with a more accurate financial metric by which to evaluate our performance as it eliminates the impact of costs incurred related to investing and financing transactions.  Internally, the Company's management utilizes Adjusted EBITDA to measure the performance of our core on-going hotel operations and is used extensively during our annual budgeting process.  Management also uses Adjusted EBITDA as a measure in determining the value of acquisitions, expansion opportunities, and dispositions and borrowing capacity.  Adjusted EBITDA is a key metric which management evaluates prior to execution of any strategic investing or financing opportunity.  

The Company has historically reported Adjusted EBITDA to its investors and believes that this continued inclusion of Adjusted EBITDA provides consistency in its financial reporting and enables investors to perform more meaningful comparisons of past, present and future operating results and to evaluate the results of its core on-going operations.    

The use of EBITDA and Adjusted EBITDA has certain limitations. Our presentation of EBITDA and Adjusted EBITDA may be different from the presentation used by other companies and therefore comparability may be limited. Depreciation expense for various long-term assets, interest expense, income taxes and other items have been and will be incurred and are not reflected in the presentation of EBITDA or Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, EBITDA and Adjusted EBITDA do not reflect capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation, interest and income tax expense, capital expenditures and other items both in our reconciliations to our financial measures under accounting principles generally accepted in the United States, or U.S. GAAP, and in our consolidated financial statements, all of which should be considered when evaluating our performance. The term EBITDA is not defined under U.S. GAAP and EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. In addition, EBITDA is impacted by reorganization of businesses and other restructuring-related charges. When assessing our operating performance, you should not consider this data in isolation, or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our EBITDA may not be comparable to EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner as we do.

A reconciliation of net income (loss), the most directly comparable U.S. GAAP measures, to EBITDA and Adjusted EBITDA for each of the respective periods indicated is as follows:

SOURCE Morgans Hotel Group Co.