MHGC Morgans Hotel Grp. Co.

NEW YORK, Nov. 4, 2015 /PRNewswire/ -- Morgans Hotel Group Co. (NASDAQ: MHGC) (the "Company" or "Morgans") today reported financial results for the quarter ended September 30, 2015. The Company's Board of Directors (the "Board") also announced that it is executing on a new strategic plan to create long-term value and is in the process of engaging a new President and Chief Executive Officer.  Pursuant to the strategic plan, the Company will initiate shortly a broker-marketed monetization of Hudson New York and Delano South Beach.

The Company also announced today that Michael Olshan and Adam Stein have joined Morgans' Board replacing Martin Edelman and John Brecker, who have resigned. Olshan is currently managing partner of O-CAP Management LLC and founding member of OTK Associates, which owns approximately 13% of Morgans' common stock.  Adam Stein is a portfolio manager at Pine River Capital Management, which owns approximately 9% of Morgans' common stock.

Third Quarter 2015 Highlights

• Adjusted EBITDA was $10.0 million in the third quarter of 2015 as compared to $9.7 million, excluding the Company's ownership interests in The Light Group ("TLG") and Mondrian SoHo, for the same period in 2014, an increase of 3.5%.
• Revenue per available room ("RevPAR") for System-Wide Comparable Hotels decreased 1.2% during the third quarter of 2015 as compared to the third quarter of 2014. System-Wide Comparable Hotels' room revenues plus resort and facility fees, implemented at certain hotels in the second half of 2014, increased 1.9% during the third quarter of 2015 as compared to the same period in 2014.
• During the third quarter of 2015, the Company settled certain outstanding litigation, resulting in the receipt of approximately $7.8 million in cash, with an additional settlement resulting in $10.0 million received in early October 2015.

Strategic Plan

On May 13, 2014, Morgans announced that its Board had authorized the exploration of a broad range of value-creating initiatives to maximize value for stockholders.  After an extensive analysis of various alternatives, the Board has taken the following immediate steps:

• Developed and begun implementing a new strategic plan;
• Engaging a new full-time, New York City based President and CEO; and
• Increased stockholder alignment on the Board.

The new strategic plan includes:

• Pursuing the monetization of Hudson New York and Delano South Beach;
• Deleveraging the Company's balance sheet, reducing its weighted average cost of capital, and increasing its financial flexibility by taking steps to retire its highest-cost and most restrictive securities;
• Maximizing the value of Morgans' iconic brands by clearly defining each of its brand lines, thoughtfully pursuing new license and management agreements for these brands, and strategically extending brands and building scale in defined target markets;
• Driving profitable revenue growth for our owners and partners by implementing new marketing systems, operational efficiencies and profit improvement programs portfolio-wide;
• Strengthening the management team to support growth initiatives while maintaining a lean and efficient corporate structure; and
• Building on our culture of transparency and accountability and ensuring open communications with stockholders and other key stakeholders.

Pursuant to the plan, the Company is in the process of engaging a leading professional commercial real estate services firm, to assist with the monetization of Hudson New York and Delano South Beach. The Company expects the marketing process to commence in the fourth quarter of 2015 and to be completed by the second quarter of 2016.

"We are very pleased to be able to share our new, comprehensive strategic plan – which is designed to transform Morgans into a stronger, better-capitalized and more focused company with an emphasis on enhancing the significance of our brands, increasing our financial flexibility and realizing maximum value for the Company's stockholders," said Howard M. Lorber, Chairman of Morgans.  "I am pleased to welcome Michael and Adam to our Board, and want to thank Marty and John for their significant time and contributions."

Third Quarter 2015 Operating Results

Adjusted EBITDA, defined below, was $10.0 million in the third quarter of 2015 as compared to $9.7 million excluding the Company's ownership interests in TLG, which were sold in January 2015, and Mondrian SoHo, which the Company no longer held ownership interest in effective March 6, 2015, for the same period in 2014, an increase of 3.5%.   Adjusted EBITDA, for the third quarter of 2014 including the ownership interests in TLG and Mondrian SoHo, was $11.0 million.

RevPAR at System-Wide Comparable Hotels decreased by 1.2% in the third quarter of 2015 as compared to the same period in 2014, due to a 2.5% decrease in average daily rate ("ADR") partially offset by a 1.3% increase in occupancy.  System-Wide Comparable Hotels' room revenues plus resort and facility fees, implemented at certain hotels in the second half of 2014, increased 1.9% during the third quarter of 2015 as compared to the same period in 2014. 

RevPAR from System-Wide Comparable Hotels in New York decreased 3.9% for the quarter ended September 30, 2015 as compared to the same period in 2014, due to a 4.3% decrease in ADR slightly offset by a 0.4% increase in occupancy.  RevPAR at Hudson decreased 4.6% during the third quarter of 2015 as compared to the same period in 2014, driven primarily by a 5.4% ADR decrease. Hudson's room revenues plus facility fees were even with the prior year's quarter.      

RevPAR from System-Wide Comparable Hotels in Miami decreased 3.6% in the third quarter of 2015 as compared to the third quarter of 2014.  Delano South Beach experienced a RevPAR decrease of 4.5% during the third quarter of 2015 as compared to the same period in 2014, driven by a 12.9% decline in ADR partially offset by a 9.7% increase in occupancy.  Delano's room revenues plus resort fees increased 1.9% in the third quarter of 2015 as compared to the same period in 2014.  EBITDA at Delano South Beach increased 17.1% quarter over quarter due primarily to a 13.2% increase in food and beverage revenues. 

The Company's System-Wide Comparable Hotels on the West Coast generated 4.7% RevPAR growth in the third quarter of 2015 as compared to 2014, driven by Clift, which experienced a 6.4% RevPAR increase quarter over quarter.   Clift's EBITDA increased 19.5% for the three months ended September 30, 2015 as compared to the same period in 2014. 

The Company's managed hotels in London are non-comparable between 2015 and 2014 due to major renovations at Sanderson and St Martins Lane in 2014 and 2015, which are now complete, as well as the opening of Mondrian London on September 30, 2014.   For the three months ended September 30, 2015, Sanderson and St Martins Lane generated RevPAR growth of 19.5% in the third quarter of 2015 as compared to 2014.

Excluding TLG, management fees increased $0.1 million, or 3.1%, during the third quarter of 2015 as compared to the same period in 2014, primarily due to the addition of Mondrian London, Delano Las Vegas and 10 Karaköy, which was partially offset by the termination of the Mondrian SoHo management agreement in April 2015. 

Interest expense decreased $0.9 million, or 6.9%, during the third quarter of 2015 as compared to the same period in 2014, primarily due to the elimination of interest expense related to the Company's convertible notes, which were repaid in October 2014.   

The Company recorded a net loss of $7.5 million in the third quarter of 2015 compared to a net loss of $10.1 million in the third quarter of 2014, primarily as a result of increased operating income and lower interest expense. 

Balance Sheet

The Company's total consolidated debt at September 30, 2015 was $606.2 million, which included $101.1 million of capital lease obligations related primarily to Clift. 

At September 30, 2015, the Company had approximately $38.8 million in cash and cash equivalents and $15.8 million in restricted cash.    

During the third quarter of 2015, the Company settled litigation related to Mondrian Istanbul and Delano Marrakech, resulting in the receipt of approximately $7.8 million in cash. In early October 2015, the Company received an additional $10.0 million related to the settlement of Mondrian SoHo legal matters.   

As of September 30, 2015, the Company had approximately $443 million of remaining Federal tax net operating loss carryforwards to offset future income.   As of September 30, 2015, the Company estimates that the tax basis of Delano South Beach is approximately $66 million and the tax basis of Hudson is approximately $141 million.

Development

The Company has signed management agreements for five hotels in various stages of development, including two hotels under construction consisting of Mondrian Doha, scheduled to open in 2016, and Delano Dubai, scheduled to open in 2017.

Investor Conference Call

The Company will host a conference call to review its third quarter 2015 results, new strategic plan and Board of Director changes on Wednesday, November 4, 2015 at 5:00 PM Eastern time. The call will be webcast live over the Internet and will be accessible at www.morganshotelgroup.com under the Investors 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 will also be accessible live over the phone by dialing (888) 812-8594 (within U.S.) or (913) 312-1499 (outside U.S.) and providing the following passcode: 994602.   A playback of the conference call will be available beginning at 8:00 PM Eastern time, Wednesday, November 4, 2015, through November 11, 2015.  To access the playback, please dial (888) 203-1112 (within U.S.) or (719) 457-0820 (outside U.S.) and enter passcode 994602.

Additional Definitions

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

"EBITDA" means earnings before interest, income taxes, depreciation and amortization.

"Owned Hotels" means Hudson in New York, Delano South Beach in Miami Beach and Clift in San Francisco, which the Company leases under a long-term lease.

"System-Wide Comparable Hotels" means all Morgans Hotel Group branded hotels operated by the Company, except for hotels added or under major renovation during the current or the prior year period, development projects and hotels no longer managed by the Company.  System-Wide Comparable Hotels for the quarters ended September 30, 2015 and 2014 exclude Sanderson and St Martins Lane in London, which were both under major renovations during 2014, Mondrian London, Delano Las Vegas and 10 Karaköy, all of which are newly opened hotels in 2014, and Mondrian SoHo, which the Company no longer managed effective April 27, 2015.

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 Delano in South Beach, Mondrian in Los Angeles, South Beach and London, Hudson in New York, Morgans and Royalton in New York, Clift in San Francisco, Shore Club in South Beach and Sanderson and St Martins Lane in London.  Morgans Hotel Group has ownership interests or owns several of these hotels. Morgans Hotel Group also licenses its brand through Delano in Las Vegas and 10 Karaköy in Istanbul, Turkey.  Morgans Hotel Group has other hotels in various stages of development to be operated under management or franchise agreements, including a Mondrian property in Doha, Qatar and a Delano in Dubai. 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. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "could," "project," "predict," "continue" or other similar words or expressions.   These forward-looking statements reflect the Company's current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause its actual results to differ materially from those expressed in any forward-looking statement. Forward-looking statements in this press release include, without limitation, statements regarding the Company's expectation related to its ability to grow in the future and expected hotel openings and its development efforts, including the opening of new hotels in the future.

Important risks and factors that could cause the Company's 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 downturn in economic and market conditions, both in the U.S. and internationally, particularly as it impacts demand for travel, hotels, dining and entertainment; the Company's levels of debt, its ability to refinance its current outstanding debt, repay outstanding debt or make payments on guaranties as they may become due, general volatility of the capital markets and the Company's ability to access the capital markets and the ability of its joint ventures to do the foregoing; the impact of financial and other covenants in the Company's loan agreements and other debt instruments that limit the Company's ability to borrow and restrict its operations; the Company's history of losses; the Company's ability to compete in the "boutique" or "lifestyle" hotel segments of the hospitality industry and changes in the competitive environment in the Company's industry and the markets where it invests; the Company's ability to protect the value of its name, image and brands and its intellectual property; risks related to natural disasters, terrorist attacks, the threat of terrorist attacks and similar disasters; risks related to the Company's international operations, such as global economic conditions, political or economic instability, compliance with foreign regulations and satisfaction of international business and workplace requirements; the Company's ability to timely fund the renovations and capital improvements necessary to maintain its properties at the quality of the Morgans Hotel Group and associated brands; risks associated with the acquisition, development and integration of properties and businesses; the risks of conducting business through joint venture entities over which the Company may not have full control; the Company's ability to perform under management agreements and to resolve any disputes with owners of properties that the Company manages but does not wholly own; potential terminations of management agreements; the impact of any material litigation, claims or disputes, including labor disputes; the seasonal nature of the hospitality business and other aspects of the hospitality industry that are beyond the Company's control; the Company's ability to comply with complex U.S. and international regulations, including regulations related to the environment, labor, food and beverage operations and data privacy; the Company's ability to maintain effective and competitive technology platforms; ownership of a substantial block of the Company's common stock by a small number of investors and the ability of such investors to influence key decisions; the impact of any dividend payments or accruals on the Company's preferred securities on its cash flow and the value of its common stock; the impact of any strategic plans established by the Company's Board of Directors, including a broker-marketed monetization of our owned real estate assets; the impact of recent changes in the Company's Board of Directors;  and other risk factors discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with the Securities and Exchange Commission (the "SEC") on March 13, 2015, and other documents filed by the Company with the SEC 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 the Company 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

The Company believes that EBITDA is a useful financial metric to assess its operating performance before the impact of investing and financing transactions and income taxes. It also facilitates comparison between the Company and its competitors. Given the significant investments that the Company and its joint ventures have made in the past in property and equipment, depreciation and amortization expense comprises a meaningful portion of its cost structure. The Company believes 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 when evaluating the operating performance for the entire Company as well as for individual properties or groups of properties because it believes 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 expense (income) that does not relate to the on-going performance of the Company's assets.  The Company excludes the following items from EBITDA to arrive at Adjusted EBITDA:

• Other non-operating expenses, such as costs, associated with discontinued operations and previously owned hotels, both consolidated and unconsolidated, transaction costs related to business acquisitions, changes in the fair value of debt and equity instruments, miscellaneous litigation and settlement costs and proceeds, and other expenses that relate to the financing and investing activities of the Company;
• Restructuring and disposal costs, which include expenses incurred related to the Company's corporate restructuring initiatives, such as professional fees, litigation and settlement costs, executive terminations and severance costs related to such restructuring initiatives, including the March 2014 corporate office termination plan and proxy contests, and gains or losses on asset disposals as part of major renovation projects or restructuring;
• Development costs, including transaction costs related to the acquisition or termination of projects, internal development payroll and other costs and pre-opening expenses incurred related to new concepts at existing hotel and the development of new hotels, and the write-off of abandoned development projects previously capitalized;
• Impairment losses on development projects and unconsolidated joint ventures. The Company may incur additional non-cash impairment charges related to assets under development, wholly-owned assets, or its investments in joint ventures, including impairment related to uncollectible receivables from development projects and unconsolidated joint ventures;
• EBITDA related to hotels and food and beverage entities reported as discontinued operations to more accurately reflect the operating performance of assets in which the Company expects to have an ongoing direct or indirect ownership interest;
• Stock based compensation expense, which is non-cash; and
• Gains or losses recognized on asset sales and disposed assets.

The Company also makes an adjustment to EBITDA for hotels in which its percentage ownership interest has changed to facilitate period-over-period comparisons and to more accurately reflect the operating performance of assets based on its actual ownership.  In this respect, the Company's method of calculating Adjusted EBITDA may change from prior periods, and calculations of Adjusted EBITDA could continue to vary from quarter to quarter to reflect changing ownership interests.

The Company believes Adjusted EBITDA provides management and its investors with a more accurate financial metric by which to evaluate its 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 its core on-going operations and is used extensively during its annual budgeting process.  Management also uses Adjusted EBITDA as a measure in determining the value of acquisitions, expansion opportunities, and dispositions and borrowing capacity, and evaluating executive incentive compensation.  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. The Company's 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 the Company's results. Additionally, EBITDA and Adjusted EBITDA do not reflect capital expenditures and other investing activities and should not be considered as a measure of the Company's liquidity. The Company compensates for these limitations by providing the relevant disclosure of its depreciation, interest and income tax expense, capital expenditures and other items in its reconciliations to its financial measures in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and/or in its consolidated financial statements, all of which should be considered when evaluating its 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 the Company's operating performance, you should not consider this data in isolation, or as a substitute for the Company's net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP.

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