Morgans Hotel Group Reports Third Quarter 2009 Results
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Morgans Hotel Group Reports Third Quarter 2009 Results
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Category: Worldwide - Industry economy
- Figures / Studies
This is a press release selected by our editorial committee and published online for free on 2009-10-27
- $75 Million Investment by Yucaipa –
- Successful Restructuring Agreement with Mezzanine Lender for Hudson Hotel -
Morgans Hotel Group Co. (NASDAQ: MHGC) (“MHG” or the “Company”) today reported financial results for the third quarter ended September 30, 2009.
* On October 15, 2009, MHG announced that an affiliate of The Yucaipa Companies, LLC (“Yucaipa”) invested $75 million in MHG in the form of preferred securities. The capital infusion will significantly strengthen MHG’s balance sheet and provide long-term financing for growth. Combined with the recent amendment to MHG’s credit line in August 2009, MHG has added approximately $200 million of liquidity in the last two months.
* On October 15, 2009, MHG announced that it has entered into an agreement with one of its lenders to effectively extend the mezzanine loan on the Hudson hotel property in New York City.
* On August 5, 2009, MHG announced the successful amendment of its revolving credit facility. This includes, among other things, the elimination of the leverage test, a reduction of the debt service coverage ratio to 0.90x from 1.75x, and an adjustment to the borrowing base test that is expected to allow MHG to access substantial liquidity for the life of the credit facility.
* Revenue per available room (“RevPAR”) for System-Wide Comparable Hotels decreased 30.6% in constant dollars in the third quarter from the comparable period in 2008. Adjusted EBITDA for the third quarter was $9.4 million, a decrease of 55.7% from the comparable period in 2008.
* As a result of cost reduction plans, EBITDA at System-Wide Comparable Hotels during the third quarter declined at a rate of 1.9 times the related RevPAR percentage change, beating industry norms.
* MHG achieved a 16.2% reduction in operating expenses at System-Wide Comparable Hotels and a 30.3% reduction in corporate expenses in the third quarter of 2009 from the comparable period in 2008.
* In July, Hard Rock opened the new Paradise Tower, consisting of 490 rooms. The casino expansion, pool expansion and south tower, consisting of 374 suites, are projected to open in late 2009 or early 2010.
* Boston Ames and Mondrian SoHo are currently targeted to open in November 2009 and the middle of 2010, respectively.
Fred Kleisner, CEO of Morgans Hotel Group, said: “We are confident that Morgans Hotel Group is well positioned to continue to navigate the current economic challenges through 2009 and beyond, and will benefit from improving demand. We have made great progress in cleaning up our balance sheet and adding approximately $200 million in liquidity. We have irreplaceable assets in 24-hour gateway markets that we believe will rebound faster and stronger as a recovery emerges. While we cannot predict when the recovery will come, we do know that historically, the 24-hour gateway markets on which this company is built have come back stronger than other markets. We have a clear growth strategy to extend our portfolio of properties with high-margin, long-term management agreements. We will continue to be diligent about taking the steps necessary to strengthen the Company, and most importantly, to build long-term shareholder value.”
Third Quarter 2009 Operating Results
RevPAR at System-Wide Comparable Hotels decreased by 32.2% (30.6% in constant dollars) in the third quarter of 2009 compared to the third quarter of 2008. Occupancy declined by 8.9% and average daily rate (“ADR”) declined by 25.5% (23.8% in constant dollars) compared to the same period in the prior year.
MHG recorded a net loss of $27.8 million in the third quarter of 2009, which includes non-cash impairment charges of $29.1 million. Excluding impairment charges, net of $11.6 million of tax, our net loss was $10.3 million compared to a net loss of $9.3 million in the third quarter of 2008.
Given the current economic environment, MHG recorded non-cash impairment charges of $29.1 million consisting of $17.2 million related to MHG’s investment in the Las Vegas joint venture at Echelon and $11.9 million related to the property across the street from Delano in South Beach. The costs related primarily to the plans and drawings for these development projects. While MHG has not made any formal decisions regarding the future of these projects, we do not expect to develop these projects in the near future.
Balance Sheet and Liquidity
As of September 30, 2009, consolidated debt excluding the Clift lease obligation was $661.3 million and cash and cash equivalents were $34.1 million.
MHG’s pro forma liquidity position as of September 30, 2009, giving effect to the net proceeds of $71.0 million from the Yucaipa transaction as if it had occurred on that date, was approximately $195.0 million. This is comprised of a pro forma cash balance of approximately $105.1 million and $89.9 million of availability under the revolving credit line, which is net of $23.5 million of outstanding borrowings and $9.8 million of letters of credit posted under the line.
On August 5, 2009, MHG announced that it had successfully completed an amendment to its existing line of credit. Among other things the amendment:
* Eliminated the corporate leverage test;
* Reduced the corporate fixed charge coverage test to 0.90x from 1.75x;
* Amended the borrowing base tests so that, among other changes, a minimum of 35% of appraised value on the New York properties securing the facilities will be available; and
* Modified a variety of other provisions at the subsidiary level that could have triggered technical defaults.
The facility’s size was reduced from $220 million to $125 million. MHG believes that, without the amendment, it would have had limited availability, if any, under the facility for the remainder of the term. The facility is secured by three of MHG’s hotels: Delano, Royalton and Morgans. The interest rate is LIBOR plus 3.75% with a LIBOR floor of 1.0% and the maturity is October 5, 2011.
On October 15, 2009, MHG issued to Yucaipa $75 million of preferred securities. The preferred securities have an 8% dividend rate for the first five years, a 10% rate for years six through seven, and a 20% rate for years thereafter. MHG has the option to accrue any and all dividend payments. MHG also has the option to redeem the preferred securities at any time without any pre-payment penalty.
In addition, MHG issued to Yucaipa warrants to purchase 12.5 million shares of MHG’s common stock at an exercise price of $6.00 per share, subject to certain anti-dilution adjustments, and exercisable utilizing a cashless exercise method only, resulting in a net share issuance. As a result of the cashless exercise method, the number of shares issuable on exercise will depend on the price of the common stock at that time. Based on the shares of MHG’s common stock outstanding today, the maximum number of shares issuable under these warrants would never represent more than 29.99% of MHG’s outstanding shares. These warrants will expire in 7.5 years.
Also on October 15, 2009, MHG announced that it had entered into an agreement with one of its lenders which holds, among other loans, the mezzanine loan on MHG’s Hudson hotel property in New York City. The Hudson mezzanine loan was to mature on July 12, 2010 and provided for a 15-month extension at MHG’s option, subject to satisfaction of certain conditions. Under the new agreement, MHG paid an aggregate of $11.2 million to (i) reduce the principal balance of the mezzanine loan from $32.5 million to $26.5 million, (ii) acquire interests in $4.5 million of certain of MHG’s other debt obligations, (iii) pay fees, and (iv) obtain a forbearance from the mezzanine lender until October 12, 2013 from exercising any remedies resulting from a maturity default, subject only to maintaining certain interest rate caps and making an additional aggregate payment of $1.3 million to purchase additional interests in certain of our other debt obligations prior to October 11, 2011. MHG believes these transactions will have the practical effect of extending the Hudson mezzanine loan by three years and three months beyond its scheduled maturity of July 12, 2010. The mezzanine lender also has agreed to cooperate with MHG in its efforts to seek an extension of the $217 million Hudson mortgage loan, which is also set to mature on July 12, 2010, and to consent to certain refinancings and other modifications of the Hudson mortgage loan.
In June 2009, the $40 million non-recourse mortgage and mezzanine loans at Mondrian Scottsdale matured and were not repaid. MHG is continuing to operate Mondrian Scottsdale and is discussing various options with the lenders. MHG does not intend to commit significant monies toward the repayment or restructuring of the loans or the funding of operating deficits.
As of September 30, 2009, MHG estimates that its total future capital commitments for development projects for the next 12 months are approximately $11 million, primarily to fund the outstanding letters of credit at Hard Rock.
Additionally, MHG intends to utilize its tax net operating losses of approximately $114 million to offset future income, including potential gains on the sale of assets or interest therein as part of its long-term strategy to reduce its ownership interests in hotels.
Development Activity
MHG’s projects currently under construction are the Hard Rock expansion, the Boston Ames and the Mondrian SoHo, all of which are expected to be completed between the fourth quarter of 2009 and the middle of 2010.
In September 2009, MHG announced that it had secured a long-term management agreement for the San Juan Water and Beach Club Hotel, a 78 room beachfront hotel in Isla Verde, Puerto Rico. The owners intend to obtain development rights to build a Morgans branded hotel including a 30,000 square foot casino. MHG assumed management of the property as of October 18, 2009. San Juan Water and Beach Club Hotel will remain open and operating as an independent hotel until it ultimately becomes a Morgans Hotel Group branded property.
2009 Outlook
The global economic downturn has had a significant adverse impact on the hotel industry, particularly since the middle of September 2008. Given the continuing uncertainty about the depth and duration of the economic crisis, we are not comfortable defining a specific RevPAR target or range for the year. However, we can provide a framework for Adjusted EBITDA given certain RevPAR declines. For example, if RevPAR for the year were to decline on average 25-30%, we would expect 2009 Adjusted EBITDA to be between $40-50 million. This is based on a ratio of EBITDA percentage decline to RevPAR percentage decline between 1.5 and 2.0 times, which is consistent with the ratio we have achieved over the past four quarters.
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 www.morganshotelgroup.com under the Corporate Info, 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 36578865. A replay of the call will be available two hours after the call and can be accessed by dialing (800) 642-1687 or (706) 645-9291 for international callers; the conference ID is 36578865. The replay will be available from October 26, 2009 through November 2, 2009.
Definitions
“Owned Comparable Hotels” includes all wholly-owned hotels operated by MHG except for hotels under renovation during the current or the prior year and development projects. Owned Comparable Hotels for 2009 excludes Mondrian Los Angeles and Morgans, which were under renovation in 2008.
“System-Wide Comparable Hotels” includes all hotels operated by MHG except for hotels under renovation during the current or the prior year and development projects. System-Wide Comparable Hotels for 2009 excludes Mondrian Los Angeles and Morgans, which were under renovation in 2008, the Hard Rock Hotel & Casino in Las Vegas (“Hard Rock”), which has been under renovation and expansion since 2008, and Mondrian South Beach, which opened in December 2008.
“Adjusted EBITDA” is adjusted earnings before interest, taxes, depreciation and amortization as further defined below.
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