Morgans Hotel Group Reports First Quarter 2010 Results

Morgans Hotel Group Co. (Nasdaq: MHGC) today reported financial results for the quarter ended March 31, 2010.

• Revenue per available room ("RevPAR") for System-Wide Comparable Hotels increased by 11.6%, or 10.1% in constant dollars, in the first quarter of 2010 from the comparable period in 2009.
• RevPAR increases were achieved in the first quarter of 2010 as compared to the first quarter of 2009 in all four of the markets where MHG has significant real estate ownership, specifically, New York, Miami, Los Angeles and London.  
• Adjusted EBITDAfor the first quarter was $9.2 million, a $2.8 million or 43.0% increase from the comparable period in 2009.  
• Management fees increased by $1.0 million or 28.4% in the first quarter of 2010 over the comparable period in 2009.
• On April 29, 2010, MHG's Mondrian South Beach joint venture successfully amended and extended the Mondrian South Beach debt to, among other things, extend the maturity date for up to 7 years.

Fred Kleisner, CEO of Morgans Hotel Group, said: "Our first quarter results reflect an improving environment and a strong turnaround in our business versus the same quarter last year.  Importantly, our performance underscores our belief that we are well positioned to come back faster than the overall industry.   We are optimistic about the future given our unique competitive advantages and we will continue taking proactive and prudent steps to grow the company with a focus on creating long-term shareholder value."

First Quarter 2010 Operating Results

RevPAR at System-Wide Comparable Hotels increased by 11.6% (10.1% in constant dollars) in the first quarter of 2010 compared to the first quarter of 2009. Occupancy increased by 12.3% and average daily rate ("ADR") declined by 0.7% (2.0% in constant dollars) compared to the same period in 2009.

Adjusted EBITDAfor the first quarter of 2010 was $9.2 million, a $2.8 million or 43.0% increase from the comparable period in 2009.  

The first quarter results were positively impacted by the Super Bowl in Miami in February. Excluding the impact of the Super Bowl, RevPAR increased by 7.5%, or 6.1% in constant dollars and Adjusted EBITDA increased approximately 31%.  

Management fees increased by $1.0 million or 28.4% in the first quarter of 2010 over the comparable period in 2009, primarily due to the Hard Rock expansion in 2009 which resulted in 865 new rooms and additional restaurant, bar and banquet space.  In addition, in the fourth quarter of 2009, we opened Ames in Boston and began managing two additional hotels – The San Juan Water and Beach Club in Puerto Rico and Hotel Las Palapas in Playa del Carmen, Mexico.    

MHG recorded a net loss of $16.0 million in the first quarter of 2010, which includes income from discontinued operations of $17.4 million and a non-cash charge of $14.3 million for the Yucaipa warrants, both discussed further below.  

During the first quarter of 2010, the Company reclassified the operations of Mondrian Scottsdale to discontinued operations.  Effective March 16, 2010, MHG no longer owned or managed the hotel.  Accordingly, MHG recorded income from discontinued operations of $17.4 million in the first quarter of 2010 due to the fact that MHG had reduced the property's carrying value to an amount less than the debt as a result of its 2009 year end impairment analysis.    

Also during the first quarter of 2010, the Company recorded a non-cash charge related to the estimated change in fair market value of $14.3 million related to the warrants issued to affiliates of The Yucaipa Companies, LLC in October 2009 due to the increase in MHG's stock price since the issuance.

Balance Sheet and Liquidity

As of March 31, 2010, MHG had $153.3 million of liquidity comprised of $56.3 million of cash and cash equivalents and approximately $97.0 million, net of outstanding borrowings and letters of credit, available under its line of credit.   Consolidated debt, excluding the Clift lease obligation, was $616.4 million.  

In April 2010, MHG's Mondrian South Beach joint venture successfully amended the non-recourse financing secured by the property and extended the maturity date for up to seven years until April 2017.  Among other things, the amendment allows the joint venture to accrue all interest for a period of two years and a portion thereafter and gives the joint venture the ability to provide seller financing to qualified condo buyers up to 80% of the condo purchase price.  The amendment also provides that approximately $28 million of the joint venture investment in the property is elevated in the capital structure to become, in effect, on par with the lender's mezzanine debt so that the joint venture receives at least 50% of all returns in excess of the first mortgage.  Mondrian South Beach, which opened in December 2008, is operated and partially owned by MHG and is both a hotel and residences.  

In January 2010, the Company obtained a maturity extension until January 24, 2011 on the $10.5 million interest only non-recourse promissory notes on the property across the street from the Delano Miami.  

As of March 31, 2010, MHG estimates that its total future capital commitments for development projects and joint ventures for the next 12 months are approximately $5.0 million.

Additionally, MHG intends to utilize its tax net operating losses of approximately $175 million to offset future income, including potential gains on the sale of assets or interests therein as part of MHG's long-term strategy to reduce its ownership interests in hotels.    

On March 1, 2010, MHG elected to stop subsidizing the Clift's monthly payment obligations.  These obligations are non-recourse to MHG but capitalized for accounting purposes and are recorded as debt on MHG's balance sheet under generally accepted accounting principles.  As of March 31, 2010, the Clift obligations on MHG's balance sheet was reflected as $84 million of debt, the EBITDA from the property during the preceding 12 months was less than $1 million and the net cash flow from the property during the same period was negative $5 million.  MHG has been in discussions with the owners to restructure the payment obligations. However, on May 4, 2010, the owner filed a lawsuit against a subsidiary of the Company.

Development Activity

MHG continues to focus on enhancing its existing assets and is re-concepting several food and beverage venues to improve profitability.  For example, in January 2010, Good Units, a new exclusive venue for special functions at Hudson, was opened and to date has already hosted numerous successful VIP events.  Additionally, MHG plans to open a new restaurant at Hudson, Hudson Hall, in the second quarter of 2010.  

Mondrian SoHo is currently under construction.  This hotel is expected to be completed in the second half of 2010.  

2010 Outlook

It continues to be very difficult to predict what will happen for the remainder of the year given the short term booking patterns and transient nature of the hotel business in addition to a still uncertain economic environment.  That said, MHG is providing the following framework for its results:

• First, given its built-in growth from new hotels and hotel expansions, if RevPAR increases by 5% in 2010 compared to 2009, MHG would expect Adjusted EBITDA to be in the $50 million to $52 million range.
• Second, while the pace of recovery appears to be faster and stronger than anticipated, MHG still does not have the visibility to be comfortable forecasting how this will progress.  However, as a framework based on the Company's existing portfolio, MHG estimates that each additional percentage point increase in RevPAR above the 5% growth amount would further increase the $50 million to $52 million of Adjusted EBITDA by approximately $1.0 million to $1.5 million.