Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Morgans Hotel Group Co. | c92073exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Morgans Hotel Group Co. | c92073exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Morgans Hotel Group Co. | c92073exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Morgans Hotel Group Co. | c92073exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2009
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33738
MORGANS HOTEL GROUP CO.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
16-1736884 (I.R.S. employer identification no.) |
|
475 Tenth Avenue | ||
New York, New York (Address of principal executive offices) |
10018 (Zip Code) |
212-277-4100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the registrants common stock, par value $0.01 per share,
as of November 5, 2009 was 29,661,630
TABLE OF CONTENTS
Page | ||||||||
PART I. FINANCIAL INFORMATION |
||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
29 | ||||||||
53 | ||||||||
54 | ||||||||
PART II. OTHER INFORMATION |
||||||||
55 | ||||||||
55 | ||||||||
55 | ||||||||
55 | ||||||||
56 | ||||||||
56 | ||||||||
56 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of a company. We may from time to time make
written or oral statements that are forward-looking, including statements contained in this
report and other filings with the Securities and Exchange Commission and in reports to our
stockholders. 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 to differ materially from those expressed in any forward-looking statement. Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements. Important risks
and factors that could cause our actual results to differ materially from any forward-looking
statements include, but are not limited to, the risks discussed in the Companys Annual Report on
Form 10-K under the section titled Risk Factors and in this Quarterly Report on Form 10-Q under
the section titled Managements Discussion and Analysis of Financial Condition and Results of
Operations; downturns in economic and market conditions, particularly levels of spending in the
business, travel and leisure industries; hostilities, including future terrorist attacks, or fear
of hostilities that affect travel; risks related to natural disasters, such as earthquakes and
hurricanes; risks associated with the acquisition, development and integration of properties; the
seasonal nature of the hospitality business; changes in the tastes of our customers; increases in
real property tax rates; increases in interest rates and operating costs; the impact of any
material litigation; the loss of key members of our senior management; general volatility of the
capital markets and our ability to access the capital markets; and changes in the competitive
environment in our industry and the markets where we invest.
We are under no duty to update any of the forward-looking statements after the date of this
report to conform these statements to actual results.
3
Table of Contents
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
Morgans Hotel Group Co.
Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(As Adjusted) | ||||||||
ASSETS |
||||||||
Property and equipment, net |
$ | 529,961 | $ | 555,645 | ||||
Goodwill |
73,698 | 73,698 | ||||||
Investments in and advances to unconsolidated joint ventures |
40,040 | 56,754 | ||||||
Cash and cash equivalents |
34,114 | 49,150 | ||||||
Restricted cash |
18,078 | 21,484 | ||||||
Accounts receivable, net |
6,653 | 6,673 | ||||||
Related party receivables |
13,127 | 7,900 | ||||||
Prepaid expenses and other assets |
10,449 | 9,192 | ||||||
Deferred tax asset |
92,948 | 61,005 | ||||||
Other, net |
17,878 | 13,963 | ||||||
Total assets |
$ | 836,946 | $ | 855,464 | ||||
LIABILITIES AND EQUITY |
||||||||
Long-term debt and capital lease obligations, net |
$ | 744,058 | $ | 717,179 | ||||
Accounts payable and accrued liabilities |
29,784 | 26,711 | ||||||
Distributions and losses in excess of investment in
unconsolidated joint ventures |
12,430 | 14,563 | ||||||
Other liabilities |
26,667 | 35,655 | ||||||
Total liabilities |
812,939 | 794,108 | ||||||
Commitments and contingencies |
||||||||
Common stock, $.01 par value; 200,000,000 shares
authorized; 36,277,495 shares issued at September 30, 2009
and December 31, 2008, respectively |
363 | 363 | ||||||
Additional paid-in capital |
248,623 | 242,158 | ||||||
Treasury stock, at cost, 6,629,399 and 6,758,303 shares of
common stock at September 30, 2009 and December 31, 2008,
respectively |
(100,191 | ) | (102,394 | ) | ||||
Comprehensive income |
(9,537 | ) | (13,949 | ) | ||||
Accumulated deficit |
(131,213 | ) | (82,755 | ) | ||||
Total Morgans Hotel Group Co. stockholders equity |
8,045 | 43,423 | ||||||
Noncontrolling interest |
15,962 | 17,933 | ||||||
Total equity |
24,007 | 61,356 | ||||||
Total liabilities and equity |
$ | 836,946 | $ | 855,464 | ||||
See accompanying notes to these consolidated financial statements.
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Table of Contents
Morgans Hotel Group Co.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share data)
(unaudited)
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended Sept. 30, | Ended Sept. 30, | Ended Sept. 30, | Ended Sept 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(As Adjusted) | (As Adjusted) | |||||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 32,524 | $ | 45,500 | $ | 92,003 | $ | 138,521 | ||||||||
Food and beverage |
18,795 | 23,269 | 57,664 | 76,392 | ||||||||||||
Other hotel |
2,351 | 3,133 | 7,355 | 9,957 | ||||||||||||
Total hotel revenues |
53,670 | 71,902 | 157,022 | 224,870 | ||||||||||||
Management fee-related parties and other
income |
3,998 | 5,799 | 11,311 | 14,887 | ||||||||||||
Total revenues |
57,668 | 77,701 | 168,333 | 239,757 | ||||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
10,770 | 12,097 | 31,313 | 37,162 | ||||||||||||
Food and beverage |
14,721 | 16,817 | 43,836 | 54,538 | ||||||||||||
Other departmental |
1,562 | 1,792 | 4,722 | 5,801 | ||||||||||||
Hotel selling, general and administrative |
12,863 | 15,003 | 36,968 | 45,375 | ||||||||||||
Property taxes, insurance and other |
4,683 | 5,447 | 13,193 | 13,229 | ||||||||||||
Total hotel operating expenses |
44,599 | 51,156 | 130,032 | 156,105 | ||||||||||||
Corporate expenses, including stock
compensation of $3.2 million, $4.8 million,
$8.8 million, and $12.1 million,
respectively |
8,507 | 12,355 | 25,295 | 35,002 | ||||||||||||
Depreciation and amortization |
7,528 | 7,587 | 23,159 | 19,696 | ||||||||||||
Restructuring, development and disposal costs |
494 | 2,957 | 2,037 | 4,124 | ||||||||||||
Total operating costs and expenses |
61,128 | 74,055 | 180,523 | 214,927 | ||||||||||||
Operating (loss) income |
(3,460 | ) | 3,646 | (12,190 | ) | 24,830 | ||||||||||
Interest expense, net |
13,098 | 10,791 | 36,599 | 32,760 | ||||||||||||
Equity in loss of unconsolidated joint
ventures |
2,262 | 7,617 | 4,700 | 16,526 | ||||||||||||
Impairment loss on development project |
11,914 | | 11,914 | | ||||||||||||
Impairment loss on investment in joint
venture |
17,220 | | 17,220 | | ||||||||||||
Other non-operating expenses |
869 | 516 | 1,934 | 1,816 | ||||||||||||
Loss before income taxes |
(48,823 | ) | (15,278 | ) | (84,557 | ) | (26,272 | ) | ||||||||
Income tax benefit |
(20,189 | ) | (6,336 | ) | (35,700 | ) | (11,304 | ) | ||||||||
Net loss |
(28,634 | ) | (8,942 | ) | (48,857 | ) | (14,968 | ) | ||||||||
Net loss (income) attributable to
noncontrolling interest |
817 | (388 | ) | 399 | (2,731 | ) | ||||||||||
Net loss attributable to common stockholders |
(27,817 | ) | (9,330 | ) | (48,458 | ) | (17,699 | ) | ||||||||
Other comprehensive loss: |
||||||||||||||||
Unrealized gain on valuation of swap/cap
agreements, net of tax |
3,887 | 696 | 12,303 | 3,635 | ||||||||||||
Realized loss on settlement of swap/cap
agreements, net of tax |
(2,382 | ) | (1,444 | ) | (7,379 | ) | (3,247 | ) | ||||||||
Foreign currency translation (loss) gain |
532 | (388 | ) | (512 | ) | (353 | ) | |||||||||
Comprehensive loss |
$ | (25,780 | ) | $ | (10,466 | ) | $ | (44,046 | ) | $ | (17,664 | ) | ||||
Loss per share attributable to common
stockholders: |
||||||||||||||||
Basic and diluted |
$ | (0.94 | ) | $ | (0.30 | ) | $ | (1.62 | ) | $ | (0.55 | ) | ||||
Weighted average number of common shares
outstanding: |
||||||||||||||||
Basic and diluted |
29,737 | 31,231 | 29,941 | 31,953 |
See accompanying notes to these consolidated financial statements.
5
Table of Contents
Morgans Hotel Group Co.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months | Nine Months | |||||||
Ended Sept. 30, | Ended Sept. 30, | |||||||
2009 | 2008 | |||||||
(As Adjusted) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (48,857 | ) | $ | (14,968 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities: |
||||||||
Depreciation |
22,633 | 19,159 | ||||||
Amortization of other costs |
526 | 537 | ||||||
Amortization of deferred financing costs |
2,614 | 2,106 | ||||||
Amortization of discount on convertible debt |
1,707 | 1,707 | ||||||
Stock-based compensation |
8,805 | 12,130 | ||||||
Accretion of interest on capital lease obligation |
1,222 | 1,114 | ||||||
Equity in losses from unconsolidated joint ventures |
4,700 | 16,526 | ||||||
Impairment loss and loss on disposal of assets |
29,113 | 2,589 | ||||||
Deferred income tax benefit |
(36,300 | ) | (11,304 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, net |
20 | 468 | ||||||
Related party receivables |
(5,227 | ) | (2,428 | ) | ||||
Restricted cash |
2,360 | (4,616 | ) | |||||
Prepaid expenses and other assets |
(1,267 | ) | 849 | |||||
Accounts payable and accrued liabilities |
3,814 | (3,536 | ) | |||||
Other liabilities |
(56 | ) | (721 | ) | ||||
Net cash (used in) provided by operating activities |
(14,193 | ) | 19,612 | |||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment |
(8,842 | ) | (55,377 | ) | ||||
(Deposits to) withdrawals from capital improvement escrows, net |
1,046 | 2,449 | ||||||
Distributions and reimbursements from unconsolidated joint ventures |
6 | 30,670 | ||||||
Investment in unconsolidated joint ventures, net |
(8,232 | ) | (23,656 | ) | ||||
Net cash used in investing activities |
(16,022 | ) | (45,914 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from long-term debt |
139,789 | | ||||||
Payments for deferred costs |
(7,063 | ) | | |||||
Payments on long-term debt and capital lease obligations |
(115,839 | ) | (244 | ) | ||||
Cash paid in connection with vesting of stock based awards |
(136 | ) | (84 | ) | ||||
Distributions to holders of noncontrolling interests in
consolidated subsidiaries |
(1,572 | ) | (2,692 | ) | ||||
Financing costs |
| (53 | ) | |||||
Repurchase of Companys common stock |
| (33,654 | ) | |||||
Net cash provided by (used in) financing activities |
15,179 | (36,727 | ) | |||||
Net decrease in cash and cash equivalents |
(15,036 | ) | (63,029 | ) | ||||
Cash and cash equivalents, beginning of period |
49,150 | 122,712 | ||||||
Cash and cash equivalents, end of period |
$ | 34,114 | $ | 59,683 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 30,859 | $ | 26,137 | ||||
Cash paid for taxes |
$ | 411 | $ | 1,198 | ||||
See accompanying notes to these consolidated financial statements.
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Table of Contents
Morgans Hotel Group Co.
Notes to Consolidated Financial Statements
1. Organization and Formation Transaction
Morgans Hotel Group Co. (the Company) was incorporated on October 19, 2005 as a Delaware
corporation to complete an initial public offering (IPO) that was part of the formation and
structuring transactions described below. The Company operates, owns, acquires and redevelops hotel
properties.
At the time of the IPO, the Company was comprised of the subsidiaries and ownership interests
that were contributed as part of the formation and structuring transactions from Morgans Hotel
Group LLC, now known as Residual Hotel Interest LLC (Former Parent), to Morgans Group LLC, the
Companys operating company. At the time of the formation and structuring transactions, the Former
Parent was owned approximately 85% by NorthStar Hospitality, LLC, a subsidiary of NorthStar Capital
Investment Corp., and approximately 15% by RSA Associates, L.P.
In connection with the IPO, the Former Parent contributed the subsidiaries and ownership
interests in nine operating hotels in the United States and the United Kingdom to Morgans Group LLC
in exchange for membership units. Simultaneously, Morgans Group LLC issued additional membership
units to the Company in exchange for cash from the IPO. The Former Parent also contributed all the
membership interests in its hotel management business to Morgans Group LLC in return for 1,000,000
membership units in Morgans Group LLC exchangeable for shares of the Companys common stock. The
Company is the managing member of Morgans Group LLC, and has full management control. On April 24,
2008, 45,935 outstanding membership units in Morgans Group LLC were converted into 45,935 shares of
the Companys common stock. As of September 30, 2009, 954,065 membership units in Morgans Group LLC
remain outstanding.
On February 17, 2006, the Company completed its IPO. The Company issued 15,000,000 shares of
common stock at $20 per share resulting in net proceeds of approximately $272.5 million, after
underwriters discounts and offering expenses.
These financial statements have been presented on a consolidated basis and reflect the
Companys assets, liabilities and results from operations. The equity method of accounting is
utilized to account for investments in joint ventures over which the Company has significant
influence, but not control.
The Company has one reportable operating segment; it operates, owns, acquires and redevelops
boutique hotels.
Operating Hotels
The Companys operating hotels as of September 30, 2009 are as follows:
Number of | ||||||||||
Hotel Name | Location | Rooms | Ownership | |||||||
Delano South Beach |
Miami Beach, FL | 194 | (1 | ) | ||||||
Hudson |
New York, NY | 831 | (5 | ) | ||||||
Mondrian Los Angeles |
Los Angeles, CA | 237 | (1 | ) | ||||||
Morgans |
New York, NY | 114 | (1 | ) | ||||||
Royalton |
New York, NY | 168 | (1 | ) | ||||||
Sanderson |
London, England | 150 | (2 | ) | ||||||
St Martins Lane |
London, England | 204 | (2 | ) | ||||||
Shore Club |
Miami Beach, FL | 309 | (3 | ) | ||||||
Clift |
San Francisco, CA | 372 | (4 | ) | ||||||
Mondrian Scottsdale |
Scottsdale, AZ | 189 | (1 | ) | ||||||
Hard Rock Hotel & Casino |
Las Vegas, NV | 1,136 | (6 | ) | ||||||
Mondrian South Beach |
Miami Beach, FL | 328 | (2 | ) |
(1) | Wholly-owned hotel. |
|
(2) | Owned through a 50/50 unconsolidated joint venture. |
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Table of Contents
(3) | Operated under a management contract, with an unconsolidated minority ownership
interest of approximately 7%. |
|
(4) | The hotel is operated under a long-term lease, which is accounted for as a financing. |
|
(5) | The Company owns 100% of Hudson, which is part of a property that is structured as a
condominium, in which Hudson constitutes 96% of the square footage of the entire
building. |
|
(6) | Operated under a management contract and owned through an unconsolidated joint
venture, of which the Company owned approximately 11.3% at September 30, 2009 based
on cash contributions. See Note 4. |
Restaurant Joint Ventures
The food and beverage operations of certain of the hotels are operated under 50/50 joint
ventures with a third party restaurant operator.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The Company consolidates
all wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in
combination. We have evaluated all subsequent events through
November 5, 2009, the date the
financial statements were issued.
Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No.
51, as amended (FIN46R), which has been subsequently
codified in Accounting Standards Codification (ASC)
810-10, Consolidation (ASC 810-10) requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial support from other
parties. Pursuant to ASC 810-10, the Company consolidates five ventures that provide food and
beverage services at the Companys hotels as the Company absorbs a majority of the ventures
expected losses and residual returns. These services include operating restaurants including room
service at five hotels, banquet and catering services at four hotels and a bar at one hotel. No
assets of the Company are collateral for the venturers obligations and creditors of the venturers
have no recourse to the Company.
Management has evaluated the applicability of ASC 810-10 to its investments in certain joint
ventures and determined that these joint ventures do not meet the requirements of a variable
interest entity or the Company is not the primary beneficiary and, therefore, consolidation of
these ventures is not required. Accordingly, these investments are accounted for using the equity
method.
Derivative Instruments and Hedging Activities
As
required by FASB Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No.133) and SFAS No. 161, Disclosures About
Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133 (SFAS No.
161), which has been subsequently codified in ASC 815-10, Derivatives and Hedging (ASC 815-10) the Company records all derivatives on the balance sheet at fair value and provides
qualitative disclosures about objectives and strategies for using derivatives, quantitative
disclosures about the fair value of and gains and losses on derivative instruments, and disclosures
about credit-risk-related contingent features in derivative instruments. The accounting for changes
in the fair value of derivatives depends on the intended use of the derivative and the resulting
designation. Derivatives used to hedge the exposure to changes in the fair value of an asset,
liability, or firm commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives used to hedge the exposure to variability in expected
future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
8
Table of Contents
The Company is exposed to certain risks arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management
of its core business activities. The Company manages economic risks, including interest rate,
liquidity, and credit risk by managing the amount, sources, and duration of its debt funding and
the use of derivative financial instruments. Specifically, the Company enters into derivative
financial instruments to manage exposures that arise from business activities that result in the
payment of future known and uncertain cash amounts, the value of which are determined by interest
rates. The Companys derivative financial instruments are used to manage differences in the amount,
timing, and duration of the Companys known or expected cash payments principally related to the
Companys borrowings.
The Companys objectives in using interest rate derivatives are to add stability to interest
expense and to manage its exposure to interest rate movements. To accomplish these objectives, the
Company primarily uses interest rate swaps and caps as part of its interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate
amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of
the agreements without exchange of the underlying notional amount. Interest rate caps designated as
cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates
rise above the strike rate on the contract in exchange for an up-front premium.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair
value of the derivative is initially reported in other comprehensive income (outside of earnings)
and subsequently reclassified to earnings when the hedged transaction affects earnings, and the
ineffective portion of changes in the fair value of the derivative is recognized directly in
earnings. The Company assesses the effectiveness of each hedging relationship by comparing the
changes in fair value or cash flows of the derivative hedging instrument with the changes in fair
value or cash flows of the designated hedged item or transaction.
The Company has interest rate caps that are not designated as hedges. These derivatives are
not speculative and are used to manage the Companys exposure to interest rate movements and other
identified risks, but the Company has elected not to designate these instruments in hedging
relationships based on the provisions in ASC 815-10. The changes in fair value of derivatives not
designated in hedging relationships have been recognized in earnings.
A summary of the Companys derivative and hedging instruments that have been recognized in
earnings as of September 30, 2009 and December 31, 2008 is as follows (in thousands):
Estimated | Estimated | |||||||||||||||
Fair Market | Fair Market | |||||||||||||||
Value at | Value at | |||||||||||||||
Type of | Maturity | Strike | September 30, | December 31, | ||||||||||||
Notional Amount | Instrument | Date | Rate | 2009 | 2008 | |||||||||||
$285,000 |
Sold interest cap | July 9, 2010 | 4.25 | % | (2 | ) | (15 | ) | ||||||||
285,000 |
Interest cap | July 9, 2010 | 4.25 | % | 2 | 17 | ||||||||||
85,000 |
Interest cap | July 15, 2010 | 7.00 | % | | | ||||||||||
85,000 |
Sold interest cap | July 15, 2010 | 7.00 | % | | | ||||||||||
Fair value of
derivative
instruments not
designated as
hedges |
$ | | $ | 2 | ||||||||||||
9
Table of Contents
As of September 30, 2009 and December 31, 2008, the Company had the following outstanding
interest rate derivatives that were designated as cash flow hedges of interest rate risk (in
thousands):
Estimated | Estimated | |||||||||||||||
Fair Market | Fair Market | |||||||||||||||
Value at | Value at | |||||||||||||||
Type of | Maturity | Strike | September 30, | December 31, | ||||||||||||
Notional Amount | Instrument | Date | Rate | 2009 | 2008 | |||||||||||
$285,000 |
Interest swap | July 9, 2010 | 5.04 | % | $ | (10,008 | ) | $ | (16,953 | ) | ||||||
85,000 |
Interest swap | July 15, 2010 | 4.91 | % | (2,966 | ) | (4,941 | ) | ||||||||
Fair value of
derivative
instruments
designated as
effective hedges |
$ | (12,974 | ) | $ | (21,894 | ) | ||||||||||
Total fair value of
derivative
instruments |
$ | (12,974 | ) | $ | (21,892 | ) | ||||||||||
Total fair value
included in other
assets |
$ | 3 | $ | 17 | ||||||||||||
Total fair value
included in other
liabilities |
$ | (12,977 | ) | $ | (21,909 | ) | ||||||||||
Amounts reported in accumulated other comprehensive income related to derivatives will be
reclassified to interest expense as interest payments are made on the Companys variable-rate debt.
It is estimated that approximately $13.3 million included in accumulated other comprehensive income
related to derivatives will be reclassified to interest expense over the next 12 months.
Credit-risk-related Contingent Features
The
Company has entered into agreements with each of its derivative
counterparties in connection with the interest rate
swaps and hedging instruments related to the Convertible Notes, discussed
in Note 6, providing that in the event the Company
either defaults or is capable of being declared in default on any of
its indebtedness, then the Company could also be declared in
default on its derivative obligations.
Fair Value Measurements
SFAS
No. 157, Fair Value Measurements (SFAS
No. 157), which has been subsequently codified in ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10) defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. ASC 820-10 applies to reported balances that are required or permitted to be measured
at fair value under existing accounting pronouncements; accordingly, the standard does not require
any new fair value measurements of reported balances.
ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based on the assumptions that
market participants would use in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy
that distinguishes between market participant assumptions based on market data obtained from
sources independent of the reporting entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entitys own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted
prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active
markets, as well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an
entitys own assumptions, as there is little, if any, related market activity. In instances where
the determination of the fair value measurement is based on inputs from different levels of the
fair value hierarchy, the level in the fair value hierarchy within which the entire fair value
measurement falls is based on the lowest level input that is significant to the fair value
measurement in its entirety. The Companys assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers factors specific to the
asset or liability.
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Currently, the Company uses interest rate caps and interest rate swaps to manage its interest
rate risk. The valuation of these instruments is determined using widely accepted valuation
techniques including discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the period to maturity,
and uses observable market-based inputs, including interest rate curves and implied volatilities.
To comply with the provisions of ASC 820-10, the Company incorporates credit valuation adjustments
to appropriately reflect both its own nonperformance risk and the respective counterpartys
nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative
contracts for the effect of nonperformance risk, the Company has considered the impact of netting
and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and
guarantees.
Although the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by itself and its counterparties. However, as of September
30, 2009, the Company has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has determined that the credit
valuation adjustments are not significant to the overall valuation of its derivatives.
During the three months ended September 30, 2009, the Company recognized nonrecurring non-cash
impairment charges of $29.1 million related to adjustments to property under development and
investments in unconsolidated joint ventures, which reflects an other-than-temporary decline in the
fair value of its investments resulting from further declines in the real estate markets in 2009.
The Companys estimated fair values relating to these impairment assessments were based upon Level
3 measurements, including a discounted cash flow analysis to estimate the fair value of the assets
taking into account the assets expected cash flow, holding period and estimated proceeds from the
disposition of assets, as well as specific market and economic conditions.
Impairment of Long-Lived Assets
In
accordance with SFAS Statement No. 144, Accounting for the
Impairment of Disposal of Long Lived Assets), which has been
subsequently codified in ASC 360-10, Property, Plant and
Equipment, long-lived
assets currently in use are reviewed periodically for possible impairment and will be written down
to fair value if considered impaired. Long-lived assets to be disposed of are written down to the
lower of cost or fair value less the estimated cost to sell. The Company reviews its portfolio of
long-lived assets for impairment at least annually. When events or changes of circumstances
indicate that an assets carrying value may not be recoverable, the Company tests for impairment by
reference to the assets estimated future cash flows. As of September 30, 2009, management
concluded that the property across the street from Delano South Beach, which the Company planned to
develop into a hotel, was impaired. Accordingly, the Company recorded an impairment charge of
approximately $11.9 million to reduce the property to its estimated fair value in September 2009.
As of September 30, 2009, management concluded that no further
reserves for impairment were required on all other
long-lived assets.
Investments in and Advances to Unconsolidated Joint Ventures
The Company periodically reviews its investments in unconsolidated joint ventures for other
temporary declines in market value. In this analysis of fair value, the Company uses discounted
cash flow analysis to estimate the fair value of its investment taking into account expected cash
flow from operations, holding period and net proceeds from the dispositions of the property. Any
decline that is not expected to be recovered is considered other-than-temporary and an impairment
charge is recorded as a reduction in the carrying value of the investment. As of September 30,
2009, management concluded that the Companys investment in the Echelon Las Vegas joint venture was
impaired. These investment costs related primarily to the plans and drawings for the development
project. Given the current economic environment, the Company recorded an impairment charge of
approximately $17.2 million representing the carrying value of this investment as it does not
expect to develop these projects in the next three to five years. As of September 30, 2009,
management concluded that no further reserves for impairment were required on all other investments in
unconsolidated joint ventures.
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Stock-based Compensation
The Company accounts for stock based employee compensation using the fair value method of
accounting described in SFAS No. 123R, Accounting for Stock-Based Compensation (as amended by SFAS No. 148 and
SFAS No. 123(R), which has subsequently been codified in ASC 718-10, Compensation, Stock Based
Compensation. For share grants,
total compensation expense is based on the price of the Companys stock at the grant date. For
option grants, the total compensation expense is based on the estimated fair value using the
Black-Scholes option-pricing model. Compensation expense is recorded ratably over the vesting
period, if any. Stock compensation expense recognized for the three months ended September 30, 2009
and 2008 was $3.2 million and $4.8 million, respectively. Stock compensation expense recognized for
the nine months ended September 30, 2009 and 2008 was $8.8 million and $12.1 million, respectively.
Income (Loss) Per Share
Basic net income (loss) per common share is calculated by dividing net income (loss) available
to common stockholders, less any dividends on unvested restricted common stock, by the
weighted-average number of common stock outstanding during the period. Diluted net income (loss)
per common share is calculated by dividing net income (loss) available to common stockholders, less
dividends on unvested restricted common stock, by the weighted-average number of common stock
outstanding during the period, plus other potentially dilutive securities, such as unvested shares
of restricted common stock and warrants.
Noncontrolling Interest
The Company follows SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements an amendment of Accounting Research Bulleting
(ARB) No. 51, which has been subsequently codified in ASC
810-10, when accounting and reporting for noncontrolling interests in a consolidated
subsidiary and the deconsolidation of a subsidiary. Under ASC 810-10, the Company now reports
noncontrolling interests in subsidiaries as a separate component of equity in the consolidated
financial statements and reflects net income attributable to the noncontrolling interests and net
income attributable to the common stockholders on the face of the consolidated statement of
operations.
The percentage of membership units in Morgans Group LLC, our operating company, owned by the
Former Parent is presented as noncontrolling interest in Morgans Group LLC in the consolidated
balance sheet and was approximately $14.9 million and $16.6 million as of September 30, 2009 and
December 31, 2008, respectively. The noncontrolling interest in Morgans Group LLC is: (i) increased
or decreased by the limited members pro rata share of Morgans Group LLCs net income or net loss,
respectively; (ii) decreased by distributions; (iii) decreased by redemptions of membership units
for the Companys common stock; and (iv) adjusted to equal the net equity of Morgans Group LLC
multiplied by the limited members ownership percentage immediately after each issuance of units of
Morgans Group LLC and/or shares of the Companys common stock and after each purchase of treasury
stock through an adjustment to additional paid-in capital. Net income or net loss allocated to the
noncontrolling interest in Morgans Group LLC is based on the weighted-average percentage ownership
throughout the period.
Additionally, $1.0 million and $1.4 million was recorded as noncontrolling interest as of
September 30, 2009 and December 31, 2008, respectively, which represents our third-party food and
beverage joint venture partners interest in the restaurant ventures at certain of our hotels.
New Accounting Pronouncements
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, which has been subsequently codified in ASC 825-10, Financial
Instruments (ASC 825-10). ASC 825-10 permits companies to make a one-time election to carry
eligible types of financial assets and liabilities at fair value, even if fair value measurement is
not required under GAAP. ASC 825-10 must be applied prospectively, and the effect of the first
re-measurement to fair value, if any, should be reported as a cumulative effect adjustment to the
opening balance of retained earnings. The adoption of ASC 825-10 had no material impact on the
Companys consolidated financial statements as the Company did not elect the fair value measurement
option for any of its financial assets or liabilities.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces SFAS
No. 141 and has subsequently been codified in ASC 805-10, Business Combinations (ASC 805-10). ASC
805-10, among other things, establishes principles and requirements for how an acquirer entity
recognizes and measures in its financial statements the identifiable assets acquired (including
intangibles), the liabilities assumed and any
noncontrolling interest in the acquired entity. Additionally, ASC 805-10 requires that all
transaction costs of a business acquisition will be expensed as incurred. The adoption of ASC
805-10 in the first quarter of 2009 will only have an impact on the accounting on future business
combinations.
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In February 2008, the FASB issued Staff Position No. FAS 157-2, which has subsequently been
codified in ASC 820-10. ASC 820-10 provided for a one-year deferral of the effective date of ASC
820-10 for non-financial assets and liabilities that are recognized or disclosed at fair value in
the financial statements on a nonrecurring basis, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis. The adoption of these provisions of
ASC 820-10 on January 1, 2009 did not have a material impact on the Companys consolidated
financial statements.
In March 2008, the FASB issued SFAS No. 161, which has subsequently been codified in ASC
815-10, and which requires enhanced disclosures related to derivative and hedging activities and
thereby seeks to improve the transparency of financial reporting. Under this statement, entities
are required to provide enhanced disclosure related to: (i) how and why an entity uses derivative
instruments; (ii) how derivative instruments and related hedge items are accounted for under SFAS
No.133, and its related interpretations; and (iii) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash flows. The Company
adopted SFAS No. 161 as of January 1, 2009 and the applicable disclosures are detailed above in
Derivative Instruments and Hedging Activities.
In May 2008, the FASB issued FASB Staff Position No. APB 14-1 (FSP APB 14-1), which has
subsequently been codified in ASC 470-20, Debt, Debt with Conversion and Other Options (ASC
470-20), and which clarifies the accounting for convertible notes payable. ASC 470-20 requires the
proceeds from the sale of convertible notes to be allocated between a liability component and an
equity component. The resulting debt discount must be amortized over the period the debt is
expected to remain outstanding as additional interest expense. ASC 470-20 requires retroactive
application to all periods presented and is effective for fiscal years beginning after December 15,
2008 and became effective for the Company as of January 1, 2009. The Company has adopted ASC 470-20
as of January 1, 2009. See Note 6 (g).
In June 2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entitys Own Stock, which has subsequently been codified in ASC
815-40, Derivatives and Hedging, Contracts in Entitys Own Equity (ASC 815-40). Former guidance
from paragraph 11(a) of SFAS No. 133 specified that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Companys own stock and (b) classified in
stockholders equity in the statement of operations would not be considered a derivative financial
instrument. ASC 815-40 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuers own stock and thus able to
qualify for the SFAS No. 133 paragraph 11(a) scope exception. ASC 815-40 is effective on January 1,
2009. The adoption of ASC 815-40 did not have a material impact on the Companys consolidated
financial statements.
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3 which clarifies the
application of SFAS No. 157, which has subsequently been codified in ASC 820-10. ASC 820-10
provides guidance in determining the fair value of a financial asset when the market for that
financial asset is not active.
On April 1, 2009, the FASB issued three FASB Staff Positions intended to provide additional
application guidance and enhance disclosures regarding the fair value of measurements and
impairments of securities. FASB Staff Position No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS No. 157. FASB Staff Position No.
FAS 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, enhances
consistency in financial reporting by increasing the frequency of fair value disclosures. FASB
Staff Position No. FAS 115-2 and No. FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity
and consistency in accounting for and presenting impairment losses on securities. All three FASB
Staff Positions have subsequently been codified in ASC 820-10, ASC 825-10, and ASC 320-10,
Investments, Investments Debt and Equity Securities, respectively. These codifications are
effective for reporting periods ending after June 15, 2009 and the adoption of these codifications
did not have a material impact on the Companys consolidated financial statements.
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On May 28, 2009, the FASB issued SFAS No. 165, Subsequent Events, which has subsequently been
codified in ASC 855-10, Subsequent Events (ASC 855-10). The Company adopted ASC 855-10 in the
second quarter of 2009. ASC 855-10 establishes the accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or are available to
be issued. It requires the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date, that is, whether that date represents the date the financial
statements were issued or were available to be issued. See above, Basis of Presentation for the
related disclosures. The adoption of ASC 855-10 did not have a material impact on our consolidated
financial statements.
On June 12, 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R),
which has subsequently been codified in ASC 810-10. ASC 810-10 amends prior guidance established
in FIN 46R and changes the consolidation guidance applicable to a variable interest entity (a
VIE). It also amends the guidance governing the determination of whether an enterprise is the
primary beneficiary of a VIE, and is therefore required to consolidate an entity by requiring a
qualitative analysis rather than a quantitative analysis. The qualitative analysis will include,
among other things, consideration of who has the power to direct the activities of the entity that
most significantly impact the entitys economic performance, and who has the obligation to absorb
losses or the right to receive benefits of the VIE that could potentially be significant to the
VIE. This standard also requires continuous reassessments of whether an enterprise is the primary
beneficiary of a VIE. Previously, FIN 46R required reconsideration of whether an enterprise was the
primary beneficiary of a VIE only when specific events had occurred. Qualified special purpose
entities, which were previously exempt from the application of this standard, will be subject to
the provisions of this standard when it becomes effective. ASC 810-10 also requires enhanced
disclosures about an enterprises involvement with a VIE. ASC 810-10 will be effective as of the
beginning of interim and annual reporting periods that begin after November 15, 2009. The Company
is currently evaluating the impact that these standards will have on its consolidated financial
statements.
Fair Value of Financial Instruments
As mentioned above, the Company adopted SFAS No. 107-1 and APB No. 28-1 during the second
quarter of 2009, which have subsequently been codified in ASC 825-10 and ASC 270-10, Presentation,
Interim Reporting, respectively. This guidance requires quarterly fair value disclosures for
financial instruments rather than annual disclosure. Disclosures about fair value of financial
instruments are based on pertinent information available to management as of the valuation date.
Considerable judgment is necessary to interpret market data and develop estimated fair values.
Accordingly, the estimates presented are not necessarily indicative of the amounts at which these
instruments could be purchased, sold, or settled. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value amounts.
The Companys financial instruments include cash and cash equivalents, accounts receivable,
restricted cash, accounts payable and accrued liabilities, and long-term debt. Substantially all of
the Companys long-term debt accrues interest at a floating rate, which re-prices frequently.
Management believes the carrying amount of the aforementioned financial instruments is a reasonable
estimate of fair value as of September 30, 2009 and December 31, 2008 due to the short-term
maturity of these items or variable interest rate. The fair value of the Companys fixed rate debt
amounted to approximately $226.8 million and $242.0 million as of September 30, 2009 and December
31, 2008, respectively, using market interest rates ranging from 1.4% to 5.8%.
Reclassifications and Adoption of New Accounting Pronouncements
Certain prior year financial statement amounts have been reclassified to conform to the
current year presentation.
The Company followed the guidance for a change in accounting principle under SFAS No. 154,
Accounting Changes and Error Corrections (which has subsequently been codified in ASC 250-10,
Accounting Changes and Error Corrections), to reflect the impact of the adoption of FSP APB 14-1,
discussed above, which was effective January 1, 2009. As a result of these adoptions, the Company
adjusted comparative consolidated financial statements of prior periods in this Quarterly Report on
Form 10-Q.
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The following consolidated balance sheet for the year ended December 31, 2008 and consolidated
statement of operations and consolidated statement of cash flows for the three and nine months
ended September 30, 2008 were affected by the changes in accounting principles (in thousands,
except per share data):
December 31, 2008 | ||||||||||||
As Originally | Effect of | |||||||||||
Consolidated Balance Sheet | Reported | As Adjusted | Change | |||||||||
Deferred tax asset |
$ | 66,279 | $ | 61,005 | $ | (5,274 | ) | |||||
Other, net |
14,490 | 13,963 | (527 | ) | ||||||||
Long term debt and capital lease obligations |
730,365 | 717,179 | (13,186 | ) | ||||||||
Additional paid-in capital |
232,022 | 242,158 | 10,136 | |||||||||
Accumulated deficit |
(80,088 | ) | (82,755 | ) | (2,667 | ) | ||||||
Noncontrolling interest |
18,017 | 17,933 | (84 | ) |
Three Months Ended Sept. 30, 2008 | Nine Months Ended Sept. 30, 2008 | |||||||||||||||||||||||
Consolidated Statement of | As Originally | As | Effect of | As Originally | As | Effect of | ||||||||||||||||||
Operations | Reported | Adjusted | Change | Reported | Adjusted | Change | ||||||||||||||||||
Interest expense, net |
$ | 10,222 | $ | 10,791 | $ | (569 | ) | $ | 31,053 | $ | 32,760 | $ | (1,707 | ) | ||||||||||
Income tax benefit |
(6,109 | ) | (6,336 | ) | 228 | (10,621 | ) | (11,304 | ) | 683 | ||||||||||||||
Net loss |
(8,600 | ) | (8,962 | ) | (342 | ) | (13,944 | ) | (14,968 | ) | (1,024 | ) | ||||||||||||
Net income attributable
to noncontrolling
interest |
(399 | ) | (388 | ) | (10 | ) | (2,762 | ) | (2,731 | ) | (31 | ) | ||||||||||||
Net loss attributable to
common stockholders |
(8,999 | ) | (9,330 | ) | (331 | ) | (16,706 | ) | (17,699 | ) | (993 | ) | ||||||||||||
Loss per share
attributable to common
stockholders: |
||||||||||||||||||||||||
Basic and diluted |
(0.29 | ) | (0.30 | ) | (0.01 | ) | (0.52 | ) | (0.55 | ) | (0.03 | ) |
Nine Months Ended September 30, 2008 | ||||||||||||
As Originally | Effect of | |||||||||||
Consolidated Statement of Cash Flows | Reported | As Adjusted | Change | |||||||||
Net loss |
$ | (13,944 | ) | $ | (14,968 | ) | $ | (1,024 | ) | |||
Amortization of discount on convertible debt |
| 1,707 | 1,707 | |||||||||
Deferred tax benefit |
(10,621 | ) | (11,304 | ) | (683 | ) |
3. Income (Loss) Per Share
Basic earnings per share is calculated based on the weighted average number of common stock
outstanding during the period. Diluted earnings per share include the effect of potential shares
outstanding, including dilutive securities. Potential dilutive securities may include shares and
options granted under the Companys stock incentive plan and membership units in Morgans Group LLC,
which may be exchanged for shares of the Companys common stock under certain circumstances. The
954,065 outstanding Morgans Group LLC membership units (which may be converted to common stock) at
September 30, 2009 have been excluded from the diluted net income (loss) per common share
calculation, as there would be no effect on reported diluted net income (loss) per common share.
All unvested restricted stock units, LTIP Units (as defined in Note 7), stock options and
contingent Convertible Notes (as defined in Note 6) have been excluded from loss per share for the
three months ended September 30, 2009 and 2008 and the nine months ended September 30, 2009 and
2008 as they are anti-dilutive.
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The table below details the components of the basic and diluted loss per share calculations
(in thousands, except for per share data):
Three Months Ended September 30, 2009 | Three Months Ended September 30, 2008 | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Average | EPS | Average | EPS | |||||||||||||||||||||
Loss | Shares | Amount | Loss | Shares | Amount | |||||||||||||||||||
Basic and diluted
loss per share |
$ | (27,817 | ) | 29,737 | $ | (0.94 | ) | $ | (9,330 | ) | 31,231 | $ | (0.30 | ) |
Nine Months Ended September 30, 2009 | Nine Months Ended September 30, 2008 | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Average | EPS | Average | EPS | |||||||||||||||||||||
Loss | Shares | Amount | Loss | Shares | Amount | |||||||||||||||||||
Basic and diluted
loss per share |
$ | (48,458 | ) | 29,941 | $ | (1.62 | ) | $ | (17,699 | ) | 31,953 | $ | (0.55 | ) |
4. Investments in and Advances to Unconsolidated Joint Ventures
The Companys investments in and advances to unconsolidated joint ventures and its equity in
income (loss) of unconsolidated joint ventures are summarized as follows (in thousands):
Investments
As of | As of | |||||||
September 30, | December 31, | |||||||
Entity | 2009 | 2008 | ||||||
Mondrian South Beach |
20,319 | 24,785 | ||||||
Shore Club |
57 | 57 | ||||||
Echelon Las Vegas |
| 17,198 | ||||||
Mondrian SoHo |
8,335 | 7,564 | ||||||
Ames |
11,228 | 7,049 | ||||||
Other |
101 | 101 | ||||||
Total investments in and advances to unconsolidated joint ventures |
$ | 40,040 | $ | 56,754 | ||||
As of | As of | |||||||
September 30, | December 31, | |||||||
Entity | 2009 | 2008 | ||||||
Morgans
Hotel Group Europe Limited |
$ | (2,778 | ) | $ | (2,689 | ) | ||
Restaurant Venture SC London |
(1,458 | ) | (811 | ) | ||||
Hard Rock Hotel & Casino |
(8,194 | ) | (11,063 | ) | ||||
Total losses from and
distributions in excess of
investment in unconsolidated
joint ventures |
$ | (12,430 | ) | $ | (14,563 | ) | ||
Equity in income (loss) from unconsolidated joint ventures
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
Entity | Sept. 30, 2009 | Sept. 30, 2008 | Sept. 30, 2009 | Sept. 30, 2008 | ||||||||||||
Mondrian South Beach |
$ | (2,580 | ) | $ | (369 | ) | $ | (4,667 | ) | $ | (1,083 | ) | ||||
Shore Club |
| | | | ||||||||||||
Echelon Las Vegas |
(80 | ) | (124 | ) | (191 | ) | (735 | ) | ||||||||
Morgans Hotel Group
Europe Ltd. |
625 | (2,527 | ) | 798 | 897 | |||||||||||
Restaurant Venture
SC London |
(230 | ) | (131 | ) | (647 | ) | 184 | |||||||||
Hard Rock Hotel &
Casino |
| (4,468 | ) | | (15,796 | ) | ||||||||||
Other |
3 | 2 | 7 | 7 | ||||||||||||
Total |
$ | (2,262 | ) | $ | (7,617 | ) | $ | (4,700 | ) | $ | (16,526 | ) | ||||
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Morgans Hotel Group Europe Limited
As of September 30, 2009, the Company owned interests in two hotels in London, England, St
Martins Lane, a 204-room hotel, and Sanderson, a 150-room hotel, through a 50/50 joint venture
known as Morgans Hotel Group Europe Limited (Morgans Europe) with Walton MG London Investors V,
L.L.C.
Under a management agreement with Morgans Europe, the Company earns management fees and a
reimbursement for allocable chain service and technical service expenses. The Company is also
entitled to an incentive management fee and a capital incentive fee. The Company did not earn any
incentive fees during the nine months ended September 30, 2009 or 2008.
Morgans Europe has outstanding mortgage debt of £101.0 million, or approximately $160.5
million at the exchange rate of 1.59 US dollars to GBP at September 30, 2009, which matures on
November 24, 2010. The joint venture is currently considering various options with respect to the
refinancing of this mortgage obligation.
Net income or loss and cash distributions or contributions are allocated to the partners in
accordance with ownership interests. The Company accounts for this investment under the equity
method of accounting.
Mondrian South Beach
On August 8, 2006, the Company entered into a 50/50 joint venture with an affiliate of Hudson
Capital to renovate and convert an apartment building on Biscayne Bay in South Beach Miami into a
condominium hotel, Mondrian South Beach, which opened in December 2008. The Company operates
Mondrian South Beach under a long-term incentive management contract.
The joint venture acquired the existing building and land for a gross purchase price of $110.0
million. An initial equity investment of $15.0 million from each of the Company and Hudson Capital
was funded at closing, and subsequently each member also contributed $8.0 million of additional
equity. The Company and an affiliate of Hudson Capital provided additional mezzanine financing of
approximately $22.5 million in total to the joint venture to fund completion of the construction at
Mondrian South Beach in 2008. Additionally, the joint venture initially received mortgage loan
financing of approximately $124.0 million at a rate of LIBOR, based on the rate set date, plus 300
basis points. A portion of this mortgage debt was paid down, prior to the amendment discussed
below, with proceeds obtained from condominium sales. In April 2008, the Mondrian South Beach joint
venture obtained a mezzanine loan of $28.0 million bearing interest at LIBOR, based on the rate set
date, plus 600 basis points. The mezzanine loan was also amended in November 2008, as discussed
below.
On November 25, 2008, together with its joint venture partner, the Company amended and
restated the mortgage loan and mezzanine loan agreements related to the Mondrian South Beach to
provide for, among other things, four one-year extension options of the third-party financing,
totaling $95.6 million as of September 30, 2009. Under the amended agreements, the initial maturity
date of August 1, 2009 can be extended to July 29, 2013, subject to certain conditions including an
amortization payment of approximately $17.5 million on August 1, 2009 for the first such annual
extension, repayment of the remainder of the A-Note, as defined in the agreements, by August 1,
2010 for the exercise of the second annual extension, achievement of defined debt service coverage
ratios for the exercise of the third and fourth annual extensions, and achievement of a loan to
value test for the fourth annual extension. The loans matured on August 1, 2009 and were not repaid
or extended. The Company is currently operating Mondrian South Beach. The joint venture is in
discussions with the lenders to extend the maturity.
A standard non-recourse carve-out guaranty by Morgans Group LLC is in place for the Mondrian
South Beach loans. In addition, although construction is complete and Mondrian South Beach opened
on December 1, 2008, the Company and affiliates of its partner may have continuing obligations
under a construction completion guaranty. The Company and affiliates of its partner also have an
agreement to purchase approximately $14 million each of
condominium units under certain conditions,
including an event of default. As noted above, the joint venture is in discussions with the
lenders to extend the maturity of the loans.
The joint venture is in the process of selling units as condominiums, subject to market
conditions, and unit buyers will have the opportunity to place their units into the hotels rental
program. In addition to hotel management fees, the Company could also realize fees from the sale of
condominium units.
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Hard Rock Hotel & Casino
Formation
and Financing
On
February 2, 2007, the Company and Morgans Group LLC (together, the Morgans Parties), an
affiliate of DLJ Merchant Banking Partners (DLJMB), and certain other DLJMB affiliates (such
affiliates, together with DLJMB, collectively the DLJMB Parties) completed the acquisition of the
Hard Rock Hotel & Casino in Las Vegas (Hard Rock). The acquisition was completed through a joint
venture entity, Hard Rock Hotel Holdings, LLC, funded one-third, or approximately $57.5 million, by
the Morgans Parties, and two-thirds, or approximately $115.0 million, by the DLJMB Parties. In
connection with the joint ventures acquisition of the Hard Rock, certain subsidiaries of the joint
venture entered into a debt
financing in the form of a real estate loan in the commercial mortgage-backed securities market
(the CMBS Facility) that matures on February 9, 2010, with two one-year extension options,
subject to certain conditions. The CMBS Facility provides for a $760.0 million acquisition loan
that was used to fund the acquisition and a construction loan of up to $620.0 million for the expansion project at the Hard
Rock. As of September 30, 2009, the joint venture had drawn $492.0 million from the construction
loan. The Company has entered into standard joint and several guarantees in connection with the
CMBS Facility, including construction completion guarantees related to the Hard Rock expansion,
which is scheduled to be completed by the end of 2009. In its joint venture agreement with DLJMB,
the Company has agreed to be responsible for the first $50.0 million of exposure on the completion
guarantees, subject to certain conditions. In August 2009, the joint venture entered into a non-binding term sheet with the lenders under the
CMBS Facility to amend the terms of the loan agreements governing the CMBS Facility. There can be
no assurance that the joint venture will complete the amendment process with the lenders under the
CMBS Facility on a timely basis or at all.
Land Loans
On August 1, 2008, a subsidiary of the Hard Rock joint venture completed an intercompany land
purchase with respect to an 11-acre parcel of land located adjacent to the Hard Rock. To finance a
portion of the purchase, a subsidiary of the Hard Rock joint venture entered into a $50.0 million
loan agreement with Column Financial, Inc. NorthStar Realty Finance Corp. is a participant lender
in the loan. The loan had an initial maturity date of August 9, 2009. In connection with the land
loan, Morgans Group LLC, together with DLJMB, as guarantors, entered into a non-recourse carve-out
guaranty agreement, which is triggered in the event of certain bad boy acts, in favor of
Column Financial, Inc. Under the joint venture agreement, DLJMB has agreed to be responsible for
100% of any liability under the guaranty, subject to certain conditions.
As part of the intercompany land purchase, the DLJMB Parties contributed an aggregate of
approximately $74.0 million to the joint venture to fund the remaining portion of the $110.0
million of proceeds necessary to complete the intercompany land purchase and to pay for related
costs and expenses. The proceeds from the financing, together with the equity contribution from the
DLJMB Parties, were used to fully satisfy an amortization payment of $110.0 million that was
required under the joint ventures CMBS Facility.
At maturity of the land loan on August 9, 2009, the joint ventures subsidiary borrower did
not repay the loan. On October 23, 2009, the joint venture received a notice of default from the lenders under the land
acquisition financing with respect to the subsidiary borrowers failure to repay the loan
in full on the then effective maturity date. However, the lenders under the land acquisition
financing have not, to the Companys knowledge, accelerated the debt or exercised any other
remedies. Further, the joint venture has entered into a term sheet with the lenders under the land
acquisition financing to amend the loan agreement governing the land
acquisition financing to, among other things, extend the maturity date to August 9, 2011 and
thereby cure the event of default. There can be no assurance that the joint venture will be able to
complete the amendment process with the lenders under the land acquisition financing on a timely
basis or at all.
Capital Structure
As a result of additional disproportionate cash contributions made by the DLJMB Parties since
the formation of the Hard Rock joint venture, the Company held approximately an 11.3% ownership
interest in the joint venture as of September 30, 2009 based on cash contributions, and applying a
weighting of 1.75x to such contributions, based on the last agreed weighting for capital
contributions beyond the amount initially committed by the DLJMB Parties. Some of these additional
contributions by the DLJMB Parties may ultimately receive a greater weighting based on an appraisal
process included in the joint venture agreement or as otherwise agreed by the parties, which would
further dilute the Companys ownership interest. As of September 30, 2009, the Company has
approximately $8.2 million
of letters of credit outstanding toward the expansion, which are expected to be funded in the
fourth quarter of 2009. Although the Company has the right to participate in any future capital
contributions that may be called by the joint ventures board of directors, the Company has no
obligation to fund such contributions. To the extent the Company decides not to participate in any
such contribution, its interest in the joint venture will be diluted.
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Management Agreement
Under an amended property management agreement, the Company operates the hotel, retail, food
and beverage, entertainment and all other businesses related to the Hard Rock, excluding the casino
prior to March 1, 2008, as discussed below. Under the terms of the agreement, the Company receives
a management fee and a chain service expense reimbursement of all non-gaming revenue including
casino rents and all other rental income. The Company can also earn an incentive management fee
based on EBITDA, as defined, above certain levels. The term of the management contract is 20 years
with two 10-year renewals. Beginning 12 months following completion of the expansion, the Companys
management agreement is subject to certain performance tests, namely achievement of an EBITDA
hurdle, as defined in the amended property management agreement.
Echelon Las Vegas
In January 2006, the Company entered into a 50/50 joint venture with a subsidiary of Boyd
Gaming Corporation (Boyd), through which the joint venture plans to develop Delano Las Vegas and
Mondrian Las Vegas as part of Boyds Echelon project.
On August 1, 2008, Boyd announced that it will delay the entire Echelon project due to the
current capital markets and economic conditions. On September 23, 2008, the Company and Boyd
amended their joint venture agreement to, among other things, extend the deadline by which the
joint venture must obtain construction financing for the development of Delano Las Vegas and
Mondrian Las Vegas to December 31, 2009. The amended joint venture agreement also provided for the
immediate return of the $30.0 million deposit the Company had provided for the project, plus
interest, the elimination of the Companys future funding obligations of approximately $41.0
million and the elimination of any obligation by the Company to provide a construction loan
guaranty. Each partner has the right to terminate the joint venture for any reason prior to
December 31, 2009. Additionally, the terms of the management
agreement, which provide for the Company to operate the joint venture hotels upon their completion,
remain unchanged.
Given the current economic environment, in September 2009, the Company recorded a non-cash
impairment charge of $17.2 million related to its investment in the Echelon Las Vegas joint
venture. The costs related primarily to the plans and drawings for the development project.
While the Company has not made any formal decisions regarding the future of the Echelon Las Vegas
project, the Company does not expect to develop this project in the next three to five years.
Mondrian SoHo
In June 2007, the Company entered into an agreement for an approximately 20% equity interest
in a joint venture with Cape Advisors Inc. to acquire and develop a Mondrian hotel in the SoHo
neighborhood of New York City. The Mondrian SoHo is currently expected to have approximately 270
rooms, a restaurant, bar, meeting rooms, exercise facility and a penthouse suite. The Company has
contributed approximately $4.8 million in equity and $3.5 million in mezzanine loans to the joint
venture through September 30, 2009. The Company has signed a 10-year management contract with two
10-year extension options to operate the hotel upon its completion, which is currently expected to
occur in the middle of 2010.
Ames
On June 17, 2008, the Company, Normandy Real Estate Partners, and Ames Hotel Partners entered
into a joint venture agreement as part of the development of the Ames hotel in Boston, located near
Government Center, Boston Common and Faneuil Hall. The Company has signed a long-term management
contract to operate the hotel upon its completion. Ames is expected to open in November 2009 and to
have approximately 115 guest rooms, a restaurant, bar and exercise facility.
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The Company has contributed approximately $11.2 million in equity through September 30, 2009
for an approximately 35% interest in the joint venture. The project is expected to qualify for
federal and state historic rehabilitation tax credits. The joint venture has obtained a development
loan for $46.5 million, which amount was outstanding as of September 30, 2009.
Shore Club
The Company operates Shore Club under a management contract and owned a minority ownership
interest of approximately 7% at September 30, 2009. On September 15, 2009, the joint venture that
owns Shore Club received a notice of default on behalf of the special
servicer for the lender on the joint ventures mortgage loan for
failure to make its September monthly payment and for failure to
maintain its debt service coverage ratio, as required by the loan documents. On October 7, 2009, the joint venture received a
second letter on behalf of the special servicer for the lender accelerating the payment of all outstanding principal, accrued
interest, and all other amounts due on the mortgage loan. The lender also demanded that the joint
venture transfer all rents and revenues directly to the lender to satisfy the joint ventures debt.
The Company understands that the joint venture and the lender are currently in discussions to
address the default.
5. Other Liabilities
Other liabilities consist of the following (in thousands):
As of | As of | |||||||
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Interest swap liability (Note 2) |
$ | 12,977 | $ | 21,909 | ||||
Designer fee payable |
13,696 | 13,175 | ||||||
Other |
(6 | ) | 571 | |||||
$ | 26,667 | $ | 35,655 | |||||
Designer Fee Payable
The Former Parent had an exclusive service agreement with a hotel designer, pursuant to which
the designer has initiated various claims related to the agreement. Although the Company is not a
party to the agreement, it may have certain contractual obligations or liabilities to the Former
Parent in connection with the agreement. While defenses and/or counter-claims may be available to
the Company or the Former Parent in connection with any claims brought by the designer, a liability
amount has been recorded in these consolidated financial statements. According to the agreement,
the designer is owed a base fee for each designed hotel, plus 1% of Gross Revenues, as defined in
the agreement, for a 10-year period from the opening of each hotel. The estimated costs of the
design services were capitalized as a component of the applicable hotel and are being amortized
over the five-year estimated life of the related design elements. Interest is accreted each year on
the liability and charged to interest expense using a rate of 9%. Changes to the liability recorded
in these consolidated financial statements are recorded as an adjustment to the capitalized design
fee and amortized prospectively. Adjustments to the liability after the five-year life of the
design asset will be charged directly to operations. In addition, the agreement also called for the
designer to design a minimum number of projects for which the designer would be paid a minimum fee,
which is recorded in the above liability. See further discussion in Note 9.
6. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consists of the following (in thousands):
As of | As of | Interest rate at | |||||||||||
September 30, | December 31, | September 30, | |||||||||||
Description | 2009 | 2008 | 2009 | ||||||||||
Notes secured by Hudson and Mondrian(a) |
$ | 370,000 | $ | 370,000 | LIBOR + 1.25 | % | |||||||
Clift debt(b) |
82,799 | 81,578 | 9.6 | % | |||||||||
Promissory note(c) |
10,500 | 10,000 | 11.0 | % | |||||||||
Note secured by Mondrian Scottsdale (d) |
40,000 | 40,000 | LIBOR + 2.30 | % | |||||||||
Liability to subsidiary trust(e) |
50,100 | 50,100 | 8.68 | % | |||||||||
Revolving credit facility(f) |
23,508 | | (f) | ||||||||||
Convertible Notes Face Value $172.5 million(g) |
161,022 | 159,314 | 2.375 | % | |||||||||
Capital lease obligations |
6,129 | 6,187 | various | ||||||||||
Total long-term debt and capital lease obligations |
$ | 744,058 | $ | 717,179 | |||||||||
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(a) Mortgage Agreement Notes secured by Hudson and Mondrian Los Angeles
On October 6, 2006, subsidiaries of the Company entered into non-recourse mortgage financings
with Wachovia Bank, National Association, as lender, consisting of two separate mortgage loans and
a mezzanine loan (collectively, the Mortgages). As of September 30, 2009, the Mortgages were
comprised of a $217.0 million first mortgage note secured by Hudson, a $32.5 million mezzanine loan
secured by a pledge of the equity interests in the Companys subsidiary owning Hudson, and a $120.5
million first mortgage note secured by Mondrian Los Angeles. As discussed below, the $32.5 million
mezzanine loan secured by the equity interests in the Companys subsidiary owning Hudson was
reduced to $26.5 million in October 2009.
The Mortgages bear interest at a blended rate of 30-day LIBOR plus 125 basis points. The
Company maintains swaps that effectively fix the LIBOR rate on the debt under the Mortgages at
approximately 5.0% through the initial maturity date.
The Mortgages mature on July 12, 2010. The Company has the option of extending the maturity
date of the Mortgages to October 15, 2011 provided that certain extension requirements are
achieved, including maintaining a debt service coverage ratio, as defined, at the subsidiary owning
the relevant hotel for the two fiscal quarters preceding the maturity date of 1.55 to 1.00 or
greater. A portion of the Mortgages may need to be repaid in order to meet this covenant, or the
Company may consider refinancing these Mortgages.
On October 14, 2009, the Company entered into an agreement with one of its lenders which
holds, among other loans, the mezzanine loan on Hudson. Under the agreement, the Company 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 the Companys 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 the Companys other debt obligations prior to
October 11, 2011. The Company 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 the Company 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.
The prepayment clause in the Mortgages permits the Company to prepay the Mortgages in whole or
in part on any business day.
The Mortgages require the Companys subsidiary borrowers (entities owning Hudson and Mondrian
Los Angeles) to fund reserve accounts to cover monthly debt service payments. Those subsidiary
borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance
premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are
deposited into restricted cash accounts and are released as certain conditions are met. The
subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade
payables, purchase money indebtedness, capital lease obligations and certain other liabilities.
The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles.
Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt or
partnership interest debt. In addition, the Mortgages do not permit (1) transfers of more than 49%
of the interests in the subsidiary borrowers, Morgans Group LLC or the Company or (2) a change in
control of the subsidiary borrowers or in respect of Morgans Group LLC or the Company itself
without, in each case, complying with various conditions or obtaining the prior written consent of
the lender.
The Mortgages provide for events of default customary in mortgage financings, including, among
others, failure to pay principal or interest when due, failure to comply with certain covenants,
certain insolvency and receivership events affecting the subsidiary borrowers, Morgans Group LLC or
the Company, and breach of the encumbrance and transfer provisions. In the event of a default under
the Mortgages, the lenders recourse is limited to the
mortgaged property, unless the event of default results from insolvency, a voluntary
bankruptcy filing or a breach of the encumbrance and transfer provisions, in which event the lender
may also pursue remedies against Morgans Group LLC.
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(b) Clift Debt
In October 2004, Clift Holdings LLC sold the hotel to an unrelated party for $71.0 million and
then leased it back for a 99-year lease term. Under this lease, the Company is required to fund
operating shortfalls including the lease payments and to fund all capital expenditures. This
transaction did not qualify as a sale due to the Companys continued involvement and therefore is
treated as a financing.
The lease payment terms are as follows:
Years 1 and 2
|
$2.8 million per annum (completed in October 2006) | |
Years 3 to 10
|
$6.0 million per annum | |
Thereafter
|
Increased at 5-year intervals by a formula tied to increases in the Consumer Price Index. At year 10, the increase has a maximum of 40% and a minimum of 20%. At each payment date thereafter, the maximum increase is 20% and the minimum is 10%. |
(c) Promissory Note
The purchase of the property across from the Delano South Beach was partially financed with
the issuance of a $10.0 million interest only non-recourse promissory note to the seller. The note
matures on January 24, 2010 and currently bears interest at 11.0%, which was required to be prepaid
in full at the time the note was extended in November 2008. The obligations under the note are
secured by the property. Additionally, in January 2009, an affiliate of the seller financed an
additional $0.5 million to pay for costs associated with obtaining necessary permits. This $0.5
million promissory note matures on January 24, 2010 and bears interest at 11%. The obligations
under this note are secured with a pledge of the equity interests in the Companys subsidiary that
owns the property.
(d) Mondrian Scottsdale Debt
In May 2006, the Company obtained non-recourse mortgage and mezzanine financing on Mondrian
Scottsdale. The $40.0 million mortgage and mezzanine loans accrue interest at LIBOR plus 2.3%. The
loans matured on June 1, 2009 and were not repaid. The Company is currently operating Mondrian
Scottsdale and is discussing various options with the lenders. The Company does not intend to
commit significant monies toward the repayment or restructuring of the loans or the funding of
operating deficits.
(e) Liability to Subsidiary Trust Issuing Preferred Securities
On August 4, 2006, a newly established trust formed by the Company, MHG Capital Trust I (the
Trust), issued $50.0 million in trust preferred securities (the Trust Securities) in a private
placement. The Company owns all of the $0.1 million of outstanding common stock of the Trust. The
Trust used the proceeds of these transactions to purchase $50.1 million of junior subordinated
notes issued by the Companys operating company and guaranteed by the Company (the Trust Notes)
which mature on October 30, 2036. The sole assets of the Trust consist of the Trust Notes. The
terms of the Trust Notes are substantially the same as the Trust Securities. The Trust Notes and
the Trust Securities have a fixed interest rate of 8.68% per annum during the first 10 years, after
which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per
annum. The Trust Notes are redeemable by the Trust, at the Companys option, after five years at
par. To the extent the Company redeems the Trust Notes, the Trust is required to redeem a
corresponding amount of Trust Securities.
Prior
to the amendment described below, the Trust Notes agreement required that the Company
not fall below a fixed charge coverage ratio, defined generally as Consolidated EBITDA,
excluding Clifts EBITDA, over consolidated interest expense, excluding Clifts interest expense,
of 1.4 to 1.0 for four consecutive quarters. On November 2,
2009, the Company amended the Trust Notes agreement to permanently
eliminate this financial covenant. The Company paid a one-time fee of $2.0
million in exchange for the permanent removal of the covenant.
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The Company has identified that the Trust is a variable interest entity under ASC 810-10
(former guidance: FIN 46R). Based on managements analysis, the Company is not the primary
beneficiary since it does not absorb a majority of the expected losses, nor is it entitled to a
majority of the expected residual returns. Accordingly, the Trust is not consolidated into the
Companys financial statements. The Company accounts for the investment in the common stock of the
Trust under the equity method of accounting.
(f) Revolving Credit Facility
On October 6, 2006, the Company and certain of its subsidiaries entered into a revolving
credit facility in the initial commitment amount of $225.0 million, which included a $50.0 million
letter of credit sub-facility and a $25.0 million swingline sub-facility (collectively, the
Revolving Credit Facility) with Wachovia Bank, National Association, as Administrative Agent, and
the other lenders party thereto. In early 2009, the Company received notice that one of the lenders
on the Revolving Credit Facility was taken over by the Federal Deposit Insurance Corporation. As
such, the total initial commitment amount on the Revolving Credit Facility was reduced to
approximately $220.0 million.
On August 5, 2009, the Company and certain of its subsidiaries entered into an amendment to
the Revolving Credit Facility (the Amended Revolving Credit Facility).
Among other things, the Amended Revolving Credit Facility:
| deleted the financial covenant requiring the Company to maintain certain leverage
ratios; |
| revised the fixed charge coverage ratio (defined generally as the ratio of
consolidated EBITDA excluding Mondrian Scottsdales EBITDA for the periods ending June
30, 2009 and September 30, 2009 and Clifts EBITDA for all periods to consolidated
interest expense excluding Mondrian Scottsdales interest expense for the periods ending
June 30, 2009 and September 30, 2009 and Clifts interest expense for all periods) that
the Company is required to maintain for each four-quarter period to no less than 0.90 to
1.00 from the previous fixed charge coverage ratio of no less than 1.75 to 1.00. As of
September 30, 2009, the Companys fixed charge coverage
ratio under the Amended Revolving Credit Facility was 1.63x; |
| limits defaults relating to bankruptcy and judgments to certain events involving
the Company, Morgans Group LLC and subsidiaries that are parties to the Amended
Revolving Credit Facility; |
| prohibits capital expenditures with respect to any hotels owned by the Company,
the borrowers, as defined, or subsidiaries, other than maintenance capital expenditures
for any hotel not exceeding 4% of the annual gross revenues of such hotel and certain
other exceptions; |
| revised certain provisions related to permitted indebtedness, including, among
other things, deleting certain provisions permitting unsecured indebtedness and
indebtedness for the acquisition or expansion of hotels; |
| prohibits repurchases of the Companys common equity interests by the Company or
Morgans Group LLC; |
| imposes certain limits on any secured swap agreements entered into after the
effective date of the Amended Revolving Credit Facility; and |
| provided for a waiver of any default or event of default, to the extent that a
default or event of default existed for failure to comply with any financial covenant
under the existing Revolving Credit Facility as of June 30, 2009 and/or for the four
fiscal quarters ended June 30, 2009. |
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In addition to the provisions above, the Amended Revolving Credit Facility reduced the maximum
aggregate amount of the commitments from $220.0 million to $125.0 million, which amount is
available under two tranches:
(i) a revolving credit facility in an amount equal to $90.0 million (the New York Tranche),
which is secured by a mortgage on Morgans Hotel and Royalton Hotel (the New York Properties) and
a mortgage on the Delano Hotel (the Florida Property); and (ii) a revolving credit facility in an
amount equal to $35.0 million (the Florida Tranche), which is secured by the mortgage on the
Florida Property (but not the New York Properties). The Amended Revolving Credit Facility also
provides for a letter of credit facility in the amount of $25.0 million, which is secured by the
mortgages on the New York Properties and the Florida Property. At any given time, the amount
available for borrowings under the Amended Revolving Credit Facility is contingent upon the
borrowing base valuation, which is calculated as the lesser of (i) 60% of appraised value and (ii)
the implied debt service coverage value of certain collateral properties securing the Amended
Revolving Credit Facility; provided that the portion of the borrowing base attributable to the New
York Properties will never be less than 35% of the appraised value of the New York Properties.
Total availability under the Amended Revolving Credit Facility as of September 30, 2009 was $123.2
million, of which the outstanding principal balance was $23.5 million, and approximately $9.8
million of letters of credit were posted, all allocated to the Florida Tranche.
The Amended Revolving Credit Facility bears interest at a fluctuating rate measured by
reference to, at the Companys election, either LIBOR (subject to a LIBOR floor of 1%) or a base
rate, plus a borrowing margin. LIBOR loans have a borrowing margin of 3.75% per annum and base rate
loans have a borrowing margin of 2.75% per annum. The Amended Revolving Credit Facility also
provides for the payment of a quarterly unused facility fee equal to the average daily unused
amount for each quarter multiplied by 0.5%.
The owners of the New York Properties, wholly-owned subsidiaries of the Company, have paid all
mortgage recording and other taxes required for the mortgage on the New York Properties to secure
in full the amount available under the New York Tranche. The commitments under the Amended
Revolving Credit Facility terminate on October 5, 2011, at which time all outstanding amounts under
the Amended Revolving Credit Facility will be due.
The Amended Revolving Credit Facility provides for customary events of default, including:
failure to pay principal or interest when due; failure to comply with covenants; any representation
proving to be incorrect; defaults relating to acceleration of, or defaults on, certain other
indebtedness of at least $10.0 million in the aggregate; certain insolvency and bankruptcy events
affecting the Company, Morgans Group LLC or certain subsidiaries of the Company that are party to
the Amended Revolving Credit Facility; judgments in excess of $5.0 million in the aggregate
affecting the Company, Morgans Group LLC and certain subsidiaries of the Company that are party to
the Amended Revolving Credit Facility; the acquisition by any person of 40% or more of any
outstanding class of capital stock having ordinary voting power in the election of directors of the
Company; and the incurrence of certain ERISA liabilities in excess of $5.0 million in the
aggregate.
(g) October 2007 Convertible Notes Offering
On October 17, 2007, the Company issued $172.5 million aggregate principal amount of 2.375%
Senior Subordinated Convertible Notes (the Convertible Notes) in a private offering. Net proceeds
from the offering were approximately $166.8 million.
The Convertible Notes are senior subordinated unsecured obligations of the Company and are
guaranteed on a senior subordinated basis by the Companys operating company, Morgans Group LLC.
The Convertible Notes are convertible into shares of the Companys common stock under certain
circumstances and upon the occurrence of specified events.
Interest on the Convertible Notes is payable semi-annually in arrears on April 15 and October
15 of each year, beginning on April 15, 2008, and the Convertible Notes mature on October 15, 2014,
unless previously repurchased by the Company or converted in accordance with their terms prior to
such date. The initial conversion rate for each $1,000 principal amount of Convertible Notes is
37.1903 shares of the Companys common stock, representing an initial conversion price of
approximately $26.89 per share of common stock. The initial conversion rate is subject to
adjustment under certain circumstances.
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On January 1, 2009, the Company adopted ASC 470-20 (former literature: FSP APB 14-1), which
clarifies the accounting for convertible notes payable. ASC 470-20 requires the proceeds from the
issuance of convertible notes to be allocated between a debt component and an equity component. The
debt component is measured based on the
fair value of similar debt without an equity conversion feature, and the equity component is
determined as the residual of the fair value of the debt deducted from the original proceeds
received. The resulting discount on the debt component is amortized over the period the debt is
expected to be outstanding as additional interest expense. ASC 470-20 required retroactive
application to all periods presented. The equity component, recorded as additional paid-in capital,
was $10.1 million, which represents the difference between the proceeds from issuance of the
Convertible Notes and the fair value of the liability, net of deferred taxes of $5.3 million as of
the date of issuance of the Convertible Notes.
In connection with the issuance of the Convertible Notes, the Company entered into convertible
note hedge transactions with respect to the Companys common stock (the Call Options) with
Merrill Lynch Financial Markets, Inc. and Citibank, N.A. (collectively, the Hedge Providers). The
Call Options are exercisable solely in connection with any conversion of the Convertible Notes and
pursuant to which the Company will receive shares of the Companys common stock from the Hedge
Providers equal to the number of shares issuable to the holders of the Convertible Notes upon
conversion. The Company paid approximately $58.2 million for the Call Options.
In connection with the sale of the Convertible Notes, the Company also entered into separate
warrant transactions with Merrill Lynch Financial Markets, Inc. and Citibank, N.A., whereby the
Company issued warrants (the Warrants) to purchase 6,415,327 shares of common stock, subject to
customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of
common stock. The Company received approximately $34.1 million from the issuance of the Warrants.
The Company recorded the purchase of the Call Options, net of the related tax benefit of
approximately $20.3 million, as a reduction of additional paid-in capital and the proceeds from the
Warrants as an addition to additional paid-in capital in accordance with EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Companys
Own Stock, which has been subsequently codified in ASC 815-30, Derivatives and Hedging, Cash Flow
Hedges.
In February 2008, the Company filed a registration statement with the Securities and Exchange
Commission to cover the resale of shares of the Companys common stock that may be issued from time
to time upon the conversion of the Convertible Notes.
7. Omnibus Stock Incentive Plan
On February 9, 2006, the Board of Directors of the Company adopted the Morgans Hotel Group Co.
2006 Omnibus Stock Incentive Plan (the 2006 Stock Incentive Plan). The 2006 Stock Incentive Plan
provided for the issuance of stock-based incentive awards, including incentive stock options,
non-qualified stock options, stock appreciation rights, restricted stock units (RSUs) and other
equity-based awards, including membership units in Morgans Group LLC which are structured as
profits interests (LTIP Units), or any combination of the foregoing. The eligible participants in
the 2006 Stock Incentive Plan included directors, officers and employees of the Company. An
aggregate of 3,500,000 shares of common stock of the Company were reserved and authorized for
issuance under the 2006 Stock Incentive Plan, subject to equitable adjustment upon the occurrence
of certain corporate events. On April 23, 2007, the Board of Directors of the Company adopted, and
at the annual meeting of stockholders on May 22, 2007, the stockholders approved, the Companys
2007 Omnibus Incentive Plan (the 2007 Incentive Plan), which amended and restated the 2006 Stock
Incentive Plan and increased the number of shares reserved for issuance under the plan by up to
3,250,000 shares to a total of 6,750,000 shares. Awards other than options and stock appreciation
rights reduce the shares available for grant by 1.7 shares for each share subject to such an award.
On April 10, 2008, the Board of Directors of the Company adopted, and at the annual meeting of
stockholders on May 20, 2008, the stockholders approved, an Amended and Restated 2007 Omnibus
Incentive Plan (the Amended 2007 Incentive Plan) which, among other things, increased the number
of shares reserved for issuance under the plan by 1,860,000 shares from 6,750,000 shares to
8,610,000 shares.
In August 2009, the Board of Directors of the Company issued an aggregate of 580,000 RSUs to
one executive officer, other senior executives and employees under the Amended 2007 Incentive Plan.
All grants vest one-third of the amount granted on each of the first three anniversaries of the
grant date so long as the recipient continues to be an eligible participant. The fair value of each
such RSU granted was between $4.96 and $5.09 at the grant date.
Also in August 2009, the Company issued an aggregate of 80,640 RSUs to the Companys
non-employee directors under the Amended 2007 Incentive Plan, which vested immediately upon grant.
The fair value of each such RSU was $4.96 at the grant date.
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A summary of stock-based incentive awards as of September 30, 2009 is as follows (in units, or
shares, as applicable):
Restricted Stock | ||||||||||||
Units | LTIP Units | Stock Options | ||||||||||
Outstanding as of January 1, 2009 |
873,553 | 1,560,788 | 2,082,943 | |||||||||
Granted during 2009 |
660,640 | 465,232 | | |||||||||
Distributed/exercised during 2009 |
(166,128 | ) | | | ||||||||
Forfeited during 2009 |
(79,659 | ) | | (410,797 | ) | |||||||
Outstanding as of September 30, 2009 |
1,288,406 | 2,026,020 | 1,672,146 | |||||||||
Vested as of September 30, 2009 |
123,040 | 1,097,813 | 1,066,393 | |||||||||
As of September 30, 2009 and December 31, 2008, there were approximately $16.3 million and
$21.8 million, respectively, of total unrecognized compensation costs related to unvested share
awards. As of September 30, 2009, the weighted-average period over which the unrecognized
compensation expense will be recorded is approximately one year.
Total stock compensation expense, which is included in corporate expenses on the accompanying
consolidated financial statements, was $3.2 million and $4.8 million for the three months ended
September 30, 2009 and September 30, 2008, respectively, and $8.8 million and $12.1 million for the
nine months ended September 30, 2009 and September 30, 2008.
8. Related Party Transactions
The Company earned management fees, chain services fees and fees for certain technical
services and has receivables from hotels it owns through investments in unconsolidated joint
ventures. These fees totaled approximately $3.9 million and $5.8 million for the three months ended
September 30, 2009 and September 30, 2008, respectively, and $11.3 million and $14.9 million for
the nine months ended September 30, 2009 and 2008, respectively.
As of September 30, 2009 and December 31, 2008, the Company had receivables from these
affiliates of approximately $13.1 million and $7.9 million, respectively, which are included in
receivables from related parties on the accompanying consolidated balance sheets.
9. Litigation
Hard Rock Financial Advisory Agreement
In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (Credit
Suisse) for $9.4 million related to the Financial Advisory Agreement the Company entered into with
Credit Suisse in July 2006. Under the terms of the financial advisory agreement, Credit Suisse
received a transaction fee for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint
venture. The transaction fee, which was paid by the Hard Rock joint venture at the closing of the
acquisition of the Hard Rock and related assets on February 2007, was based upon an agreed upon
percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The
invoice received in July 2008 alleges that as a result of events subsequent to the closing of the
Hard Rock acquisition transactions, Credit Suisse is due additional transaction fees. The Company
believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.
Potential Litigation
The Company understands that Mr. Philippe Starck has attempted to initiate arbitration
proceedings in the London Court of International Arbitration regarding an exclusive service
agreement that he entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel
Group LLC) in February 1998 regarding the design of certain hotels now owned by the Company. The
Company is not a party to these proceedings at this time. See Note 5 of the consolidated financial
statements.
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Other Litigation
The Company is involved in various lawsuits and administrative actions in the normal course of
business. In managements opinion, disposition of these lawsuits is not expected to have a material
adverse effect on the Companys financial positions, results of operations or liquidity.
10. Preferred Securities
On October 15, 2009, the Company entered into a Securities Purchase Agreement (the Securities
Purchase Agreement) with Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance
(Parallel) Fund II, L.P. (collectively, the Investors). Under the Securities Purchase Agreement,
the Company issued and sold to the Investors (i) 75,000 of the Companys Series A Preferred
Securities, $1,000 liquidation preference per share (the Series A Preferred Securities), and (ii)
warrants to purchase 12,500,000 shares of the Companys common stock at an exercise price of $6.00
per share.
The Series A Preferred Securities have an 8% dividend rate for the first five years, a 10%
dividend rate for years six and seven, and a 20% dividend rate thereafter. The Company has the
option to redeem any or all of the Series A Preferred Securities at par at any time. The Series A
Preferred Securities have limited voting rights and only vote on the authorization to issue senior
preferred, amendments to their certificate of designations, amendments to the Companys charter
that adversely affect the Series A Preferred Securities and certain change in control transactions.
The warrants to purchase 12,500,000 shares of the Companys common stock at an exercise price
of $6.00 per share have a 7-1/2 year term and are exercisable utilizing a cashless exercise method
only, resulting in a net share issuance. The exercise of the warrants is subject to approval by
the Companys stockholders of the issuance of the shares of common stock issuable upon exercise.
The exercise of the warrants is also subject to an exercise cap which effectively limits the
Investors beneficial ownership of the Companys common stock to 9.9% at any one time. The
exercise price and number of shares subject to the warrants are both subject to anti-dilution
adjustments.
Under the Securities Purchase Agreement, the Investors have consent rights over certain
transactions for so long as they collectively own or have the right to purchase through exercise of
the warrants 6,250,000 shares of the Companys common stock, including (subject to certain
exceptions and limitations):
| the sale of substantially all of the Companys assets to a third party; |
| the acquisition by the Company of a third party where the equity investment by the
Company is $100 million or greater; |
| the acquisition of the Company by a third party; or |
| any change in the size of the Companys Board of Directors to a number below 7 or above
9. |
Subject to certain exceptions, the Investors may not transfer any Series A Preferred
Securities, warrants or common stock until October 15, 2012. The Investors are also subject to
certain standstill arrangements as long as they beneficially own over 15% of the Companys common
stock. Until October 15, 2010, the Investors have certain rights to purchase their pro rata share
of any equity or debt securities offered or sold by the Company.
In connection with the investment by the Investors, the Company paid to the Investors a
commitment fee of $2.4 million and reimbursed the Investors for $600,000 of expenses.
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The Company and Yucaipa American Alliance Fund II, LLC, an affiliate of the Investors (the
Fund Manager), also entered into a Real Estate Fund Formation Agreement (the Fund Formation
Agreement), on October 15, 2009, pursuant to which the Company and the Fund Manager have agreed to
use their good faith efforts to endeavor to raise a private investment fund (the Fund). The
purpose of the Fund will be to invest in hotel real estate projects located in North America. The
Company will be offered the opportunity to manage the hotels owned by the Fund under long-term
management agreements. In connection with the Fund Formation Agreement, the Company issued to the
Fund Manager 5,000,000 contingent warrants to purchase the Companys common stock at an exercise
price of $6.00 per share with a 7-1/2 year term. These contingent warrants will only become
exercisable if the Fund
obtains capital commitments in certain amounts over certain time periods and also meets
certain further capital commitment and investment thresholds. The exercise of these contingent
warrants is subject to the approval of the issuance of the shares of common stock issuable upon
exercise by the Companys stockholders. The exercise of these contingent warrants is also subject
to an exercise cap which effectively limits the Fund Managers beneficial ownership (which is
considered jointly with the Investors beneficial ownership) of the Companys common stock to 9.9%
at any one time. The exercise price and number of shares subject to these contingent warrants are
both subject to anti-dilution adjustments.
For
so long the Investors collectively own or have the right to purchase through exercise of the
warrants 875,000 shares of the Companys common stock, the Company has agreed to use its reasonable
best efforts to cause its board of directors to nominate and recommend to the Companys
stockholders the election of a person nominated by the Investors as a director of the Company and
to use its reasonable best efforts to ensure that the Investors nominee is elected to the
Companys board of directors at each such meeting. If that nominee is not elected by the Companys
stockholders, the Investors have certain observer rights and, in certain circumstances, the
dividend rate on the Series A Preference Securities increases by
4% during any time that the
Investors nominee is not a member of the Companys board of directors. Effective October 15, 2009,
the Investors nominated and the Companys board of directors elected Michael Gross as a member of
the Companys board of directors. Mr. Gross was also named to the Companys corporate governance
and nominating committee. Deepak Chopra and David Moore have resigned from their positions on the
Companys board of directors effective October 15, 2009.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes
appearing elsewhere in this Quarterly Report on Form 10-Q for the nine months ended September 30,
2009. In addition to historical information, this discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to, those set forth under Risk Factors and elsewhere in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Overview
We are a fully integrated hospitality company that operates, owns, acquires, develops and
redevelops boutique hotels, primarily in gateway cities and select resort markets in the United
States and Europe. Over our 25-year history, we have gained experience operating in a variety of
market conditions.
The historical financial data presented herein is the historical financial data for:
| our Owned Hotels, consisting of Morgans, Royalton and Hudson in New York, Delano South
Beach in Miami, Mondrian Los Angeles in Los Angeles, Clift in San Francisco, and Mondrian
Scottsdale in Scottsdale; |
| our Joint Venture Hotels, consisting of our London hotels (Sanderson and St Martins
Lane), Shore Club, Hard Rock, and Mondrian South Beach; |
| our investments in hotels under construction, such as Mondrian SoHo and Ames, and our
investment in other proposed properties; |
| our investment in certain joint venture food and beverage operations at our Owned
Hotels and Joint Venture Hotels, discussed further below; |
| our management company
subsidiary, Morgans Hotel Group Management LLC; and |
| the rights and obligations contributed to Morgans Group LLC in the formation and
structuring transactions described in Note 1 to the consolidated financial statements,
included elsewhere in this report. |
We consolidate the results of operations for all of our Owned Hotels and certain food and
beverage operations at five of our Owned Hotels, which are operated under 50/50 joint ventures with
restaurateur Jeffrey Chodorow. We consolidate the food and beverage joint ventures as we believe
that we are the primary beneficiary of these entities. Our partners share of the results of
operations of these food and beverage joint ventures is recorded as a noncontrolling interest in
the accompanying consolidated financial statements. This noncontrolling interest is based upon 50%
of the income of the applicable entity after giving effect to rent and other administrative charges
payable to the hotel. The Asia de Cuba restaurant at Mondrian Scottsdale is operated under license
and management agreements with China Grill Management, a company controlled by Jeffrey Chodorow.
We own partial interests in the Joint Venture Hotels and certain food and beverage operations
at three of the Joint Venture Hotels, Sanderson, St Martins Lane and Mondrian South Beach. We
account for these investments using the equity method as we believe we do not exercise control over
significant asset decisions such as buying, selling or financing nor are we the primary beneficiary
of the entities. Under the equity method, we increase our investment in unconsolidated joint
ventures for our proportionate share of net income and contributions and decrease our investment
balance for our proportionate share of net losses and distributions.
On February 2, 2007, we began managing the hotel operations at the Hard Rock. We also have
signed agreements to manage Mondrian SoHo and Ames in Boston once development is complete. We have
signed agreements to manage Mondrian Las Vegas, Delano Las Vegas, Delano Dubai and Mondrian Palm
Springs, but we are unsure of the future of the development of these hotels as financing has not
yet been obtained.
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As of September 30, 2009, we operated the following Joint Venture Hotels under management
agreements which expire as follows:
| Sanderson June 2018 (with one 10-year extension at our option); |
||
| St Martins Lane June 2018 (with one 10-year extension at our option); |
||
| Shore Club July 2022; |
||
| Hard Rock February 2027 (with two 10-year extensions); and |
||
| Mondrian South Beach August 2026. |
These agreements are subject to early termination in specified circumstances. For instance,
beginning 12 months following completion of the expansion of the Hard Rock, our Hard Rock
management agreement may be terminated if the Hard Rock fails to achieve an EBITDA hurdle, as
defined in the management agreement. There can be no assurances that we will satisfy this or other
performance tests in our management agreements, many of which may be beyond our control, or that
our management agreements will not be subject to early termination. Several of our hotels are also
subject to substantial mortgage and mezzanine debt, and in some instances our management fee is
subordinated to the debt and our management agreements may be terminated by the lenders on
foreclosure.
Factors Affecting Our Results of Operations
Revenues. Changes in our revenues are most easily explained by three performance indicators
that are commonly used in the hospitality industry:
| occupancy; |
||
| Average daily rate (ADR); and |
| RevPAR, which is the product of ADR and average daily occupancy, but does not include
food and beverage revenue, other hotel operating revenue such as telephone, parking and
other guest services, or management fee revenue. |
Substantially all of our revenue is derived from the operation of our hotels. Specifically,
our revenue consists of:
| Rooms revenue. Occupancy and ADR are the major drivers of rooms revenue. |
| Food and beverage revenue. Most of our food and beverage revenue is earned by our 50/50
restaurant joint ventures and is driven by occupancy of our hotels and the popularity of
our bars and restaurants with our local customers. |
| Other hotel revenue. Other hotel revenue, which consists of ancillary revenue such as
telephone, parking, spa, entertainment and other guest services, is principally driven by
hotel occupancy. |
| Management fee related parties revenue and other income. We earn fees under our
management agreements. These fees may include management fees as well as reimbursement for
allocated chain services. Additionally, we earn branding fees related to the use of our
Delano brand in connection with sales by our joint venture partner in our Delano Dubai
development project of condominium units associated with the project. |
Fluctuations in revenues, which tend to correlate with changes in gross domestic product, are
driven largely by general economic and local market conditions but can also be impacted by major
events, such as terrorist attacks or natural disasters, which in turn affect levels of business and
leisure travel.
The seasonal nature of the hospitality business can also impact revenues. For example, our
Miami hotels are generally strongest in the first quarter, whereas our New York hotels are
generally strongest in the fourth quarter. However, given the current economic environment, the
impact of seasonality in 2009 may not be as significant as in prior periods.
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In addition to economic conditions, supply is another important factor that can affect
revenues. Room rates and occupancy tend to fall when supply increases, unless the supply growth is
offset by an equal or greater increase in demand. One reason why we focus on boutique hotels in key
gateway cities is because these markets have significant barriers to entry for new competitive
supply, including scarcity of available land for new development and extensive regulatory
requirements resulting in a longer development lead time and additional expense for new
competitors.
Finally, competition within the hospitality industry can affect revenues. Competitive factors
in the hospitality industry include name recognition, quality of service, convenience of location,
quality of the property, pricing, and range and quality of food services and amenities offered. In
addition, all of our hotels, restaurants and bars are located in areas where there are numerous
competitors, many of whom have substantially greater resources than us. New or existing competitors
could offer significantly lower rates or more convenient locations, services or amenities or
significantly expand, improve or introduce new service offerings in markets in which our hotels
compete, thereby posing a greater competitive threat than at present. If we are unable to compete
effectively, we would lose market share, which could adversely affect our revenues.
Operating Costs and Expenses. Our operating costs and expenses consist of the costs to provide
hotel services, costs to operate our management company, and costs associated with the ownership of
our assets, including:
| Rooms expense. Rooms expense includes the payroll and benefits for the front office,
housekeeping, concierge and reservations departments and related expenses, such as laundry,
rooms supplies, travel agent commissions and reservation expense. Like rooms revenue,
occupancy is a major driver of rooms expense, which has a significant correlation with
rooms revenue. |
| Food and beverage expense. Similar to food and beverage revenue, occupancy of our
hotels and the popularity of our restaurants and bars are the major drivers of food and
beverage expense, which has a significant correlation with food and beverage revenue. |
| Other departmental expense. Occupancy is the major driver of other departmental
expense, which includes telephone and other expenses related to the generation of other
hotel revenue. |
| Hotel selling, general and administrative expense. Hotel selling, general and
administrative expense consist of administrative and general expenses, such as payroll and
related costs, travel expenses and office rent, advertising and promotion expenses,
comprising the payroll of the hotel sales teams, the global sales team and advertising,
marketing and promotion expenses for our hotel properties, utility expense and repairs and
maintenance expenses, comprising the ongoing costs to repair and maintain our hotel
properties. |
| Property taxes, insurance and other. Property taxes, insurance and other consist
primarily of insurance costs and property taxes. |
| Corporate expenses, including stock compensation. Corporate expenses consist of the
cost of our corporate office, net of any cost recoveries, which consists primarily of
payroll and related costs, stock-based compensation expenses, office rent and legal and
professional fees and costs associated with being a public company. |
| Depreciation and amortization expense. Hotel properties are depreciated using the
straight-line method over estimated useful lives of 39.5 years for buildings and five years
for furniture, fixtures and equipment. |
| Restructuring, development and disposal costs include costs incurred related to our
restructuring initiatives implemented in 2008 and 2009, charges associated with disposals
of assets as part of major renovation projects and the write-off of abandoned development
projects resulting primarily from events generally outside managements control such as the
tightening of the credit markets. These items do not relate to the ongoing operating
performance of our assets. |
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Other Items
| Interest expense, net. Interest expense, net includes interest on our debt and
amortization of financing costs and is presented net of interest income and interest
capitalized. |
| Equity in (income) loss of unconsolidated joint ventures. Equity in (income) loss of
unconsolidated joint ventures constitutes our share of the net profits and losses of our
Joint Venture Hotels and our investments in hotels under development. |
| Impairment loss on development project and investment in joint venture. When certain
triggering events occur, we periodically review each property, asset and investment for
possible impairment. If such assets are considered to be impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets exceeds the
estimated discounted future cash flows of the assets to estimate the fair value of the
asset taking into account each propertys expected cash flow from operations, holding
period and net proceeds from the dispositions of the property. For the three and nine
months ended September 30, 2009, management concluded that our investment in the Echelon
Las Vegas joint venture and the property across the street from Delano South Beach, were
impaired. Impairment charges of $17.2 million and $11.9 million on these investments,
respectively, are reflected in our consolidated financial statements for the three and nine
months ended September 30, 2009. |
| Other non-operating (income) expenses include costs associated with financings,
litigation and settlement costs and other items that relate to the financing and investing
activities associated with our assets and not to the on-going operating performance of our
assets, both consolidated and unconsolidated. |
| Income tax (benefit) expense. One of our foreign subsidiaries is subject to United
Kingdom corporate income taxes. Income tax expense is reported at the applicable rate for
the periods presented. We are subject to Federal and state income taxes. Income taxes for
the three and nine months ended September 30, 2009 and 2008 were computed using our
calculated effective tax rate. We also recorded net deferred taxes related to cumulative
differences in the basis recorded for certain assets and liabilities. |
| Noncontrolling interest. Noncontrolling interest constitutes the third-party food and
beverage joint venture partners interest in the profits of the restaurant ventures at
certain of our hotels as well as the percentage of membership units in Morgans Group LLC,
our operating company, owned by Residual Hotel Interest LLC, our Former Parent, as
discussed in Note 2 of the consolidated financial statements. |
Most categories of variable operating expenses, such as operating supplies and certain labor
such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to
increases in occupancy are accompanied by increases in most categories of variable operating costs
and expenses. Increases in RevPAR attributable to improvements in ADR typically only result in
increases in limited categories of operating costs and expenses, primarily credit card and travel
agent commissions. Thus, improvements in ADR have a more significant impact on improving our
operating margins than occupancy.
Notwithstanding our efforts to reduce variable costs, there are limits to how much we can
accomplish because we have significant costs that are relatively fixed costs, such as depreciation
and amortization, labor costs and employee benefits, insurance, real estate taxes and other
expenses associated with owning hotels that do not necessarily decrease when circumstances such as
market factors cause a reduction in our hotel revenues.
Recent Trends and Developments
Recent Trends. Starting in the fourth quarter of 2008 and continuing throughout 2009, the
weakened U.S. and global economies have resulted in considerable negative pressure on both consumer
and business spending. As a result, lodging revenues, which are primarily driven by growth in GDP,
business investment and employment growth, has weakened
substantially, as compared to the lodging demand we experience prior
to the fourth
quarter of 2008. We believe these trends will continue through the remainder of 2009 and into
2010, although not to the magnitude we have experienced during the last four quarters. Recently,
the rate of decline in the lodging sector has slowed and we are beginning to see indications of
return in demand in key gateway markets, most notably in the form of increasing occupancy in those
markets. However, while the outlook for the U.S. and global economies have somewhat improved, we
anticipate
that lodging demand will not improve significantly during early 2010, as spending by
businesses and consumers remains cautious.
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To help mitigate the effects of these trends, we are actively managing costs, and each of our
properties and our corporate office has implemented certain cost reduction plans. Through our
multi-phased contingency plan, we reduced hotel operating expenses and corporate expenses during
2008 and 2009. We will continue to carefully monitor our costs with the objective of achieving all
possible efficiencies throughout the remainder of 2009 and into 2010. We believe that these cost
reduction plans have resulted and will continue to result in significant savings in future quarters
and that our experienced management team and dedicated employees have allowed us to implement these
cost cuts without impacting the overall quality of our guest experience.
In addition, as occupancy levels begin to rise in some of our markets, we are focusing on
revenue enhancement by actively managing rates and availability. As
modest demand begins to return, as evidenced by the increase in occupancy, the ability to increase pricing
will be a critical component in driving profitability. Through these challenging times, our strategy
and focus continues to be to preserve profit margins by maximizing revenue, increasing our market
share and managing costs.
Although the pace of new lodging supply in various phases of development has increased over
the past several quarters, we believe the timing of some of these
projects may be affected by the ongoing economic recession and the reduced availability of
financing. These factors may dampen the pace of new supply development, including our own, during
the fourth quarter of 2009 and into 2010. Nevertheless, we did witness new competitive luxury and
boutique properties opening in 2008 and 2009 in some of our markets, particularly in Los Angeles,
Scottsdale and Miami Beach, which have impacted our performance in these markets and may continue
to do so.
For the remainder of 2009 and into early 2010, we believe that if various economic forecasts
citing modest expansion are accurate, this may lend to a gradual and modest increase in lodging
demand for both leisure and business travel, but with continued pressure on rates, as leisure and
business travelers alike continue to focus on cost containment. As such, there can be no
assurances that any increases in hotel revenues or earnings at our properties will occur or that
any losses will not increase for these or any other reasons.
We believe that the global credit market conditions will gradually improve during 2010,
although we believe there will continue to be less credit available and on less favorable terms
than were obtainable in prior years. Given the current state of the credit markets, some of our
joint venture projects, such as Mondrian Palm Springs and Delano Dubai, may not be able to obtain
adequate project financing in a timely manner or at all. If adequate project financing is not
obtained, the joint ventures or developers, as applicable, may seek additional equity investors to
raise capital, limit the scope of the project, defer the project or cancel the project altogether.
Recent Developments.
Amendment to the Revolving Credit Facility On August 5, 2009, we and certain of our
subsidiaries amended the Revolving Credit Facility (the Amended Revolving Credit Facility) with
Wells Fargo Securities, LLC (successor in interest to Wachovia Capital Markets, LLC) and Citigroup
Global Markets Inc. For further discussion of the Amended Revolving Credit Facility, see Note 6 to
our consolidated financial statements.
Stockholder Protection Rights Agreement. On October 1, 2009, we amended and restated our
Stockholder Protection Rights Agreement (the Rights Agreement), which was scheduled to expire on
October 9, 2009. In connection with the amendment, the expiration date was extended to October 9,
2012 (assuming there is no earlier redemption or exchange of the rights, or a consolidation, merger
or statutory share exchange which does not trigger the rights, or any subsequent extension by our
board of directors pursuant to the terms of the Rights Agreement) and certain technical changes
were made to facilitate the implementation of the rights if exercised. The Rights Agreement was not
extended in response to any specific effort to obtain control of the Company but rather to continue
to deter abusive takeover tactics that otherwise could be used to deprive stockholders of the full
value of their investment.
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In connection with the issuance of preferred securities and warrants discussed below, on
October 15, 2009, the Rights Agreement was further amended to revise the definition of Acquiring
Person and to add the definition of Exempt Person to exempt the Investors, defined below, the
Fund Manager, defined below, and their affiliates from the definition of Acquiring Person in the
Rights Agreement.
Management Agreement San Juan Water and Beach Club. On October 1, 2009, the Company
announced 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 of the San Juan Water and Beach Club
intend to obtain development rights to build a Morgans Hotel Group branded hotel including a
casino. The ownership group includes Hotel Development Corp., a subsidiary of the Puerto Rico
Tourism Company. We assumed management of the property as of October 18, 2009, under a 10-year
management agreement. 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.
Issuance of Preferred Securities and Real Estate Opportunity Fund. On October 15, 2009, we
entered into a Securities Purchase Agreement (the Securities Purchase Agreement) with Yucaipa
American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P.
(collectively, the Investors). Under the Securities Purchase Agreement, we issued and sold to
the Investors (i) 75,000 of our Series A Preferred Securities, $1,000 liquidation preference per
share (the Series A Preferred Securities), and (ii) warrants to purchase 12,500,000 shares of our
common stock at an exercise price of $6.00 per share.
The Series A Preferred Securities have an 8% dividend rate for the first five years, a 10%
dividend rate for years six and seven, and a 20% dividend rate thereafter. We have the option to
redeem any or all of the Series A Preferred Securities at par at any time. The Series A Preferred
Securities have limited voting rights and only vote on the authorization to issue senior preferred,
amendments to their certificate of designations, amendments to our charter that adversely affect
the Series A Preferred Securities and certain change in control transactions.
The warrants to purchase 12,500,000 shares of our common stock at an exercise price of $6.00
per share have a 7-1/2 year term and are exercisable utilizing a cashless exercise method only,
resulting in a net share issuance. The exercise of the warrants is subject to approval by our
shareholders of the issuance of the shares of common stock issuable upon exercise. The exercise of
the warrants is also subject to an exercise cap which effectively limits the Investors beneficial
ownership of our common stock to 9.9% at any one time. The exercise price and number of shares
subject to the warrants are both subject to anti-dilution adjustments.
Under the Securities Purchase Agreement, the Investors have consent rights over certain
transactions for so long as they collectively own or have the right to purchase through exercise of
the warrants 6,250,000 shares of our common stock, including (subject to certain exceptions and
limitations):
| the sale of substantially all of our assets to a third party; |
| the acquisition by us of a third party where the equity investment by us is $100
million or greater; |
| the acquisition of us by a third party; or |
| any change in the size of our board of directors to a number below 7 or above 9. |
Subject to certain exceptions, the Investors may not transfer any Series A Preferred
Securities, warrants or common stock until October 15, 2012. The Investors are also subject to
certain standstill arrangements as long as they beneficially own over 15% of our common stock.
Until October 15, 2010, the Investors have certain rights to purchase their pro rata share of any
equity or debt securities offered or sold by us.
In connection with the investment by the Investors, we paid to the Investors a commitment fee
of $2.4 million and reimbursed the Investors for $600,000 of expenses.
34
Table of Contents
We
also entered into a Real Estate Fund Formation Agreement (the
Fund Formation Agreement) with Yucaipa American Alliance Fund II, LLC, an affiliate of the Investors (the
Fund Manager) on October 15, 2009 pursuant to which we and the Fund Manager have agreed to use our
good faith efforts to endeavor to raise a private investment fund (the Fund). The purpose of the
Fund will be to invest in hotel real estate projects located in North America. We will be offered
the opportunity to manage the hotels owned by the Fund under long-term management agreements. In
connection with the Fund Formation Agreement, we issued to the Fund Manager 5,000,000 contingent
warrants to purchase our common stock at an exercise price of $6.00 per share with a 7-1/2 year
term. These contingent warrants will only become exercisable if the Fund obtains capital
commitments in certain amounts over certain time periods and also meets certain further capital
commitment and investment thresholds. The exercise of these contingent warrants is subject to the
approval of the issuance of the shares of common stock issuable upon exercise by our stockholders.
The exercise of these contingent warrants is also subject to an exercise cap which effectively
limits the Fund Managers beneficial ownership (which is considered jointly with the Investors
beneficial ownership) of our common stock to 9.9% at any one time. The exercise price and number
of shares subject to these contingent warrants are both subject to anti-dilution adjustments.
For
so long the Investors collectively own or have the right to purchase through exercise of the
warrants 875,000 shares of our common stock, we have agreed to use its reasonable best efforts to
cause its board of directors to nominate and recommend to our stockholders the election of a person
nominated by the Investors as a director and to use our reasonable best efforts to ensure that the
Investors nominee is elected to our board of directors at each such meeting. If that nominee is
not elected by our stockholders, the Investors have certain observer rights and, in certain
circumstances, the dividend rate on the Series A Preference Securities increases by 4% during any
time that the Investors nominee is not a member of our board of directors. Effective October 15,
2009, the Investors nominated and our board of directors elected Michael Gross as a member of our
board of directors. Mr. Gross was also named to the corporate governance and nominating committee.
Deepak Chopra and David Moore have resigned from their positions on our board of directors
effective October 15, 2009.
Amendment to Hudson Mezzanine Loan. On October 14, 2009, we entered into an agreement with
one of our lenders which holds, among other loans, the mezzanine loan on Hudson. Under the
agreement, we 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 our 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. We believe 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 us in our efforts to seek
an extension of the $217 million Hudson mortgage loan, which is also set to mature on July 12,
2010, and to consent to certain refinancings and other modifications of the Hudson mortgage loan.
35
Table of Contents
Operating Results
Comparison of Three Months Ended September 30, 2009 to Three Months Ended September 30, 2008
The following table presents our operating results for the three months ended September 30,
2009 and the three months ended September 30, 2008, including the amount and percentage change in
these results between the two periods. The consolidated operating results for the three months
ended September 30, 2009 is comparable to the consolidated operating results for the three months
ended September 30, 2008, with the exception of Mondrian Los Angeles and Morgans, both of which
were under renovation during 2008, the investment in the Hard Rock, which has been under renovation
and expansion during 2008 and 2009, and the investment in Mondrian South Beach, which opened in
December 2008. The consolidated operating results are as follows:
Three Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2009 | 2008 | Change ($) | Change (%) | |||||||||||||
As adjusted(2) | ||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 32,524 | $ | 45,500 | $ | (12,976 | ) | (28.5 | )% | |||||||
Food and beverage |
18,795 | 23,269 | (4,474 | ) | (19.2 | )% | ||||||||||
Other hotel |
2,351 | 3,133 | (782 | ) | (25.0 | )% | ||||||||||
Total hotel revenues |
53,670 | 71,902 | (18,232 | ) | (25.4 | )% | ||||||||||
Management feerelated parties and other
income |
3,998 | 5,799 | (1,801 | ) | (31.1 | )% | ||||||||||
Total revenues |
57,668 | 77,701 | (20,033 | ) | (25.8 | )% | ||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
10,770 | 12,097 | (1,327 | ) | (11.0 | )% | ||||||||||
Food and beverage |
14,721 | 16,817 | (2,096 | ) | (12.5 | )% | ||||||||||
Other departmental |
1,562 | 1,792 | (230 | ) | (12.8 | )% | ||||||||||
Hotel selling, general and administrative |
12,863 | 15,003 | (2,140 | ) | (14.3 | )% | ||||||||||
Property taxes, insurance and other |
4,683 | 5,447 | (764 | ) | (14.0 | )% | ||||||||||
Total hotel operating expenses |
44,599 | 51,156 | (6,557 | ) | (12.8 | )% | ||||||||||
Corporate expenses, including stock
compensation |
8,507 | 12,355 | (3,848 | ) | (31.1 | )% | ||||||||||
Depreciation and amortization |
7,528 | 7,587 | (59 | ) | (1.0 | )% | ||||||||||
Restructuring, development and disposal costs |
494 | 2,957 | (2,463 | ) | (83.3 | )% | ||||||||||
Total operating costs and expenses |
61,128 | 74,055 | (12,927 | ) | (17.5 | )% | ||||||||||
Operating (loss) income |
(3,460 | ) | 3,646 | (7,106 | ) | (1 | ) | |||||||||
Interest expense, net |
13,098 | 10,791 | 2,307 | 21.4 | % | |||||||||||
Equity in loss of unconsolidated joint ventures |
2,262 | 7,617 | (5,355 | ) | (70.3 | )% | ||||||||||
Impairment loss on development project and
investment in joint venture |
29,134 | | (29,134 | ) | (1 | ) | ||||||||||
Other non-operating expense |
869 | 516 | 353 | 68.4 | % | |||||||||||
Loss before income taxes |
(48,823 | ) | (15,278 | ) | (33,545 | ) | (1 | ) | ||||||||
Income tax benefit |
(20,189 | ) | (6,336 | ) | (13,853 | ) | (1 | ) | ||||||||
Net loss income |
(28,634 | ) | (8,942 | ) | (19,692 | ) | (1 | ) | ||||||||
Net loss (income) attributable to
noncontrolling interest |
817 | (388 | ) | 1,205 | (1 | ) | ||||||||||
Net loss attributable to Morgans Hotel
Group Co. |
(27,817 | ) | (9,330 | ) | (18,487 | ) | (1 | ) | ||||||||
Other comprehensive income (loss): |
||||||||||||||||
Unrealized gain on valuation of swap/cap
agreements, net of tax |
3,887 | 696 | 3,191 | (1 | ) | |||||||||||
Realized loss on settlement of swap/cap
agreements, net of tax |
(2,382 | ) | (1,444 | ) | (938 | ) | (65.0 | )% | ||||||||
Foreign currency translation (loss) gain |
532 | (388 | ) | 920 | (1 | ) | ||||||||||
Comprehensive loss |
$ | (25,780 | ) | $ | (10,466 | ) | $ | (15,314 | ) | (1 | ) | |||||
(1) | Not meaningful. |
|
(2) | Adjusted for change in accounting principle related to the Convertible
Notes (defined below). See Note 6 to our consolidated financial
statements for additional information and the effect of the change in
accounting principle to our consolidated financial statements. |
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Table of Contents
Total Hotel Revenues. Total hotel revenues decreased 25.4% to $53.7 million for the three
months ended September 30, 2009 compared to $71.9 million for the three months ended September 30,
2008. The components of RevPAR from our comparable Owned Hotels for the three months ended
September 30, 2009 and 2008, which includes Hudson, Delano, Clift, Mondrian Scottsdale, and
Royalton, and excludes Mondrian Los Angeles and Morgans, which were under renovation during 2008,
are summarized as follows:
Three Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2009 | 2008 | Change ($) | Change (%) | |||||||||||||
Occupancy |
77.9 | % | 85.4 | % | | (8.8 | )% | |||||||||
ADR |
$ | 210 | $ | 291 | $ | (81 | ) | (27.8 | )% | |||||||
RevPAR |
$ | 164 | $ | 249 | $ | (85 | ) | (34.2 | )% |
RevPAR from our comparable Owned Hotels decreased 34.2% to $164 for the three months ended
September 30, 2009 compared to $249 for the three months ended September 30, 2008.
Rooms revenue decreased 28.5% to $32.5 million for the three months ended September 30, 2009
compared to $45.5 million for the three months ended September 30, 2008. The overall decrease was
primarily attributable to the significant adverse impact on lodging demand and pricing as a result
of the global economic downturn. All of our comparable Owned Hotels experienced a decline in rooms
revenue in excess of 25% during the three months ended September 30, 2009 as compared to the same
period in 2008.
Food and beverage revenue decreased 19.2% to $18.8 million for the three months ended
September 30, 2009 compared to $23.3 million for the three months ended September 30, 2008. The
overall decrease was primarily attributable to the economic downturn which has had a significant
adverse impact on lodging demand and local spending, which negatively impacts the ancillary venues
at our hotels, such as the bar and restaurant revenue. All of our comparable Owned Hotels
experienced a decline in food and beverage revenue in excess of 15% during the three months ended
September 30, 2009 as compared to the same period in 2008.
Other hotel revenue decreased 25.0% to $2.4 million for the three months ended September 30,
2009 compared to $3.1 million for the three months ended September 30, 2008. The overall decrease
was primarily attributable to the significant adverse impact on lodging demand, which negatively
impacts the ancillary revenues at our hotels, as a result of the global economic downturn.
Management Fee Related Parties and Other Income decreased by 31.1% to $4.0 million for the
three months ended September 30, 2009 compared to $5.8 million for the three months ended September
30, 2008. This decrease is primarily attributable to a branding fee earned in September 2008
relating to the use of the Delano brand for the sale of branded residences to be constructed in
connection with the Delano Dubai project for which there was no comparable fee earning during 2009,
and the significant adverse impact on lodging demand as a result of the global economic downturn,
especially at our London joint venture hotels and Shore Club. Slightly offsetting these decreases
are management fees earned at Mondrian South Beach, which opened in December 2008, and an increase
in management fees earned at Hard Rock due to the opening of the new 490-room south tower in July
2009.
Operating Costs and Expenses
Rooms expense decreased 11.0% to $10.8 million for the three months ended September 30, 2009
compared to $12.1 million for the three months ended September 30, 2008. This decrease is a direct
result of the decrease in rooms revenue. While we have implemented cost cutting initiatives at our
hotels in 2008 and early 2009, our occupancy did not decrease as significantly as our ADR.
Therefore certain variable expenses, such as housekeeping payroll costs, did not decrease in
proportion to the decrease in rooms revenue noted above.
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Table of Contents
Food and beverage expense decreased 12.5% to $14.7 million for the three months ended
September 30, 2009 compared to $16.8 million for the three months ended September 30, 2008. All of
our comparable Owned Hotels experienced a decline in food and beverage expense in excess of 7%
during the three months ended September 30, 2009 as compared to the same period in 2008.
Other departmental expense decreased 12.8% to $1.6 million for the three months ended
September 30, 2009 compared to $1.8 million for the three months ended September 30, 2008. This
decrease is a direct result of the decrease in other hotel revenue. While we have implemented cost
cutting initiatives at our hotels in 2008 and early 2009, our occupancy did not decrease as
significantly as our ADR. Therefore certain variable expenses did not decrease in proportion to the
decrease in revenue noted above.
Hotel selling, general and administrative expense decreased 14.3% to $12.9 million for the
three months ended September 30, 2009 compared to $15.0 million for the three months ended
September 30, 2008. This decrease was primarily due to the impact of cost cutting initiatives
across all hotel properties, which were implemented in 2008 and in early 2009, resulting in
decreased administrative and general costs and advertising and promotion expenses.
Property taxes, insurance and other expense decreased 14.0% to $4.7 million for the three
months ended September 30, 2009 compared to $5.4 million for the three months ended September 30,
2008. This decrease was primarily due to pre-opening expenses recorded at Mondrian Los Angeles and
Morgans during the three months ended September 30, 2008 as a result of their re-launch after
renovation. Slightly offsetting this decrease is an increase related to Morgans which was closed
for renovation for the three months ended September 30, 2008.
Corporate expenses, including stock compensation decreased by 31.1% to $8.5 million for the
three months ended September 30, 2009 compared to $12.4 million for the three months ended
September 30, 2008. This decrease is due primarily to the impact of cost cutting initiatives at the
corporate office which were implemented in late 2008 and early 2009.
Depreciation and amortization decreased 1.0% to $7.5 million for the three months ended
September 30, 2009 compared to $7.6 million for the three months ended September 30, 2008. This
decrease is primarily the result of an impairment charge on Mondrian Scottsdale we recognized in
December 2008 which reduced the basis of the asset being depreciated for the three months ended
September 30, 2009 as compared to the same period in 2008. Slightly offsetting this decrease was
an increase in depreciation expense resulting from the increased depreciation due to hotel
renovations at Mondrian Los Angeles and Morgans during 2008.
Restructuring, development and disposal costs decreased 83.3% to $0.5 million for the three
months ended September 30, 2009 as compared to $3.0 million for the three months ended September
30, 2008. The decrease in the expense is primarily related to the write-off of assets at Mondrian
Los Angeles and Morgans during the three months ended September 2008 when both hotels were nearing
completion of large-scale renovation projects. There was no comparable asset write-off during the
three months ended September 30, 2009.
Interest expense, net increased 21.4% to $13.1 million for the three months ended September
30, 2009 compared to $10.8 million for the three months ended September 30, 2008. The increase in
this expense is primarily due to lower interest income earned on our cash balances for the three
months ended September 30, 2009, which nets down interest expense, and interest incurred on the
outstanding balance on the revolving credit facility during the three months ended September 30,
2009 for which there was no comparable amount in 2008.
Equity in loss of unconsolidated joint ventures decreased 70.3% to $2.3 million for the three
months ended September 30, 2009 compared to $7.6 million for the three months ended September 30,
2008. This decrease is primarily due to a reduction in our share of losses from the Hard Rock. We
did not record our proportionate share of loss from our investment in the Hard Rock for the three
months ended September 30, 2009 as losses have been recognized to the extent of our capital
investment and commitments to fund. Additionally, the decrease is due to the recognition of our
share of earnings of our London hotels during the three months ended September 30, 2009 as compared
to equity in loss of our London hotels which we recorded for the three months ended September 30,
2008. Slightly offsetting this decrease was our share of losses from Mondrian South Beach, which
opened in December 2008.
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Table of Contents
The components of RevPAR from our comparable Joint Venture Hotels for the three months ended
September 30, 2009 and 2008, which includes Sanderson, St Martins Lane and Shore Club, but excludes
the Hard Rock, which has been under renovation and expansion during 2008 and 2009, and Mondrian
South Beach, which opened in December 2008, are summarized as follows (in constant dollars):
Three Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2009 | 2008 | Change ($) | Change (%) | |||||||||||||
Occupancy |
61.5 | % | 68.0 | % | | (9.5 | )% | |||||||||
ADR |
$ | 302 | $ | 344 | $ | (42 | ) | (12.3 | )% | |||||||
RevPAR |
$ | 186 | $ | 234 | $ | (48 | ) | (20.6 | )% |
The components of RevPAR from the Hard Rock for the three months ended September 30, 2009 and
the three months ended September 30, 2008 are summarized as follows:
Three Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2009 | 2008 | Change ($) | Change (%) | |||||||||||||
Occupancy |
89.0 | % | 92.4 | % | | (3.8 | )% | |||||||||
ADR |
$ | 133 | $ | 190 | $ | (57 | ) | (29.8 | )% | |||||||
RevPAR |
$ | 119 | $ | 176 | $ | (57 | ) | (32.4 | )% |
As is customary for companies in the gaming industry, the Hard Rock presents average occupancy
rate and average daily rate including rooms provided on a complimentary basis. Like most operators
of hotels in the non-gaming lodging industry, we do not follow this practice at our other hotels,
where we present average occupancy rate and average daily rate net of rooms provided on a
complimentary basis.
Impairment loss of development project and investment in joint venture of $29.1 million was
recognized during the three months ended September 30, 2009 related to the write-down in the
carrying value of our investment in Echelon Las Vegas and the property across the street from
Delano South Beach. No such impairment loss was recognized in 2008.
Other non-operating expense increased 68.4% to $0.9 million for the three months ended
September 30, 2009 as compared to $0.5 million for the three months ended September 30, 2008. The
increase in the expense is primarily related to costs associated with advisory services incurred
during the three months ended September 30, 2009 in connection with our financing efforts.
Income tax benefit was $20.2 million for the three months ended September 30, 2009 compared to
$6.3 million for the three months ended September 30, 2008. The income tax benefit was due
primarily to the recording of deferred tax assets from the net operating loss.
39
Table of Contents
Comparison of Nine Months Ended September 30, 2009 to Nine Months Ended September 30, 2008
The following table presents our operating results for the nine months ended September 30,
2009 and the nine months ended September 30, 2008, including the amount and percentage change in
these results between the two periods. The consolidated operating results for the nine months ended
September 30, 2009 is comparable to the consolidated operating results for the nine months ended
September 30, 2008, with the exception of Mondrian Los Angeles and Morgans, both of which were
under renovation during 2008, the investment in the Hard Rock, which has been under renovation and
expansion during 2008 and 2009, and the investment in Mondrian South Beach, which opened in
December 2008. The consolidated operating results are as follows:
Nine Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2009 | 2008 | Change ($) | Change (%) | |||||||||||||
As adjusted(2) | ||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 92,003 | $ | 138,521 | $ | (46,518 | ) | (33.6 | )% | |||||||
Food and beverage |
57,664 | 76,392 | (18,728 | ) | (24.5 | )% | ||||||||||
Other hotel |
7,355 | 9,957 | (2,602 | ) | (26.1 | )% | ||||||||||
Total hotel revenues |
157,022 | 224,870 | (67,848 | ) | (30.2 | )% | ||||||||||
Management feerelated parties and other income |
11,311 | 14,887 | (3,576 | ) | (24.0 | )% | ||||||||||
Total revenues |
168,333 | 239,757 | (71,424 | ) | (29.8 | )% | ||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
31,313 | 37,162 | (5,849 | ) | (15.7 | )% | ||||||||||
Food and beverage |
43,836 | 54,538 | (10,702 | ) | (19.6 | )% | ||||||||||
Other departmental |
4,722 | 5,801 | (1,079 | ) | (18.6 | )% | ||||||||||
Hotel selling, general and administrative |
36,968 | 45,375 | (8,407 | ) | (18.5 | )% | ||||||||||
Property taxes, insurance and other |
13,193 | 13,229 | (36 | ) | (0.3 | )% | ||||||||||
Total hotel operating expenses |
130,032 | 156,105 | (26,073 | ) | (16.7 | )% | ||||||||||
Corporate expenses, including stock compensation |
25,295 | 35,002 | (9,707 | ) | (27.7 | )% | ||||||||||
Depreciation and amortization |
23,159 | 19,696 | 3,463 | 17.6 | % | |||||||||||
Restructuring, development and disposal costs |
2,037 | 4,124 | (2,087 | ) | (50.6 | )% | ||||||||||
Total operating costs and expenses |
180,523 | 214,927 | (34,404 | ) | (16.0 | )% | ||||||||||
Operating (loss) income |
(12,190 | ) | 24,830 | (37,020 | ) | (1 | ) | |||||||||
Interest expense, net |
36,599 | 32,760 | 3,839 | 11.7 | % | |||||||||||
Equity in loss of unconsolidated joint ventures |
4,700 | 16,526 | (11,826 | ) | (71.6 | )% | ||||||||||
Impairment loss on development project and
investment in joint venture |
29,134 | | 29,134 | (1 | ) | |||||||||||
Other non-operating expense |
1,934 | 1,816 | 118 | 6.5 | % | |||||||||||
Loss before income taxes |
(84,557 | ) | (26,272 | ) | (58,285 | ) | (1 | ) | ||||||||
Income tax benefit |
(35,700 | ) | (11,304 | ) | (24,396 | ) | (1 | ) | ||||||||
Net loss |
(48,857 | ) | (14,968 | ) | (33,889 | ) | (1 | ) | ||||||||
Net loss (income) attributable to
noncontrolling interest |
399 | (2,731 | ) | 3,130 | (114.6 | )% | ||||||||||
Net loss attributable to Morgans Hotel Group Co. |
(48,458 | ) | (17,699 | ) | (30,759 | ) | (1 | ) | ||||||||
Other comprehensive income: |
||||||||||||||||
Unrealized gain on valuation of swap/cap
agreements, net of tax |
12,303 | 3,635 | 8,668 | (1 | ) | |||||||||||
Realized loss on settlement of swap/cap
agreements, net of tax |
(7,379 | ) | (3,247 | ) | (4,132 | ) | (1 | ) | ||||||||
Foreign currency translation (loss) gain |
(512 | ) | (353 | ) | (159 | ) | 45.0 | % | ||||||||
Comprehensive loss |
$ | (44,046 | ) | $ | (17,664 | ) | $ | (26,382 | ) | (1 | ) | |||||
(1) | Not meaningful. |
|
(2) | Adjusted for change in accounting principle related to the Convertible
Notes. See Note 6 to our consolidated financial statements for
additional information and the effect of the change in accounting
principle to our consolidated financial statements. |
40
Table of Contents
Total Hotel Revenues. Total hotel revenues decreased 29.8% to $168.3 million for the nine
months ended September 30, 2009 compared to $239.8 million for the nine months ended September 30,
2008. The components of RevPAR from our comparable Owned Hotels for the nine months ended September
30, 2009 and 2008, which includes Hudson, Delano, Clift, Mondrian Scottsdale, and Royalton, and
excludes Mondrian Los Angeles and Morgans, which were under renovation during 2008, are summarized
as follows:
Nine Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2009 | 2008 | Change ($) | Change (%) | |||||||||||||
Occupancy |
72.5 | % | 83.0 | % | | (12.6 | )% | |||||||||
ADR |
$ | 220 | $ | 308 | $ | (88 | ) | (28.7 | )% | |||||||
RevPAR |
$ | 159 | $ | 256 | $ | (97 | ) | (37.7 | )% |
RevPAR from our comparable Owned Hotels decreased 37.7% to $159 for the nine months ended
September 30, 2009 compared to $256 for the nine months ended September 30, 2008.
Rooms revenue decreased 33.6% to $92.0 million for the nine months ended September 30, 2009
compared to $138.5 million for the nine months ended September 30, 2008. The overall decrease was
primarily attributable to the significant adverse impact on lodging demand and pricing as a result
of the global economic downturn. All of our comparable Owned Hotels experienced a decline in rooms
revenue in excess of 30% during the nine months ended September 30, 2009 as compared to the same
period in 2008.
Food and beverage revenue decreased 24.5% to $57.7 million for the nine months ended September
30, 2009 compared to $76.4 million for the nine months ended September 30, 2008. The overall
decrease was primarily attributable to the economic downturn which has had a significant adverse
impact on lodging demand and local spending, which negatively impacts the ancillary venues at our
hotels, such as the bar and restaurant revenue. All of our comparable Owned Hotels experienced a
decline in food and beverage revenue in excess of 20% during the nine months ended September 30,
2009 as compared to the same period in 2008.
Other hotel revenue decreased 26.1% to $7.4 million for the nine months ended September 30,
2009 compared to $10.0 million for the nine months ended September 30, 2009. The overall decrease
was primarily attributable to the significant adverse impact on lodging demand, which negatively
impacts the ancillary revenues at our hotels, as a result of the global economic downturn.
Management Fee Related Parties and Other Income decreased by 24.0% to $11.3 million for the
nine months ended September 30, 2009 compared to $14.9 million for the nine months ended September
30, 2008. This decrease is primarily attributable to a branding fee earned in September 2008
relating to the use of the Delano brand for the sale of branded residences to be constructed in
connection with the Delano Dubai project for which there was no comparable fee earning during 2009,
and the significant adverse impact on lodging demand as a result of the global economic downturn,
especially at our London joint venture hotels and Shore Club. Partially offsetting these decreases
are management fees earned at Mondrian South Beach, which opened in December 2008.
Operating Costs and Expenses
Rooms expense decreased 15.7% to $31.3 million for the nine months ended September 30, 2009
compared to $37.2 million for the nine months ended September 30, 2008. This decrease is a direct
result of the decrease in rooms revenue. While we have implemented cost cutting initiatives at our
hotels in 2008 and early 2009, our occupancy did not decrease as significantly as our ADR.
Therefore certain variable expenses, such as housekeeping payroll costs did not decrease in
proportion to the decrease in rooms revenue noted above.
Food and beverage expense decreased 19.6% to $43.8 million for the nine months ended September
30, 2009 compared to $54.5 million for the nine months ended September 30, 2008. All of our
comparable Owned Hotels experienced a decline in food and beverage expense in excess of 15% during
the nine months ended September 30, 2009 as compared to the same period in 2008.
Other departmental expense decreased 18.6% to $4.7 million for the nine months ended September
30, 2009 compared to $5.8 million for the nine months ended September 30, 2008. This decrease is a
direct result of the decrease in other departmental revenue. While we have implemented cost cutting
initiatives at our hotels in 2008 and early 2009, our occupancy did not decrease as significantly
as our ADR. Therefore, certain variable expenses did not decrease in proportion to the decrease in
revenue noted above.
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Hotel selling, general and administrative expense decreased 18.5% to $37.0 million for the
nine months ended September 30, 2009 compared to $45.4 million for the nine months ended September
30, 2008. This decrease was primarily due to the impact of cost cutting initiatives across all
hotel properties, which were implemented in 2008 and in early 2009, resulting in decreased
administrative and general costs and advertising and promotion expenses.
Property taxes, insurance and other expense increased 0.3% to $13.2 million for the nine
months ended September 30, 2009 compared to $13.2 million for the nine months ended September 30,
2008. This increase was primarily due to increases in property taxes at Hudson as a result of the
expiration of a property tax abatement, which will continue to be phased out over the next three
years, fully expiring in 2012. Additionally, we recognized an increase related to Morgans which was
closed for renovation for the three months ended September 30, 2008. Slightly offsetting these
increases was a decrease due to pre-opening expenses recorded at Mondrian Los Angeles and Morgans
during 2008 as a result of their re-launch after renovation.
Corporate expenses, including stock compensation decreased by 27.7% to $25.3 million for the
nine months ended September 30, 2009 compared to $35.0 million for the nine months ended September
30, 2008. This decrease is due primarily to the impact of cost cutting initiatives at the corporate
office which were implemented in late 2008 and early 2009.
Depreciation and amortization increased 17.6% to $23.2 million for the nine months ended
September 30, 2009 compared to $19.7 million for the nine months ended September 30, 2008. This
increase is a result of hotel renovations at Mondrian Los Angeles and Morgans, during 2008.
Slightly offsetting this increase was a decrease at Mondrian Scottsdale which was the result of an
impairment charge we recognized in December 2008 which reduced the basis of the asset being
depreciated for the nine months ended September 30, 2009 as compared to the same period in 2008.
Restructuring, development and disposal costs decreased 50.6% to $2.0 million for the nine
months ended September 30, 2009 as compared to $4.1 million for the nine months ended September 30,
2008. The decrease in the expense is primarily related to the write-off of assets at Mondrian Los
Angeles and Morgans during the nine months ended September 2008 when both hotels were nearing
completion of large-scale renovation projects. There was no comparable asset write-off during the
nine months ended September 30, 2009.
Interest expense, net increased 11.7% to $36.6 million for the nine months ended September 30,
2009 compared to $32.8 million for the nine months ended September 30, 2008. The increase in this
expense is primarily due to lower interest income earned on our cash balances for the nine months
ended September 30, 2009 which nets down interest expense, and interest incurred on the outstanding
balance on the revolving credit facility during the nine months ended September 30, 2009 for which
there was no comparable amount in 2008.
Equity in loss of unconsolidated joint ventures decreased 71.6% to $4.7 million for the nine
months ended September 30, 2009 compared to $16.5 million for the nine months ended September 30,
2008. This decrease is primarily due to a reduction in our share of losses from the Hard Rock. We
did not record our proportionate share of loss from our investment in the Hard Rock for the nine
months ended September 30, 2009 as losses have been recognized to the extent of our capital
investment and commitments to fund. Slightly offsetting this decrease was our share of losses from
Mondrian South Beach, which opened in December 2008.
The components of RevPAR from our comparable Joint Venture Hotels for the nine months ended
September 30, 2009 and 2008, which includes Sanderson, St Martins Lane and Shore Club, but excludes
the Hard Rock, which has been under renovation and expansion during 2008 and 2009, and Mondrian
South Beach, which opened in December 2008, are summarized as follows (in constant dollars):
Nine Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2009 | 2008 | Change ($) | Change (%) | |||||||||||||
Occupancy |
61.5 | % | 71.3 | % | | (13.7 | )% | |||||||||
ADR |
$ | 325 | $ | 382 | $ | (57 | ) | (14.8 | )% | |||||||
RevPAR |
$ | 200 | $ | 272 | $ | (72 | ) | (26.5 | )% |
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The components of RevPAR from the Hard Rock for the nine months ended September 30, 2009 and
the nine months ended September 30, 2008 are summarized as follows:
Nine Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2009 | 2008 | Change ($) | Change (%) | |||||||||||||
Occupancy |
90.0 | % | 93.6 | % | | (3.8 | )% | |||||||||
ADR |
$ | 143 | $ | 197 | $ | (54 | ) | (27.5 | )% | |||||||
RevPAR |
$ | 129 | $ | 185 | $ | (56 | ) | (30.3 | )% |
As is customary for companies in the gaming industry, the Hard Rock presents average occupancy
rate and average daily rate including rooms provided on a complimentary basis. Like most operators
of hotels in the non-gaming lodging industry, we do not follow this practice at our other hotels,
where we present average occupancy rate and average daily rate net of rooms provided on a
complimentary basis.
Impairment loss of development project and investment in joint venture of $29.1 million was
recognized during the three months ended September 30, 2009 related to the write-down in the
carrying value of our investment in Echelon Las Vegas and the property across the street from
Delano South Beach. No such impairment loss was recognized in 2008.
Other non-operating expense increased 6.5% to $1.9 million for the nine months ended September
30, 2009 as compared to $1.8 million for the nine months ended September 30, 2008. This increase is
immaterial.
Income tax benefit was $35.7 million for the nine months ended September 30, 2009 compared to
$11.3 million for the nine months ended September 30, 2008. The income tax benefit was due
primarily to the recording of deferred tax assets from the net operating loss.
Liquidity and Capital Resources
As of September 30, 2009, we had approximately $34.1 million in cash and cash equivalents.
This amount includes the approximately $23.5 million of proceeds from borrowings under our Amended
Revolving Credit Facility, defined below.
Our 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 our Amended Revolving Credit Facility, which is net of $23.5
million of outstanding borrowings and $9.8 million of letters of credit posted.
On August 5, 2009, we and certain of our subsidiaries amended our Revolving Credit Facility
(as defined below). In accordance with the amendment, at any given time, the amount available for
borrowings under the Amended Revolving Credit Facility is contingent upon the borrowing base, which
is calculated by reference to the appraised value and implied debt service coverage value of
certain collateral properties securing the Amended Revolving Credit Facility. In addition, the
Company is required to maintain a fixed charge coverage ratio for each four-quarter period of 0.90
to 1.00. We cannot provide assurance that the full amount of the Amended Revolving Credit Facility
will be available at any time. See Debt Revolving Credit Facility. As of September 30, 2009,
the maximum amount of borrowings under the Amended Credit Facility is $123.2 million, of which
$23.5 million of borrowings were outstanding and $9.8 million of letters of credit were posted.
Additionally, in October 15, 2009, we received net proceeds of approximately $71.0 million in
connection with our issuance of the Series A Preferred Securities. See Recent Trends and
Developments Recent Developments Issuance of Preferred Securities and Real Estate Opportunity
Fund.
We have both short-term and long-term liquidity requirements as described in more detail
below.
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Liquidity Requirements
Short-Term Liquidity Requirements. We generally consider our short-term liquidity requirements
to consist of those items that are expected to be incurred within the next 12 months and believe
those requirements currently consist primarily of funds necessary to pay operating expenses and
other expenditures directly associated with our properties, including the funding of our reserve
accounts, capital commitments associated with certain of our development projects, and payment of
scheduled debt maturities, unless otherwise extended or refinanced.
We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as
determined pursuant to our debt and lease agreements related to such hotels, with the exception of
Delano South Beach, Royalton and Morgans. Our Joint Venture Hotels generally are subject to similar
obligations under debt agreements related to such hotels, or under our management agreements. These
capital expenditures relate primarily to the periodic replacement or refurbishment of furniture,
fixtures and equipment. Such agreements typically require us to reserve funds at amounts equal to
4% of the hotels revenues and require the funds to be set aside in restricted cash. In addition,
our restaurant joint ventures require the ventures to set aside restricted cash of between 2% to 4%
of gross revenues of the restaurant. Our Owned Hotels that were not subject to these reserve
funding obligations Delano South Beach, Royalton, and Morgans underwent significant room and
common area renovations during 2006, 2007 and 2008, and as such, are not expected to require a
substantial amount of capital spending during the remainder of 2009 or 2010.
In addition to reserve funds for capital expenditures, our debt and lease agreements also
require us to deposit cash into escrow accounts for taxes, insurance and debt service payments. As
of September 30, 2009 total restricted cash was $18.1 million.
Further, as of September 30, 2009, we had aggregate capital commitments or plans to fund
development projects of approximately $11.0 million, including approximately $8.2 million of
letters of credit posted in February 2008 to fund the expansion of the Hard Rock, which we
anticipate funding during the fourth quarter of 2009.
Our $10.5 million interest-only, non-recourse promissory notes relating to the property across
the street from Delano South Beach are due in January 2010. Management does not intend to commence
development of this hotel unless financing is available and will evaluate its options prior to
maturity of the non-recourse promissory note.
As of September 30, 2009, our non-recourse mortgage financing on Hudson and Mondrian Los
Angeles, discussed below in DebtMortgage Agreements, consisted of (i) a $217.0 million first
mortgage note secured by Hudson, (ii) a $32.5 million mezzanine loan secured by a pledge of the
equity interests in our subsidiary owning Hudson, and (iii) a $120.5 million first mortgage note
secured by Mondrian Los Angeles (collectively, the Mortgages). The Mortgages all mature on July
12, 2010. We have the option of extending the maturity date of the Mortgages to October 12, 2011
provided that certain extension requirements are achieved, including maintaining a debt service
coverage ratio, as defined in the Mortgages, for the two fiscal quarters preceding the maturity
date of 1.55 to 1.00 or greater. A portion of the Mortgages may need to be repaid in order to meet
this covenant, or alternatively, we may consider refinancing the Mortgages.
On October 14, 2009, we entered into an agreement with one of our lenders which holds, among
other loans, the Hudson mezzanine loan. Under the agreement, we 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 our 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. We believe
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 agreed to cooperate with us in our efforts to seek an
extension of the $217.0 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.
We expect to meet our short-term liquidity needs for the next 12 months through existing cash
balances, including the cash received from the issuance of the Series A Preferred Securities and
warrants in October 2009, and cash provided by our operations; if necessary, we may also access
additional borrowings under our Amended Revolving Credit Facility. See also Potential Capital
Expenditures and Liquidity Requirements below for additional liquidity that may be required in the
short-term, depending on market and other circumstances, including our ability to refinance or
extend existing debt.
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Long-Term Liquidity Requirements. We generally consider our long-term liquidity requirements
to consist of those items that are expected to be incurred beyond the next 12 months and believe
these requirements consist primarily of funds necessary to pay scheduled debt maturities,
renovations and other non-recurring capital expenditures that need to be made periodically to our
properties and the costs associated with acquisitions and development of properties under contract
and new acquisitions and development projects that we may pursue.
Historically, we have satisfied our long-term liquidity requirements through various sources
of capital, including borrowings under our Amended Revolving Credit Facility, our existing working
capital, cash provided by operations, equity and debt offerings, and long-term mortgages on our
properties. Other sources may include cash generated through asset dispositions and joint venture
transactions. Additionally, we may secure other financing opportunities. Given the current economic
environment and turmoil in the credit markets, however, we may not be able to obtain such
financings on terms acceptable to us or at all. We may require additional borrowings, including
additional borrowings under our Amended Revolving Credit Facility if they remain available as
discussed above, to satisfy our long-term liquidity requirements.
Although the credit and equity markets remain challenging, we believe that these sources of
capital will become available to us in the future to fund our long-term liquidity requirements.
However, our ability to incur additional debt is dependent upon a number of factors, including our
degree of leverage, borrowing restrictions imposed by existing lenders and general market
conditions. We will continue to analyze which source of capital is most advantageous to us at any
particular point in time.
Potential Capital Expenditures and Liquidity Requirements
In addition to our expected short-term and long-term liquidity requirements, our liquidity
requirements could also be affected by possible required expenditures or liquidity requirements at
certain of our Owned Hotels or Joint Venture Hotels, as discussed below.
Mondrian Scottsdale Mortgage and Mezzanine Agreements. Mondrian Scottsdale is subject to $40.0
million of non-recourse mortgage and mezzanine financing, for which Morgans Group LLC has provided
a standard non-recourse carve-out guaranty. In June 2009, the loans matured and we discontinued
subsidizing the $40 million non-recourse mortgage and mezzanine loans secured by our interests in
Mondrian Scottsdale. We are currently operating Mondrian Scottsdale. We do not intend to commit
significant monies toward the repayment or restructuring of the loans or the funding of operating
deficits.
Potential Litigation. We may have potential liability in connection with certain claims by a
designer for which we have accrued $13.7 million as of September 30, 2009, as discussed in Note 5
of our consolidated financial statements.
Mondrian South Beach Mortgage and Mezzanine Agreements. The non-recourse mortgage loan and
mezzanine loan agreements related to the Mondrian South Beach matured on August 1, 2009 and were
not repaid or extended. We are currently operating Mondrian South Beach. The joint venture is in
discussions with the lenders to extend the maturity.
A standard non-recourse carve-out guaranty by Morgans Group LLC is in place for the Mondrian
South Beach loans. In addition, although construction is complete and Mondrian South Beach opened
on December 1, 2008, we and affiliates of our partner may have continuing obligations under a
construction completion guaranty. We and affiliates of our partner also have an agreement to
purchase approximately $14 million each of condominium units under certain conditions. As noted
above, the joint venture is in discussions with the lenders to extend the maturity of the loans.
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Hard Rock Construction and Acquisition Loans. In connection with the joint ventures
acquisition of the Hard Rock, certain subsidiaries of the joint venture entered into a debt financing in the form of a real
estate loan in the commercial mortgage-backed securities market (the CMBS Facility) that matures
on February 9, 2010, with two one-year extension options, subject to certain conditions. The CMBS
Facility provides for a $760.0 million acquisition loan that was used to fund the acquisition
and a construction
loan of up to $620.0 million for the expansion project at the Hard Rock. As of September 30, 2009,
the joint venture had drawn $492.0 million from the construction loan. We have entered into
standard joint and several guarantees in connection with the CMBS Facility, including construction
completion guarantees related to the Hard Rock expansion, which is scheduled to be completed by the
end of 2009. In our joint venture agreement with DLJMB, we have agreed to be responsible for the
first $50.0 million of exposure on the completion guarantees, subject to certain conditions. In
August 2009, the joint venture entered into a
non-binding term sheet with the lenders under the CMBS Facility to amend the terms of the loan
agreements governing the CMBS Facility. There can be no assurance that the joint venture will
complete the amendment process with the lenders under the CMBS Facility on a timely basis or at
all.
Hard Rock Land Loan. On August 1, 2008, a subsidiary of the Hard Rock joint venture completed
an intercompany land purchase with respect to an 11-acre parcel of land located adjacent to the
Hard Rock. To finance a portion of the purchase, a subsidiary of the Hard Rock joint venture
entered into a $50.0 million loan agreement with Column Financial, Inc. NorthStar Realty Finance
Corp. is a participant lender in the loan. The loan had an initial maturity date of August 9,
2009. In connection with the land loan, Morgans Group LLC, together with DLJMB, as guarantors,
entered into a non-recourse carve-out guaranty agreement, which is triggered in the event of
certain bad boy acts, in favor of Column Financial, Inc. Under the joint venture agreement,
DLJMB has agreed to be responsible for 100% of any liability under the guaranty, subject to certain
conditions.
At maturity of the land loan on August 9, 2009, the joint ventures subsidiary borrower did
not repay the loan. On October 23, 2009, the joint venture received a notice of default from the lenders under the land
acquisition financing with respect to the subsidiary borrowers failure to repay the loan
in full on the then effective maturity date. However, the lenders under the land acquisition
financing have not, to our knowledge, accelerated the debt or exercised any other
remedies. Further, the joint venture has entered into a term sheet with the lenders under the land
acquisition financing to amend the loan agreement governing the land
acquisition financing to, among other things, extend the maturity date to August 9, 2011 and
thereby cure the event of default. There can be no assurance that the joint venture will be able to
complete the amendment process with the lenders under the land acquisition financing on a timely
basis or at all.
Morgans Europe Mortgage Agreement. Morgans Europe, the 50/50 joint venture through which we
own interests in two hotels located in London, England, St Martins Lane and Sanderson, has
outstanding mortgage debt of £101.0 million, or approximately $160.5 million, as of September 30,
2009, which matures on November 24, 2010. The joint venture is currently considering various
options with respect to the refinancing of this mortgage obligation.
Other Possible Uses of Capital. We have a number of owned expansion and development projects
under consideration at our discretion. We also have joint venture projects under development, such
as Mondrian SoHo, which may require additional equity investments and/or credit support to
complete.
Comparison of Cash Flows for the Nine Months Ended September 30, 2009 to the Nine Months Ended
September 30, 2008
Given the current economic downturn, we have implemented various cost-saving initiatives in
2008 and 2009, which we believe will help prepare us for the anticipated continuing economic
challenges during 2009.
Operating Activities. Net cash used in operating activities was $14.2 million for the nine
months ended September 30, 2009 as compared to net cash provided by operating activities of $19.6
million for the nine months ended September 30, 2008. The increase in cash used in operating
activities is primarily due to changes in working capital and lower operating cash flow due to the
impact of the current economic downturn.
Investing Activities. Net cash used in investing activities amounted to $16.0 million for the
nine months ended September 30, 2009 as compared to $45.9 million for the nine months ended
September 30, 2008. The decrease in cash used in investing activities primarily relates to a
decrease in our capital expenditures. During the first nine months of 2008, Mondrian Los Angeles
and Morgans were under renovation and there are no comparable renovation activities during 2009.
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Financing Activities. Net cash provided by financing activities amounted to $15.2 million for
the nine months ended September 30, 2009 as compared to net cash used in financing activities of
$36.7 million for the nine months ended September 30, 2008. In March 2009 and May 2009, the Company
borrowed an aggregate of approximately
$139.3 million under its Revolving Credit Facility for general corporate purposes, for which
there were no comparable borrowings during the same period in 2008. All but $23.5 million of these
borrowings were repaid in August 2009. Additionally, during the nine months ended September 30,
2008, the Company repurchased approximately $19.2 million of its common stock, for which there were
no comparable stock repurchases during the same period in 2009.
Debt
Amended Revolving Credit Facility. On October 6, 2006, we and certain of our subsidiaries
entered into a revolving credit facility in the initial commitment amount of $225.0 million, which
included a $50.0 million letter of credit sub-facility and a $25.0 million swingline sub-facility
(collectively, the Revolving Credit Facility) with Wachovia Bank, National Association, as
Administrative Agent, and the lenders thereto. In 2009, we received notice that one of the lenders
on the Revolving Credit Facility was taken over by the Federal Deposit Insurance Corporation. As
such, the total initial commitment amount on the Revolving Credit Facility was reduced to
approximately $220.0 million.
On August 5, 2009, we and certain of our subsidiaries entered into an amendment to the
Revolving Credit Facility (the Amended Revolving Credit Facility).
Among other things, the Amended Revolving Credit Facility:
| deleted the financial covenant requiring us to maintain certain leverage ratios; |
| revised the fixed charge coverage ratio (defined generally as the ratio of
consolidated EBITDA excluding Mondrian Scottsdales EBITDA for the periods ending June
30, 2009 and September 30, 2009 and Clifts EBITDA for all periods to consolidated
interest expense excluding Mondrian Scottsdales interest expense for the periods ending
June 30, 2009 and September 30, 2009 and Clifts interest expense for all periods) that
we are required to maintain for each four-quarter period to no less than 0.90 to 1.00
from the previous fixed charge coverage ratio of no less than 1.75 to 1.00 As of
September 30, 2009, the Companys fixed charge coverage
ratio was 1.63x; |
| limits defaults relating to bankruptcy and judgment to certain events involving
us, Morgans Group LLC and subsidiaries that are parties to the Amended Revolving Credit
Facility; |
| prohibits capital expenditures with respect to any hotels owned by us, the
borrowers, as defined, or our subsidiaries, other than maintenance capital expenditures
for any hotel not exceeding 4% of the annual gross revenues of such hotel and certain
other exceptions; |
| revised certain provisions related to permitted indebtedness, including, among
other things, deleting certain provisions permitting unsecured indebtedness and
indebtedness for the acquisition or expansion of hotels; |
| prohibits repurchase of our common equity interests by the Company or Morgans
Group LLC; |
| imposes certain limits on any secured swap agreements entered into after the
effective date of the Amended Revolving Credit Facility; and |
| provided for a waiver of any default or event of default, to the extent that a
default or event of default existed for failure to comply with any financial covenant
under the existing Revolving Credit Facility as of June 30, 2009 and/or for the four
fiscal quarters ended June 30, 2009. |
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In addition to the provisions above, the Amended Revolving Credit Facility reduced the maximum
aggregate amount of the commitments from $220.0 million to $125.0 million, which amount is
available under two tranches: (i) a revolving credit facility in an amount equal to $90.0 million
(the New York Tranche), which is secured by a mortgage on Morgans Hotel and Royalton Hotel (the
New York Properties) and a mortgage on the Delano Hotel (the Florida Property); and (ii) a
revolving credit facility in an amount equal to $35.0 million (the Florida
Tranche), which is secured by the mortgage on the Florida Property (but not the New York
Properties). The Amended Revolving Credit Facility also provides for a letter of credit facility in
the amount of $25.0 million, which is secured by the mortgages on the New York Properties and the
Florida Property. At any given time, the amount available for borrowings under the Amended
Revolving Credit Facility is contingent upon the borrowing base valuation, which is calculated as
the lesser of (i) 60% of appraised value and (ii) the implied debt service coverage value of
certain collateral properties securing the Amended Revolving Credit Facility; provided that the
portion of the borrowing base attributable to the New York Properties will never be less than 35%
of the appraised value of the New York Properties. Total availability under the Amended Revolving
Credit Facility as of September 30, 2009 was $123.2 million, of which $23.5 million of borrowings
were outstanding, and approximately $9.8 million of letters of credit were posted, all allocated to
the Florida Tranche. We believe that, without the amendment, we would have had limited, if any,
availability under the Revolving Credit Facility for the remainder of its term.
The Amended Revolving Credit Facility bears interest at a fluctuating rate measured by
reference to, at the Companys election, either LIBOR (subject to a LIBOR floor of 1%) or a base
rate, plus a borrowing margin. LIBOR loans have a borrowing margin of 3.75% per annum and base rate
loans have a borrowing margin of 2.75% per annum. The Amended Revolving Credit Facility also
provides for the payment of a quarterly unused facility fee equal to the average daily unused
amount for each quarter multiplied by 0.25% before the effective date of the amendment and 0.5%
after the effective date of the amendment.
The owners of the New York Properties, our wholly-owned subsidiaries, have paid all mortgage
recording and other taxes required for the mortgage on the New York Properties to secure in full
the amount available under the New York Tranche. The commitments under the Amended Revolving Credit
Facility terminate on October 5, 2011, at which time all outstanding amounts under the Amended
Revolving Credit Facility will be due.
Mortgage Agreements. On October 6, 2006, our subsidiaries that own Hudson and Mondrian Los
Angeles entered into non-recourse mortgage financings with Wachovia Bank, National Association, as
lender, consisting of two separate mortgage loans and a mezzanine loan. As of September 30, 2009,
the Mortgages consisted of (i) $217.0 million first mortgage note secured by Hudson, (ii) a $32.5
million mezzanine loan secured by a pledge of the equity interests in our subsidiary owning Hudson,
and (iii) a $120.5 million first mortgage note secured by Mondrian Los Angeles. The Mortgages bear
interest at a blended rate of 30-day LIBOR plus 125 basis points.
The Mortgages mature on July 12, 2010. We have the option of extending the maturity date of
the Mortgages to October 15, 2011 provided that certain extension requirements are achieved,
including maintaining a debt service coverage ratio, as defined, at the subsidiary owning the
relevant hotel for the two fiscal quarters preceding the maturity date of 1.55 to 1.00 or greater.
A portion of the Mortgages may need to be repaid in order to meet this covenant, or we may consider
refinancing these Mortgages. We maintain swaps that effectively fix the LIBOR rate on the debt
under the Mortgages at approximately 5.0% through the initial maturity date.
The prepayment clause in the Mortgages permits us to prepay the Mortgages in whole or in part
on any business day.
On October 14, 2009, we entered into an agreement with one of our lenders which holds, among
other loans, the Hudson mezzanine loan. Under the agreement, we 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 our 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. We believe 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 agreed to cooperate with us in our efforts to seek an extension of the $217.0
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.
The Mortgages require our subsidiary borrowers to fund reserve accounts to cover monthly debt
service payments. Those subsidiary borrowers are also required to fund reserves for property, sales
and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of
those hotels. Reserves are deposited into restricted cash accounts and are released as certain
conditions are met. Our subsidiary borrowers are not
permitted to have any liabilities other than certain ordinary trade payables, purchase money
indebtedness, capital lease obligations and certain other liabilities.
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The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles.
Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt or
partnership interest debt. In addition, the Mortgages do not permit (i) transfers of more than 49%
of the interests in the subsidiary borrowers, Morgans Group LLC or the Company or (ii) a change in
control of the subsidiary borrowers or in respect of Morgans Group LLC or the Company itself
without, in each case, complying with various conditions or obtaining the prior written consent of
the lender.
The Mortgages provide for events of default customary in mortgage financings, including, among
others, failure to pay principal or interest when due, failure to comply with certain covenants,
certain insolvency and receivership events affecting the subsidiary borrowers, Morgans Group LLC or
the Company, and breach of the encumbrance and transfer provisions. In the event of a default under
the Mortgages, the lenders recourse is limited to the mortgaged property, unless the event of
default results from insolvency, a voluntary bankruptcy filing or a breach of the encumbrance and
transfer provisions, in which event the lender may also pursue remedies against Morgans Group LLC.
Notes to a Subsidiary Trust Issuing Preferred Securities. In August 2006, we formed a trust,
MHG Capital Trust I (the Trust), to issue $50.0 million of trust preferred securities in a
private placement. The sole assets of the Trust consist of the trust notes (the Trust Notes) due
October 30, 2036 issued by Morgans Group LLC and guaranteed by Morgans Hotel Group Co. The Trust
Notes have a 30-year term, ending October 30, 2036, and bear interest at a fixed rate of 8.68% for
the first 10 years, ending October 2016, and thereafter will bear interest at a floating rate based
on the three-month LIBOR plus 3.25%. These securities are redeemable by the Trust at par beginning
on October 30, 2011.
The Trust Notes agreement required that we do not fall below a fixed charge coverage ratio,
defined generally as the ratio of consolidated EBITDA, excluding Clifts EBITDA, over consolidated
interest expense, excluding Clifts interest expense, of 1.4 to
1.0 for four consecutive quarters. On November 2, 2009, we
amended the Trust
Notes Agreement to permanently eliminate this financial covenant. We paid a one-time fee of $2.0
million in exchange for the permanent removal of the covenant.
Clift. We lease Clift under a 99-year non-recourse lease agreement expiring in 2103. The lease
is accounted for as a financing with a balance of $82.8 million at September 30, 2009. The lease
payments are $6.0 million per year through October 2014 with inflationary increases at five-year
intervals thereafter beginning in October 2014.
Hudson. We lease two condominium units at Hudson which are reflected as capital leases with
balances of $6.1 million at September 30, 2009. Currently annual lease payments total approximately
$800,000 and are subject to increases in line with inflation. The leases expire in 2096 and 2098.
Promissory Note. The purchase of the property across from the Delano South Beach was partially
financed with the issuance of a $10.0 million interest only non-recourse promissory note to the
seller. The note matures on January 24, 2010 and currently bears interest at 11.0%, which was
required to be prepaid in full at the time the note was extended in November 2008. The obligations
under the note are secured by the property. Additionally, in January 2009, an affiliate of the
seller financed an additional $0.5 million to pay for costs associated with obtaining necessary
permits. This $0.5 million promissory note matures on January 24, 2010 and bears interest at 11%.
The obligations under this note are secured with a pledge of the equity interests in our subsidiary
that owns the property.
Mondrian Scottsdale Debt. Mondrian Scottsdale is subject to $40.0 million of non-recourse
mortgage and mezzanine financing, for which Morgans Group LLC has provided a standard non-recourse
carve-out guaranty. In June 2009, the loans matured and the Company discontinued subsidizing the
$40 million non-recourse mortgage and mezzanine loans secured by its interests in Mondrian
Scottsdale. We are currently operating Mondrian Scottsdale. We do not intend to commit significant
monies toward the repayment or restricting of the loans or the funding of the operating deficits.
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Convertible Notes. On October 17, 2007, we completed an offering of $172.5 million aggregate
principal amount of 2.375% Senior Subordinated Convertible Notes (Convertible Notes) in a private
offering, which included an additional issuance of $22.5 million in aggregate principal amount of
Convertible Notes as a result of the initial purchasers exercise in full of their overallotment
option. The Convertible Notes are senior subordinated unsecured obligations of the Company and are
guaranteed on a senior subordinated basis by our operating company, Morgans Group LLC. The
Convertible Notes are convertible into shares of our common stock under certain circumstances and
upon the occurrence of specified events.
On January 1, 2009, the Company adopted FASB Staff Position No. APB 14-1 (FSP APB 14-1),
which clarifies the accounting for the Convertible Notes payable and has subsequently been codified
in ASC 470-20, Debt, Debt with Conversion and other Options (ASC 470-20). ASC 470-20 requires the
proceeds from the sale of the Convertible Notes to be allocated between a liability component and
an equity component. The resulting debt discount must be amortized over the period the debt is
expected to remain outstanding as additional interest expense. ASC 470-20 required retroactive
application to all periods presented. The equity component, recorded as additional paid-in capital,
was $10.1 million, which represents the difference between the proceeds from issuance of the
Convertible Notes and the fair value of the liability, net of deferred taxes of $5.3 million, as of
the date of issuance of the Convertible Notes.
In connection with the private offering, the Company entered into certain Convertible Note
hedge and warrant transactions. These transactions are intended to reduce the potential dilution to
the holders of our common stock upon conversion of the Convertible Notes and will generally have
the effect of increasing the conversion price of the Convertible Notes to approximately $40.00 per
share, representing a 82.23% premium based on the closing sale price of our common stock of $21.95
per share on October 11, 2007. The net proceeds to us from the sale of the Convertible Notes were
approximately $166.8 million (of which approximately $24.1 million was used to fund the Convertible
Note call options and warrant transactions).
Seasonality
The hospitality business is seasonal in nature. For example, our Miami hotels are generally
strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth
quarter. Quarterly revenues also may be adversely affected by events beyond our control, such as
the current recession, extreme weather conditions, terrorist attacks or alerts, natural disasters,
airline strikes, and other considerations affecting travel. Given the current economic environment,
the impact of seasonality may not be as significant as in prior periods.
To the extent that cash flows from operations are insufficient during any quarter, due to
temporary or seasonal fluctuations in revenues, we may have to enter into additional short-term
borrowings or increase our borrowings, if available, on our Amended Revolving Credit Facility to
meet cash requirements.
Capital Expenditures and Reserve Funds
We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as
determined pursuant to our debt and lease agreements related to such hotels, with the exception of
Delano South Beach, Royalton and Morgans. Our Joint Venture Hotels generally are subject to similar
obligations under debt agreements related to such hotels, or under our management agreements. These
capital expenditures relate primarily to the periodic replacement or refurbishment of furniture,
fixtures and equipment. Such agreements typically require us to reserve funds at amounts equal to
4% of the hotels revenues and require the funds to be set aside in restricted cash. In addition,
our restaurant joint ventures require the ventures to set aside restricted cash of between 2% to 4%
of gross revenues of the restaurant. As of September 30, 2009, $3.3 million was available in
restricted cash reserves for future capital expenditures under these obligations related to our
Owned Hotels.
The lenders under the Mortgages require the Companys subsidiary borrowers to fund reserve
accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to
fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and
the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts
and are released as certain conditions are met. The Companys subsidiary borrowers are not
permitted to have any liabilities other than certain ordinary trade payables, purchase money
indebtedness, capital lease obligations, and certain other liabilities.
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During 2006, 2007 and 2008, our Owned Hotels that were not subject to these reserve funding
obligations Delano South Beach, Royalton, and Morgans underwent significant room and common
area renovations, and as such, are not expected to require a substantial amount of capital spending
during 2009. Management will evaluate the capital spent at these properties on an individual basis
and ensure that such decisions do not impact the overall quality of our hotels or our guests
experience.
Under
the Amended Revolving Credit Facility, we are generally prohibited from funding capital
expenditures with respect to any hotels owned by us other than maintenance capital expenditures for any hotel not exceeding 4% of the annual gross
revenues of such hotel and certain other exceptions.
Derivative Financial Instruments
We use derivative financial instruments to manage our exposure to the interest rate risks
related to our variable rate debt. We do not use derivatives for trading or speculative purposes
and only enter into contracts with major financial institutions based on their credit rating and
other factors. We determine the fair value of our derivative financial instruments using models
which incorporate standard market conventions and techniques such as discounted cash flow and
option pricing models to determine fair value. We believe these methods of estimating fair value
result in general approximation of value, and such value may or may not be realized.
On February 22, 2006, we entered into an interest rate forward starting swap that effectively
fixes the interest rate on $285.0 million of mortgage debt at approximately 4.25% on Mondrian Los
Angeles and Hudson with an effective date of July 9, 2007 and a maturity date of July 15, 2010.
This derivative qualifies for hedge accounting treatment per ASC 815-10, Derivatives and Hedging
(ASC 815-10) and accordingly, the change in fair value of this instrument is recognized in other
comprehensive income.
In connection with the Mortgages, the Company also entered into an $85.0 million interest rate
swap that effectively fixes the LIBOR rate on $85.0 million of the debt at approximately 5.0% with
an effective date of July 9, 2007 and a maturity date of July 15, 2010. This derivative qualifies
for hedge accounting treatment per ASC 815-10 and accordingly, the change in fair value of this
instrument is recognized in other comprehensive income.
In connection with the sale of the Convertible Notes (discussed above) we entered into call
options which are exercisable solely in connection with any conversion of the Convertible Notes and
pursuant to which we will receive shares of our common stock from counterparties equal to the
number of shares of our common stock, or other property, deliverable by us to the holders of the
Convertible Notes upon conversion of the Convertible Notes, in excess of an amount of shares or
other property with a value, at then current prices, equal to the principal amount of the converted
Convertible Notes. Simultaneously, we also entered into warrant transactions, whereby we sold
warrants to purchase in the aggregate 6,415,327 shares of our common stock, subject to customary
anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock.
The warrants may be exercised over a 90-day trading period commencing January 15, 2015. The call
options and the warrants are separate contracts and are not part of the terms of the Convertible
Notes and will not affect the holders rights under the Convertible Notes. The call options are
intended to offset potential dilution upon conversion of the Convertible Notes in the event that
the market value per share of the common stock at the time of exercise is greater than the exercise
price of the call options, which is equal to the initial conversion price of the Convertible Notes
and is subject to certain customary adjustments.
Off-Balance Sheet Arrangements
Morgans Europe. We own interests in two hotels through a 50/50 joint venture known as Morgans
Europe. Morgans Europe owns two hotels located in London, England, St Martins Lane, a 204-room
hotel, and Sanderson, a 150-room hotel. Under a management agreement with Morgans Europe, we earn
management fees and a reimbursement for allocable chain service and technical service expenses.
Morgans Europes net income or loss and cash distributions or contributions are allocated to
the partners in accordance with ownership interests. At September 30, 2009, we had a negative
investment in Morgans Europe of $2.8 million. We account for this investment under the equity
method of accounting. Our equity in income of the
joint venture amounted to $0.8 million and $0.9 million for the nine months ended September
30, 2009 and 2008, respectively.
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Mondrian South Beach. We own a 50% interest in Mondrian South Beach, a recently renovated
apartment building which was converted into a condominium and hotel. Mondrian South Beach opened in
December 2008, at which time we began operating the property under a long-term management contract.
We account for this investment under the equity method of accounting. At September 30, 2009,
our investment in Mondrian South Beach was $20.3 million. Our equity in loss of Mondrian South
Beach amounted to $4.7 million and $1.1 million for the nine months ended September 30, 2009 and
2008, respectively.
Hard Rock. As of September 30, 2009, we owned an 11.3% interest in the Hard Rock, based on
cash contributions, through a joint venture with DLJMB. We also manage the Hard Rock under a
management agreement, for which we receive a management fee and a chain service expense
reimbursement based on a percentage of all non-gaming revenue including rental income, and a fixed
annual gaming facilities support fee. We can also earn an incentive management fee based on EBITDA,
as defined, above certain levels. We account for this investment under the equity method of
accounting. For the nine months ended September 30, 2009, our equity in loss from the Hard Rock
joint venture was $13.2 million. This amount was not recognized in our consolidated financial
statements for the nine months ended September 30, 2009, as it exceeds our investment balance and
commitments to provide additional equity to the joint venture. At September 30, 2009, we had a
negative investment in the Hard Rock of $8.2 million.
Echelon Las Vegas. In January 2006, we entered into a 50/50 joint venture agreement with a
subsidiary of Boyd to develop Delano Las Vegas and Mondrian Las Vegas as part of Boyds Echelon
project. We account for this investment under the equity method of accounting. Given the current
economic environment, during the three months ended September 30, 2009, we recorded non-cash
impairment charges of $17.2 million representing the entire value of this investment. These costs
related primarily to the plans and drawings for this development project. While we have not made
any formal decisions regarding the future of this project, we do not expect to develop this project
in next three to five years.
Mondrian SoHo. In June 2007, we contributed approximately $5.0 million for a 20% equity
interest in a joint venture with Cape Advisors Inc. which is developing a Mondrian hotel in the
SoHo neighborhood of New York City. Upon completion, we expect to operate the hotel under a 10-year
management contract with two 10-year extension options. As of September 30, 2009, our investment in
the Mondrian SoHo venture was $8.3 million.
Ames in Boston. On June 17, 2008 the Company, Normandy Real Estate Partners, and local partner
Ames Hotel Partners, entered into a joint venture to develop the Ames hotel in Boston. Upon
completion, we expect to operate Ames under a 20-year management contract. Ames is currently
expected to open in the fourth quarter of 2009. We expect to have an approximately 35% economic
interest in the joint venture. As of September 30, 2009, our investment in the Ames joint venture
was $11.2 million. The project is expected to qualify for federal and state historic rehabilitation
tax credits.
Convertible Note Call and Warrant Options. In connection with the issuance of the Convertible
Notes, we entered into convertible note hedge transactions with respect to our common stock (the
Call Options) with Merrill Lynch Financial Markets, Inc. and Citibank, N.A. (collectively, the
Hedge Providers). The Call Options are exercisable solely in connection with any conversion of
the Convertible Notes and pursuant to which we will receive shares of our common stock from the
Hedge Providers equal to the number of shares issuable to the holders of the Convertible Notes upon
conversion. We paid approximately $58.2 million for the Call Options.
In connection with the sale of the Convertible Notes, we also entered into separate warrant
transactions whereby we issued warrants (the Warrants) to purchase 6,415,327 shares of common
stock, subject to customary anti- dilution adjustments, at an exercise price of approximately
$40.00 per share of common stock. We received approximately $34.1 million from the issuance of the
Warrants.
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Yucaipa warrants. In connection with the Yucaipa investment, discussed above, we issued
warrants to the Investors to purchase 12,500,000 shares of our common stock at an exercise price of
$6.00 per share. The warrants
have a 7-1/2 year term and are exercisable utilizing a cashless exercise method only,
resulting in a net share issuance. The exercise of the warrants is subject to approval by our
stockholders of the issuance of the shares of common stock issuable upon exercise. The exercise
of the warrants is also subject to an exercise cap which effectively limits the Investors
beneficial ownership of our common stock to 9.9% at any one time. The exercise price and number of
shares subject to the warrants are both subject to anti-dilution adjustments.
Yucaipa contingent warrants. In connection with the Fund Formation Agreement, we issued to
the Fund Manager 5,000,000 contingent warrants to purchase our common stock at an exercise price of
$6.00 per share with a 7-1/2 year term. These contingent warrants will only become exercisable if
the Fund obtains capital commitments in certain amounts over certain time periods and also meets
certain further capital commitment and investment thresholds. The exercise of these contingent
warrants is subject to the approval of the issuance of the shares of common stock issuable upon
exercise by our stockholders. The exercise of these contingent warrants is also subject to an
exercise cap which effectively limits the Fund Managers beneficial ownership (which is considered
jointly with the Investors beneficial ownership) of our common stock to 9.9% at any one time. The
exercise price and number of shares subject to these contingent warrants are both subject to
anti-dilution adjustments.
For further information regarding our off balance sheet arrangements, see Notes 4, 6 and 10 to
our consolidated financial statements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America, or GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience,
information that is currently available to us and on various other assumptions that we believe are
reasonable under the circumstances. Actual results may differ from these estimates under different
assumptions or conditions. No material changes to our critical accounting policies have occurred
since December 31, 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and Qualitative Disclosures About Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent
upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes
in market prices and interest rates. Some of our outstanding debt has a variable interest rate. As
described in Managements Discussion and Analysis of Financial Results of Operations Derivative
Financial Instruments above, we use some derivative financial instruments, primarily interest rate
caps, to manage our exposure to interest rate risks related to our floating rate debt. We do not
use derivatives for trading or speculative purposes and only enter into contracts with major
financial institutions based on their credit rating and other factors. As of September 30, 2009,
our total outstanding consolidated debt, including capitalized lease obligations, was approximately
$744.1 million, of which approximately $433.5 million, or 58.3%, was variable rate debt.
We entered into hedging arrangements on $285.0 million of variable rate debt in connection
with the mortgage debt on Hudson and Mondrian Los Angeles, which matures on July 9, 2010 and
effectively fixes LIBOR at approximately 4.25%. At September 30, 2009, the one month LIBOR rate was
0.2%. If market rates of interest on this variable rate debt increase by 1.0%, or 100 basis points,
the increase in interest expense would reduce future pre-tax earnings and cash flows by
approximately $2.9 million annually and the maximum annual amount the interest expense would
increase on this variable rate debt is $13.7 million due to our interest rate cap agreement, which
would reduce future pre-tax earnings and cash flows by the same amount annually. If market rates of
interest on this variable rate decrease by 0.2%, or 20 basis points, the decrease in interest
expense would increase pre-tax earnings and cash flow by approximately $0.7 million annually.
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In connection with the Mortgages, we also entered into an $85.0 million interest rate swap
that effectively fixes the LIBOR rate on $85.0 million of the debt at approximately 5.0% with an
effective date of July 9, 2007 and a maturity date of July 15, 2010. If market rates of interest on
this variable rate debt increase by 1.0%, or 100 basis points, the increase in interest expense
would reduce future pre-tax earnings and cash flows by approximately $0.9 million annually and the
maximum annual amount the interest expense would increase on this variable rate debt is $4.0
million due to our interest rate cap agreement, which would reduce future pre-tax earnings and cash
flows by the same amount annually. If market rates of interest on this variable rate decrease by
0.2%, or 20 basis points, the decrease in interest expense would increase pre-tax earnings and cash
flow by approximately $0.2 million annually.
Our variable rate debt also consisted of $23.5 million outstanding under the Revolving Credit
Facility at a rate of LIBOR plus 1.35% as of September 30, 2009. If market rates of interest on
this variable rate debt increase by 1.0% or 100 basis points, the increase in interest expense
would reduce future pre-tax earnings and cash flows by approximately $0.1 million annually. If
market rates of interest on this variable rate debt decrease by 0.2%, or 20 basis points, the
decrease in interest expense would increase pre-tax earnings and cash flow by approximately $0.1
million.
Our fixed rate debt consists of Trust Notes, the Convertible Notes, the promissory notes on
the property across the street from Delano South Beach, and the Clift lease. The fair value of some
of this debt is greater than the book value. As such, if market rates of interest increase by 1.0%,
or approximately 100 basis points, the fair value of our fixed rate debt would decrease by
approximately $11.1 million. If market rates of interest decrease by 1.0%, or 100 basis points, the
fair value of our fixed rate debt would increase by $62.0 million.
Interest risk amounts were determined by considering the impact of hypothetical interest rates
on our financial instruments and future cash flows. These analyses do not consider the effect of a
reduced level of overall economic activity. If overall economic activity is significantly reduced,
we may take actions to further mitigate our exposure. However, because we cannot determine the
specific actions that would be taken and their possible effects, these analyses assume no changes
in our financial structure.
We
have entered into agreements with each of our derivative
counterparties in connection with our interest rate swaps and
hedging instruments related to the Convertible Notes, providing that in the event we either
default or are capable of being declared in default on any of our
indebtedness, then we could also be declared in default on our derivative
obligations.
Currency Exchange Risk
As we have international operations with our two London hotels, currency exchange risk between
the U.S. dollar and the British pound arises as a normal part of our business. We reduce this risk
by transacting this business in British pounds. A change in prevailing rates would have, however,
an impact on the value of our equity in Morgans Europe. The U.S. dollar/British pound currency
exchange is currently the only currency exchange rate to which we are directly exposed. Generally,
we do not enter into forward or option contracts to manage our exposure applicable to net operating
cash flows. We do not foresee any significant changes in either our exposure to fluctuations in
foreign exchange rates or how such exposure is managed in the future.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, an evaluation was performed under the
supervision and with the participation of our management, including the chief executive officer and
the chief financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and
Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and the
chief financial officer concluded that the design and operation of these disclosure controls and
procedures were effective as of the end of the period covered by this report.
There were no changes in our internal control over financial reporting (as defined in Rule
13a-15 of the Securities and Exchange Act of 1934, as amended) that occurred during the quarter
ended September 30, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART IIOTHER INFORMATION
Item 1. Legal Proceedings.
Litigation
Potential Litigation
We understand that Mr. Philippe Starck has attempted to initiate arbitration proceedings in
the London Court of International Arbitration regarding an exclusive service agreement that he
entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel Group LLC) in
February 1998 regarding the design of certain hotels now owned by us. We are not a party to these
proceedings at this time. See Note 5 of our consolidated financial statements.
Hard Rock Financial Advisory Agreement
In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (Credit
Suisse) for $9.4 million related to the Financial Advisory Agreement the Company entered into with
Credit Suisse in July 2006. Under the terms of the financial advisory agreement, Credit Suisse
received a transaction fee for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint
venture. The transaction fee, which was paid by the Hard Rock joint venture at the closing of the
acquisition of the Hard Rock and related assets in February 2007, was based upon an agreed upon
percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The
invoice received in July 2008 alleges that as a result of events subsequent to the closing of the
Hard Rock acquisition transactions, Credit Suisse is due additional transaction fees. The Company
believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.
Other Litigation
We are involved in various lawsuits and administrative actions in the normal course of
business. In managements opinion, disposition of these lawsuits is not expected to have a material
adverse effect on our financial position, results of operations or liquidity.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008. These risks and uncertainties have the potential to materially
affect our business, financial condition, results of operations, cash flows, projected results and
future prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
On June 1, 2009, the $40.0 million mortgage and mezzanine financing on Mondrian Scottsdale
matured and were not repaid. We are currently operating Mondrian Scottsdale and accruing interest.
As of November 3, 2009, the $40.0 million mortgage and mezzanine loans remained outstanding and we
have accrued $0.5 million in interest. See Debt Mondrian Scottsdale in the section of this
Quarterly Report on Form 10-Q entitled Managements Discussion and Analysis of Financial Condition
and Results of Operations.
On August 1, 2009, the $95.6 million outstanding non-recourse mortgage loan and mezzanine loan
agreements related to Mondrian South Beach matured. We are currently operating Mondrian South
Beach. The joint venture is in discussions with the lenders to extend the maturity. As of November
3, 2009, the mortgage and mezzanine loans remained outstanding and the joint venture has accrued
$1.7 million in interest since August 1, 2009. See Potential Capital Expenditures and Liquidity
Requirements Mondrian South Beach Mortgage and Mezzanine Loans in the
section of this Quarterly Report on Form 10-Q entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations.
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At
maturity of the land loan on August 9, 2009, Hard Rock joint ventures subsidiary borrower did not repay its outstanding $50.0 million land
loan. On October 23, 2009, the joint venture received a notice of default from the lenders under the land
acquisition financing with respect to the subsidiary borrowers failure to repay the loan
in full on the then effective maturity date. However, the lenders under the land acquisition
financing have not, to the Companys knowledge, accelerated the debt or exercised any other
remedies. Further, the joint venture has entered into a term sheet with the lenders under the land
acquisition financing to amend the loan agreement governing the land
acquisition financing to, among other things, extend the maturity date to August 9, 2011 and
thereby cure the event of default. There can be no assurance that the joint venture will be able to
complete the amendment process with the lenders under the land acquisition financing on a timely
basis or at all. As of November 3, 2009, the land loan remained outstanding and the joint venture has paid interest
through November 8, 2009. See Potential Capital Expenditures and Liquidity Requirements Hard
Rock Land Loan in the section of this Quarterly Report on Form 10-Q entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations.
On September 15, 2009, the joint venture that owns Shore Club received a notice of default
on behalf of the special servicer for the lender on the joint ventures mortgage loan for failure to make its
September monthly payment and for failure to maintain its debt service coverage ratio, as
required by the loan documents. On October 7, 2009, the joint
venture received a second letter on behalf of the special servicer for the lender accelerating the
payment of all outstanding principal, accrued interest, and all other amounts due on the mortgage
loan. The lender also demanded that the joint venture transfer all rents and revenues directly to
the lender to satisfy the joint ventures debt. The Company
understands that the joint venture and the lender are currently in
discussions to address the default.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed in the accompanying Exhibit Index are filed as part of this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Morgans Hotel Group Co. |
||||
November 5, 2009 | /s/ Fred J. Kleisner | |||
Fred J. Kleisner | ||||
President and Chief Executive Officer | ||||
/s/ Richard Szymanski | ||||
Richard Szymanski | ||||
Chief Financial Officer and Secretary |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
2.1 | Agreement and Plan of Merger, dated May 11, 2006, by and
among Morgans Hotel Group Co., MHG HR Acquisition Corp.,
Hard Rock Hotel, Inc. and Peter Morton (incorporated by
reference to Exhibit 2.1 to the Companys Current Report on
Form 8-K filed on May 17, 2006) |
|||
2.2 | First Amendment to Agreement and Plan of Merger, dated as of
January 31, 2007, by and between Morgans Hotel Group Co.,
MHG HR Acquisition Corp., Hard Rock Hotel, Inc., (solely
with respect to Section 1.6 and Section 1.8 thereof) 510
Development Corporation and (solely with respect to Section
1.7 thereof) Peter A. Morton (incorporated by reference to
Exhibit 2.1 to the Companys Current Report on Form 8-K
filed on February 6, 2007) |
|||
3.1 | Amended and Restated Certificate of Incorporation of Morgans
Hotel Group Co.(incorporated by reference to Exhibit 3.1 to
Amendment No. 5 to the Companys Registration Statement on
Form S-1 (File No. 333-129277) filed on February 6, 2006) |
|||
3.2 | Amended and Restated By-laws of Morgans Hotel Group Co.
(incorporated by reference to Exhibit 3.2 to Amendment No. 5
to the Companys Registration Statement on Form S-1 (File
No. 333-129277) filed on February 6, 2006) |
|||
3.3 | Certificate of Designations for Series A Preferred
Securities (incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K filed on October 16,
2009) |
|||
4.1 | Specimen Certificate of Common Stock of Morgans Hotel Group
Co. (incorporated by reference to Exhibit 4.1 to Amendment
No. 3 to the Companys Registration Statement on Form S-1
(File No. 333-129277) filed on January 17, 2006) |
|||
4.2 | Junior Subordinated Indenture, dated as of August 4, 2006,
between Morgans Hotel Group Co., Morgans Group LLC and
JPMorgan Chase Bank, National Association (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K filed on August 11, 2006) |
|||
4.3 | Amended and Restated Trust Agreement of MHG Capital Trust I,
dated as of August 4, 2006, among Morgans Group LLC,
JPMorgan Chase Bank, National Association, Chase Bank USA,
National Association, and the Administrative Trustees Named
Therein (incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on August 11,
2006) |
|||
4.4 | Stockholder Protection Rights Agreement, dated as of October
9, 2007, between Morgans Hotel Group Co. and Mellon Investor
Services LLC, as Rights Agent (incorporated by reference to
Exhibit 4.1 of the Companys Current Report on Form 8-K
filed on October 10, 2007) |
|||
4.5 | Amendment to the Stockholder Protection Rights Agreement,
dated July 25, 2008, between the Company and Mellon Investor
Services LLC, as Rights Agent (incorporated by reference to
Exhibit 4.1 of the Companys Current Report on Form 8-K
filed on July 30, 2008) |
|||
4.6 | Amended and Restated Stockholder Protection Rights
Agreement, dated as of October 1, 2009, between Morgans
Hotel Group Co. and Mellon Investor Services LLC, as Rights
Agent (including Forms of Rights Certificate and Assignment
and of Election to Exercise as Exhibit A thereto and Form of
Certificate of Designation and Terms of Participating
Preferred Stock as Exhibit B thereto) (incorporated by
reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K filed on October 2, 2009) |
|||
4.7 | Indenture related to the Senior Subordinated Convertible
Notes due 2014, dated as of October 17, 2007, by and among
Morgans Hotel Group Co., Morgans Group LLC and The Bank of
New York, as trustee (including form of 2.375% Senior
Subordinated Convertible Note due 2014) (incorporated by
reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K filed on October 17, 2007) |
58
Table of Contents
Exhibit | ||||
Number | Description | |||
4.8 | Registration Rights Agreement, dated as of October 17, 2007,
between Morgans Hotel Group Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to
Exhibit 4.2 of the Companys Current Report on Form 8-K
filed on October 17, 2007) |
|||
4.9 | Form of Warrant for Warrants issued under Securities
Purchase Agreement to Yucaipa American Alliance Fund II,
L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P.
(incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K filed on October 16, 2009) |
|||
4.10 | Warrant, dated October 15, 2009, issued to Yucaipa American
Alliance Fund II, LLC (incorporated by reference to Exhibit
4.2 to the Companys Current Report on Form 8-K filed on
October 16, 2009) |
|||
4.11 | Warrant, dated October 15, 2009, issued to Yucaipa American
Alliance Fund II, LLC (incorporated by reference to Exhibit
4.3 to the Companys Current Report on Form 8-K filed on
October 16, 2009) |
|||
4.12 | Amendment No. 1, dated as of October 15, 2009, to Amended
and Restated Stockholder Protection Rights Agreement, dated
as of October 1, 2009, between the Registrant and Mellon
Investor Services LLC, as Rights Agent (incorporated by
reference to Exhibit 4.4 to the Companys Current Report on
Form 8-K filed on October 16, 2009) |
|||
4.13 | Supplemental
Indenture, dated as of November 2, 2009, by and among Morgans
Group LLC, the Company and The Bank of New York Mellon Trust Company,
National Association (as successor to JPMorgan Chase Bank, National
Association), as Trustee (incorporated by reference to Exhibit 4.1 to
the Companys Current Report on Form 8-K filed on
November 4, 2009) |
|||
10.1 | Fifth Amendment to Credit Agreement; and Waiver Agreement
dated as of August 5, 2009, by and among Morgans Group LLC,
Beach Hotel Associates LLC, Morgans Holdings LLC and
Royalton LLC, as Borrowers, Morgans Hotel Group Co., each of
the Guarantors party thereto, each of the Lenders party
thereto and Wachovia Bank, National Association, as Agent
(incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K filed on August 6, 2009) |
|||
10.2 | Securities Purchase Agreement, dated as of October 15, 2009,
by and among the Registrant and Yucaipa American Alliance
Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund
II, L.P. (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on October 16,
2009) |
|||
10.3 | Real Estate Fund Formation Agreement, dated as of October
15, 2009, by and between Yucaipa American Alliance Fund II,
LLC and the Registrant (incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on
October 16, 2009) |
|||
10.4 | Registration Rights Agreement, dated as of October 15, 2009,
by and between the Registrant and Yucaipa American Alliance
Fund II, L.P., Yucaipa American Alliance (Parallel) Fund II,
L.P. and Yucaipa American Alliance Fund II, LLC
(incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K filed on October 16, 2009) |
|||
31.1 | Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002* |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002* |
|||
32.1 | Certificate of Chief Executive Officer pursuant to 18 U.S.C.
1350, as created by Section 906 of the Sarbanes-Oxley Act of
2002* |
|||
32.2 | Certificate of Chief Financial Officer pursuant to 18 U.S.C.
1350, as created by Section 906 of the Sarbanes-Oxley Act of
2002* |
* | Filed herewith. |
59