UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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.

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)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value		The NASDAQ Stock Market LLC

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.

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 Act). Yes o No þ

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was approximately $96,446,788, based on a closing sale price of $3.83 as reported on the NASDAQ Global Market (formerly the NASDAQ National Market) on June 30, 2009.

As of March 11, 2010, the registrant had issued and outstanding 29,926,229 shares of common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Morgans Hotel Group Co.’s Proxy Statement in connection with its Annual Meeting of Stockholders
to be held in 2010 are incorporated by reference into Part III of this report.

 

 

INDEX

		Page
PART I
ITEM 1 BUSINESS			5
ITEM 1A RISK FACTORS			18
ITEM 1B UNRESOLVED STAFF COMMENTS			39
ITEM 2 PROPERTIES			40
ITEM 3 LEGAL PROCEEDINGS			56
ITEM 4 RESERVED			57
PART II
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			57
ITEM 6 SELECTED FINANCIAL INFORMATION			59
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			61
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			90
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			91
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			91
ITEM 9A CONTROLS AND PROCEDURES			91
ITEM 9B OTHER INFORMATION			94
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			94
ITEM 11 EXECUTIVE COMPENSATION			94
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			94
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			94
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES			94
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			95
Exhibit 10.8
Exhibit 10.30
Exhibit 10.33
Exhibit 10.36
Exhibit 10.64
Exhibit 21.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. References to “we,” “our” and the “Company” refer to Morgans Hotel Group Co. together in each case with our consolidated subsidiaries and any predecessor entities unless the context suggests otherwise.

The forward-looking statements contained in this Annual Report on Form 10-K 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 those expressed in any forward-looking statements include, but are not limited to economic, business, competitive market and regulatory conditions such as:

•

a sustained downturn in economic and market conditions, particularly levels of spending in the business, travel and leisure industries;

•

continued tightness in the global credit markets;

•

general volatility of the capital markets and our ability to access the capital markets;

•

our ability to refinance our current outstanding debt and to repay outstanding debt as such debt matures;

•

the impact of financial and other covenants in our Amended Revolving Credit Facility (defined below) and other debt instruments that limit our ability to borrow and restrict our operations;

•

our ability to protect the value of our name, image and brands and our intellectual property;

•

risks related to natural disasters, such as earthquakes and hurricanes;

•

hostilities, including future terrorist attacks, or fear of hostilities that affect travel;

•

risks related to our international operations, such as global economic conditions, political or economic instability, compliance with foreign regulations and satisfaction of international business and workplace requirements;

•

our ability to timely fund the renovations and capital improvements necessary to maintain our properties at the quality of the Morgans Hotel Group brand;

•

our ability to adjust in a timely manner to any increases in fixed costs, such as taxes and insurance, or reductions in revenues;

•

risks associated with the acquisition, development and integration of properties;

•

the risks of conducting business through joint venture entities over which we may not have full control;

•

our ability to perform under management agreements and to resolve any disputes with owners of properties that we manage but do not wholly own;

	•		the impact of any material litigation;
	•		the loss of key members of our senior management;

•

changes in the competitive environment in our industry and the markets where we invest;

•

the seasonal nature of the hospitality business;

•

ownership of a substantial block of our common stock by a small number of outside investors and the ability of such investors to influence key decisions;

•

the impact of any dividend payments or accruals on our preferred securities on our cash flow and the value of our common stock; and

•

other risks discussed in this Annual Report on Form 10-K in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Result of Operations.”

We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results.

PART I

ITEM 1.		BUSINESS

Overview

Morgans Hotel Group Co. is 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, Europe and in select international locations. Over our 26-year history, we have gained experience operating in a variety of market conditions. At December 31, 2009, we owned or partially owned, and managed a portfolio of thirteen luxury hotel properties in New York, Miami, Los Angeles, San Francisco, London, Las Vegas, Boston and Scottsdale, comprising approximately 4,700 rooms. In addition, we manage two non-Morgans Hotel Group branded hotels in San Juan, Puerto Rico and Playa del Carmen, Mexico comprising approximately 150 rooms, each of which we anticipate will be re-developed by the respective owner into Morgans Hotel Group branded properties in the future. We also have a hotel under development in the SoHo neighborhood of New York which is currently scheduled to open in late 2010. We have other hotel development projects, including projects to be developed by third-parties but managed by us upon completion, in various stages of advancement and pending financing, located in Palm Springs and elsewhere.

Unlike traditional brand-managed or franchised hotels, boutique hotels provide their guests with what we believe is a distinctive lodging experience. Each of our Morgans Hotel Group branded hotels has a personality specifically tailored to reflect the local market environment and features a modern, sophisticated design that includes critically acclaimed public spaces, popular “destination” bars and restaurants and highly personalized service. Significant media attention has been devoted to our hotels, which we believe is the result of their distinctive nature, renowned design, dynamic and exciting atmosphere, celebrity guests and high-profile events. We believe that the Morgans Hotel Group brand and each of our individual property brands are synonymous with style, innovation and service. We believe that this combination of lodging and social experiences, and association with our brands, increases our occupancy levels and pricing power.

At December 31, 2009, our owned or partially owned and managed portfolio of Morgans Hotel Group branded hotel properties consisted of:

•

seven hotels that we own and manage, or the Owned Hotels — Morgans, Royalton and Hudson in New York, Delano in South Beach, Miami (“Delano South Beach”), Mondrian in Los Angeles (“Mondrian Los Angeles”), Clift in San Francisco (which we lease under a long-term lease that is treated as a financing) and Mondrian in Scottsdale (“Mondrian Scottsdale”), comprising approximately 2,100 rooms. Mondrian Scottsdale is in foreclosure proceedings and the management agreement has been terminated with an effective termination date of March 16, 2010;

•

a 50% interest in two hotels in London, St Martins Lane and Sanderson, comprising approximately 350 rooms, which we manage;

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a 50% interest in Mondrian in South Beach, Miami (“Mondrian South Beach”), which is a hotel condominium project that opened in December 2008, comprising approximately 330 rooms, which we manage;

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a 7% interest in the 300-room Shore Club in South Beach, Miami which we manage;

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a 12.8% interest in the Hard Rock Hotel and Casino in Las Vegas (“Hard Rock”), which we manage; and

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a 35% interest in the 114-room Ames in Boston, which we manage.

In addition to the above Morgans Hotel Group branded hotels, as of December 31, 2009, we also managed the San Juan Water and Beach Club in San Juan, Puerto Rico and Hotel Las Palapas in Playa del Carmen, Mexico, each of which we anticipate will be re-developed by the respective owner into Morgans Hotel Group branded properties in the future.

In addition to our current portfolio, we expect to operate, own, acquire, redevelop and develop new hotel properties that are consistent with our portfolio in major metropolitan cities and select resort markets in the United States, Europe and other select international destinations. We currently have a development project in the SoHo neighborhood of New York which has identified financing and is expected to open in late 2010. In addition, we have other development projects in various stages of advancement, including a project in Palm Springs, to be developed by third-parties but managed by us upon completion. As a result of the challenging economic environment, and specifically the tightening of the credit markets, financing for Palm Springs and other projects has not yet been obtained. We and our joint venture partners or the project developers, as applicable, may not be able to obtain adequate project financing in a timely manner or at all. If project financing is not obtained, we and our joint venture partners or the project developers, as applicable, may seek additional equity investors to raise capital, limit the scope of the project, defer the project or cancel the project all together.

We conduct our operations through Morgans Group LLC, a Delaware limited liability company and our operating company, which we refer to as Morgans Group. Morgans Group holds substantially all of our assets. We are the managing member of Morgans Group and held approximately 97% of its membership units at December 31, 2009, not including long-term incentive plan units, or LTIP Units, convertible into membership units issued as part of our employee compensation plans. We manage all aspects of Morgans Group, including the operation, development, sale and purchase of, and investments in, hotels primarily through our management company, Morgans Hotel Group Management LLC, or MHG Management Company. The remaining membership interests in Morgans Group, other than LTIP Units, are owned by Residual Hotel Interest, LLC or its affiliates and are exchangeable for our common stock.

We were incorporated in Delaware in October 2005 and completed our initial public offering of common stock, or IPO, on February 17, 2006. Our corporate offices are located at 475 Tenth Avenue, New York, New York 10018. Our telephone number is (212) 277-4100. We maintain a website that contains information about us at www.morganshotelgroup.com.

Corporate Strategy

Our corporate strategy has been to grow through our proven ability to replicate our model on an individualized but consistent basis across a growing portfolio and by leveraging our portfolio of brands for expansion in both new and existing markets. Although we believe our growth will continue to be negatively impacted by the current global economic downturn and extreme disruptions in financial markets in the near-term, we intend to continue building on this corporate strategy in the long-term. We believe that our current management team and existing operating infrastructure provide us with the ability to successfully integrate assets into our portfolio as we grow and expand. Due to our proven corporate strategy and the plans we have implemented to weather the difficult economic environment, we believe we are well positioned for the future.

Internal Growth. With the completion of renovations over the past several years, we believe our portfolio of Owned Hotels is well positioned and has no significant deferred capital expenditures or improvements in the near term. During 2008, we completed extensive renovations of guest rooms, including technological upgrades, common areas and the restaurant and bars at Mondrian Los Angeles and Morgans. Between 2006 and 2008, we completed renovations of guest rooms and common areas at Delano, Royalton, Morgans and Mondrian Los Angeles. As a result of these hotel renovations, we believe we are well positioned to generate increased revenue at these properties in the future.

Targeted Renovations and Expansions. We will continue to pursue targeted projects throughout our portfolio of both Owned Hotels and Joint Venture Hotels that we believe will increase our appeal to potential guests and improve the revenue generation potential at our properties. During 2009, we completed major portions of a large-scale expansion project at Hard Rock that included the addition of approximately 875 guest rooms, including an all-suite tower with upgraded amenities, and expanded and reconfigured public areas with the addition of amenities and revenue drivers, such as restaurants, bars, health clubs, banquet and meeting spaces and retail shops. At Hudson, we converted 26 single room occupancy (“SRO”) units into guest rooms during early 2009. In addition, at Hudson, we recently developed previously unused space and opened Good Units, an exclusive venue for special functions, in February 2010. We continuously seek internal expansion and growth opportunities.

Operational and Infrastructure Initiatives. We strive to implement state-of-the-art operational systems and apply best practices to maximize synergies at the portfolio level. Within the past few years, we have launched a number of operational and technology initiatives that are designed to result in revenue growth, significant improvements in our operating costs and efficiencies, an improved guest experience and an enhanced ability to market to our customers’ specific lodging needs. Operationally, during late 2008 and throughout 2009, we weathered the economic downturn by implementing restructuring efforts and developing a multiphase contingency plan, which was rolled out beginning in early 2008. This contingency plan included targeted reductions in corporate-related costs as well as direct hotel expenses. We believe our experienced management team has allowed us to implement these cost cuts without significant impact on the overall quality of our guest experience. Going forward as occupancies begin to rebound, we will strive to maintain these cost efficiencies while increasing revenues.

External Growth. Once the economy and financial markets improve, we believe we are poised for external growth that will be driven by growth in major metropolitan markets and select resort locations as we extend our hotel, restaurant and bar brands. We intend to be flexible with respect to transaction structures and real estate requirements as we grow our business. During 2009, we expanded our hotel portfolio with the opening of Ames, a 114-room hotel in Boston, in November 2009. Additionally, we are expanding our hotel portfolio through the development of Mondrian SoHo, which has identified financing and is expected to open in late 2010. Currently, we have development projects in Palm Springs and other locations, for which financing has not yet been identified by us, the joint venture or the project developer. Given the current economic environment, including the state of the credit markets, with many sources of financing not readily available, these and other projects may not be able to obtain adequate project financing in a timely manner or at all and we, the joint venture or the project developer may have less capital to invest in them. If adequate project financing is not obtained, external growth projects may need to be limited in scope, deferred or cancelled altogether.

Target Markets. We base our decisions to enter new markets on a number of criteria, with a focus on markets that attract affluent travelers who value a distinctive and sophisticated atmosphere and outstanding service. Specifically, we target key gateway destinations that attract both domestic and foreign business and leisure travelers, as well as select resort markets. We believe that Boston, where we recently opened Ames, is an example of such a market. Consistent with our prior expansion activities, we will continue to seek growth primarily in markets with multiple demand drivers and high barriers to entry, including major North American metropolitan markets with vibrant urban locations, select resort locations, key European destinations that we believe offer a similar customer base as our established United States and United Kingdom markets, and select locations in the Middle East, Asia and South America.

Brand Extensions. We believe that our existing brand portfolio has considerable development potential. Many of our brands, including hotel brands such as Delano, Mondrian and Sanderson, and restaurant and bar brands such as Asia de Cuba and Skybar, may be extended to other hotels, restaurants and bars in our existing and new markets. Similarly, we believe our brand portfolio improves our ability to secure joint ventures and management agreements with third parties. For example, we currently have a development project underway in SoHo, New York to expand our Mondrian brand.

Flexible Business Model. We intend to be flexible with respect to transaction structures and real estate requirements as we grow our business. We will pursue attractive management agreements, joint ventures, acquisitions and other opportunities as they arise. As we pursue these opportunities, we will place significant emphasis on re-flag and pure management opportunities and, where equity investment is required, on securing long-term management agreements and a meaningful percentage of any equity growth or a significant total dollar return on investment. The acquisition and finance markets and the specifics of any particular deal will influence each transaction’s structure. We believe our flexibility should allow us greater access to strategically important hotels and other opportunities. Joint ventures with management agreements should provide us with enhanced return on investment through management and other fee income and access to strategically important hotels and other opportunities. For example, we have demonstrated our flexibility and our ability to partner effectively through our joint venture structures by entering into a management agreement for Hotel Las Palapas, located in the Playa del Carmen resort area of Mexico in November 2009. Hotel Las Palapas is owned by affiliates of Walton Street Capital (“Walton”) which is our joint venture partner in the ownership of Sanderson and St Martins Lane hotels in London, and is being operated as a non-Morgans Hotel Group branded hotel by us until such time as it can be re-developed by the owner into a Morgans Hotel Group branded property.

Moreover, we believe our flexibility with respect to the physical configuration of buildings gives us more options to grow in any given market as compared to many of our competitors who require very particular specifications so that their hotels will all look the same. In addition, the destination nature of our hotels has enabled us in the past to acquire assets in locations that are less established and, therefore, more attractively priced, due to our ability to create a destination hotel rather than be located directly adjacent to existing popular destinations.

2009 Transactions and Developments

Amendment to the Revolving Credit Facility. On August 5, 2009, we and certain of our subsidiaries amended our $220.0 million 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 the “Item 7 — Managements Discussion and Analysis of Financial Condition and Results of Operations — Debt—Amended Revolving Credit Facility” appearing elsewhere in this Annual Report on Form 10-K.

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 Scottsdale’s EBITDA for the periods ending June 30, 2009 and September 30, 2009 and Clift’s EBITDA for all periods to consolidated interest expense excluding Mondrian Scottsdale’s interest expense for the periods ending June 30, 2009 and September 30, 2009 and Clift’s 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;
	•		limits defaults relating to bankruptcy and judgments to certain events involving us, Morgans Group and our subsidiaries that are parties to the Amended Revolving Credit Facility;
	•		prohibits capital expenditures with respect to any hotels owned by us, the borrowers, 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;
	•		revises 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 us or Morgans Group;
	•		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 our revolving credit facility before it was amended as of June 30, 2009 and/or for the four fiscal quarters ended June 30, 2009.

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, divided into 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 and Royalton (the “New York Properties”) and a mortgage on the Delano South Beach (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.

The interest rate per annum applicable to loans under the Amended Revolving Credit Facility is a fluctuating rate of interest measured by reference to, at our 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%.

As of December 31, 2009, the outstanding balance of the Amended Revolving Credit Facility was $23.5 million, and approximately $1.8 million of letters of credit were outstanding, all allocated to the Florida Tranche. 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.

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 us, Morgans Group or certain of our other subsidiaries that are party to the Amended Revolving Credit Facility; judgments in excess of $5.0 million in the aggregate affecting us, Morgans Group and certain of our other subsidiaries that are party to the Amended Revolving Credit Facility; the acquisition by any person of 40% or more of any outstanding class of our capital stock having ordinary voting power in the election of directors; and the incurrence of certain ERISA liabilities in excess of $5.0 million in the aggregate.

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 any time. The Series A Preferred Securities have limited voting rights and only vote on the authorization to issue senior preferred securities, 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 also subject to an exercise cap which effectively limits the Investors’ beneficial ownership of our common stock to 9.9% at any one time, unless we are no longer subject to gaming requirements or the Investors obtain all necessary gaming approvals to hold and exercise in full the warrants. The exercise price and number of shares subject to the warrant 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 all or substantially all of our assets to a third party;

	•		the acquisition (including by merger, consolidation or other business combination) by us of a third party where the equity investment by us is $100 million or greater;
	•		the acquisition (including by merger, consolidation or other business combination) 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.

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 an exercise cap which effectively limits the Fund Manager’s beneficial ownership (which is considered jointly with the Investors’ beneficial ownership) of our common stock to 9.9% at any one time, subject to certain exceptions. The exercise price and number of shares subject to these contingent warrants are both subject to anti-dilution adjustments.

For so long as 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 our reasonable best efforts to cause our 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 resigned from their positions on our Board of Directors effective October 15, 2009.

Amendment to Trust Preferred Securities Indenture. On November 2, 2009, we entered into an amendment to the indenture related to our trust preferred securities to permanently eliminate the sole financial covenant. In exchange for the permanent removal of the covenant, we paid a one-time fee of $2.0 million.

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 debt securities secured by 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.

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.

In connection with the issuance of preferred securities and warrants discussed above, 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, the Fund Manager, and their affiliates from the definition of Acquiring Person in the Rights Agreement.

San Juan Water and Beach Club Management Agreement. On October 18, 2009, we began managing the San Juan Water and Beach Club Hotel, a 78-room beachfront hotel in Isla Verde, Puerto Rico, pursuant to a 10-year management agreement. 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 plan to operate the San Juan Water and Beach Club Hotel as a separate independent hotel pending re-development into a Morgans Hotel Group branded property. We anticipate contributing approximately $0.8 million toward the renovation of the hotel, which will be treated as a minority percentage ownership. As of December 31, 2009, we did not have an ownership interest in the hotel.

Hotel Las Palapas Management Agreement. On December 15, 2009 we began managing Hotel Las Palapas, located in the Playa del Carmen resort area, pursuant to a five-year management agreement with one five-year renewal option. Hotel Las Palapas is a 75-key beachfront hotel that is owned by affiliates of Walton. Walton plans to convert the site into a Morgans Hotel Group branded hotel when economic conditions improve.

Amendment of the Hard Rock Debt. On December 24, 2009 our Hard Rock joint venture amended the loan secured by the hotel and casino so that it is extendable to February 2014. In addition, the non-recourse loan, secured by approximately 11-acres of unused land owned by a Hard Rock subsidiary was also amended so that is extendable until February 2014. One of the lender groups funded half of the reserves necessary for the extension of the land loan in exchange for an equity participation in the land.

Mondrian Scottsdale Mortgage. In June 2009, the $40.0 million non-recourse mortgage and mezzanine loans on Mondrian Scottsdale matured and we discontinued subsidizing the debt service. The lender has initiated foreclosure proceedings against the property and the management agreement has been terminated with an effective termination date of March 16, 2010.

Special Stockholder Meeting. We held a special meeting of stockholders on January 28, 2010. At this meeting, our stockholders approved an amendment to our Amended and Restated 2007 Omnibus Incentive Plan to increase the number of shares reserved for issuance under the plan by 3,000,000 shares. Also at this meeting, our stockholders approved the full exercise of the warrants issued to the Investors and the Fund Manager in connection with the Yucaipa investment discussed above.

Extension of Promissory Notes. 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 with a scheduled maturity of January 24, 2010, which was subsequently extended, effective January 24, 2010, until January 24, 2011. The note continues to bear interest at 11.0%, and we are permitted to defer half of each monthly interest payment until the maturity date. 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 had a scheduled maturity date on January 24, 2010, which was also extended until January 24, 2011. The obligations under this note are secured with a pledge of the equity interests in our subsidiary that owns the property.

Shore Club Debt. We operate Shore Club under a management contract and owned a minority ownership interest of approximately 7% at December 31, 2009. In March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings against the property. We are continuing to operate the hotel pursuant to the management agreement during foreclosure proceedings, but we are uncertain whether we will continue to manage the property once foreclosure proceedings are complete.

Management and Operations of Our Portfolio

Overview of Management

We manage and operate each of our hotels, which are staffed by our employees and the employees of our joint venture operating companies, with personnel dedicated to each of the properties, including a general manager, director of finance, director of sales and marketing, director of revenue management, director of human resources and other employees. The personnel in each hotel report to the general manager of the hotel. Each general manager reports to our executive vice president of operations. The corporate office provides support directly to certain functions at the hotel such as sales, marketing and revenue management. This organizational structure allows for each property to operate in a responsive and dynamic fashion while ensuring integrity of our guest experience and core values. As we have expanded in our existing markets, we have begun to regionalize certain operational, finance and sales functions. Our management team is headquartered in New York City and coordinates our management and operations. The management team reviews business contracts, oversees the financial budgeting and forecasting for our hotels, performs internal accounting and audit functions, administers insurance plans and identifies new systems and procedures to employ within our hotels to improve efficiency and profitability. In addition, the management team is responsible for coordinating the sales and marketing activities at each of our hotels, designing sales training programs, tracking future business prospects and identifying, employing and monitoring marketing programs. The management team is also responsible for the design of our hotels and overall product and service quality levels.

Our Engaging Dynamic Guest Experience, or EDGE, service program, which we updated in 2009, has been implemented across our portfolio, with the exception of Hard Rock. This program is designed to enhance employee initiative and responsiveness which we believe results in high customer satisfaction. Our EDGE initiative further allows the sharing of best practices and expertise across our employee base, creating a culture that we believe is more service-oriented than many of our competitors. At Hard Rock, comparable service initiatives which incorporate the spirit of EDGE are in place and continuously assessed to ensure they meet our brand standards.

Restaurant Joint Ventures

As a central element of our operating strategy, we focus significant resources on identifying exciting and creative restaurant concepts. Consistent with this objective and to further enhance the dining experience offered by our hotels, we have established joint venture relationships with well-known restaurateur Jeffrey Chodorow to develop, own and operate restaurants and bars at certain of the hotels we operate. As of December 31, 2009, these joint ventures operated the restaurants (including in-room dining, banquet catering and other food and beverage operations) at Morgans, Delano South Beach, Mondrian Los Angeles, Clift, St Martins Lane, Sanderson, and Mondrian South Beach as well as the bars in Delano South Beach, St Martins Lane and Sanderson.

Marketing, Sales and Public Relations

Strong direct sales have been an integral part of our success. As of December 31, 2009, we employed a sales force of greater than 100 people with multiple sales managers stationed in each of our markets. The sales force has global responsibility for sourcing business for our hotels. The sales teams are deployed by industry focus and geography.

In 2009, we derived approximately 29% of our business from corporate transient and group accounts. Our core corporate business comes from the technology, financial services, entertainment, advertising, fashion and consumer goods industries.

Unlike many hotel companies, our sales managers are trained to sell the experience, not simply the rate. By branding the “experience” we showcase the kind of creativity that happens inside our hotels and prove that our guests come to us for much more than just a room or a bed. Our objective is to create differentiation by selling an “experience” and “brand.”

While marketing initiatives are customized in order to account for local preferences and market conditions, consistent major campaign and branding concepts are utilized throughout all our marketing activities. These concepts are developed by our central sales and marketing teams, but a significant amount of discretion is left to the local sales managers who are often more able to promptly respond to local changes and market trends and to customize marketing concepts to meet each hotel’s specific needs.

We place significant emphasis on branded communication strategies that are multi-layered and non-traditional. Our public relations and social networking outreach strategy is a highly cost-effective marketing tool for us. Through highly publicized events, prospective guests are more likely to be made aware of our hotels through word-of-mouth or magazine, newspaper articles or social networking entries and high-profile events rather than direct advertising. This publicity is supplemented with focused marketing activities to our existing customers. Our in-house marketing and public relations team coordinates the efforts of third-party public relations firms to promote our properties through travel magazines and various local, national and international newspaper travel sections. We regularly host events that attract celebrity guests and journalists generating articles in newspapers and magazines around the world. Our marketing efforts also include hosting other special events which have included events for Art Basel Miami, The Academy Awards, The Grammy’s and Fashion Week in New York and London.

Integration and Centralization Efforts

We have centralized certain aspects of our operations in an effort to provide further revenue growth and reduce operating costs. We continuously assess our technological tools and processes and seek to employ current and cutting-edge tools. For example, in 2009 we launched an updated website, www.morganshotelgroup.com, which provides our guests with a unique and distinctive booking experience, while offering a lower cost to reserve rooms than previously offered. The new website, unlike any other hotel company’s website, offers a more immersive experience to its visitors through the use of film, lifestyle photography and updated localized content specific to each hotel. In January 2010, our website was awarded a Platinum Adrian Award by Hospitality Sales and Marketing Association International. During 2009, our website generated approximately 15.1% of our total bookings and approximately 17.9% of our total rooms revenue. In addition, we continue to expand our social media programs globally and with targeted local positioning in key networks.

In an effort to reduce expenses and to drive revenue growth, we employ what we believe to be the state-of-the-art systems available to the hospitality industry. These include our:

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Property Management System — Our property management system provides management solutions to improve operations and profitability for a global hotel organization. Our property management system is designed for comprehensive guest management by, among other things, allowing the user to track and retrieve information pertaining to guests, groups and company accounts. Additional features of this system allow the user to extract information on a customized basis from its customer database. We believe that this increases the possibility of maximizing revenue by allowing us to efficiently respond and cater to guest demands and trends and decreases expenses by centralizing the information database in an easy to use format.

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Central Reservations System — Our central reservations system and related distribution and reservations services provide hotel reservations-related services and technology.

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Central Reservations Office — Our central reservations office provides contact management solutions. It is managed by a third-party out of its facility in New Brunswick, Canada.

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Sales and Catering — Our sales and catering system is a strategic tool specifically designed to maximize the effectiveness of the sales process, increase revenues and efficiency, and reduce costs.

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Revenue Management — Our revenue management system is a proprietary system which provides hospitality focused pricing and revenue optimization solutions.

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Accounting and Reporting — Our accounting and reporting is performed under The Uniform System of Accounts for the Lodging Industry and utilizes a widely used international accounting system that allows for customizing and analyzing data while ensuring consistent controls.

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Customer Relationship Management — Our customer relationship management system is designed specifically for the hospitality industry and provides personalized guest recognition, high service quality, improved guest satisfaction and loyalty, which we believe results in increased revenues. This centralized database tracks guest sales history and guest preferences to provide our staff in our hotels and sales agents with a method of efficiently responding to and targeting guest needs.

Competition

We believe competition in the hospitality industry reflects a highly fragmented group of owners and operators offering a wide range of quality and service levels. Our hotels compete with other hotels in their respective locations that operate in the same segments of the hospitality market. These segments consist of traditional hotels in the luxury sector and boutique hotels in the same local area. Competitive factors include quality of service, convenience of location, quality of the property, pricing and range and quality of food services and amenities offered. We compete by providing a differentiated combination of location, design, amenities and service. We are constantly striving to enhance the experience and service we are providing for our guests and have a continuing focus on improving our customer experience.

Insurance

We bid out our insurance programs to obtain the most competitive coverage and pricing. We believe our programs provide coverage of the insurable risks facing our business that are consistent with or exceed industry standards.

We provide insurance coverage for our Owned Hotels and all of our operated properties, with the exception of The Shore Club, San Juan Beach and Water Club, Hotel Las Palapas and Hard Rock, which are all discussed below, including all-risk property, terrorism, commercial general liability, umbrella/excess liability, workers’ compensation and employers’ liability, pollution legal liability, blanket crime, employment practices liability and fiduciary liability policies for which we are the named insured. Our property insurance includes coverage for catastrophic perils of flood, earthquake and windstorm at limits exceeding probable maximum loss estimates. These policies also cover the restaurants and bars that operate in our hotels, with the exception of the properties mentioned above.

The Shore Club is covered under our employee related insurance policies only, with all other lines of coverage being provided by the property owner.

Hard Rock has stand alone insurance policies for all lines of coverage, including property, general liability, excess liability, workers compensation and employment practices liability.

Insurance coverage for San Juan Beach and Water Club and Hotel Las Palapas is provided for by the respective property owners.

Directors and officers liability insurance has been in place since our initial public offering in February 2006 at limits and retentions that we believe are consistent with public companies in our industry groups. Coverage includes protection for securities claims.

We believe that the premiums we pay and the insurance coverages we maintain are reasonable and consistent with comparable businesses of our size and risk profile. Our insurance policies require annual renewal. Given current trends, our insurance expense may increase in the foreseeable future.

Employees

As of December 31, 2009, we employed approximately 4,500 individuals, approximately 13.9% of whom were represented by labor unions. In addition, our restaurant joint ventures employed approximately 1,000 individuals, approximately 35.6% of whom were represented by labor unions.

Relations with Labor Unions

New York. The terms of employment of our employees that are represented by the New York Hotel and Motel Trades Council, AFL-CIO, or Trades Council, at our New York City hotels are governed by a collective bargaining agreement. The term of the agreement is from July 1, 2006 through June 30, 2012 and generally incorporates by reference the industry-wide agreement between the Hotel Association of New York City, Inc., a multi-employer association composed of New York City hotel operators, and the Trades Council, or the IWA. The agreement governs wages, hours and terms and conditions of employment of employees at these hotels. It provides that there will be no strikes or lockouts during its term, and that all disputes arising under the agreement or concerning the relations of the parties shall be resolved through arbitration before a contract arbitrator — the Office of the Impartial Chairman of the Hotel Industry. The employees of certain of our bars and restaurants in certain New York City hotels are represented by the Trades Council and covered by a collective bargaining agreement which generally incorporates by reference the IWA. By operation of the collective bargaining agreement, the bars and restaurants are considered a joint employer with the hotels. Accordingly, if there is any breach of our labor agreement by the concessionaire, the hotels would be liable for such breach.

San Francisco. The majority of our Clift employees that are represented by labor unions are represented by UNITE/HERE Local 2. We adopted the industry-wide agreement between the union and the San Francisco Hotels Multi-Employer Group, a multi-employer association composed of San Francisco hotel operators, which expired August 14, 2009. This agreement is subject to a temporary extension while a new labor agreement is being negotiated. The employees at the Asia de Cuba Restaurant in the Clift hotel are members of UNITE/HERE Local 2 and this restaurant joint venture is considered a joint employer with Clift. Accordingly, if there is any breach of our labor agreement by the concessionaire, Clift would be liable for such breach. Labor agreements with the unions representing the remaining Clift employees are either set to expire in 2010 or expired in 2008 or 2009, but are subject to a temporary extension while a new labor agreement is negotiated.

Government Regulation

Our businesses are subject to numerous laws, including those relating to the preparation and sale of food and beverages, such as health and liquor license laws. Our businesses are also subject to laws governing employees in our hotels in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. Also, our ability to expand our existing properties may be dependent upon our obtaining necessary building permits or zoning variances from local authorities.

Under the Americans with Disabilities Act, or ADA, all public accommodations are required to meet federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been invested to ensure that our hotels comply with ADA requirements, a determination that our hotels are not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. We believe that we are currently in compliance in all material respects with all statutory and administrative government regulations with respect to our business.

Our hotel properties expose us to possible environmental liabilities, including liabilities related to activities that predated our acquisition or operation of a property. Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous substances released at the property and may be held liable to a governmental entity or to third parties for property damages and for investigation and cleanup costs incurred by such parties in connection with the contamination. Environmental liability can be incurred by a current owner or operator of a property for environmental problems or violations that occurred on a property prior to acquisition or operation. These laws often impose liability whether or not the owner knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The presence of contamination or the failure to remediate contamination may adversely affect the owner’s ability to sell or lease real estate or to borrow using the real estate as collateral. The owner or operator of a site may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site.

All of our properties have been subject to environmental site assessments, or ESAs, prepared by independent third-party professionals. These ESAs were intended to evaluate the environmental conditions of these properties and included a site visit, a review of certain records and public information concerning the properties, the preparation of a written report and, in some cases, invasive sampling. We obtained the ESAs before we acquired our hotels to help us identify whether we might be responsible for cleanup costs or other environmental liabilities. The ESAs on our properties did not reveal any environmental conditions that are likely to have a material adverse effect on our business, assets, and results of operations or liquidity. However, ESAs do not always identify all potential problems or environmental liabilities. Consequently, we may have material environmental liabilities of which we are unaware. Moreover, it is possible that future laws, ordinances or regulations could impose material environmental liabilities, or that the current environmental condition of our properties could be adversely affected by third parties or by the condition of land or operations in the vicinity of our properties. We believe that we are currently in compliance with all applicable environmental regulations in all material aspects.

As a result of our February 2007 acquisition of the Hard Rock, we and its casino operations are subject to gaming industry regulations. The gaming industry is highly regulated, and we and the casino must maintain all necessary gaming licenses and the casino must pay all applicable gaming taxes to continue operations. We and the casino are subject to extensive regulation under the laws, rules and regulations of the jurisdiction in which the casino operates. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws could result in, among other things, disciplinary action.

Trademarks

Our trademarks include, without limitation, Morgans Hotel Group^®, Morgans^®, Morgans Reload^®, Morgans Semi-Automatic^®, Agua Baby^®, Agua Bath House^®, Agua Home^®, Blue Door^®, Blue Door at Delano^® (and design), Asia de Cuba^®, The Florida Room TM (and design), Clift Hotel^®, Delano^®, Mondrian^®, Skybar^®, Royalton^®, The Royalton^®, The Royalton Hotel^®, Bar 44^® (and design), Brasserie 44^® (and design), Sanderson Hotel^®, St Martins^® and St Martins Lane Hotel^®. The majority of these trademarks are registered in the United States. Several of these trademarks are also registered in the European Community and we are seeking registration of several of our trademarks in Russia, Turkey, the United Arab Emirates, Canada, Mexico, India, China and other jurisdictions. Our trademarks are very important to the success of our business and we actively enforce, maintain and protect these marks.

All intellectual property rights related to the Hard Rock are held by our joint venture with an affiliate of DLJ Merchant Banking Partners (“DLJMB”), and certain other DLJMB affiliates (such affiliates, together with DLJMB, collectively the “DLJMB Parties”). The joint venture acquired the rights to the use of the “Hard Rock Hotel” and “Hard Rock Casino” trademarks in connection with our operations in Las Vegas and in connection with hotel casinos and casinos in the State of Illinois and all states and possessions of the United States which are located west of the Mississippi River, including the entire state of Louisiana, but excluding Texas, except for the Greater Houston Area, the nations of Australia, Brazil, Israel, and Venezuela, and the Greater Vancouver Area, British Columbia, Canada.

Materials Available On Our Website

We file annual, quarterly and periodic reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may obtain and copy any document we file with or furnish to the SEC at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, N.E., Washington, D.C. 20549. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish such information electronically with the SEC. Our SEC filings are accessible through the Internet at that website.

Copies of SEC filings including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as well as reports on Forms 3, 4, and 5 regarding officers, directors or 10% beneficial owners of our Company, are available for download, free of charge, as soon as reasonably practicable after these reports are filed or furnished with the SEC, at our website at www.morganshotelgroup.com. Our website also contains copies of the following documents that can be downloaded free of charge:

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Corporate Governance Guidelines;

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Business Code of Conduct;

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Code of Ethics;

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Charter of the Audit Committee;

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Charter of the Compensation Committee; and

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Charter of the Corporate Governance and Nominating Committee.

In the event of any changes to these charters, codes or guidelines, changed copies will also be made available on our website. If we waive or amend any provision of our code of ethics, we will promptly disclose such waiver or amendment as required by SEC or Nasdaq rules.

The content of our website is not a part of this report. You may request a copy of any of the above documents, at no cost to you, by writing or telephoning us at: Morgans Hotel Group Co., 475 Tenth Avenue, New York, New York 10018, Attention: Investor Relations, telephone (212) 277-4100. We will not send exhibits to these reports, unless the exhibits are specifically requested and you pay a modest fee for duplication and delivery.

ITEM 1A.		RISK FACTORS

Set forth below are risks that we believe are material to investors who purchase or own our securities. You should consider carefully the following risks, together with the other information contained in and incorporated by reference in this Annual Report on Form 10-K, and the descriptions included in our consolidated financial statements and accompanying notes.

Risks Related to Our Business

The recent crisis in the financial markets and contraction of the economy have weakened, and could further weaken, demand for travel, hotels, dining and entertainment, which could have a material adverse effect on our business, results of operations and financial condition.

U.S. and global financial markets have experienced extreme disruptions in 2008 and 2009, including, among other things, extreme volatility in securities prices, as well as severely diminished liquidity and credit availability. U.S. and global economies also contracted significantly in 2009, reducing the amounts people spend on travel, hotels, dining and entertainment. Lodging demand weakened significantly during the last quarter of 2008 and throughout 2009, and we believe it will remain weak in 2010 until current economic trends reverse course. If current economic conditions continue or worsen, they could have a material adverse effect on our business, results of operations, and financial condition.

We have substantial debt, and we may incur additional indebtedness, which may negatively affect our business and financial results.

As of December 31, 2009, we had $739.0 million of outstanding consolidated indebtedness, including capital lease obligations. Our share of indebtedness held by our joint venture entities, which is generally non-recourse to us, with the exception of certain standard carve-out guarantees, was approximately $342.2 million as of December 31, 2009. Our substantial debt may negatively affect our business and operations in several ways, including:

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requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which will reduce funds available for operations and capital expenditures, future business opportunities and other purposes;

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making us more vulnerable to economic and industry downturns, such as the one we are currently experiencing, and reducing our flexibility in responding to changing business and economic conditions;

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limiting our ability to borrow more money for operations, capital or to finance development projects or acquisitions in the future; and

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requiring us to dispose of properties in order to make required payments of interest and principal.

We also will likely incur additional debt in connection with any future acquisitions. However, the tightening of the credit markets may negatively impact our ability to access additional financing. We may, therefore, in some instances, borrow under our Amended Revolving Credit Facility or borrow other funds to acquire properties. In addition, we may incur further mortgage debt by obtaining loans secured by the properties we acquire or our existing portfolio.

Our working capital and liquidity reserves may not be adequate to cover all of our cash needs and we may have to obtain additional debt financing. Sufficient financing may not be available or, if available, may not be available on terms acceptable to us. Additional borrowings for working capital purposes will increase our interest expense, and therefore may harm our business and operations.

Our organizational documents do not limit the amount of indebtedness that we may incur. If we increase our leverage, the resulting increase in debt service could adversely affect our ability to make payments on our indebtedness and harm our business and operations.

We anticipate that we will need to refinance our indebtedness from time to time to repay our debt, and our inability to refinance on favorable terms, or at all, could harm our business and operations.

We have $374.5 million of mortgages and mezzanine debt, excluding $40.0 million on a hotel held for non-sale disposition, on several of our hotel properties to secure our indebtedness, including, as of December 31, 2009, $364.0 million on Hudson and Mondrian Los Angeles which matures on July 12, 2010. Properties held by our joint venture entities are also subject to mortgages and mezzanine debt, including, as of December 31, 2009, £100.4 million, or approximately $159.6 million, on Sanderson and St Martins Lane, which matures on November 24, 2010. Since we anticipate that our internally generated cash will be inadequate to repay our indebtedness prior to maturity, we expect that we will be required to repay debt from time to time through refinancings of our indebtedness and/or offerings of equity or debt. The amount of our existing indebtedness and the continued tightness in the credit markets may harm our ability to repay our debt through refinancings. In addition, if prevailing interest rates or other factors at the time of any refinancing result in higher interest rates on any refinancing, our interest expense would increase, which could harm our business and operations. If we are unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to sell one or more of our properties on disadvantageous terms, which might result in losses to us.

We did not repay the mortgage and mezzanine financing on one of our properties upon maturity, and in the future we may elect to cease making payments on additional mortgages or sell a property at a loss if it fails to generate cash flow to cover its debt service or we are unable to refinance the mortgage at maturity, which could result in foreclosure proceedings, negative publicity and reduce the number of properties we own, as well as our revenues, and could negatively affect our ability to obtain loans or raise equity or debt financing in the future.

We did not repay the $40.0 million non-recourse mortgage and mezzanine financing on Mondrian Scottsdale when it matured on June 1, 2009, and the lender has begun foreclosure proceedings on the property and terminated the management agreement effective March 16, 2010.

In the future, we or our joint venture entities may cease making payments on the mortgages on one or more of our properties if the property fails to generate cash flow to cover its debt service or if we or the joint venture entity are unable to refinance the mortgage at maturity. To the extent we or our joint venture entity does not meet debt service obligations and we or the joint venture entity defaults on a mortgage or other loan, the lender may have the right to exercise various remedies under the loan documents, including foreclosing on the applicable property. Foreclosure on a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our operating results. Lenders may assert numerous claims and take various actions against us, including, without limitation, seeking a deficiency judgment. Foreclosures may also create a negative public perception of us, resulting in a diminution of our brand value, and may negatively impact our ability to obtain loans or raise equity or debt financing in the future. Foreclosure actions may also require a substantial amount of resources and negotiations, which may divert the attention of our executive officers from other activities, adversely affecting our business, financial condition and results of operations.

A foreclosure may also result in increased tax costs to us if we recognize income upon foreclosure. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any cash proceeds.

In addition, certain mortgage or other loan defaults could result in a default under our corporate debt, including our Amended Revolving Credit Facility, or otherwise have an adverse effect on our business, results of operations or financial condition.

For additional information on Clift, see the risk factor beginning “Because land underlying Sanderson is subject to a 150-year ground lease” below.

Our Amended Revolving Credit Facility and other debt instruments contain financial and other covenants that may limit our ability to borrow and restrict our operations, and if we fail to comply with such covenants, such failure could result in a default under one or more of our debt instruments.

Our Amended Revolving Credit Facility requires the maintenance of a fixed charge coverage ratio. Our ability to borrow under our Amended Revolving Credit Facility is subject to compliance with this financial and other covenants, and our ability to comply with the covenants may be impacted by any deterioration in our operations brought on by the current economic downturn, potential further declines in our property values, and additional borrowings to maintain our liquidity and fund our capital and financing obligations. As of December 31, 2009, we are in compliance with the financial covenants set forth in our Amended Revolving Credit Facility and other agreements. However, if our business deteriorates, we may breach one or more of our financial covenants in the future. In the event we breach our financial covenants, we would be in default under the Amended Revolving Credit Facility and/or certain other agreements, which could allow lenders to declare all amounts outstanding under the applicable agreements to become due and payable. Additionally, an acceleration event under one debt instrument could allow for acceleration under other debt instruments with cross-acceleration provisions. If this happens, there would be a material adverse effect on our financial position and results of operations.

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. As of December 31, 2009, the available borrowing base, before $1.8 million of outstanding letters of credit posted against the Amended Revolving Credit Facility, was approximately $123.2 million. Our ability to borrow under the Amended Revolving Credit Facility and the amount of cash that may need to be retained from such borrowings also depends on our ability to maintain the Amended Revolving Credit Facility’s financial covenant. If current economic conditions continue, however, this borrowing base may be significantly reduced in the future. As a result, we cannot assure you of the future amount, if any, that will be available under our Amended Revolving Credit Facility.

In addition, the Amended Revolving Credit Facility, trust preferred securities, and Convertible Notes (as defined below) include limitations on our ability to sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders.

Some of our other existing indebtedness contain limitations on our ability to incur additional debt on specific properties, as well as financial covenants relating to the performance of those properties. If these covenants restrict us from engaging in activities that we believe would benefit those properties, our growth may be limited. If we fail to comply with these covenants, we will need to obtain consents or waivers from compliance with these covenants, which may take time, cause us to incur additional expenses, or may require us to prepay the debt containing the restrictive covenants.

We have incurred substantial losses and have a significant net deficit, and due to the current negative economic environment, may continue to incur losses in the future.

We reported pre-tax net losses of $127.8 million, $87.9 million, and $21.2 million, for the years ended December 31, 2009, 2008 and 2007, respectively. Our net losses primarily reflect losses in equity of unconsolidated joint ventures, impairment charges, which we do not expect to be recurring, and interest expense and depreciation and amortization charges, which we expect will continue to be significant. Further, stock compensation, a non-cash expense, contributed to the net losses recorded during 2009, 2008, and 2007. There can be no assurance that we will attain profitability and generate net income for our stockholders in the near term or at all.

Boutique hotels such as ours may be more susceptible to an economic downturn than other segments of the hospitality industry, which could result in declines in our average daily room rates or occupancy, or both.

The performance of the hospitality industry, and the boutique hotel segment in particular, has traditionally been closely linked with the general economy. In the current economic downturn, boutique hotels such as ours may be more susceptible to a decrease in revenues, as compared to hotels in other segments that have lower room rates, because our hotels generally target business and high-end leisure travelers. In this period of economic difficulties, business and high-end leisure travelers may seek to reduce travel costs by limiting travel, choosing lower cost hotels or otherwise reducing the costs of their trips. These changes could result in further declines in average daily room rates or occupancy, or both. Profitability also may be negatively affected by the relatively high fixed costs of operating hotels such as ours, when compared to other segments of the hospitality industry.

Disruptions in the financial markets could affect our ability to obtain financing for development of our properties and other purposes on reasonable terms.

U.S. and global stock and credit markets are experiencing significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing. Continued uncertainty in the stock and credit markets may prevent or negatively impact our ability to access additional financing or refinancing for development of our properties and other purposes at reasonable terms, which may cause us to suspend, abandon or delay development and other activities and otherwise negatively affect our business or our ability to refinance debt as it comes due. For example, in 2009, our Echelon Las Vegas project was canceled after the applicable joint venture was unable to obtain necessary financing. We have other potential development opportunities, which have not yet been financed, including Mondrian Palm Springs. The downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital through the issuance of our common stock or preferred stock.

Boutique hotels are a highly competitive segment of the hospitality industry. If we are unable to compete effectively, our business and operations will be adversely affected by declines in our average daily room rates or occupancy, or both.

We generally compete in the boutique hotel segment of the hospitality industry. We believe that this segment is highly competitive. Competition within the boutique hotel segment is also likely to increase in the future. 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. Market perception that we no longer provide innovative property concepts and designs would adversely affect our ability to compete effectively. If we are unable to compete effectively, we would lose market share, which could adversely affect our business and operations.

All of our properties are located in areas with numerous competitors, many of whom have substantially greater resources than us. In addition, new hotels may be constructed in the areas in which our properties are located, possibly without corresponding increases in demand for hotel rooms. 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. The resulting decrease in our revenues could adversely affect our business and operations.

Our success depends on the value of our name, image and brands, and if the demand for our hotels and their features decreases or the value of our name, image or brands diminishes, our business and operations would be adversely affected.

Our success depends, to a large extent, on our ability to shape and stimulate consumer tastes and demands by producing and maintaining innovative, attractive, and exciting properties and services, as well as our ability to remain competitive in the areas of design and quality. There can be no assurance that we will be successful in this regard or that we will be able to anticipate and react to changing consumer tastes and demands in a timely manner.

Furthermore, a high media profile is an integral part of our ability to shape and stimulate demand for our hotels with our target customers. A key aspect of our marketing strategy is to focus on attracting media coverage. If we fail to attract that media coverage, we may need to substantially increase our advertising and marketing costs, which would adversely affect our results of operations. In addition, other types of marketing tools, such as traditional advertising and marketing, may not be successful in attracting our target customers.

Our business would be adversely affected if our public image, reputation or brand were to be diminished, including as a result of any failure to remain competitive in the areas of design, quality and service. If we do not maintain our hotel properties at a high level, which necessitates, from time to time, capital expenditures and the replacement of furniture, fixtures and equipment, or the owners of the hotels that we manage fail to develop or maintain the properties at standards worthy of the Morgans Hotel Group brand, the value of our name, image or brands would be diminished and our business and operations would be adversely affected.

Any failure to protect our trademarks could have a negative impact on the value of our brand names and adversely affect our business.

We believe that our trademarks are critical to our success. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. Monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States.

From time to time, we apply to have certain trademarks registered. There is no guarantee that such trademark registrations will be granted. We cannot assure you that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brands and their market acceptance, competitive advantages or goodwill, which could adversely affect our business.

We may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights, which could have a negative impact on our business.

Other parties may assert trademark, copyright or other intellectual property rights that have a negative impact on our business. We cannot assure you that others will not seek to block our use of certain marks or seek monetary damages or other remedies for the prior use of our brand names or other intellectual property or the sale of our products or services as a violation of their trademark, copyright or other proprietary rights. Defending any claims, even claims without merit, could divert our management’s attention, be time-consuming, result in costly settlements, litigation or restrictions on our business and damage our reputation.

In addition, there may be prior registrations or use of trademarks in the United States or foreign countries for similar or competing marks or other proprietary rights of which we are not aware. In all such countries it may be possible for any third-party owner of a national trademark registration or other proprietary right to enjoin or limit our expansion into those countries or to seek damages for our use of such intellectual property in such countries. In the event a claim against us were successful and we could not obtain a license to the relevant intellectual property or redesign or rename our products or operations to avoid infringement, our business, financial condition or results of operations could be harmed. Securing registrations does not fully insulate us against intellectual property claims, as another party may have rights superior to our registration or our registration may be vulnerable to attack on various grounds.

Our hotels are geographically concentrated in a limited number of cities and, accordingly, we could be disproportionately harmed by an economic downturn in these cities or a disaster, such as a hurricane or earthquake.

The concentration of our hotels in a limited number of cities exposes us to greater risk to local economic, business and other conditions than more geographically diversified hotel companies. Morgans, Royalton and Hudson, located in Manhattan, represented approximately 22.8% of our total guest rooms for all the hotels we manage and approximately $103.2 million, or 47.4%, of our consolidated hotel revenues for the year ended December 31, 2009. Currently, the Manhattan hotel market is experiencing a significant decline related to the global economic downturn. A terrorist attack or similar disaster would also cause a decline in the Manhattan hotel market and adversely affect occupancy rates, the financial performance of our New York hotels and our overall results of operations. In addition, the significant expansion of the Hard Rock Hotel & Casino in Las Vegas and the opening of Mondrian South Beach, our third hotel in Miami, have increased our geographic concentration in Las Vegas and Miami, respectively, making us susceptible to economic slowdowns and other factors in those markets, which could adversely affect our business and results of operations.

In addition, certain of our hotels are located in markets that are more susceptible to natural disasters than others, which could adversely affect those hotels, the local economies, or both. Specifically, the Miami area, where Delano South Beach, Shore Club and Mondrian South Beach are located, is susceptible to hurricanes and California, where Mondrian Los Angeles and Clift are located, is susceptible to earthquakes. A variety of factors affecting the local markets in which our hotels operate, including such natural disasters, could have a material adverse affect on our business and operations.

The Hard Rock Hotel & Casino in Las Vegas is subject to extensive state and local regulation, and licensing and gaming authorities in Nevada have significant control over our gaming operations at the Hard Rock Hotel & Casino in Las Vegas and gaming license considerations could constrain the manner in which we conduct our business.

Our ability to operate the casino at the Hard Rock Hotel & Casino in Las Vegas is contingent upon our maintenance of all regulatory licenses, permits, approvals, registrations, findings of suitability, orders and authorizations. The laws, regulations and ordinances requiring these licenses, permits and other approvals generally relate to the responsibility, financial stability and character of the owners and managers of gaming operations, as well as persons financially interested or involved in gaming operations. The scope of the approvals required to open and operate a facility is extensive. Failure to obtain or maintain any of the required gaming approvals and licenses could impair our future financial position and results of operations.

The Nevada Gaming Commission may, in its discretion, require the holder of any securities we issue to file applications, be investigated and be found suitable to own our securities if it has reason to believe that such ownership would be inconsistent with the declared policies of the State of Nevada.

Nevada regulatory authorities have broad powers to request detailed financial and other information, to limit, condition, suspend or revoke a registration, gaming license or related approval and to approve changes in our operations. Such authorities may levy substantial fines or forfeiture of assets for violations of gaming laws or regulations. The suspension or revocation of any license that may be granted to us or the levy of substantial fines or forfeiture of assets could significantly harm our business, financial condition and results of operations. Furthermore, compliance costs associated with gaming laws, regulations and licenses are significant. Any change in the laws, regulations or licenses applicable to our business or a violation of any current or future laws or regulations applicable to our business or gaming license could require us to make substantial expenditures or could otherwise negatively affect our gaming operations.

The threat of terrorism has adversely affected the hospitality industry generally and these adverse effects may continue or worsen.

The threat of terrorism has caused, and may in the future cause, a significant decrease in hotel occupancy and average daily rate, or ADR, due to disruptions in business and leisure travel patterns and concerns about travel safety. Hotels in major metropolitan areas, such as New York and London that represented approximately 30.1% of our total guest rooms for all the hotels we manage at December 31, 2009, may be adversely affected due to concerns about travel safety and a significant overall decrease in the amount of air travel, particularly transient business travel, which includes the corporate and premium business segments that generally pay the highest average room rates. The possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.

We are exposed to the risks of a global market, which could hinder our ability to maintain and expand our international operations.

We have properties in the United States, the United Kingdom and Mexico and may expand to other international markets. The success and profitability of any future international operations are subject to numerous risks and uncertainties, many of which are outside of our control, such as:

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global economic conditions, such as the current economic downturn;

	•		political or economic instability;
	•		changes in governmental regulation;

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trade restrictions;

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foreign currency controls;

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difficulties and costs of staffing and managing operations in certain foreign countries;

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work stoppages or other changes in labor conditions;

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taxes;

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payments terms; and

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seasonal reductions in business activity in some parts of the world.

Furthermore, changes in policies and/or laws of the United States or foreign governments resulting in, among other things, higher taxation, currency conversion limitations or the expropriation of private enterprises could reduce the anticipated benefits of our international operations. Any actions by countries in which we conduct business to reverse policies that encourage foreign trade could adversely affect our business relationships and gross profit. In addition, we may be restricted in moving or repatriating funds attributable to our international properties without the approval of foreign governmental authorities or courts. For example, because of our historical net losses in our United Kingdom operations, funds repatriated from the United Kingdom may be considered a return of capital and may require court approval. These limitations could have a material adverse effect on our business and results of operations.

Establishing operations in any foreign country or region presents risks such as those described above, as well as risks specific to the particular country or region. We may not be able to maintain and expand our international operations successfully, and as a result, our business operations could be adversely affected.

The hotel business is capital intensive and requires capital improvements to remain competitive; the failure to timely fund such capital improvements, the rising cost of such improvements and increasing operating expenses could negatively impact our ability to compete, reduce our cash flow and adversely affect our financial performance.

Our hotel properties have an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. To compete effectively, we will need to make capital expenditures to maintain our innovative property concepts and designs. In addition, we will need to make capital expenditures to comply with applicable laws and regulations. For the year ended December 31, 2009, we spent approximately $13.0 million for capital improvements and renovations to our hotels. If we are not able to fund capital improvements solely from cash provided from our operating activities, we will need to access debt or equity capital, which may not be available, particularly in the current financial markets. If we cannot access debt or equity capital, we may need to postpone or cancel such capital improvements, which could harm our ability to remain competitive.

In addition, renovations and other capital improvements to our hotels may be expensive and may require us to close all or a portion of the hotels to customers during such renovations, affecting occupancy and average daily rate. These capital improvements may give rise to the following additional risks, among others:

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construction cost overruns and delays;

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exposure under completion and related guarantees;

	•		uncertainties as to market demand or a loss of market demand after capital improvements have begun;
	•		disruption in service and room availability causing reduced demand, occupancy and rates; and

•

possible environmental problems.

As a result, capital improvement projects may increase our expenses and reduce our cash flows and our revenues. If capital expenditures exceed our expectations, this excess would have an adverse effect on our available cash.

In addition, our Amended Revolving Credit Facility prohibits capital expenditures with respect to any hotels owned by us 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. If we are unable to make the capital improvements necessary to attract customers and grow our business within the limits imposed by the Amended Revolving Credit Facility, our properties may not remain competitive.

We have high fixed costs, including property taxes and insurance costs, which we may be unable to adjust in a timely manner in response to a reduction in revenues. In addition, our property taxes have increased in recent years and we expect those increases to continue.

The costs associated with owning and operating hotels are significant, some of which may not be altered in a timely manner in response to changes in demand for services; failure to adjust our expenses may adversely affect our business and operations. For example, pursuant to the terms of our agreements with the labor unions for our New York City and San Francisco hotels, we may not unilaterally reduce the wages of the employees subject to these agreements, and are restricted in the manner in which we may layoff and/or alter the schedule of employees.

Property taxes and insurance costs are a significant part of our operating expenses. In recent years, our real property taxes have increased and we expect those increases to continue. Our real property taxes may increase as property tax rates change and as the values of properties are assessed and reassessed by taxing authorities. In addition, our real property tax rates will increase as property tax abatements expire. For example, the property tax abatement applicable to Hudson began phasing out over a five-year period beginning in 2008. Our real estate taxes do not depend on our revenues, and generally we could not reduce them other than by disposing of our real estate assets.

Insurance premiums for the hospitality industry have increased significantly in recent years, and continued escalation may result in our inability to obtain adequate insurance at acceptable premium rates. A continuation of this trend would appreciably increase the operating expenses of our hotels. If we do not obtain adequate insurance, to the extent that any of the events not covered by an insurance policy materialize, our financial condition may be materially adversely affected.

In the future, our properties may be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, as well as reductions in our revenues due to the current global economic downturn, which could reduce our cash flow and adversely affect our financial performance. Although we have instituted measures to actively manage costs by implementing certain cost-cutting contingency plans at each of our properties and cost reduction plans at our corporate office, we may not be successful in managing such cost reductions effectively to mitigate reductions in revenues without significantly impacting the customer experience. If our revenue continues to decline, as it did in 2009, and we are unable to reduce our expenses in a timely manner, our results of operations could be adversely affected.

Our strategy to acquire and develop or redevelop hotels creates timing, financing, operational and other risks that may adversely affect our business and operations.

We intend to acquire and develop, or redevelop through expansion, hotel properties as suitable opportunities arise. Acquisitions, development or redevelopment projects of hotel properties require significant capital expenditures, especially since these properties usually generate little or no cash flow until the project’s completion. We generally are not able to fund acquisitions and development or redevelopment projects solely from cash provided from our operating activities. Consequently, we rely upon the availability of debt or equity capital to fund hotel acquisitions and development or redevelopment. For example, we are currently developing a property in New York — Mondrian SoHo. Additionally, we have other potential development opportunities, which have not yet been financed, including Mondrian Palm Springs. Given the current state of the credit markets, however, we or the joint ventures may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, we or the joint ventures may seek additional investors to raise capital, limit the scope of the project, defer the project or cancel the project altogether. Our inability to complete a project or complete a project on time or within budget may adversely affect our operating results and financial performance.

Neither our charter nor our bylaws limits the amount of debt that we can incur. However, given the current economic environment, no assurances can be made that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms.

We may not be able to successfully compete for desirable hotel management, development, acquisition or investment opportunities.

We may not be successful in identifying or completing hotel projects that are consistent with our strategy. We compete with hotel operating companies, institutional pension funds, private equity investors, real estate investment trusts, owner-operators of hotels and others who are engaged in hotel operating or real estate investment activities for the operation, development, and acquisition of hotels. In addition, competition for suitable hotel management, development, investment and acquisition opportunities is intense and may increase in the future. Some competitors may have substantially greater financial resources than we do, and as such, will be able to accept more risk than we can prudently manage. These competitors may limit the number of suitable hotel management, development, investment and acquisition opportunities for us by driving up the price we must pay for such opportunities. In addition, our potential hotel management or development projects or acquisition targets may find our competitors to be more attractive suitors because they may have greater resources, be willing to pay more, have a more compatible operating philosophy, or better relationships with hotel franchisors, sellers or lenders. Furthermore, the terms of our management agreements are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue or that we will be able to enter into future collaborations, renew agreements, or enter into new agreements in the future on terms that are as favorable to us as those that exist today.

Even if we are able to successfully identify and acquire other hotel management or development projects, acquisitions or investments, they may not yield the returns we expect and, if financed using our equity capital, may be dilutive. We also may incur significant costs and divert management attention in connection with evaluating and negotiating potential hotel management or development projects or acquisitions, including ones that we or others are subsequently unable to complete. For example, although we entered into an agreement to manage a hotel to be developed in Dubai, the owner has not yet begun development and may never be able to do so. We may underestimate the costs necessary to bring a hotel management agreement or development project or acquired property up to the standards established for its intended market position or to re-develop it as a Morgans Hotel Group brand hotel or the costs to integrate it with our existing operations. Although we anticipate that the owners of the hotels that we manage in San Juan, Puerto Rico and Playa del Carmen, Mexico will re-develop the hotels into Morgans Hotel Group branded properties in the future, we can provide no assurances that such re-branding will be completed, successful or timely. Significant costs of hotel development projects or acquisitions could materially impact our operating results, including costs of uncompleted hotel development projects or acquisitions as they would generally be expensed in the time period during which they are incurred.

Integration of new hotels may be difficult and may adversely affect our business and operations.

The success of any hotel management or development project or acquisition will depend, in part, on our ability to realize the anticipated benefits from integrating new hotels with our existing operations. For instance, we may manage, develop or acquire new hotels in geographic areas in which our management may have little or no operating experience and in which potential customers may not be familiar with our existing hotels, name, image or brands. These hotels may attract fewer customers than our existing hotels, while at the same time, we may incur substantial additional costs with these new hotel properties. As a result, the results of operations at new hotel properties may be inferior to those of our existing hotels. Until recently, none of our individual hotel brands were used for more than one hotel. Extension of our brands may jeopardize what we believe are the distinct reputations of our existing properties. Unanticipated expenses and insufficient demand at a new hotel property, therefore, could adversely affect our business. Our success in realizing anticipated benefits and the timing of this realization depend upon the successful integration of the operations of the new hotel. This integration is a complex, costly and time-consuming process. The difficulties of combining new hotel properties with our existing operations include, among others:

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coordinating sales, distribution and marketing functions;

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integrating information systems;

•

preserving the important licensing, distribution, marketing, customer, labor, and other relationships of a new hotel;

•

costs relating to the opening, operation and promotion of new hotel properties that are substantially greater than those incurred in other geographic areas; and

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converting hotels to our brand.

We may not accomplish the integration of new hotels smoothly or successfully. The diversion of the attention of our management from our existing operations to integration efforts and any difficulties encountered in combining operations could prevent us from realizing the anticipated benefits from the addition of the new hotel and could adversely affect our business and operations.

The use of joint ventures or other entities, over which we may not have full control, for hotel development projects or acquisitions could prevent us from achieving our objectives.

We have in the past and may in the future acquire, develop or redevelop hotel properties through joint ventures with third parties, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, joint venture or other entity. For example, we currently are party to a joint venture to develop a Mondrian hotel in New York’s SoHo neighborhood. As of December 31, 2009, we also owned our St Martins Lane and Sanderson hotels in London and our Mondrian hotel in Miami through 50/50 joint ventures, our Ames hotel in Boston through a joint venture in which our interest was approximately 35%, and the Hard Rock through a joint venture of which our interest was 12.8%. Our interest in the Hard Rock joint venture is based on cash contributions, as of December 31, 2009, after applying a weighting of 1.75x to the DLJMB Parties’ contributions in excess of $250.0 million, which was the last agreed weighting for capital contributions beyond the amount initially committed by our joint venture partner. Some of these additional contributions made 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 our ownership interest.

To the extent we own properties through joint ventures or other entities, we may not be in a position to exercise sole decision-making authority regarding the property, joint venture or other entity. Investments in joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners might become bankrupt or fail to fund their share of required capital contributions. Likewise, partners may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of creating impasses on decisions if neither we nor our partner have full control over the joint venture or other entity. Disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent management from focusing their time and effort on our business. Consequently, actions by, or disputes with, our partners might result in subjecting properties owned by the joint venture to additional risk. In addition, we may, certain circumstances, be liable for the actions of our partners.

We have recently invested, and may continue to invest in the future, in select properties which have residential components, and this strategy may not yield the returns we expect and, may result in disruptions to our business or strain management resources.

As part of our growth strategy, we may seek to leverage awareness of our hotel brands by acquiring, developing and/or managing non-hotel properties, such as condominium developments and other residential projects, including condominiums or apartments. We may invest in these opportunities solely or with joint venture partners. For example, in August 2006, together with a 50/50 joint venture partner, we acquired an apartment building in the South Beach area of Miami, Florida, which we renovated and converted into a hotel and condominium project and re-branded as Mondrian South Beach. This strategy, however, may expose us to additional risks, including the following:

•

we may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations, which could result in increased development or re-development costs and/or lower than expected sales;

•

the downturn in market conditions for residences, which has partially been the result of the reduction in credit availability and the worsening of pricing terms, has affected and may continue to affect our ability to sell residential units at a profit or at the price levels originally anticipated;

•

local residential real estate market conditions, such as the current oversupply and reduction in demand, may result in reduced or fluctuating sales;

•

cost overruns, including development or re-development costs that exceed our original estimates, could make completion of the project uneconomical;

•

land, insurance and development or re-development costs continue to increase and may continue to increase in the future and we may be unable to attract rents, or sales prices that compensate for these increases in costs;

•

development or re-development of condominium properties usually generate little or no cash flow until the project’s completion and the sale of a significant number of condominium units and may experience operating deficits after the date of completion and until such condominium units are sold;

•

failure to achieve expected occupancy and/or rent levels at residential apartment properties within the projected time frame, if at all; and

•

we may abandon development or re-development opportunities that we have already begun to explore, and we may fail to recover expenses already incurred in connection with exploring any such opportunities.

Overall project costs may significantly exceed the costs that were estimated when the project was originally undertaken, which will result in reduced returns, or even losses, from our investment.

We may be involved in disputes, from time to time, with the owners of the hotels that we manage.

The nature of our responsibilities under our management agreements to manage hotels that are not wholly-owned by us may be subject to interpretation and will from time to time give rise to disagreements. Such disagreements may be more likely as hotel returns are depressed as a result of current economic conditions. To the extent that such conflicts arise, we seek to resolve them by negotiation with the relevant parties. In the event that such resolution cannot be achieved, litigation may result in damages or other remedies against us. Such remedies could include termination of the right to manage the relevant property.

We may be terminated pursuant to the terms of certain hotel management agreements if we do not achieve established performance criteria.

Certain of our management agreements allow the hotel owner to replace us if certain financial or performance criteria are not met and in certain cases, upon a sale of the property. Our ability to meet these financial and performance criteria is subject to, among other things, the risks described in this section. 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. The lender for the Scottsdale mortgage has terminated the management agreement with respect to that property. In addition, in March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings against the property. We are continuing to operate the hotel during foreclosure proceedings, but we are uncertain whether we will continue to manage the property once foreclosure proceedings are complete. Our operating results would be adversely affected if we could not maintain existing management agreements or obtain new agreements on as favorable terms as the existing agreements.

Our hedging strategies may not be successful in mitigating our risks associated with interest rates.

We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. When interest rates change, we may be required to record a gain or loss on those derivatives that we currently hold. Our hedging activities may include entering into interest rate swaps, caps and floors and options to purchase these items. We currently use interest rate caps to manage our interest rate risks related to our variable rate indebtedness; however, our actual hedging decisions will be determined in light of the facts and circumstances existing at the time and may differ from our currently anticipated hedging strategy. There can be no assurance that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses, and such losses could harm our results of operations, financial condition and business prospects.

Our operations are sensitive to currency exchange risks, and we cannot predict the impact of future exchange-rate fluctuations on our business and operating results.

Our operations are sensitive to currency exchange risks. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating results. For example, all else being equal, a weaker U.S. dollar will promote international tourism in our domestic markets. As foreign currencies appreciate against the U.S. dollar, it becomes less expensive, in terms of those appreciating foreign currencies, to pay for our U.S. hotel services. Conversely, all else being equal, an appreciating U.S. dollar could affect demand for our U.S. hotel services. We cannot predict the impact of future exchange-rate fluctuations on our business and operations.

If we fail to maintain effective internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act, it may have an adverse effect on our business and stock price.

We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX, and the applicable SEC rules and regulations that require our management to conduct an annual assessment and to report on the effectiveness of our internal controls over financial reporting. In addition, our independent registered public accounting firm must issue an attestation report addressing the operating effectiveness of our internal controls over financial reporting. While our internal controls over financial reporting currently meet all of the standards required by SOX, failure to maintain an effective internal control environment could have a material adverse effect on our business, financial condition and results of operations and the price of our common stock. We cannot be certain as to our ability to continue to comply with the requirements of SOX. If we are not able to continue to comply with the requirements of SOX in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, including the SEC or Financial Industry Regulatory Authority. In addition, should we identify a material weakness, there can be no assurance that we would be able to remediate such material weakness in a timely manner in future periods. Moreover, if we are unable to assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, and incur significant expenses to restructure our internal controls over financial reporting, which may have an a material adverse effect on our business and operations.

We depend on our senior management for the future success of our business, and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business and implement our growth strategies, or could be negatively perceived in the capital markets.

Our future success and our ability to manage future growth depend, in large part, upon the efforts and continued service of our senior management team which has substantial experience in the hospitality industry and which exercises substantial influence over our operational, financing, acquisition and disposition activity. It could be difficult for us to find replacements for our senior management, as competition for such personnel is intense. The loss of services of one or more members of our senior management team could have an adverse effect on our ability to manage our business and implement our growth strategies. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.

We depend on Jeffrey Chodorow for the management of many of our restaurants and bars.

As of December 31, 2009, the restaurants in Morgans, Delano South Beach, Mondrian Los Angeles, Clift, Mondrian South Beach, Sanderson and St Martins Lane as well as the bars in Delano South Beach, Sanderson and St Martins Lane were owned and managed through several joint venture operations with restaurateur Jeffrey Chodorow pursuant to a master agreement between our subsidiaries and Chodorow Ventures LLC. If any of the risks outlined below materialize, our results of operations may be adversely affected. The joint ventures involve risks not otherwise present in our business, including:

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the risk that Mr. Chodorow or Chodorow Ventures LLC has economic or other interests or goals that are inconsistent with our interests and goals and that he may not take, or may veto, actions which may be in our best interests;

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the risk that a joint venture entity or Chodorow Ventures LLC may default on its obligations under the agreement or the leases with our hotels, or not renew those leases when they expire, and therefore we may not continue to receive its services;

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the risk that disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business;

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the risk that we may in certain circumstances be liable for the actions of our third party partners or co-venturers; and

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the risk that Chodorow Ventures LLC may become bankrupt and will be unable to continue to provide services to us.

Because land underlying Sanderson is subject to a 150-year ground lease, Clift is leased pursuant to a 99-year lease and a portion of Hudson is the lease of a condominium interest, we are subject to the risk that these leases could be terminated and could cause us to lose the ability to operate these hotels.

Our rights to use the land underlying Sanderson in London are based upon our interest under a 150-year ground lease. Our rights to operate Clift in San Francisco are based upon our interest under a 99-year lease. In addition, a portion of Hudson in New York is a condominium interest that is leased to us. Pursuant to the terms of the leases for these hotels, we are required to pay all rent due and comply with all other lessee obligations under the leases. Any transfer, including a pledge, of our interest in a lease may require the consent of the applicable lessor and its lenders. As a result, we may not be able to sell, assign, transfer or convey our lessee’s interest in any hotel subject to a lease in the future absent consent of such third parties even if such transactions may be in the best interest of our stockholders.

The lessor may require us, at the expiration or termination of the lease to surrender or remove any improvements, alterations or additions to the land or hotel at our own expense. The leases also generally require us to restore the premises following a casualty or taking and to apply in a specified manner any proceeds received in connection therewith. We may have to restore the premises if a material casualty, such as a fire or an act of God, occurs, the cost of which may exceed any available insurance proceeds. The termination of any of these leases could cause us to lose the ability to continue operating these hotels, which would materially affect our business and results of operations.

Due to the amount of rent stated in the lease, which will increase periodically, and the economic environment in which the hotel operates, we are not operating Clift at a profit and do not know when we will be able to operate Clift profitably. Morgans Group has funded cash shortfalls sustained at Clift in order to make rent payments from time to time, but, on March 1, 2010, our subsidiary that leases Clift did not make the scheduled monthly rent payment. We are in discussions with the landlord to restructure the lease arrangements, but there can be no assurance that we will be successful in restructuring the lease or in continuing to operate Clift. The lease provides that the landlord may terminate the lease upon a default in the payment of rent and may assert a claim for damages or a substantial termination fee upon termination. However, under the lease, the landlord’s recourse is limited to the lessee, which has no substantial assets other than its leasehold interest in Clift.

We are party to numerous contracts and operating agreements, certain of which limit our activities through restrictive covenants or consent rights. Violation of those covenants or failure to receive consents could lead to termination of those contracts or operating agreements.

We are party to numerous contracts and operating agreements, many of which are integral to our business operations. Certain of those contracts and operating agreements, including our joint venture agreements, generally require that we obtain the consent of the other party or parties before taking certain actions and/or contain restrictive covenants that could affect the manner in which we conduct our business. Our failure to comply with restrictive covenants or failure to obtain consents could provide the beneficiaries of those covenants or consents with the right to terminate the relevant contract or operating agreement or seek damages against us. If those claims relate to agreements that are integral to our operations, any termination could have a material adverse effect on our results of operations or financial condition.

Risks Related to the Hospitality Industry

A number of factors, many of which are common to the lodging industry and beyond our control, could affect our business, including those described elsewhere in this section as well as the following:

	•		increased competition from new supply or existing hotel properties in our markets, which would likely adversely affect occupancy and revenues at our hotels;
	•		dependence on business, commercial and leisure travelers and tourism;
	•		dependence on group and meeting/conference business;
	•		increases in energy costs, airline strikes or other factors that may affect travel patterns and reduce the number of business and commercial travelers and tourists;
	•		changes in laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; and
	•		risks generally associated with the ownership of hotel properties and real estate.

These factors could have an adverse effect on our financial condition and results of operations.

Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues.

The hospitality industry is seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in our revenues. Our revenue is generally highest in the second and fourth quarters. Our quarterly earnings may also be adversely affected by factors outside our control, including weather conditions and poor economic conditions, such as the current economic downturn. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues.

The industries in which we operate are heavily regulated and a failure to comply with regulatory requirements may result in an adverse effect on our business.

Any failure to comply with regulatory requirements may result in an adverse effect on our business. Our various properties are subject to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol. We are also subject to laws governing our relationship with our employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. Also, our ability to remodel, refurbish or add to our existing properties may be dependent upon our obtaining necessary building permits from local authorities. The failure to obtain any of these permits could adversely affect our ability to increase revenues and net income through capital improvements of our properties. In addition, we are subject to the numerous rules and regulations relating to state and federal taxation. Compliance with these rules and regulations requires significant management attention. Any failure to comply with all such rules and regulations could subject us to fines or audits by the applicable taxation authority.

In addition, as a result of our acquisition of the Hard Rock Hotel & Casino, the casino operations at that property are subject to gaming industry regulations. The gaming industry is highly regulated, and the casino must maintain its licenses and pay gaming taxes to continue operations. The casino is subject to extensive regulation under the laws, rules and regulations of the jurisdiction in which it operates. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interests in the gaming operations. Violations of laws could result in, among other things, disciplinary action.

The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more of our properties in response to changing economic, financial and investment conditions is limited. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

Although we evaluate alternative uses throughout our portfolio, including residential conversion and other opportunities, hotel properties may not readily be converted to alternative uses. The conversion of a hotel to alternative uses would also generally require substantial capital expenditures and may not provide a more profitable return than the use of the hotel property prior to that conversion.

We may be required to expend funds to correct defects or to make improvements before a property can be sold. We may not have funds available to correct those defects or to make those improvements and as a result our ability to sell the property would be limited. In acquiring a hotel, we may agree to lock-out provisions that materially restrict us from selling that hotel for a period of time or impose other restrictions on us. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could significantly harm our financial condition and results of operations.

Uninsured and underinsured losses could adversely affect our financial condition and results of operations.

We are responsible for insuring our hotel properties as well as obtaining the appropriate insurance coverage to reasonably protect our interests in the ordinary course of business. Additionally, each of our leases and loans typically specifies that comprehensive insurance be maintained on each of our hotel properties, including liability, fire and extended coverage. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. We will use our discretion in determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. Uninsured and underinsured losses could harm our financial condition and results of operations. We could incur liabilities resulting from loss or injury to our hotels or to persons at our hotels. Claims, whether or not they have merit, could harm the reputation of a hotel or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.

In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. In the event of a significant loss, our deductible may be high and we may be required to pay for all such repairs and, as a consequence, it could materially adversely affect our financial condition. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.

Since September 11, 2001, it has generally become more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When our current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our properties at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (e.g., earthquake, hurricane, flood and terrorism) may not be generally available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we were unable to obtain adequate insurance on our properties for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments that require us to maintain adequate insurance on our properties to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and our properties experienced damage which would otherwise have been covered by insurance, it could materially adversely affect our financial condition and the operations of our properties.

In addition, insurance coverage for our hotel properties and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

Environmental and other governmental laws and regulations could increase our compliance costs and liabilities and adversely affect our financial condition and results of operations.

Our hotel properties are subject to various federal, state and local laws relating to the environment, fire and safety and access and use by disabled persons. Under these laws, courts and government agencies have the authority to require us, if we are the owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of clean-up, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under such environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, to pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.

Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in or working at a hotel may seek to recover damages for injuries suffered. Additionally, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, some laws require a business using chemicals (such as swimming pool chemicals at a hotel) to manage them carefully and to notify local officials that the chemicals are being used.

We could be responsible for the types of costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could reduce the funds available for distribution to our stockholders. Future laws or regulations may impose material environmental liabilities on us, or the current environmental condition of our hotel properties may be affected by the condition of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.

Our hotel properties are also subject to the Americans with Disabilities Act of 1990, or the ADA. Under the ADA, all public accommodations must meet various Federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers and non-compliance could result in the United States government imposing fines or in private litigants’ winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition and results of operations could be harmed. In addition, we are required to operate our hotel properties and laundry facilities in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and become applicable to our properties.

Our hotels may be faced with labor disputes or, upon expiration of a collective bargaining agreement, a strike, which would adversely affect the operation of our hotels.

We rely heavily on our employees providing high-quality personal service at our hotels and any labor dispute or stoppage caused by poor relations with a labor union or the hotels’ employees could adversely affect our ability to provide those services, which could reduce occupancy and room revenue, tarnish our reputation and hurt our results of operations. Most of our employees who work at Morgans, Royalton, Hudson and Clift are members of local labor unions. Our relationship with our employees or the union could deteriorate due to disputes relating to, among other things, wage or benefit levels or management responses to various economic and industry conditions. The collective bargaining agreement governing the terms of employment for employees working in our New York City hotels will not expire until June 30, 2012. The collective bargaining agreements with the unions representing the Clift employees are either set to expire in 2010 or expired in 2008 or 2009, but are subject to temporary extensions while new labor agreements are negotiated.

Risks Related to Our Organization and Corporate Structure

Morgans Hotel Group Co. is a holding company with no operations.

Morgans Hotel Group Co. is a holding company and we conduct all of our operations through our subsidiaries. We do not have, apart from our ownership of Morgans Group and a non-equity voting interest in Hard Rock Hotel Holdings, LLC, any independent operations. As a result and although we have no current plan to do so, we would rely on dividends and other payments or distributions from Morgans Group and our other subsidiaries to pay dividends on our common stock. We also rely on dividends and other payments or distributions from Morgans Group and our other subsidiaries to meet our debt service and other obligations, including our obligations in respect of the trust preferred notes. The ability of Morgans Group and our other subsidiaries to pay dividends or make other payments or distributions to us will depend on Morgans Group’s operating results.

In addition, because Morgans Hotel Group Co. is a holding company, claims of our stockholders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our subsidiaries will be able to satisfy the claims of our stockholders only after all of our and our subsidiaries’ liabilities and obligations have been paid in full.

Substantially all of our businesses are held through our direct subsidiary, Morgans Group. Other than with respect to 954,065 membership units held by affiliates of NorthStar and LTIP units convertible into membership units issued as part of our employee compensation plans, we own all of the outstanding membership units of Morgans Group. We may, in connection with acquisitions or otherwise, issue additional membership units of Morgans Group in the future. Such issuances would reduce our ownership of Morgans Group. Because our stockholders do not directly own Morgans Group units, they do not have any voting rights with respect to any such issuances or other corporate level activities of Morgans Group.

Provisions in our charter documents, Delaware law and our rights plan could discourage potential acquisition proposals, could delay, deter or prevent a change in control and could limit the price certain investors might be willing to pay for our stock.

Certain provisions of our certificate of incorporation and bylaws may inhibit changes in control of our company not approved by our Board of Directors or changes in the composition of our Board of Directors, which could result in the entrenchment of current management. These provisions include:

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a prohibition on stockholder action through written consents;

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a requirement that special meetings of stockholders be called by the Board of Directors;

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advance notice requirements for stockholder proposals and director nominations;

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limitations on the ability of stockholders to amend, alter or repeal the bylaws; and

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the authority of the Board of Directors to issue, without stockholder approval, preferred stock with such terms as the Board of Directors may determine and additional _______shares of our common stock.

We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which prevents us from engaging in a business combination with a person who becomes a 15% or greater stockholder for a period of three years from the date such person acquires such status unless certain Board of Directors or stockholder approvals are obtained. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock.

In addition, our Board of Directors adopted and recently amended and restated a stockholder rights plan which may deter certain takeover tactics. See “Item 1 — 2009 Transactions and Developments — Stockholder Protection Rights Agreement.”

We may experience conflicts of interest with certain of our directors and officers and significant stockholders as a result of their tax positions.

Mr. Hamamoto, our Chairman of the Board, and Mr. Marc Gordon, our President and a member of the Board, may suffer adverse tax consequences upon our sale of certain properties and may therefore have different objectives regarding the appropriate pricing and timing of a particular property’s sale. Messrs. Hamamoto and Gordon may therefore influence us to not sell certain properties, even if such sale might be financially advantageous to our stockholders, or to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest, as they may wish to avoid realization of their share of the built-in gains in those properties.

In addition, at the completion of our IPO, an affiliate of NorthStar guaranteed approximately $225.0 million of the indebtedness of subsidiaries of Morgans Group and Messrs. Hamamoto and Gordon agreed to reimburse this guarantor for up to $98.3 million and $7.0 million of its guarantee obligation, respectively. These guarantees and reimbursement undertakings were provided so that Messrs. Hamamoto and Gordon did not realize taxable capital gains in connection with the formation and structuring transactions undertaken in connection with our IPO in the amount that each has agreed to reimburse. If our current debt were to be repaid, restructured or refinanced, Messrs. Hamamoto and Gordon would be adversely affected unless similar reimbursement or guarantees were put in place with respect to the new or existing debt of the Morgans Group subsidiaries.

The Investors, who own a substantial number of warrants to purchase our common stock, may have interests that are not aligned with yours and will have substantial influence over the vote on key matters requiring stockholder approval.

As of December 31, 2009, the Investors have 12,500,000 warrants to purchase shares of our common stock issued in connection with the Yucaipa investment, which does not include the 5,000,000 contingent warrants that will only become exercisable if we and an affiliate of the Investors are successful in raising a private equity fund pursuant to the terms of a fund formation agreement entered into between an affiliate of the Investors and us. 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 addition, 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):

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the sale of all or substantially all of our assets to a third party;

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the acquisition (including by merger, consolidation or other business combination) by us of a third party where the equity investment by us is $100 million or greater;

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our acquisition by a third party; or

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any change in the size of our Board of Directors to a number below 7 or above 9.

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 our reasonable best efforts to cause our Board of Directors to nominate and recommend to our stockholders the election of a person nominated by the Investors as a director of the Company and to use our reasonable best efforts to ensure that the Investors’ nominee is elected to our Board of Directors at each such meeting.

Accordingly, the Investors have substantial control over our business and can decide the outcome of key corporate decisions. The interests of the Investors may differ from the interests of our other stockholders, and they may cause us to take or not take certain actions with which you may disagree. Third parties may be discouraged from making a tender offer or bid to acquire us because of this concentration of ownership, and we may have more difficulty raising equity or debt financing due to the Investors’ significant ownership and ability to influence certain decisions.

Payment of dividends on our Series A Preferred Securities and any redemptions of warrants may negatively impact our cash flow and the value of our common stock.

On October 15, 2009 we issued 75,000 shares of Series A Preferred Securities to the Investors. The holders of such Series A Preferred Securities are entitled to cumulative cash dividends, payable in arrears on every three-month anniversary following the original date of issuance if such dividends are declared by the Board of Directors or an authorized committee thereof, at a rate of 8% per year for the first five years, 10% per year for years six and seven, and 20% per year thereafter. In addition, should the Investors’ nominee fail to be elected to our Board of Directors, the dividend rate would increase by 4% during any time that the Investors’ nominee is not a director. We have the option to accrue any and all dividend payments, and as of December 31, 2009, have not declared any dividends. The accrual of these dividends may dampen the value of our common stock.

In addition, the Company has the option to redeem any or all of the Series A Preferred Securities at any time. While we do not anticipate redeeming any or all of the Series A Preferred Securities in the near-term, we may want to redeem them in the future prior to the escalation in dividend rate to 20% in 2017. Our working capital and liquidity reserves may not be adequate to cover these redemption payments should we elect to redeem these securities, which would place pressure on us to find outside sources of financing that may or may not be available. In addition, the payment of these dividends, by reducing our ability to use capital for other business and operational needs, may limit our ability to grow and compete.

In addition, we may be required to redeem a portion of the warrants issued to the Investors to the extent necessary to facilitate compliance with gaming approval requirements. If we were unable to fund the redemption from available cash resources, we would need to find an alternative source of financing to do so. There can be no assurance that we would be able to raise such funds on favorable terms or at all.

Our basis in the hotels contributed to us is generally substantially less than their fair market value which will decrease the amount of our depreciation deductions and increase the amount of recognized gain upon sale.

Some of the hotels which were part of our formation and structuring transactions were contributed to us in tax-free transactions. Accordingly, our tax basis in the assets contributed was not adjusted in connection with our IPO and is generally substantially less than the fair market value of the contributed hotels as of the date of our IPO. We also intend to generally use the “traditional” method for making allocations under Section 704(c) of the Internal Revenue Code of 1986, as amended, as opposed to the “curative” or “remedial” method for making such allocations. Consequently, (i) our depreciation deductions with respect to our hotels will likely be substantially less than the depreciation deductions that would have been available to us had our tax basis been equal to the fair market value of the hotels as of the date of our IPO, (ii) we may recognize gain upon the sale of an asset that is attributable to appreciation in the value of the asset that accrued prior to the date of our IPO, and (iii) we may utilize available net operating losses against the potential gain from the sale of an asset.

Non-U.S. holders owning more than 5% of our common stock may be subject to United States federal income tax on gain recognized on the disposition of our common stock.

Because of our significant United States real estate holdings, we believe that we are a “United States real property holding corporation” as defined under Section 897 of the Internal Revenue Code. As a result, any “non-U.S. holder” (as defined under “Material U.S. Federal Income Tax Considerations for Non-U.S. Holders”) will be subject to United States federal income tax on gain recognized on a disposition of our common stock if such non-U.S. holder has held, directly or indirectly, 5% of our common stock at any time during the five-year period ending on the date of the disposition and such non-U.S. holder is not eligible for any treaty exemption.

Changes in market conditions or sales of our common stock could adversely affect the market price of our common stock.

The market price of our common stock depends on various financial and market conditions, which may change from time to time and which are outside of our control. Since late 2008, U.S. and global financial markets have been experiencing extreme disruption, including extreme volatility in securities prices, which has adversely affected the price of our common stock.

Sales of a substantial number of additional shares of our common stock, or the perception that such sales could occur, also could adversely affect prevailing market prices for our common stock. In addition to the possibility that we may sell shares of our common stock in a public offering at any time, we also may issue shares of common stock in connection with the warrants we issued to the Investors and the Fund Manager in the Yucaipa investment, our 2.375% Senior Subordinated Convertible Notes (the “Convertible Notes”) due in 2014, grants of restricted stock or long term incentive plan units or upon exercise of stock options that we grant to our directors, officers and employees. All of these shares may be available for sale in the public markets from time to time. As of December 31, 2009, there were:

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12,500,000 shares of common stock issuable upon exercise of the warrants we issued to the Investors, and up to 5,000,000 shares of common stock issuable upon exercise to the contingent warrants we issued to the Fund Manager in the Yucaipa investment, at exercise prices of $6.00 per share. The stock price at December 31, 2009 was $4.57;

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7,858,755 shares of common stock issuable upon conversion of the Convertible Notes assuming a conversion rate corresponding to the maximum conversion rate of 45.5580 shares per $1,000 principal amount of the Convertible Notes;

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1,659,279 shares of our common stock issuable upon exercise of outstanding options, of which options to purchase 1,210,361 shares were exercisable, at a weighted average exercise price of $19.06 per share. As of December 31, 2009, all of these options were underwater;

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139,169 restricted stock units and 1,139,896 LTIP units outstanding exercisable for a total of 1,279,065 shares of our common stock;

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1,126,163 restricted stock units and 878,763 LTIP units outstanding and subject to vesting requirements for a total of 2,004,926 shares of our common stock; and

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512,085 shares of our common stock available for future grants under our equity incentive plans.

Most of the outstanding shares of our common stock are eligible for resale in the public market and certain holders of our shares have the right to require us to file a registration statement for purposes of registering their shares for resale. A significant portion of these shares is held by a small number of stockholders. If our stockholders sell substantial amounts of our common stock, the market price of our common stock could decline, which may make it more difficult for us to sell equity or equity related securities in the future at a time and price that we deem appropriate. We are unable to predict the effect that sales of our common stock may have on the prevailing market price of our common stock.

Transactions relating to our convertible note hedge and warrant transactions may affect the trading price of our common stock.

In connection with the issuance of the Convertible Notes, we have entered into convertible note hedge and warrant transactions with affiliates of certain of the initial purchasers, which we refer to as the counterparties. Pursuant to the convertible note hedge, we have purchased from the counterparties a call option on our common stock, and pursuant to the warrant transaction, we have sold to the counterparties a warrant for the purchase of shares of our common stock. The warrant has an exercise price that is 82.2% higher than the closing price of our common stock on the date of the pricing of the Convertible Notes. Together, the convertible note hedge and warrant transactions are expected to provide us with some protection against increases in our stock price over the conversion price per share and, accordingly, reduce our exposure to potential dilution upon the conversion of the Convertible Notes. We used an aggregate of approximately $21.0 million of the net proceeds of the offering of the Convertible Notes to fund the net cost of these hedging transactions. In connection with these transactions, the counterparties to these transactions:

	•		entered into various over-the-counter derivative transactions or purchased or sold our common stock in secondary market transactions at or about the time of the pricing of the Convertible Notes; and
	•		may enter into, or may unwind, various over-the-counter derivatives or purchase or sell our common stock in secondary market transactions following the pricing of the Convertible Notes, including during any conversion reference period with respect to a conversion of Convertible Notes.

These activities may have the effect of increasing, or preventing a decline in, the market price of our common stock. In addition, any hedging transactions by the counterparties following the pricing of the Convertible Notes, including during any conversion reference period, may have an adverse impact on the trading price of our common stock. The counterparties are likely to modify their hedge positions from time to time prior to conversion or maturity of the Convertible Notes by purchasing and selling shares of our common stock or other instruments, including over-the-counter derivative instruments, that they may wish to use in connection with such hedging. In particular, such hedging modifications may occur during a conversion reference period. In addition, we intend to exercise our purchased call option whenever Convertible Notes are converted, although we are not required to do so. In order to unwind any hedge positions with respect to our exercise of the purchased call option, the counterparties would expect to sell shares of common stock in secondary market transactions or unwind various over-the-counter derivative transactions with respect to the common stock during the conversion reference period for the converted Convertible Notes.

The effect, if any, of any of these transactions and activities on the market price of our common stock will depend in part on current market conditions and therefore cannot be ascertained at this time. However, any of these activities could adversely affect the trading price of our common stock.

Our stock price has been and continues to be volatile.

Our stock price has been extremely volatile recently, especially given current market conditions, and may continue to fluctuate as a result of various factors, such as:

•

general industry and economic conditions, such as the current global economic downturn;

•

general stock market volatility unrelated to our operating performance;

•

announcements relating to significant corporate transactions;

•

fluctuations in our quarterly and annual financial results;

•

operating and stock price performance of companies that investors deem comparable to us;

•

changes in government regulation or proposals relating thereto; and

•

sales or the expectation of sales of a substantial number of shares of our common stock in the public market.

The stock markets have, since late 2008, experienced extreme price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stock is traded. Market volatility, as well as the global economic downturn, have adversely affected, and will likely continue to adversely affect, the market price of our common stock.

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

Our Hotel Properties

Set forth below is a summary of certain information related to certain of our hotel properties as of December 31, 2009:

																Twelve Months
				Year				Interest				Number				Ended December 31, 2009
Hotel		City		Opened				Owned				of Rooms				ADR(1)				Occupancy(2)				RevPAR(3)				Restaurants and Bars(4)
Morgans		New York			1984				100	%			114			$	245				87.0	%		$	213			Asia de Cuba
Royalton		New York			1988				100	%			168				276				87.1	%			240			Brasserie 44 Lobby Lounge Bar
Hudson		New York			2000				(5	)			831	(5)			200				83.8	%			168			Hudson Bar Private Park Library Bar Sky Terrace
Delano South Beach		Miami			1995				100	%			194				488				62.3	%			304			Blue Door Blue Sea Rose Bar Pool Bar The Florida Room
Mondrian Los Angeles		Los Angeles			1996				100	%			237				264				63.4	%			168			Asia de Cuba Skybar ADCB
Clift		San Francisco			2001				(6	)			372				201				65.5	%			131			Asia de Cuba Redwood Room Living Room
Mondrian Scottsdale		Scottsdale			2006				100	%			189				132				40.8	%			54			Asia de Cuba Skybar Red Bar
St Martins Lane		London			1999				50	%			204				323	(7)			74.4	%			240	(7)		Asia de Cuba Light Bar Rum Bar Bungalow 8
Sanderson		London			2000				50	%			150				386	(7)			71.8	%			277	(7)		Suka Long Bar Purple Bar
Shore Club		Miami			2001				7	%			309				307				50.8	%			156			Nobu Ago Skybar Redroom Rumbar Sandbar
Hard Rock Hotel & Casino		Las Vegas			2007				12.8	%			1,510				134				88.2	%			118			Nobu Rare 120 Pink Taco Ago Mr. Lucky’s Espumosa Cafe Center Bar Luxe Bar Beach Bar
Mondrian South Beach		Miami			2008				50	%			328				222				62.0	%			137			Asia de Cuba
Ames (8)		Boston			2009				35	%			114				175				33.4	%			58			Woodward
Total/Weighted Average													4,720			$	214				74.7	%		$	155

Not included in the above table are the San Juan Water and Beach Club and Hotel Las Palapas. We began operating the San Juan Water and Beach Club in October 2009 and began operating Hotel Las Palapas in December 2009. As of December 31, 2009, we managed both hotels and had no ownership interest in either of them. We anticipate that both hotels will be re-developed in the future, once funding is available to the hotels owners. We anticipate contributing approximately $0.8 million toward the renovation of the San Juan Water and Beach Club, which will be treated as a minority percentage ownership. Once re-developed, the hotels are expected to be converted into Morgans Hotel Group branded hotels. As the hotels currently are not Morgans Hotel Group branded hotels, we believe that including hotel operating data for these hotels with hotel operating data for our branded Morgans Hotel Group hotels would not provide a meaningful view of the performance of our portfolio of branded hotels. Additionally, these hotels were only managed by us for a relatively short period of time in 2009.

At December 31, 2009, we owned or partially owned and managed a portfolio of thirteen Morgans Hotel Group branded luxury hotel properties primarily in gateway cities and select resort markets in the United States and Europe. We believe each of our hotels are positioned in its respective market as a gathering place or destination hotel offering outstanding personalized service with renowned restaurants and bars. We also managed two non-branded properties, the San Juan Water and Beach Club and Hotel Las Palapas, as described above.

Individual Property Information

We believe each of our hotel properties reflects the strength of our operating platform and our ability to create branded destination hotels. The tables below reflect the results of operations of our individual properties before any third-party ownership interests in the hotels or restaurants.

Morgans

Overview

Opened in 1984, Morgans was the first Morgans Group hotel. It was named after the nearby Morgan Library located on Madison Avenue on the site of the former home of J. Pierpont Morgan. Initially conceived by French designer Andrée Putman, and renovated in 2008, Morgans remains a modern classic. The renovation, completed in September 2008 after closing the hotel for over three months, included upgrades to the hotel’s furniture, fixtures and equipment, certain technology upgrades and an upgrade to the lobby. Morgans has 114 rooms, including 30 suites, and is situated in midtown Manhattan’s fashionable East Side, offering guests a residential neighborhood within midtown Manhattan and walking distance of the midtown business district, Fifth Avenue shopping and Times Square. Morgans features Asia de Cuba restaurant, Living Room, and the Penthouse, a duplex that is also used for special functions.

Property highlights include:

Location		•      237 Madison Avenue, New York, New York
Guest Rooms		•      114, including 30 suites
Food and Beverage		•      Asia de Cuba Restaurant with seating for 210
Meetings Space		•      Multi-service meeting facility consisting of one suite with capacity for 100
Other Amenities		•      Living Room — a guest lounge that includes a television, computer, magazines and books in one of the suites
		•      24-hour concierge service

We own a fee simple interest in Morgans.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Morgans:

		Year Ended December 31,
		2009				2008				2007				2006				2005
Selected Operating Information:
Occupancy			87.0	%			81.1	%			86.4	%			85.0	%			83.4	%
ADR		$	245			$	351			$	342			$	312			$	295
RevPAR		$	213			$	285			$	296			$	265			$	246
Selected Financial Information (in thousands):
Room Revenue (1)		$	8,867			$	8,813			$	12,190			$	10,931			$	10,161
Total Revenue (1)			17,159				19,109				24,124				22,219				21,805
Depreciation (1)			2,805				1,481				1,201				1,354				1,485
Operating Income (1)			(2,328	)			2,010				5,671				4,851				4,398

Royalton

Overview

Opened in 1988, Royalton is located in the heart of midtown Manhattan, steps away from Times Square, Fifth Avenue shopping and the Broadway Theater District. Royalton was renovated during 2007 and has 168 rooms and suites, 37 of which feature working fireplaces. Recently redesigned by noted New York-based design firm Roman & Williams, the hotel is widely regarded for its distinctive lobby which spans a full city block. Royalton features a restaurant and bar, Brasserie 44 and Bar 44, and three unique penthouses with terraces offering views of midtown Manhattan.

Property highlights include:

Location		•      44 West 44th Street, New York, New York
Guest Rooms		•      168, including 27 suites
Food and Beverage		•      Brasserie 44 Restaurant with seating for 100
		•      Bar 44 with capacity for 100
		•      Lobby Lounge with capacity for 98
Meetings Space		•      Multi-service meeting facilities consisting of three suites with total capacity for 150
Other Amenities		•      37 working fireplaces and five foot round tubs in 41 guest rooms
		•      24-hour concierge service

We own a fee simple interest in Royalton.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Royalton:

		Year Ended December 31,
		2009				2008				2007				2006				2005
Selected Operating Information:
Occupancy			87.1	%			88.0	%			84.7	%			87.4	%			86.2	%
ADR		$	276			$	390			$	384			$	339			$	316
RevPAR		$	240			$	343			$	326			$	297			$	272
Selected Financial Information (in thousands):
Room Revenue (1)		$	14,747			$	21,090			$	13,840			$	18,307			$	16,793
Total Revenue (1)			20,375				27,891				18,290				24,211				22,239
Depreciation (1)			5,552				4,095				2,328				1,813				2,097
Operating Income (1)			(3,581	)			2,464				1,383				5,726				4,595

Hudson

Overview

Opened in 2000, Hudson is our largest New York City hotel, with 831 guest rooms and suites, including two ultra-luxurious accommodations — a 3,355 square foot penthouse with a landscaped terrace and an apartment with a 2,500 square foot tented terrace. Hudson occupies the former clubhouse of the American Women’s Association, which was originally constructed in 1929 by J.P. Morgan’s daughter. The hotel, which is only a few blocks away from Columbus Circle, Time Warner Center and Central Park, was designed by Philippe Starck to offer guests affordable luxury and style. Hudson’s notable design includes a 40-foot high ivy-covered lobby and a lobby ceiling fresco by renowned artist Francesco Clemente. The hotel’s food and beverage offerings include Private Park, a restaurant and bar in the indoor/outdoor lobby garden, Hudson Bar and the Library Bar and Sky Terrace, a private landscaped terrace on the 15th floor. The primary restaurant is being re-concepted and is under renovation, with opening expected in the second quarter of 2010.

Property highlights include:

Location		•      356 West 58th Street, New York, New York
Guest Rooms		•      831, including 43 suites
Food and Beverage		•      Hudson Hall, new restaurant concept with an opening expected in the second quarter of 2010
		•      Hudson Bar with capacity for 334
		•      Library Bar with capacity for 170
		•      Good Units, an exclusive venue for special functions, opened in February 2010
Meeting Space		•      Multi-service meeting facilities, consisting of three executive board rooms, two suites and other facilities, with total capacity for 1,260
Other Amenities		•      24-hour concierge service and business center
		•      Indoor/outdoor private park
		•      Library with antique billiard tables and books
		•      Sky Terrace, a private landscaped terrace and solarium
		•      Fitness center

In February 2010, we completed and opened Good Units, an exclusive venue for special functions. The raw space was conceived for performances and other experiences. Good Units is located in approximately 8,000 square feet of previously unused basement space within the hotel. There is another 19,000 square feet of unused space in the lower level of the hotel.

We own 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. Hudson has a total of 920 rooms, including 89 SROs. SROs are single room dwelling units. Each SRO is for occupancy by a single eligible individual. The unit need not, but may, contain food preparation or sanitary facilities, or both. SROs remain from the prior ownership of the building and we are by statute required to maintain these long-term tenants, unless we get their consent to terminate the lease, as long as they pay us their rent. Over time, we intend to develop new guest rooms from rooms that were formerly SRO units. The hotel is subject to mortgage indebtedness.

We own a fee simple interest in Hudson. The hotel is subject to mortgage indebtedness as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Selected Financial and Operating Information

The following table shows selected financial and operating information for Hudson:

		Year Ended December 31,
		2009				2008				2007				2006				2005
Selected Operating Information:
Occupancy			83.8	%			90.7	%			91.8	%			87.6	%			85.3	%
ADR		$	200			$	283			$	284			$	265			$	247
RevPAR		$	168			$	257			$	261			$	232			$	211
Selected Financial Information (in thousands):
Room Revenue		$	49,853			$	75,722			$	76,610			$	68,106			$	61,673
Total Revenue			65,663				97,789				101,271				88,083				80,893
Depreciation			6,813				6,399				6,275				5,092				9,415
Operating Income			6,329				32,885				36,800				33,807				24,756

Delano South Beach

Overview

Opened in 1995, Delano South Beach has 194 guest rooms, suites and lofts and is located in the heart of Miami Beach’s fashionable South Beach Art Deco district. Room renovations began in 2006, including technology upgrades and upgrading of suites and bungalows, and was completed in October 2007. Formerly a 1947 landmark hotel, Delano South Beach is noted for its simple white Art Deco décor. The hotel features an “indoor/outdoor” lobby, the Water Salon and Orchard (which is Delano South Beach’s landscaped orchard and 100-foot long pool) and beach facilities. The hotel’s accommodations also include eight poolside bungalows and a penthouse and apartment. Delano South Beach’s restaurant and bar offerings include Blue Door and Blue Sea restaurants, a poolside bistro, the Rose Bar and a new lounge, The Florida Room, designed by Kravitz Design, which opened in December 2007. The hotel also features Agua Spa, a full-service spa facility, renovated and expanded in late 2007.

Property highlights include:

Location		•      1685 Collins Avenue, Miami Beach, Florida
Guest Rooms		•      194, including a penthouse, apartment, nine suites, three lofts and eight poolside bungalows and nine cabanas
Food and Beverage		•      Blue Door Restaurant with seating for 210
		•      Blue Sea Restaurant with seating for 18
		•      Rose Bar and lobby lounge with capacity for 334
		•      Pool Bar with capacity for 40
		•      The Florida Room lounge with capacity for 210
Meeting Space		•      Multi-service meeting facilities, consisting of one executive boardroom and other facilities, with total capacity for 24
Other Amenities		•      Swimming pool and water salon
		•      Agua Spa and solarium
		•      Billiards area
		•      24-hour concierge service

We own a fee simple interest in Delano South Beach.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Delano South Beach:

		Year Ended December 31,
		2009				2008				2007				2006				2005
Selected Operating Information:
Occupancy			62.3	%			79.3	%			73.0	%			67.1	%			72.1	%
ADR		$	488			$	540			$	557			$	505			$	474
RevPAR		$	304			$	428			$	407			$	338			$	342
Selected Financial Information (in thousands):
Room Revenue		$	21,539			$	30,417			$	28,923			$	23,961			$	24,276
Total Revenue			44,814				62,115				56,603				50,433				49,685
Depreciation			4,646				5,776				3,858				2,203				3,272
Operating Income			11,024				18,917				17,852				16,100				15,877

Mondrian Los Angeles

Overview

Acquired in 1996 and renovated in 2008, Mondrian Los Angeles has 237 guest rooms, studios and suites. The renovation, which was completed in October 2008 and designed by international designer Benjamin Noriega-Ortiz, included lobby renovations, room renovations, including the replacement of bathrooms, and technology upgrades. The hotel is located on Sunset Boulevard in close proximity to Beverly Hills, Hollywood and the downtown Los Angeles business district. Mondrian Los Angeles’ accommodations also feature a two bedroom, 2,025 square foot penthouse and an apartment, each of which has an expansive terrace affording city-wide views. The hotel features Asia de Cuba and ADCB restaurants, Skybar, and Outdoor Living Room and Agua Spa.

Property highlights include:

Location		•      8440 West Sunset Boulevard, Los Angeles, California
Guest Rooms		•      237, including 183 suites
Food and Beverage		•      Asia de Cuba Restaurant with seating for 225
		•      ADCB lounge with seating for 32
		•      Skybar with capacity for 491
Meeting Space		•      Multi-service meeting facilities, consisting of two executive boardrooms and one suite, with total capacity for 165
Other Amenities		•      Indoor/outdoor lobby
		•      Agua Spa
		•      Heated swimming pool
		•      Outdoor living room
		•      24-hour concierge service
		•      Full service business center
		•      24-hour fitness center

We own a fee simple interest in Mondrian Los Angeles. The hotel is subject to mortgage indebtedness as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Selected Financial and Operating Information

The following table shows selected financial and operating information for Mondrian Los Angeles:

		Year Ended December 31,
		2009				2008				2007				2006				2005
Selected Operating Information:
Occupancy			63.4	%			52.0	%			76.5	%			79.1	%			79.5	%
ADR		$	264			$	348			$	327			$	315			$	301
RevPAR		$	167			$	181			$	250			$	249			$	239
Selected Financial Information (in thousands):
Room Revenue (1)		$	14,483			$	15,715			$	21,623			$	21,579			$	20,674
Total Revenue (1)			31,266				33,408				44,443				43,978				43,494
Depreciation (1)			5,239				3,373				2,182				1,727				2,238
Operating Income (1)			4,049				4,920				14,429				15,873				14,925

Clift

Overview

Acquired in 1999 and reopened after an extensive renovation in 2001, Clift has 366 guestrooms and suites designed by Philippe Starck. Built in 1915, Clift is located in the heart of San Francisco’s Union Square district, within walking distance of San Francisco’s central retail, dining, cultural and business activities. The hotel features Asia de Cuba Restaurant; the Redwood Room Bar, a paneled San Francisco landmark; and the Living Room, which is available for private events.

Property highlights include:

Location		•      495 Geary Street, San Francisco, California
Guest Rooms		•      372, including 25 suites
Food and Beverage		•      Asia de Cuba restaurant with seating for 139
		•      Redwood Room bar with capacity for 124
		•      Living Room with capacity for 46
Meeting Space		•      Multi-service meeting facilities, consisting of two executive boardrooms, one suite and other facilities, with total capacity for 403
Other Amenities		•      24-hour concierge service
		•      24-hour business center
		•      24-hour fitness center

Our rights to operate Clift in San Francisco are based upon our interest under a 99-year lease. Due to the amount of rent stated in the lease, which will increase periodically, and the economic environment in which the hotel operates, we are not operating Clift at a profit and do not know when we will be able to operate Clift profitably. Morgans Group has funded cash shortfalls sustained at Clift in order to make rent payments from time to time, but, on March 1, 2010, our subsidiary that leases Clift did not make the scheduled monthly rent payment. We are in discussions with the landlord to restructure the lease arrangements, but there can be no assurance that we will be successful in restructuring the lease or in continuing to operate Clift. Under the lease, the landlord’s recourse is limited to the lessee, which has no substantial assets other than its leasehold interest in Clift.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Clift:

		Year Ended December 31,
		2009				2008				2007				2006				2005
Selected Operating Information:
Occupancy			65.5	%			74.8	%			74.3	%			70.6	%			68.7	%
ADR		$	201			$	254			$	259			$	239			$	221
RevPAR		$	131			$	190			$	192			$	169			$	152
Selected Financial Information (in thousands):
Room Revenue		$	17,700			$	25,297			$	25,497			$	22,370			$	20,098
Total Revenue			30,702				42,066				43,337				38,686				35,565
Depreciation			3,028				2,602				2,372				5,487				7,245
Operating (loss) income			(2,712	)			5,041				4,383				(12	)			(2,616	)

Mondrian Scottsdale

Overview

Acquired in 2006, Mondrian Scottsdale has 189 guestrooms, including 15 suites and two apartments. Mondrian Scottsdale is located in the heart of Old Town Scottsdale overlooking the Scottsdale Mall gardens. Ground floor rooms have patio terraces and the upper floors have private balconies. Two swimming pools, a 24-hour gym, state-of-the-art technology and business facilities, and Morgans Hotel Group’s signature spa, Agua, highlight the impressive list of amenities. During 2006, the hotel underwent a complete renovation of all guest rooms, common areas, bars and restaurant space. The newly renovated hotel was designed by international designer Benjamin Noriega-Ortiz, who drew his inspiration from the Garden of Eden. The hotel was completed in January 2007, and featured an Asia de Cuba Restaurant, Skybar and the Red Bar. In January 2010, Asia de Cuba was re-concepted into an Italian restaurant.

Property highlights include:

Location		•      7353 East Indian School Road, Scottsdale, Arizona
Guest Rooms		•      189, including 15 suites and 2 apartments
Food and Beverage		•      An Italian restaurant, with seating, both indoors and outdoors, for 190
		•      Skybar with capacity for 250
		•      Red Bar with capacity for 125
Meeting Space		•      Multi-service meeting facilities, consisting of eight function rooms and a private reception area, with total capacity for 500
Other Amenities		•      Agua Spa
		•      Two swimming pools
		•      24-hour business center
		•      24-hour fitness center

In June 2009, the $40.0 million non-recourse mortgage and mezzanine loans on Mondrian Scottsdale matured, and we discontinued subsidizing the debt service. The lender has initiated foreclosure proceedings against the property and has terminated the management agreement with an effective termination date of March 16, 2010.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Mondrian Scottsdale for the years ended December 31, 2008 and 2007 and for the period of our ownership during 2006. The Mondrian Scottsdale was under renovation for the majority of 2006.

		Year Ended				Year Ended				May 5, 2006 -
		December 31,				December 31,				December 31,
		2008				2007				2006
Selected Operating Information:
Occupancy			40.8	%			56.0	%			44.0	%
ADR		$	132			$	203			$	162
RevPAR		$	54			$	114			$	71
Selected Financial Information (in thousands):
Room Revenue		$	3,713			$	8,069			$	3,317
Total Revenue			7,594				16,736				5,503
Depreciation			1,174				2,945				967
Operating Loss			(2,416	)			(3,468	)			(3,210	)

St Martins Lane

Overview

Opened in 1999, St Martins Lane has 204 guestrooms and suites, including 16 rooms with private patio gardens, and a loft-style luxury penthouse and apartment with expansive views of London. The renovated 1960s building that previously housed the Mickey Mouse Club and the Lumiere Cinema is located in the hub of Covent Garden and the West End theatre district, within walking distance of Trafalgar Square, Leicester Square and the London business district. Designed by Philippe Starck, the hotel’s meeting and special event space includes the Back Room, Studios, and an executive boardroom. St Martins Lane features Asia de Cuba Restaurant; The Rum Bar, which is a modern twist on the classic English pub; and the Light Bar, an exclusive destination which has attracted significant celebrity patronage and received frequent media coverage. During 2007, we undertook an expansion project at St Martins Lane to add a new members-only bar, Bungalow 8, which opened in September 2007. Additionally, in the first quarter of 2007, a new, state-of-the-art gym, Gymbox, opened in the hotel and is operated by a third party under a lease agreement.

Property highlights include:

Location		•      45 St Martins Lane, London, United Kingdom
Guest Rooms		•      204, including 16 rooms with private patio gardens and a luxury penthouse and apartment
Food and Beverage		•      Asia de Cuba restaurant with seating for 180
		•      Rum Bar with capacity for 30
		•      Light Bar with capacity for 150
		•      Bungalow 8 private club with capacity for 200
Meeting Space		•      Multi-service meeting facilities, consisting of one executive boardroom, three suites, including some outdoor function space, and other facilities, with total capacity for 450
Other Amenities		•      24-hour concierge service
		•      Full service business center
		•      24-hour fitness center

We operate St Martins Lane through Morgans Hotels Group Europe Limited, a 50/50 joint venture with an affiliate of Walton Street Capital LLC. The hotel is subject to mortgage indebtedness as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Selected Financial and Operating Information

The following table shows selected financial and operating information for St Martins Lane:

		Year Ended December 31,
		2009				2008				2007				2006				2005
Selected Operating Information:
Occupancy			74.4	%			75.0	%			77.1	%			78.2	%			73.6	%
ADR (1)		$	323			$	420			$	467			$	399			$	364
RevPAR (1)		$	240			$	315			$	360			$	312			$	267
Selected Financial Information (in thousands): (1)
Room Revenue		$	17,927			$	19,900			$	21,041			$	19,807			$	16,967
Total Revenue			44,390				40,595				41,648				39,482				35,063
Depreciation			4,155				4,072				3,442				3,200				3,975
Operating Income			6,330				8,770				11,096				9,475				5,916

Sanderson

Overview

Opened in 2000, Sanderson has 150 guestrooms and suites, seven with private terraces and 18 suites, including a luxury penthouse and apartment. The hotel is located in London’s Soho district, within walking distance of Trafalgar Square, Leicester Square and the West End business district. Sanderson’s structure is considered a model of 1950s British architecture and the hotel has been designated as a landmark building. Designed by Philippe Starck, the guestrooms do not have interior walls (the dressing room and bathroom are encased in a glass box that is wrapped in layers of sheer curtains). Dining and bar offerings include Suka restaurant, Long Bar and the Purple Bar. Other amenities include the Courtyard Garden, the Billiard Room, and Agua Spa. Like the Light Bar at St Martins Lane, the Long Bar is a popular destination that has consistently attracted a high-profile celebrity clientele and has generated significant media coverage.

Property highlights include:

Location		•     50 Berners Street, London, United Kingdom
Guest Rooms		•     150, including seven with private terraces and 18 suites, including a penthouse and apartment
Food and Beverage		•     Suka Restaurant with seating for 120
		•     Long Bar and courtyard garden with capacity for 290
		•     Purple Bar with capacity for 45
Meeting Space		•     Multi-service facilities, consisting of a penthouse boardroom and suites with total capacity for 80
Other Amenities		•     Courtyard Garden
		•     Billiard Room
		•     Agua Spa
		•     24-hour concierge service
		•     24-hour business center
		•     24-hour fitness center

We operate Sanderson through Morgans Europe, a 50/50 joint venture with an affiliate of Walton. Through Morgans Europe, we operate Sanderson under a 150-year lease. The hotel is subject to mortgage indebtedness as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Selected Financial and Operating Information

The following table shows selected financial and operating information for Sanderson:

		Year Ended December 31,
		2009				2008				2007				2006				2005
Selected Operating Information:
Occupancy			71.8	%			74.1	%			77.8	%			77.5	%			69.6	%
ADR (1)		$	386			$	483			$	539			$	475			$	443
RevPAR (1)		$	278			$	358			$	419			$	368			$	308
Selected Financial Information (in thousands): (1)
Room Revenue		$	15,233			$	16,615			$	18,006			$	17,182			$	14,386
Total Revenue			34,174				31,546				33,860				33,308				29,213
Depreciation			2,359				2,356				2,658				3,674				4,399
Operating Income			4,050				5,575				6,461				4,990				1,640

Shore Club

Overview

Opened in 2001, Shore Club has 309 rooms including 67 suites, seven duplex bungalows with private outdoor showers and dining areas, executive suites, an expansive penthouse suite encompassing 6,000 square feet and spanning three floors with a private elevator and private terrace, pool and panoramic views of Miami. Located on one of Miami’s main streets, Collins Avenue, Shore Club was designed by David Chipperfield. Some notable design elements of Shore Club include an Art Deco Lobby with a polished terrazzo floor and lit metal wall mural as well as custom silver and glass lanterns. Shore Club offers on-site access to restaurants and bars such as Nobu, Ago and Skybar (which is made up of the Red Room, Red Room Garden, Rum Bar and Sand Bar), shopping venues such as Scoop and Me & Ro and Pipino Salon, a hair care and accessories salon.

Property highlights include:

Location		•     1901 Collins Avenue, Miami Beach, Florida
Guest Rooms		•     309, including 67 suites and 7 bungalows
Food and Beverage		•     Nobu Restaurant with seating for 120
		•     Nobu Lounge with capacity for 140
		•     Ago Restaurant with seating for 275
		•     Skybar
		•     Red Room with seating for 144
		•     Red Room Garden with capacity for 250
		•     Rum Bar with capacity for 415
		•     Sand Bar with capacity for 75
Meeting Space		•     Multi-service meeting facilities, consisting of a 1,200 square foot ocean front meeting room, six executive boardrooms, one loft boardroom, and other facilities, with total capacity for 550
Other Amenities		•     Two elevated infinity edge pools (one Olympic size and one lap pool with hot tub)
		•     Spa @ Shore Club
		•     Salon, jewelry shop, clothing shop and gift shop
		•     Concierge service

We operate Shore Club under a management contract and owned a minority ownership interest of approximately 7% at December 31, 2009. In March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings against the property. We are continuing to operate the hotel pursuant to the management agreement during foreclosure proceedings, but we are uncertain whether we will continue to manage the property once foreclosure proceedings are complete.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Shore Club:

		Year Ended December 31,
		2009				2008				2007				2006				2005
Selected Operating Information:
Occupancy			50.8	%			64.2	%			65.1	%			65.7	%			63.6	%
ADR		$	307			$	388			$	436			$	373			$	349
RevPAR		$	156			$	249			$	284			$	245			$	222
Selected Financial Information (in thousands):
Room Revenue		$	17,562			$	28,181			$	32,006			$	27,467			$	24,922
Total Revenue			27,430				43,291				48,759				42,423				39,726
Depreciation			4,395				4,562				4,877				9,662				8,824
Operating (loss) income			(4,067	)			8,305				8,386				1,102				2,004

Hard Rock Hotel & Casino Las Vegas

Overview

On February 2, 2007, we along with our joint venture partner, DLJMB, acquired the Hard Rock. As a result of the large-scale expansion project that has been underway since 2008, the hotel’s three towers consist of 1,510 spacious hotel rooms, of which 450 or 30% are suites, including 9 penthouses, 10 pool villas and 8 multi-level spa villas.

As part of the expansion project, in 2009, Hard Rock debuted an expanded casino. The innovative, distinctive style of the 60,000 square foot casino is designed with a unique layout around the two elevated lounges, Luxe Bar and Center Bar, which allows the casino’s patrons to see and be seen from nearly every area of the casino.

In 2009, Hard Rock opened recently renovated The Joint, a live music venue with a capacity of 4,100. The Joint successfully draws audiences from Las Vegas visitors and from the local Las Vegas population. In addition, Hard Rock’s new 80,000 square-foot conference center and entertainment areas have capacity to accommodate groups of up to 8,000. Hard Rock offers its patrons a selection of high-quality food and beverages at multiple price points. Hard Rock’s food and beverage operations include six restaurants (Ago, Rare 120, Pink Taco, Mr. Lucky’s, Espumoso Cafe and Nobu), eight bars (Luxe Bar, Lobby Lounge, Midway Bar, Sports Deluxe, Helle’s Belles Bar, Wasted Space, Poker Lounge Bar and Center Bar), four bars in The Joint, a bar at the Beach Club and catering service for corporate events, conventions, banquets and parties. Hard Rock also hosts a 3,600 square-foot retail store, jewelry store and a lingerie store; a high-end Poker Lounge with 18 tables; a beach club which features a 300-foot long sand-bottomed tropical themed pool with a water slide, a water fall, a running stream and underwater rock music; a new 15,400 square-foot night club, Vanity; and a new spa facility, Reliquary, which opened late December 2009, features a 1,500 square-foot Roman bath, 21 treatment rooms, including couples facilities and hydro therapy rooms, a fitness room with CYBEX machines and a Spa Bar.

The expansion project also includes the expansion of the hotel’s pool, outdoor gaming, and additional food and beverage outlets, which are expected to open in March of 2010.

Property highlights include:

Location		•     4455 Paradise Road, Las Vegas
Guest Rooms		•     Three hotel towers with 1,510 hotel rooms averaging approximately 500 square feet in size (including 450 suites, 9 penthouses, 10 pool villas and 8 spa villas)
Food and Beverage		•     Nobu with seating for 300
		•     Rare 120 with seating for 178
		•     Pink Taco with seating for 259
		•     Espumosa Café with seating for 35
		•     Mr. Lucky’s with seating for 200
		•     Ago with seating for 200
		•     Starbucks
		•     Eight cocktail lounges, including two circular lounges, Luxe Bar and Center Bar, that are elevated and surrounded by the gaming floor
Meeting Space		•     80,000 square-feet of banquet and meeting facilities
Other Amenities		•     An approximately 60,000 square foot uniquely styled casino with 835 slot machines and 125 table games

		•     Poker Lounge with 18 tables and a 1,000 square foot connected bar
		•     Vanity nightclub, with capacity for 1,400
		•     Recently renovated and expanded live music concert hall, The Joint, with capacity for 4,100
		•     Wasted Space rock n’ roll bar, with capacity for 500
		•     Beach Club, including a 300-foot long sand bottomed tropical theme outdoor swimming pool area, with a water slide, water fall, a running stream and underwater rock music. The expansion of the pool is expected to open in March 2010
		•     Approximately 21,000 square foot spa/salon/fitness center, called Reliquary
		•     Rock Spa health club and fitness center
		•     An approximately 3,600 square foot retail store, a jewelry store and a lingerie store
		•     24-hour concierge service
		•     24-hour room service

We operate the Hard Rock under a management agreement and owned a 12.8% equity interest, based on cash contributions in the joint venture at December 31, 2009 and applying a weighting of 1.75x to the DLJMB Parties contributions in excess of $250.0 million, which was the last agreed weighting for capital contributions beyond the amount initially committed by our joint venture partners. Some of these additional contributions made by our joint venture partners 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 our ownership interest.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Hard Rock:

		For the Year				For the Year				For the Period
		Ended				Ended				from Feb. 2, 2007
		Dec. 31, 2009				Dec. 31, 2008				to Dec. 31, 2007
Selected Operating Information:
Occupancy			88.2	%			91.7	%			94.6	%
ADR		$	134			$	186			$	207
RevPAR		$	118			$	171			$	196
Selected Financial Information (in thousands):
Room Revenue		$	35,063			$	39,008			$	42,220
Total Revenue			185,698				164,345				173,655
Depreciation			23,062				23,454				17,413
Operating (loss) income (1)			(131,851	)			(202,895	)			19,626