Attached files
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EX-31.1 - EXHIBIT 31.1 - Morgans Hotel Group Co. | c04521exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Morgans Hotel Group Co. | c04521exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Morgans Hotel Group Co. | c04521exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Morgans Hotel Group Co. | c04521exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2010
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
________
to
________
Commission File Number: 001-33738
MORGANS HOTEL GROUP CO.
(Exact name of registrant as specified in its charter)
Delaware | 16-1736884 | |
(State or other jurisdiction of | (I.R.S. employer | |
incorporation or organization) | identification no.) | |
475 Tenth Avenue | ||
New York, New York | 10018 | |
(Address of principal executive offices) | (Zip Code) |
212-277-4100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the registrants common stock, par value $0.01 per share,
as of August 6, 2010 was 30,107,467
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
1
Table of Contents
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of a company. We may from time to time make
written or oral statements that are forward-looking, including statements contained in this
report and other filings with the Securities and Exchange Commission and in reports to our
stockholders. These forward-looking statements reflect our current views about future events and
are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our
actual results to differ materially from those expressed in any forward-looking statement. Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements. Important risks
and factors that could cause our actual results to differ materially from any forward-looking
statements include, but are not limited to, the risks discussed in the Companys Annual Report on
Form 10-K under the section titled Risk Factors and in this Quarterly Report on Form 10-Q under
the section titled Managements Discussion and Analysis of Financial Condition and Results of
Operations; downturns in economic and market conditions, particularly levels of spending in the
business, travel and leisure industries; hostilities, including future terrorist attacks, or fear
of hostilities that affect travel; risks related to natural disasters, such as earthquakes,
volcanoes and hurricanes; risks associated with the acquisition, development and integration of
properties; the seasonal nature of the hospitality business; changes in the tastes of our
customers; increases in real property tax rates; increases in interest rates and operating costs;
the impact of any material litigation; the loss of key members of our senior management; general
volatility of the capital markets and our ability to access the capital markets; and changes in the
competitive environment in our industry and the markets where we invest.
We are under no duty to update any of the forward-looking statements after the date of this
report to conform these statements to actual results.
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Morgans Hotel Group Co.
Consolidated Balance Sheets
(in thousands, except per share data)
(in thousands, except per share data)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Property and equipment, net |
$ | 480,868 | $ | 488,189 | ||||
Goodwill |
73,698 | 73,698 | ||||||
Investments in and advances to unconsolidated joint ventures |
27,105 | 32,445 | ||||||
Investment in hotel property of discontinued operations, net |
| 23,977 | ||||||
Cash and cash equivalents |
37,739 | 68,994 | ||||||
Restricted cash |
33,369 | 21,109 | ||||||
Accounts receivable, net |
6,897 | 6,531 | ||||||
Related party receivables |
9,629 | 9,522 | ||||||
Prepaid expenses and other assets |
9,795 | 10,862 | ||||||
Deferred tax asset, net |
80,240 | 83,980 | ||||||
Other, net |
15,062 | 18,931 | ||||||
Total assets |
$ | 774,402 | $ | 838,238 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Long-term debt and capital lease obligations |
$ | 703,029 | $ | 699,013 | ||||
Mortgage debt of discontinued operations |
| 40,000 | ||||||
Accounts payable and accrued liabilities |
27,496 | 30,325 | ||||||
Accounts payable and accrued liabilities of discontinued operations |
8 | 1,455 | ||||||
Distributions and losses in excess of investment in unconsolidated
joint ventures |
1,584 | 2,740 | ||||||
Other liabilities |
46,549 | 41,294 | ||||||
Total liabilities |
778,666 | 814,827 | ||||||
Commitments and contingencies |
||||||||
Preferred stock, $.01 par value; liquidation preference $1,000 per
share, 75,000,000 shares authorized and issued at June 30, 2010 and
December 31, 2009, respectively |
49,756 | 48,564 | ||||||
Common stock, $.01 par value; 200,000,000 shares authorized; 36,277,495
shares issued at June 30, 2010 and December 31, 2009, respectively |
363 | 363 | ||||||
Additional paid-in capital |
249,785 | 247,728 | ||||||
Treasury stock, at cost, 6,170,028 and 6,594,864 shares of common
stock at June 30, 2010 and December 31, 2009, respectively |
(95,869 | ) | (99,724 | ) | ||||
Accumulated comprehensive loss |
(883 | ) | (6,000 | ) | ||||
Accumulated deficit |
(220,135 | ) | (181,911 | ) | ||||
Total Morgans Hotel Group Co. stockholders (deficit) equity |
(16,983 | ) | 9,020 | |||||
Noncontrolling interest |
12,719 | 14,391 | ||||||
Total (deficit) equity |
(4,264 | ) | 23,411 | |||||
Total liabilities and stockholders equity |
$ | 774,402 | $ | 838,238 | ||||
See accompanying notes to these consolidated financial statements.
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Table of Contents
Morgans Hotel Group Co.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(unaudited)
(in thousands, except per share data)
(unaudited)
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended June 30, | Ended June 30, | Ended June 30, | Ended June 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 35,093 | $ | 30,137 | $ | 64,343 | $ | 57,007 | ||||||||
Food and beverage |
17,549 | 18,403 | 35,045 | 36,959 | ||||||||||||
Other hotel |
2,444 | 2,150 | 4,653 | 4,504 | ||||||||||||
Total hotel revenues |
55,086 | 50,690 | 104,041 | 98,470 | ||||||||||||
Management fee-related parties and other
income |
5,103 | 3,863 | 9,532 | 7,312 | ||||||||||||
Total revenues |
60,189 | 54,553 | 113,573 | 105,782 | ||||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
10,291 | 9,918 | 20,316 | 19,628 | ||||||||||||
Food and beverage |
14,184 | 13,826 | 28,100 | 27,693 | ||||||||||||
Other departmental |
1,260 | 1,483 | 2,512 | 2,964 | ||||||||||||
Hotel selling, general and administrative |
11,811 | 11,164 | 23,248 | 22,186 | ||||||||||||
Property taxes, insurance and other |
4,711 | 4,078 | 8,811 | 8,293 | ||||||||||||
Total hotel operating expenses |
42,257 | 40,469 | 82,987 | 80,764 | ||||||||||||
Corporate expenses, including stock
compensation of $2.8 million, $2.5 million,
$6.6 million, and $5.6 million, respectively |
9,220 | 7,488 | 19,225 | 16,788 | ||||||||||||
Depreciation and amortization |
8,011 | 8,116 | 15,356 | 15,045 | ||||||||||||
Restructuring, development and disposal costs |
1,189 | 653 | 1,866 | 1,531 | ||||||||||||
Total operating costs and expenses |
60,677 | 56,726 | 119,434 | 114,128 | ||||||||||||
Operating loss |
(488 | ) | (2,173 | ) | (5,861 | ) | (8,346 | ) | ||||||||
Interest expense, net |
12,680 | 11,768 | 25,297 | 22,949 | ||||||||||||
Equity in loss of unconsolidated joint
ventures |
7,739 | 1,895 | 8,002 | 2,438 | ||||||||||||
Other non-operating expenses |
241 | 496 | 15,318 | 1,065 | ||||||||||||
Loss before income taxes |
(21,148 | ) | (16,332 | ) | (54,478 | ) | (34,798 | ) | ||||||||
Income tax expense (benefit) |
131 | (6,969 | ) | 299 | (15,125 | ) | ||||||||||
Net loss before income attributable to
noncontrolling interest |
(21,279 | ) | (9,363 | ) | (54,777 | ) | (19,673 | ) | ||||||||
Net loss (income) attributable to
noncontrolling interest |
434 | (115 | ) | 581 | (418 | ) | ||||||||||
Net loss from continuing operations |
(20,845 | ) | (9,478 | ) | (54,196 | ) | (20,091 | ) | ||||||||
(Loss) income from discontinued operations |
(226 | ) | (579 | ) | 17,165 | (552 | ) | |||||||||
Net loss |
(21,071 | ) | (10,057 | ) | (37,031 | ) | (20,643 | ) | ||||||||
Preferred stock dividends and accretion |
2,114 | | 4,192 | | ||||||||||||
Net loss attributable to common stockholders |
(23,185 | ) | (10,057 | ) | (41,223 | ) | (20,643 | ) | ||||||||
Other comprehensive loss: |
||||||||||||||||
Unrealized gain on valuation of swap/cap
agreements, net of tax |
5,079 | 4,326 | 10,003 | 8,416 | ||||||||||||
Realized loss on settlement of swap/cap
agreements, net of tax |
(2,588 | ) | (2,587 | ) | (5,141 | ) | (4,997 | ) | ||||||||
Foreign
currency translation gain (loss) |
2 | (1,157 | ) | 256 | (1,044 | ) | ||||||||||
Comprehensive loss |
$ | (20,692 | ) | $ | (9,475 | ) | $ | (36,105 | ) | $ | (18,268 | ) | ||||
Loss per share: |
||||||||||||||||
Basic and diluted continuing operations |
$ | (0.75 | ) | $ | (0.32 | ) | $ | (1.92 | ) | $ | (0.67 | ) | ||||
Basic and diluted discontinued operations |
$ | (0.01 | ) | $ | (0.02 | ) | $ | 0.56 | $ | (0.02 | ) | |||||
Basic and diluted attributable to common
stockholders |
$ | (0.76 | ) | $ | (0.34 | ) | $ | (1.36 | ) | $ | (0.69 | ) | ||||
Weighted average number of common shares
outstanding: |
||||||||||||||||
Basic and diluted |
30,484 | 29,745 | 30,395 | 29,742 |
See accompanying notes to these consolidated financial statements.
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Table of Contents
Morgans Hotel Group Co.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
(in thousands)
(unaudited)
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss, before noncontrolling interest and after discontinued
operations |
$ | (37,612 | ) | $ | (20,225 | ) | ||
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities: |
||||||||
Depreciation |
14,506 | 14,647 | ||||||
Amortization of other costs |
850 | 354 | ||||||
Amortization of deferred financing costs |
3,063 | 1,378 | ||||||
Amortization of discount on convertible notes |
1,138 | 1,140 | ||||||
Stock-based compensation |
6,588 | 5,574 | ||||||
Accretion of interest on capital lease obligation |
2,879 | 813 | ||||||
Equity in losses from unconsolidated joint ventures |
8,002 | 2,438 | ||||||
Gain on disposal of assets |
(17,927 | ) | (20 | ) | ||||
Deferred income taxes |
| (15,508 | ) | |||||
Change in value of warrants |
13,808 | | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, net |
(366 | ) | 875 | |||||
Related party receivables |
(107 | ) | (4,054 | ) | ||||
Restricted cash |
(12,459 | ) | 5,336 | |||||
Prepaid expenses and other assets |
1,067 | (2,029 | ) | |||||
Accounts payable and accrued liabilities |
(2,964 | ) | (406 | ) | ||||
Other liabilities |
(138 | ) | (228 | ) | ||||
Discontinued operations |
483 | 622 | ||||||
Net cash used in operating activities |
(19,189 | ) | (9,293 | ) | ||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment |
(7,210 | ) | (6,131 | ) | ||||
(Withdrawals
from) deposits to capital improvement escrows, net |
199 | (659 | ) | |||||
Distributions from unconsolidated joint ventures |
204 | 4 | ||||||
Investment in unconsolidated joint ventures |
(3,578 | ) | (5,025 | ) | ||||
Net cash used in investing activities |
(10,385 | ) | (11,811 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from long-term debt |
| 139,789 | ||||||
Payments for deferred costs |
(44 | ) | (807 | ) | ||||
Cash paid in connection with vesting of stock based awards |
(433 | ) | (114 | ) | ||||
Distributions to holders of noncontrolling interests in
consolidated subsidiaries |
(958 | ) | (1,337 | ) | ||||
Issuance costs of preferred stock and warrants |
(246 | ) | | |||||
Net cash (used in) provided by financing activities |
(1,681 | ) | 137,531 | |||||
Net (decrease) increase in cash and cash equivalents |
(31,255 | ) | 116,427 | |||||
Cash and cash equivalents, beginning of period |
68,994 | 48,656 | ||||||
Cash and cash equivalents, end of period |
$ | 37,739 | $ | 165,083 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest, net of interest capitalized |
$ | 18,378 | $ | 20,960 | ||||
Cash paid for taxes |
$ | 17 | $ | 301 | ||||
See accompanying notes to these consolidated financial statements.
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Table of Contents
Morgans Hotel Group Co.
Notes to Consolidated Financial Statements
(unaudited)
(unaudited)
1. Organization and Formation Transaction
Morgans Hotel Group Co. (the Company) was incorporated on October 19, 2005 as a Delaware
corporation to complete an initial public offering (IPO) that was part of the formation and
structuring transactions described below. The Company operates, owns, acquires and redevelops hotel
properties.
The Morgans Hotel Group Co. predecessor (the Predecessor) was comprised of the subsidiaries
and ownership interests that were contributed as part of the formation and structuring transactions
from Morgans Hotel Group LLC, now known as Residual Hotel Interest LLC (Former Parent), to
Morgans Group LLC (Morgans Group), the Companys operating company. At the time of the formation
and structuring transactions, the Former Parent was owned approximately 85% by NorthStar
Hospitality, LLC, a subsidiary of NorthStar Capital Investment Corp., and approximately 15% by RSA
Associates, L.P.
In connection with the IPO, the Former Parent contributed the subsidiaries and ownership
interests in nine operating hotels in the United States and the United Kingdom to Morgans Group in
exchange for membership units. Simultaneously, Morgans Group issued additional membership units to
the Predecessor in exchange for cash raised by the Company from the IPO. The Former Parent also
contributed all the membership interests in its hotel management business to Morgans Group in
return for 1,000,000 membership units in Morgans Group exchangeable for shares of the Companys
common stock. The Company is the managing member of Morgans Group, and has full management control.
On April 24, 2008, 45,935 outstanding membership units in Morgans Group were redeemed in exchange
for 45,935 shares of the Companys common stock. As of June 30, 2010, 954,065 membership units in
Morgans Group remain outstanding.
On February 17, 2006, the Company completed its IPO. The Company issued 15,000,000 shares of
common stock at $20 per share resulting in net proceeds of approximately $272.5 million, after
underwriters discounts and offering expenses.
The Company has one reportable operating segment; it operates, owns, acquires and redevelops
boutique hotels.
Operating Hotels
The Companys operating hotels as of June 30, 2010 are as follows:
Number of | ||||||||||
Hotel Name | Location | Rooms | Ownership | |||||||
Delano South Beach |
Miami Beach, FL | 194 | (1 | ) | ||||||
Hudson |
New York, NY | 831 | (5 | ) | ||||||
Mondrian Los Angeles |
Los Angeles, CA | 237 | (1 | ) | ||||||
Morgans |
New York, NY | 114 | (1 | ) | ||||||
Royalton |
New York, NY | 168 | (1 | ) | ||||||
Sanderson |
London, England | 150 | (2 | ) | ||||||
St Martins Lane |
London, England | 204 | (2 | ) | ||||||
Shore Club |
Miami Beach, FL | 309 | (3 | ) | ||||||
Clift |
San Francisco, CA | 372 | (4 | ) | ||||||
Hard Rock Hotel & Casino |
Las Vegas, NV | 1,510 | (6 | ) | ||||||
Mondrian South Beach |
Miami Beach, FL | 328 | (2 | ) | ||||||
Ames |
Boston, MA | 114 | (7 | ) | ||||||
Water and Beach Club Hotel |
San Juan, PR | 78 | (8 | ) | ||||||
Hotel Las Palapas |
Playa del Carmen, Mexico | 75 | (9 | ) |
(1) | Wholly-owned hotel. |
|
(2) | Owned through a 50/50 unconsolidated joint venture. |
|
(3) | Operated under a management contract, with an unconsolidated minority ownership
interest of approximately 7%. |
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Table of Contents
(4) | The hotel is operated under a long-term lease, which is accounted for as a financing. |
|
(5) | The Company owns 100% of Hudson, which is part of a property that is structured as a
condominium, in which Hudson constitutes 96% of the square footage of the entire
building. |
|
(6) | Operated under a management contract and owned through an unconsolidated joint
venture, of which the Company owned approximately 12.8% at June 30, 2010 based on
weighted cash contributions. See note 4. |
|
(7) | Operated under a management contract and owned through an unconsolidated joint
venture, of which the Company owned approximately 31%, at June 30, 2010 based on
cash contributions. See note 4. |
|
(8) | Operated under a management contract, with an unconsolidated minority ownership
interest of approximately 25% at June 30, 2010 based on cash contributions. |
|
(9) | Operated under a management contract. |
Restaurant Joint Venture
The food and beverage operations of certain of the hotels are operated under 50/50 joint
ventures with a third party restaurant operator.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP). The Company
consolidates all wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation. We have evaluated all subsequent events through the date the financial
statements were issued.
The consolidated financial statements have been prepared in accordance with GAAP for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. The information furnished in the accompanying consolidated financial
statements reflect all adjustments that, in the opinion of management, are necessary for a fair
presentation of the aforementioned consolidated financial statements for the interim periods.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates. Operating results for the
six months ended June 30, 2010 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2010. For further information, refer to the consolidated
financial statements and accompanying footnotes included in the Companys Annual Report on Form
10-K for the year ended December 31, 2009.
On June 12, 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R) (SFAS No. 167), which has subsequently been codified
in Accounting Standards Codification (ASC) 810-10, Consolidation (ASC 810-10). ASC 810-10
amends prior guidance established in and changes the consolidation guidance applicable to a
variable interest entity (a VIE). It also amends the guidance governing the determination of
whether an enterprise is the primary beneficiary of a VIE, and is therefore required to consolidate
an entity by requiring a qualitative analysis rather than a quantitative analysis. The qualitative
analysis will include, among other things, consideration of who has the power to direct the
activities of the entity that most significantly impact the entitys economic performance, and who
has the obligation to absorb losses or the right to receive benefits of the VIE that could
potentially be significant to the VIE.
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Pursuant to the adoption of ASC 810-10, the Company reevaluated its interest in four ventures
that provide food and beverage services at the Companys hotels as the Company absorbs a majority
of the ventures expected losses and residual returns. These services include operating restaurants
including room service at four hotels, banquet and catering services at three hotels and a bar at
one hotel. No assets of the Company are collateral for the ventures obligations and creditors of
the venture have no recourse to the Company. Based on the reevaluation performed, the Company has
concluded that there is no change from its initial assessment and continues to consolidate these
four ventures.
Management has evaluated the applicability of ASC 810-10 to its investments in unconsolidated
joint ventures and has concluded that these joint ventures do not meet the requirements of a
variable interest entity or the Company is not the primary beneficiary and, therefore,
consolidation of these ventures is not required. Accordingly, these investments are accounted for
using the equity method.
Derivative Instruments and Hedging Activities
In accordance with ASC 815-10, Derivatives and Hedging (ASC 815-10) the Company records all
derivatives on the balance sheet at fair value and provides qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about the fair value of
and gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and the resulting designation.
Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate risk, are considered fair value
hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow hedges.
The Company is exposed to certain risks arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management of its core business activities. The Company manages economic
risks, including interest rate, liquidity, and credit risk by managing the amount, sources, and
duration of its debt funding and the use of derivative financial instruments. Specifically, the
Company enters into derivative financial instruments to manage exposures that arise from business
activities that result in the payment of future known and uncertain cash amounts relating to
interest payments on the Companys borrowings. The Companys derivative financial instruments are
used to manage differences in the amount, timing, and duration of the Companys known or expected
cash payments principally related to the Companys borrowings.
The Companys objectives in using interest rate derivatives are to add stability to interest
expense and to manage its exposure to interest rate movements. To accomplish these objectives, the
Company primarily uses interest rate swaps and caps as part of its interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate
amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of
the agreements without exchange of the underlying notional amount. Interest rate caps designated as
cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates
rise above the strike rate on the contract in exchange for an up-front premium.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair
value of the derivative is initially reported in other comprehensive loss (outside of earnings) and
subsequently reclassified to earnings when the hedged transaction affects earnings, and the
ineffective portion of changes in the fair value of the derivative is recognized directly in
earnings. The Company assesses the effectiveness of each hedging relationship by comparing the
changes in fair value or cash flows of the derivative hedging instrument with the changes in fair
value or cash flows of the designated hedged item or transaction. The net loss recognized in
earnings during the reporting period representing the amount of the hedges ineffectiveness is
insignificant.
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As of June 30, 2010 and December 31, 2009, the Company had interest rate caps that were not
designated as hedges. These derivatives were not speculative and were used to manage the Companys
exposure to interest rate movements and other identified risks, but the Company has elected not to
designate these instruments in hedging relationships based on the provisions in ASC 815-10. The
changes in fair value of derivatives not designated in hedging relationships have been recognized
in earnings. The changes in fair value of the derivatives recognized for the three and six months
ended June 30, 2010 and 2009 were insignificant. Summarized below are the interest rate derivatives
that were designated as cash flow hedges and the fair value of all derivative assets and
liabilities at June 30, 2010 and December 31, 2009 (in thousands):
Estimated | Estimated | |||||||||||||||||||
Fair Market | Fair Market | |||||||||||||||||||
Value at | Value at | |||||||||||||||||||
Type of | Maturity | Strike | June 30, | December 31, | ||||||||||||||||
Notional Amount | Instrument | Date | Rate | 2010 | 2009 | |||||||||||||||
$285,000 |
Interest swap | July 9, 2010 | 5.04 | % | $ | (296 | ) | $ | (6,925 | ) | ||||||||||
$85,000 |
Interest swap | July 15, 2010 | 4.91 | % | (150 | ) | (2,075 | ) | ||||||||||||
Fair value of
derivative
instruments
designated as
effective hedges |
(446 | ) | (9,000 | ) | ||||||||||||||||
Total fair value of
derivative
instruments |
$ | (446 | ) | $ | (9,000 | ) | ||||||||||||||
Total fair value
included in other
assets |
$ | | $ | | ||||||||||||||||
Total fair value
included in other
liabilities |
$ | (446 | ) | $ | (9,000 | ) | ||||||||||||||
Amounts reported in accumulated other comprehensive loss related to derivatives will be
reclassified to interest expense as interest payments are made on the Companys variable-rate debt.
It is estimated that approximately $0.4 million included in accumulated other comprehensive loss
related to derivatives will be reclassified to interest expense over the next month.
Credit-risk-related Contingent Features
The Company has entered into agreements with each of its derivative counterparties in
connection with the interest rate swaps and hedging instruments related to the Convertible Notes,
discussed in note 6, providing that in the event the Company either defaults or is capable of being
declared in default on any of its indebtedness, then the Company could also be declared in default
on its derivative obligations.
The Company has entered into warrant agreements with Yucaipa, as discussed in note 5,
providing Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II,
L.P. (collectively, the Investors) with consent rights over certain transactions for so long as
they collectively own or have the right to purchase through exercise of the warrants 6,250,000
shares of the Companys common stock.
Fair Value Measurements
ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10) defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. ASC 820-10 applies to reported balances that are required or permitted to be measured
at fair value under existing accounting pronouncements; accordingly, the standard does not require
any new fair value measurements of reported balances.
ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based on the assumptions that
market participants would use in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy
that distinguishes between market participant assumptions based on market data obtained from
sources independent of the reporting entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entitys own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy).
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Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted
prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active
markets, as well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an
entitys own assumptions, as there is little, if any, related market activity. In instances where
the determination of the fair value measurement is based on inputs from different levels of the
fair value hierarchy, the level in the fair value hierarchy within which the entire fair value
measurement falls is based on the lowest level input that is significant to the fair value
measurement in its entirety. The Companys assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers factors specific to the
asset or liability.
Currently, the Company uses interest rate caps and interest rate swaps to manage its interest
rate risk. The valuation of these instruments is determined using widely accepted valuation
techniques including discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the period to maturity,
and uses observable market-based inputs, including interest rate curves and implied volatilities.
To comply with the provisions of ASC 820-10, the Company incorporates credit valuation adjustments
to appropriately reflect both its own nonperformance risk and the respective counterpartys
nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative
contracts for the effect of nonperformance risk, the Company has considered the impact of netting
and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and
guarantees.
Although the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by itself and its counterparties. However, as of June 30,
2010 the Company has assessed the significance of the impact of the credit valuation adjustments on
the overall valuation of its derivative positions and has determined that the credit valuation
adjustments are not significant to the overall valuation of its derivatives. Accordingly, all
derivatives have been classified as Level 2 fair value measurements.
In connection with the issuance of 75,000 of the Companys Series A Preferred Securities to
the Investors, as discussed in note 8, the Company also issued warrants to purchase 12,500,000
shares of the Companys common stock at an exercise price of $6.00 per share to the Investors.
Until October 15, 2010, the Investors have certain rights to purchase their pro rata share of any
equity or debt securities offered or sold by the Company. In addition, the $6.00 exercise price of
the warrants is subject to certain reductions if, any time prior to the first anniversary of the
warrant issuance, the Company issues shares of common stock below $6.00 per share. The fair value
for each warrant granted was estimated at the date of grant using the Black-Scholes option pricing
model, an allowable valuation method under ASC 718-10,
Compensation, Stock-Based Compensation (ASC
718-10). The estimated fair value per warrant was $1.96 on October 15, 2009.
Although the Company has determined that the majority of the inputs used to value the
outstanding warrants fall within Level 1 of the fair value hierarchy, the Black-Scholes model
utilizes Level 3 inputs, such as estimates of the Companys volatility. The estimated fair value of
the Companys outstanding warrants issued to the Investors as a result of applying Level 3
measurements as of June 30, 2010 was $2.58 per warrant or $32.2 million. See notes 5 and 8.
Fair Value of Financial Instruments
As mentioned below and in accordance with ASC 825-10 and ASC 270-10, Presentation, Interim
Reporting (ASC 825-10 and ASC 270-10) the Company provides quarterly fair value disclosures for
financial instruments. Disclosures about fair value of financial instruments are based on pertinent
information available to management as of the valuation date. Considerable judgment is necessary to
interpret market data and develop estimated fair values. Accordingly, the estimates presented are
not necessarily indicative of the amounts at which these instruments could be purchased, sold, or
settled. The use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
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The Companys financial instruments include cash and cash equivalents, accounts receivable,
restricted cash, accounts payable and accrued liabilities, and fixed and variable rate long-term
debt. Management believes the carrying amount of the aforementioned financial instruments,
excluding fixed-rate long-term debt, is a reasonable estimate of fair value as of June 30, 2010 and
December 31, 2009 due to the short-term maturity of these items or variable interest rate.
The fair value of the Companys $233.1 million of fixed rate debt as of June 30, 2010 and
December 31, 2009 was approximately $254.6 million and $222.8 million, respectively, using market
interest rates. See note 6.
Stock-based Compensation
The Company accounts for stock-based employee compensation using the fair value method of
accounting as defined in ASC 718-10. For share grants, total compensation expense is based on the
price of the Companys stock at the grant date. For option grants, the total compensation expense
is based on the estimated fair value using the Black-Scholes option-pricing model. Compensation
expense is recorded ratably over the vesting period, if any. Stock compensation expense recognized
for the three months ended June 30, 2010 and 2009 was $2.8 million and $2.5 million, respectively.
Stock compensation expense recognized for the six months ended June 30, 2010 and 2009 was $6.6
million and $5.6 million, respectively.
Income (Loss) Per Share
Basic net income (loss) per common share is calculated by dividing net income (loss) available
to common stockholders, less any dividends on unvested restricted common stock, by the
weighted-average number of common stock outstanding during the period. Diluted net income (loss)
per common share is calculated by dividing net income (loss) available to common stockholders, less
dividends on unvested restricted common stock, by the weighted-average number of common stock
outstanding during the period, plus other potentially dilutive securities, such as unvested shares
of restricted common stock and warrants.
Noncontrolling Interest
The Company follows ASC 810-10, when accounting and reporting for noncontrolling interests in
a consolidated subsidiary and the deconsolidation of a subsidiary. Under ASC 810-10, the Company
reports noncontrolling interests in subsidiaries as a separate component of stockholders equity in
the consolidated financial statements and reflects net income (loss) attributable to the
noncontrolling interests and net income (loss) attributable to the common stockholders on the face
of the consolidated statements of operations.
The membership units in Morgans Group, the Companys operating company, owned by the Former
Parent is presented as noncontrolling interest in Morgans Group in the consolidated balance sheets
and was approximately $12.0 million and $13.3 million as of June 30, 2010 and December 31, 2009,
respectively. The noncontrolling interest in Morgans Group is: (i) increased or decreased by the
limited members pro rata share of Morgans Groups net income or net loss, respectively; (ii)
decreased by distributions; (iii) decreased by exchanges of membership units for the Companys
common stock; and (iv) adjusted to equal the net equity of Morgans Group multiplied by the limited
members ownership percentage immediately after each issuance of units of Morgans Group and/or
shares of the Companys common stock and after each purchase of treasury stock through an
adjustment to additional paid-in capital. Net income or net loss allocated to the noncontrolling
interest in Morgans Group is based on the weighted-average percentage ownership throughout the
period.
Additionally, $0.7 million and $1.1 million was recorded as noncontrolling interest as of June
30, 2010 and December 31, 2009, respectively, which represents the Companys third-party food and
beverage joint venture partners interest in the restaurant ventures at certain of the Companys
hotels.
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Table of Contents
New Accounting Pronouncements
On April 1, 2009, the FASB issued three FASB Staff Positions intended to provide additional
application guidance and enhance disclosures regarding the fair value of measurements and
impairments of securities. FASB Staff Position No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS No. 157. SFAS 107-1 and APB No.
28-1 enhance consistency in financial reporting by increasing the frequency of fair value
disclosures. FASB Staff Position No. FAS 115-2 and No. FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity
and consistency in accounting for and presenting impairment losses on securities. All three FASB
Staff Positions have subsequently been codified in ASC 820-10, ASC 825-10, and ASC 320-10,
Investments, Investments Debt and Equity Securities, respectively. These codifications are
effective for the Company as of January 1, 2010 and the adoption of these codifications did not
have a material impact on the Companys consolidated financial statements.
On June 12, 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R),
which has subsequently been codified in ASC 810-10. ASC 810-10 amends prior guidance established in
FIN 46R and changes the consolidation guidance applicable to a variable interest entity (a VIE).
It also amends the guidance governing the determination of whether an enterprise is the primary
beneficiary of a VIE, and is therefore required to consolidate an entity by requiring a qualitative
analysis rather than a quantitative analysis. The qualitative analysis will include, among other
things, consideration of who has the power to direct the activities of the entity that most
significantly impact the entitys economic performance, and who has the obligation to absorb losses
or the right to receive benefits of the VIE that could potentially be significant to the VIE. This
standard also requires continuous reassessments of whether an enterprise is the primary beneficiary
of a VIE. Previously, FIN 46R required reconsideration of whether an enterprise was the primary
beneficiary of a VIE only when specific events had occurred. Qualified special purpose entities,
which were previously exempt from the application of this standard, will be subject to the
provisions of this standard. ASC 810-10 also requires enhanced disclosures about an enterprises
involvement with a VIE. The adoption of this topic did not have an impact on the Companys
consolidated financial statements. See note 2 for further discussion.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162,
which has been codified in ASC 105, Generally Accepted Accounting Principles (ASC 105). ASC 105
is a pronouncement establishing the FASB ASC as the single official source of authoritative,
nongovernmental GAAP. The ASC did not change GAAP but reorganized the literature. This
pronouncement is effective for interim and annual periods ending after September 15, 2009. This
pronouncement impacts disclosures only and did not have any impact on the Companys consolidated
financial condition, results of operations or cash flows.
The Company adopted certain provisions of Accounting Standards Update No. 2010-06, Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU
No. 2010-06), in the first quarter of 2010. These provisions of ASU No. 2010-06 amended ASC
820-10, Fair Value Measurements and Disclosures, by requiring additional disclosures for transfers
in and out of Level 1 and Level 2 fair value measurements, as well as requiring fair value
measurement disclosures for each class of assets and liabilities, a subset of the captions
disclosed in our consolidated balance sheets. The adoption did not have a material impact on our
consolidated financial statements or our disclosures, as we did not have any transfers between
Level 1 and Level 2 fair value measurements and did not have material classes of assets and
liabilities that required additional disclosure.
The Company adopted Accounting Standards Update No. 2010-09 Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements (ASU No. 2010-09) in the first
quarter of 2010. ASU No. 2010-09 amended ASC 855-10, Subsequent Events Overall by removing the
requirement for a United States Securities and Exchange Commission registrant to disclose a date,
in both issued and revised financial statements, through which that filer had evaluated subsequent
events. Accordingly, we removed the related disclosure from note 2 above and the adoption did not
have a material impact on our consolidated financial statements.
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Reclassifications
Certain prior year financial statement amounts have been reclassified to conform to the
current year presentation, including discontinued operations, as discussed in note 9.
3. Income (Loss) Per Share
The Company applies the two-class method as required by ASC 260-10, Earnings per Share (ASC
260-10). ASC 260-10 requires the net income per share for each class of stock (common stock and
preferred stock) to be calculated assuming 100% of the Companys net income is distributed as
dividends to each class of stock based on their contractual rights. To the extent the Company has
undistributed earnings in any calendar quarter, the Company will follow the two-class method of
computing earnings per share.
Basic earnings (loss) per share is calculated based on the weighted average number of common
stock outstanding during the period. Diluted earnings (loss) per share include the effect of
potential shares outstanding, including dilutive securities. Potential dilutive securities may
include shares and options granted under the Companys stock incentive plan and membership units in
Morgans Group, which may be exchanged for shares of the Companys common stock under certain
circumstances. The 954,065 outstanding Morgans Group membership units (which may be converted to
common stock) at June 30, 2010 have been excluded from the diluted net income (loss) per common
share calculation, as there would be no effect on reported diluted net income (loss) per common
share. All unvested restricted stock units, LTIP Units (as defined in note 7), stock options,
shares issuable upon conversation of outstanding Convertible Notes (as defined in note 7), and
warrants issued to the holders of our preferred stock have been excluded from loss per share for
the three and six months ended June 30, 2010 and 2009 as they are anti-dilutive.
The table below details the components of the basic and diluted loss per share calculations
(in thousands, except for per share data):
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
Numerator: |
||||||||
Net loss from continuing operations |
$ | (20,845 | ) | $ | (9,478 | ) | ||
Net loss from discontinued operations |
(226 | ) | (579 | ) | ||||
Net loss attributable to common shareholders |
(21,071 | ) | (10,057 | ) | ||||
Less: preferred stock dividends and accretion |
2,114 | | ||||||
Numerator for basic and diluted loss available to common
stockholders |
$ | (23,185 | ) | $ | (10,057 | ) | ||
Denominator, continuing and discontinued operations: |
||||||||
Weighted average basic common shares outstanding |
30,484 | 29,745 | ||||||
Effect of dilutive securities |
| | ||||||
Weighted average diluted common shares outstanding |
30,484 | 29,745 | ||||||
Basic and diluted loss from continuing operations per share |
$ | (0.75 | ) | $ | (0.32 | ) | ||
Basic and diluted loss from discontinued operations per share |
$ | (0.01 | ) | $ | (0.02 | ) | ||
Basic and diluted loss available to common stockholders per
common share |
$ | (0.76 | ) | $ | (0.34 | ) | ||
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Six Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
Numerator: |
||||||||
Net loss from continuing operations |
$ | (54,196 | ) | $ | (20,091 | ) | ||
Net income (loss) from discontinued operations |
17,165 | (552 | ) | |||||
Net loss attributable to common shareholders |
(37,031 | ) | (20,643 | ) | ||||
Less: preferred stock dividends and accretion |
4,192 | | ||||||
Numerator for basic and diluted loss available to common
stockholders |
$ | (41,223 | ) | $ | (20,643 | ) | ||
Denominator, continuing and discontinued operations: |
||||||||
Weighted average basic common shares outstanding |
30,395 | 29,742 | ||||||
Effect of dilutive securities |
| | ||||||
Weighted average diluted common shares outstanding |
30,395 | 29,742 | ||||||
Basic and diluted loss from continuing operations per share |
$ | (1.92 | ) | $ | (0.67 | ) | ||
Basic and diluted income from discontinued operations per share |
$ | 0.56 | $ | (0.02 | ) | |||
Basic and diluted loss available to common stockholders per
common share |
$ | (1.36 | ) | $ | (0.69 | ) | ||
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4. Investments in and Advances to Unconsolidated Joint Ventures
The Companys investments in and advances to unconsolidated joint ventures and its equity in
income (losses) of unconsolidated joint ventures are summarized as follows (in thousands):
Investments
As of | As of | |||||||
June 30, | December 31, | |||||||
Entity | 2010 | 2009 | ||||||
Mondrian South Beach |
$ | 13,189 | $ | 10,745 | ||||
Morgans Hotel Group Europe Ltd. |
339 | | ||||||
Mondrian SoHo |
| 8,335 | ||||||
Boston Ames |
10,693 | 11,185 | ||||||
Other |
2,884 | 2,180 | ||||||
Total investments in and advances to unconsolidated joint ventures |
$ | 27,105 | $ | 32,445 | ||||
As of | As of | |||||||
June 30, | December 31, | |||||||
Entity | 2010 | 2009 | ||||||
Morgans Hotel Group Europe Ltd. |
$ | | $ | (1,604 | ) | |||
Restaurant Venture SC London |
(1,584 | ) | (1,136 | ) | ||||
Hard Rock Hotel & Casino |
| | ||||||
Total losses from and distributions in excess of investment in unconsolidated
joint ventures |
$ | (1,584 | ) | $ | (2,740 | ) | ||
Equity in income (loss) from unconsolidated joint ventures
Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
Entity | June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | ||||||||||||
Morgans Hotel Group
Europe Ltd. |
$ | 687 | $ | 505 | $ | 1,499 | $ | 173 | ||||||||
Restaurant Venture
SC London |
(191 | ) | (258 | ) | (448 | ) | (417 | ) | ||||||||
Mondrian South Beach |
192 | (2,101 | ) | (232 | ) | (2,087 | ) | |||||||||
Ames |
(95 | ) | | (491 | ) | | ||||||||||
Echelon Las Vegas |
| (44 | ) | | (111 | ) | ||||||||||
Mondrian SoHo |
(8,335 | ) | | (8,335 | ) | | ||||||||||
Other |
3 | 3 | 5 | 4 | ||||||||||||
Total equity in
loss from
unconsolidated
joint ventures |
$ | (7,739 | ) | $ | (1,895 | ) | $ | (8,002 | ) | $ | (2,438 | ) | ||||
Morgans Hotel Group Europe Limited
As of June 30, 2010, the Company owned interests in two hotels in London, England, St Martins
Lane, a 204-room hotel, and Sanderson, a 150-room hotel, through a 50/50 joint venture known as
Morgans Hotel Group Europe Limited (Morgans Europe) with Walton MG London Investors V, L.L.C
(Walton).
Under the joint venture agreement with Walton, the Company owns indirectly a 50% equity
interest in Morgans Europe and has an equal representation on the Morgans Europe board of
directors. In the event the parties cannot agree on certain specified decisions, such as approving
hotel budgets or acquiring a new hotel property, or beginning any time after February 9, 2010,
either party has the right to buy all the shares of the other party in the joint venture or, if its
offer is rejected, require the other party to buy all of its shares at the same offered price per
share in cash.
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Under a management agreement with Morgans Europe, the Company earns management fees and a
reimbursement for allocable chain service and technical service expenses. The Company is also
entitled to an incentive management fee and a capital incentive fee. The Company did not earn any
incentive fees during the three and six months ended June 30, 2010 and 2009.
As of June 30, 2010, Morgans Europe had outstanding mortgage debt of £99.3 million, or
approximately $149.7 million at the exchange rate of 1.51 US dollars to GBP at June 30, 2010, which
was scheduled to mature on November 24, 2010. On July 15, 2010, the joint venture refinanced in
full the outstanding mortgage debt with a new loan maturing in July 2015. The new financing is a
£100 million loan that is non-recourse to the Company and is secured by Sanderson and St Martins
Lane. The joint venture also entered into a swap agreement that effectively fixes the interest
rate at 5.22% for the term of the loan, a reduction in interest rate of approximately 105 basis
points, as compared to the previous mortgage loan.
Mondrian South Beach
On August 8, 2006, the Company entered into a 50/50 joint venture with an affiliate of Hudson
Capital to renovate and convert an apartment building on Biscayne Bay in South Beach Miami into a
condominium hotel, Mondrian South Beach, which opened in December 2008. The Company operates
Mondrian South Beach under a long-term incentive management contract.
The joint venture acquired the existing building and land for a gross purchase price of $110.0
million. An initial equity investment of $15.0 million from each of the Company and Hudson Capital
was funded at closing, and subsequently each member also contributed $8.0 million of additional
equity. The Company and an affiliate of Hudson Capital provided additional mezzanine financing of
approximately $22.5 million in total to the joint venture to fund completion of the construction at
Mondrian South Beach in 2008. Additionally, the joint venture initially received non-recourse
mortgage loan financing of approximately $124.0 million at a rate of LIBOR plus 300 basis points. A
portion of this mortgage debt was paid down, prior to the amendments discussed below, with proceeds
obtained from condominium sales. In April 2008, the Mondrian South Beach joint venture obtained a
mezzanine loan of $28.0 million bearing interest at LIBOR, based on the rate set date, plus 600
basis points. The $28.0 million mezzanine loan provided by the lender and the $22.5 million
mezzanine loan provided by the joint venture partners were both amended in April 2010, as discussed
below.
On November 25, 2008, the mortgage loan and mezzanine loan agreements related to the Mondrian
South Beach were amended and restated to provide for, among other things, four one-year extension
options of the third-party financing, subject to certain conditions. The loans matured on August 1,
2009, but the maturity date was extended in April 2010, as described below.
In April 2010, the joint venture further amended the non-recourse financing secured by the
property and extended the maturity date for up to seven years until April 2017. Among other things,
the amendment allows the joint venture to accrue all interest for a period of two years and a
portion thereafter and provides the joint venture the ability to provide seller financing to
qualified condominium buyers with up to 80% of the condominium purchase price. Each of the joint
venture partners provided an additional $2.75 million to the joint venture resulting in total
mezzanine financing provided by the partners of $28.0 million. The amendment also provides that
this $28.0 million mezzanine financing invested in the property be elevated in the capital
structure to become, in effect, on par with the lenders mezzanine debt so that the joint venture
receives at least 50% of all returns in excess of the first mortgage.
A standard non-recourse carve-out guaranty by Morgans Group is in place for the Mondrian South
Beach loans. In addition, although construction is complete and Mondrian South Beach opened on
December 1, 2008, the Company and affiliates of its joint venture partner may have continuing
obligations under a construction completion guaranty. The Company and affiliates of its joint
venture partner also have an agreement to purchase approximately $14 million each of condominium
units under certain conditions, including an event of default.
The joint venture is in the process of selling units as condominiums, subject to market
conditions, and unit buyers will have the opportunity to place their units into the hotels rental
program. In addition to hotel management fees, the Company could also realize fees from the sale of
condominium units.
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Hard Rock Hotel & Casino
Formation and Financing
On February 2, 2007, the Company and Morgans Group (together, the Morgans Parties), an
affiliate of DLJ Merchant Banking Partners (DLJMB), and certain other DLJMB affiliates (such
affiliates, together with DLJMB, collectively the DLJMB Parties) completed the acquisition of the
Hard Rock Hotel & Casino in Las Vegas (Hard Rock). The acquisition was completed through a joint
venture entity, Hard Rock Hotel Holdings, LLC, funded one-third, or approximately $57.5 million, by
the Morgans Parties, and two-thirds, or approximately $115.0 million, by the DLJMB Parties. In
connection with the joint ventures acquisition of the Hard Rock, certain subsidiaries of the joint
venture entered into a debt financing in the form of a real estate loan in the commercial
mortgage-backed securities market (the CMBS Facility), which provided for a $760.0 million
acquisition loan that was used to fund the acquisition, of which $110.0 million was repaid
according to the terms of the loan, and a construction loan of up to $620.0 million for the
expansion project at the Hard Rock. The DLJMB Parties and the Morgans Parties have subsequently
made additional contributions primarily to fund the expansion. As of June 30, 2010, the DLJMB
Parties had contributed an aggregate of $424.4 million in cash and the Morgans Parties had
contributed an aggregate of $75.8 million in cash. In 2009, the Company wrote down its investment
in Hard Rock to zero.
Amendment of the CMBS Facility
On December 24, 2009 our Hard Rock joint venture amended the loan secured by the hotel and
casino so that the maturity date 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 the maturity date is extendable until February 2014. One of the lender groups funded half of the reserves necessary for
the extension in exchange for an equity participation in the land.
Capital Structure
As a result of additional disproportionate cash contributions made by the DLJMB Parties since
the formation of the Hard Rock joint venture, the Company held approximately a 12.8% ownership
interest in the joint venture as of June 30, 2010, based on cash contributions 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 the DLJMB
Parties. 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 the Companys ownership interest.
Although the Company has the right to participate in any future capital contributions that may be
called by the joint ventures board of directors, the Company has no obligation to fund such
contributions. To the extent the Company decides not to participate in any such contribution, its
interest in the joint venture will be diluted.
Management Agreement
Under an amended property management agreement, the Company operates the hotel, retail, food
and beverage, entertainment and all other businesses related to the Hard Rock, excluding the casino
prior to March 1, 2008, which was managed by a third party up to that date. Under the terms of
the agreement, the Company receives a management fee and a chain service expense reimbursement of
all non-gaming revenue including casino rents and all other rental income. The Company can also
earn an incentive management fee based on EBITDA, as defined, above certain levels. The term of the
management contract is 20 years with two 10-year renewals. Beginning 12 months following the year
of 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.
Mondrian SoHo
In June 2007, the Company entered into a joint venture with Cape Advisors Inc. to acquire and
develop a Mondrian hotel in the SoHo neighborhood of New York City. The Company initially
contributed $5.0 million for a 20% equity interest in the joint venture and subsequently loaned an
additional $3.3 million to the venture. The joint venture obtained a loan of $195.2 million to
acquire and develop the hotel, which matured in June 2010.
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On July 31, 2010 the lender amended the debt financing on the property, among other things,
to provide for extensions of the maturity date of the mortgage loan secured by the hotel for up to
five years through extension options, subject to certain conditions. In addition to new funds
being provided by the lender, Cape Advisors Inc. is
making cash and other contributions to the joint venture, and the Company will provide up to
$3.2 million of additional funds to complete the project. The Companys contribution will be
treated as a loan with priority over the equity.
In accordance with ASC 323-10, other-than-temporary declines in fair value of an investment in
unconsolidated joint ventures results in a reduction in the carrying value of the investment.
Based on the decline in general market conditions since the inception of the joint venture and more
recently, the need for additional funding to complete the hotel, the Company performed an
impairment analysis and concluded that its investment in the Mondrian SoHo joint venture was
impaired. As such, the Company recorded an $8.3 million impairment charge through its equity in
loss of unconsolidated joint ventures in the quarter ended June 30, 2010.
The Mondrian SoHo is currently under construction and is expected to have a restaurant, bar,
and other facilities. The hotel is expected to open in January 2011. The Company has a 10-year
management contract with two 10-year extension options to operate the hotel.
Ames
On June 17, 2008, the Company, Normandy Real Estate Partners, and Ames Hotel Partners entered
into a joint venture agreement as part of the development of the Ames hotel in Boston. Ames opened
on November 19, 2009 and has 114 guest rooms, a restaurant, bar and other facilities. The Company
manages Ames under a 15-year management contract.
The Company has contributed approximately $11.0 million in equity through June 30, 2010 for an
approximately 31% interest in the joint venture. The joint venture obtained a loan for $46.5
million secured by the hotel, which amount was outstanding as of June 30, 2010. The project also
qualified for federal and state historic rehabilitation tax credits which were sold for
approximately $15.4 million.
Shore Club
The Company operates Shore Club under a management contract and owned a minority ownership
interest of approximately 7% at June 30, 2010. On September 15, 2009, the joint venture that owns
Shore Club received a notice of default on behalf of the special servicer for the lender on the
joint ventures mortgage loan for failure to make its September monthly payment and for failure to
maintain its debt service coverage ratio, as required by the loan documents. On October 7, 2009,
the joint venture received a second letter on behalf of the special servicer for the lender
accelerating the payment of all outstanding principal, accrued interest, and all other amounts due
on the mortgage loan. The lender also demanded that the joint venture transfer all rents and
revenues directly to the lender to satisfy the joint ventures debt. In March 2010, the lender for
the Shore Club mortgage initiated foreclosure proceedings against the property. The Company is
continuing to operate the hotel pursuant to the management agreement during foreclosure
proceedings, but is uncertain whether the Company will continue to manage the property once
foreclosure proceedings are complete.
San Juan Water and Beach Club
On October 18, 2009, the Company began managing the San Juan Water and Beach Club Hotel, a
78-key beachfront hotel in Isla Verde, Puerto Rico, pursuant to a 10-year management agreement. The
owners intend to obtain development rights to build a Morgans Hotel Group branded hotel. The
Company plans 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. The Company anticipates
contributing a total of approximately $0.8 million toward the renovation of the hotel, which will
be treated as a minority percentage ownership. As of June 30, 2010, the Company had contributed
$0.7 million and had an approximately 25% ownership interest in the venture.
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5. Other Liabilities
Other liabilities consist of the following (in thousands):
As of | As of | |||||||
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Interest swap liability (note 2) |
$ | 446 | $ | 9,000 | ||||
Designer fee payable |
13,867 | 13,866 | ||||||
Warrant liability (note 8) |
32,236 | 18,428 | ||||||
$ | 46,549 | $ | 41,294 | |||||
Interest Swap Liability
As discussed further in note 2, the estimated fair value of the interest rate swap derivative
liability was approximately $0.4 million and $9.0 million at June 30, 2010 and December 31, 2009,
respectively.
Designer Fee Payable
The Former Parent had an exclusive service agreement with a hotel designer, pursuant to which
the designer had made various claims. Although the Company is not a party to the agreement, it may
have certain contractual obligations or liabilities to the Former Parent in connection with the
agreement. According to the agreement, the designer was owed a base fee for each designed hotel,
plus 1% of Gross Revenues, as defined in the agreement, for a 10-year period from the opening of
each hotel. In addition, the agreement also called for the designer to design a minimum number of
projects for which the designer would be paid a minimum fee. A liability amount has been estimated
and recorded in these consolidated financial statements before considering any defenses and/or
counter-claims that may be available to the Company or the Former Parent in connection with any
claim brought by the designer. The estimated costs of the design services were capitalized as a
component of the applicable hotel and amortized over the five-year estimated life of the related
design elements. Until December 2009, interest was accreted each year on the liability and charged
to interest expense using a rate of 9%.
Warrant Liability
As discussed further in notes 2 and 8, on October 15, 2009, in connection with the issuance of
75,000 of the Companys Series A Preferred Securities to the Investors, as discussed in note 8, the
Company issued warrants to purchase 12,500,000 shares of the Companys common stock at an exercise
price of $6.00 per share to the Investors. Due to the potential anti-dilution adjustment prior to
the first anniversary of the warrant issuance, the Company is required to fair value the warrants,
which are recorded as a liability until expiration of this anti-dilution clause on October 15,
2010.
6. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consists of the following (in thousands):
As of | As of | Interest rate at | ||||||||||
June 30, | December 31, | June 30, | ||||||||||
Description | 2010 | 2009 | 2010 | |||||||||
Notes secured by Hudson and Mondrian (a) |
$ | 364,000 | $ | 364,000 | LIBOR + 1.25 | % | ||||||
Clift debt (b) |
86,084 | 83,206 | 9.60 | % | ||||||||
Promissory notes (c) |
10,500 | 10,500 | 11.00 | % | ||||||||
Liability to subsidiary trust (d) |
50,100 | 50,100 | 8.68 | % | ||||||||
Revolving credit (e) |
23,508 | 23,508 | (f | ) | ||||||||
Convertible Notes, face value of $172.5 million (f) |
162,729 | 161,591 | 2.38 | % | ||||||||
Capital lease obligations |
6,108 | 6,108 | varies | |||||||||
Total long-term debt |
$ | 703,029 | $ | 699,013 | ||||||||
Note secured by discontinued operation (g) |
| 40,000 | ||||||||||
(a) Mortgage Agreement Notes secured by Hudson and Mondrian Los Angeles
On October 6, 2006, subsidiaries of the Company entered into non-recourse mortgage financings
with Wachovia Bank, National Association, as lender, consisting of two separate mortgage loans and
a mezzanine loan (collectively, the Mortgages). As of June 30, 2010, the Mortgages were comprised
of a $217.0 million first mortgage note secured by Hudson, a $26.5 million mezzanine loan secured
by a pledge of the equity interests in the Companys subsidiary owning Hudson, and a $120.5 million
first mortgage note secured by Mondrian Los Angeles. The Mortgages bore interest at a blended rate
of 30-day LIBOR plus 125 basis points. The Company maintained swaps that effectively fixed the
LIBOR rate on the debt under the Mortgages at approximately 5.0% through the initial
maturity date. The initial maturity date of the Mortgages was July 12, 2010, which date has
effectively been extended to October 12, 2013 for the Hudson mezzanine loans, described below, and
September 12, 2010 for the remainder of the Mortgages through forbearance agreements.
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On July 9, 2010, the Company entered into forbearance agreements with the lenders that hold
the first mortgage notes of the Mortgages. The forbearance agreements effectively extend the
maturities of the first mortgage loans until September 12, 2010. The Company is in negotiations
with the mortgage lenders to extend the first mortgage loans. A portion of these loans may need to
be repaid in order to obtain an extension. There can be no assurance that the Company will be
successful in extending the maturity of these mortgage loans.
On October 14, 2009, the Company entered into an agreement with one of its lenders which
holds, among other loans, the mezzanine loan on Hudson. Under the agreement, the Company paid an
aggregate of $11.2 million to (i) reduce the principal balance of the mezzanine loan from $32.5
million to $26.5 million, (ii) acquire interests in $4.5 million of certain debt securities secured
by certain of the Companys other debt obligations, (iii) pay fees, and (iv) obtain a forbearance
from the mezzanine lender until October 12, 2013 from exercising any remedies resulting from a
maturity default, subject only to maintaining certain interest rate caps and making an additional
aggregate payment of $1.3 million to purchase additional interests in certain of the Companys
other debt obligations prior to October 11, 2011. The Company believes these transactions will have
the practical effect of extending the Hudson mezzanine loan by three years and three months beyond
its scheduled maturity of July 12, 2010. The mezzanine lender also has agreed to cooperate with the
Company in its efforts to seek an extension of the $217 million Hudson mortgage loan and consent to
certain refinancings and other modifications of the Hudson mortgage loan.
The Mortgages require the Companys subsidiary borrowers (entities owning Hudson and Mondrian
Los Angeles) to fund reserve accounts to cover monthly debt service payments. Those subsidiary
borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance
premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are
deposited into restricted cash accounts and are released as certain conditions are met. As of March
31, 2010, the Mortgages had fallen below the required debt service coverage and as such, all
excess cash, once all other reserve accounts are completed, is funded into a curtailment reserve
fund. As of June 30, 2010, the balance in the curtailment reserve fund was $16.4 million. The
subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade
payables, purchase money indebtedness, capital lease obligations and certain other liabilities.
The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles.
Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt or
partnership interest debt. In addition, the Mortgages do not permit (1) transfers of more than 49%
of the interests in the subsidiary borrowers, Morgans Group or the Company or (2) a change in
control of the subsidiary borrowers or in respect of Morgans Group or the Company itself without,
in each case, complying with various conditions or obtaining the prior written consent of the
lender.
The Mortgages provide for events of default customary in mortgage financings, including, among
others, failure to pay principal or interest when due, failure to comply with certain covenants,
certain insolvency and receivership events affecting the subsidiary borrowers, Morgans Group or the
Company, and breach of the encumbrance and transfer provisions. In the event of a default under the
Mortgages, the lenders recourse is limited to the mortgaged property, unless the event of default
results from insolvency, a voluntary bankruptcy filing, a breach of the encumbrance and transfer
provisions, or various other bad acts, in which event the lender may also pursue remedies against
Morgans Group.
(b) Clift Debt
In October 2004, Clift Holdings LLC (Clift Holdings) sold the hotel to an unrelated party
for $71.0 million and then leased it back for a 99-year lease term. Under this lease, the Company
is required to fund operating shortfalls including the lease payments and to fund all capital
expenditures. This transaction did not qualify as a sale due to the Companys continued involvement
and therefore is treated as a financing.
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The lease payment terms are as follows:
Years 1 and 2
|
$2.8 million per annum (completed in October 2006) | |
Years 3 to 10
|
$6.0 million per annum | |
Thereafter
|
Increased at 5-year intervals by a formula tied to increases in the Consumer Price Index. At year 10, the increase has a maximum of 40% and a minimum of 20%. At each payment date thereafter, the maximum increase is 20% and the minimum is 10%. |
Due to the amount of the payments stated in the lease, which will increase periodically, and
the economic environment in which the hotel operates, Clift Holdings, the Companys subsidiary that
leases Clift, had not been operating Clift at a profit and Morgans Group had been funding cash
shortfalls sustained at Clift in order to enable Clift Holdings to make lease payments from time to
time. On March 1, 2010, however, the Company discontinued subsidizing Clift Holdings and Clift
Holdings stopped making the scheduled monthly payments. Under the lease, the owners recourse is
limited to Clift Holdings, which has no substantial assets other than its leasehold interest in
Clift. The Company has been in discussions with the owners to restructure the payment obligations.
However, on May 4, 2010, the owners filed a lawsuit against Clift Holdings, which the court
dismissed on June 1, 2010. On June 8, 2010, the owners filed a new lawsuit and on June 17, 2010,
the Company and Clift Holdings filed an affirmative civil lawsuit. The Company has had discussion
with the owners regarding resolution of this litigation, but there can be no assurance that it will
be successful in restructuring the lease, resolving this litigation, or continuing to operate
Clift. See footnote 11 to the consolidated financial statements for further discussion.
(c) Promissory Notes
The property across from the Delano South Beach has a $10.0 million interest only non-recourse
promissory note to the seller. Effective January 24, 2010, the Company extended the maturity of
the note until January 24, 2011. The note bears interest at 11.0%, but the Company is 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 the Company
extended to January 24, 2011, and continues to bear interest at 11%. The obligations under this
note are secured with a pledge of the equity interests in the Companys subsidiary that owns the
property. Effective April 25, 2010, the Company discontinued subsidizing the monthly scheduled
interest payments under both notes. The Company is reviewing the feasibility of the project,
including whether the project qualifies for various tax credits. The Company may consider
development of the property if the proceeds from the sale of the tax credits are available to fund
a sufficient portion of the costs.
(d) Liability to Subsidiary Trust Issuing Preferred Securities
On August 4, 2006, a newly established trust formed by the Company, MHG Capital Trust I (the
Trust), issued $50.0 million in trust preferred securities in a private placement. The Company
owns all of the $0.1 million of outstanding common stock of the Trust. The Trust used the proceeds
of these transactions to purchase $50.1 million of junior subordinated notes issued by the
Companys operating company and guaranteed by the Company (the Trust Notes) which mature on
October 30, 2036. The sole assets of the Trust consist of the Trust Notes. The terms of the Trust
Notes are substantially the same as preferred securities issued by the Trust. The Trust Notes and
the preferred securities have a fixed interest rate of 8.68% per annum during the first 10 years,
after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus
3.25% per annum. The Trust Notes are redeemable by the Trust, at the Companys option, after five
years at par. To the extent the Company redeems the Trust Notes, the Trust is required to redeem a
corresponding amount of preferred securities.
The Company has identified that the Trust is a variable interest entity under ASC 810-10.
Based on managements analysis, the Company is not the primary beneficiary since it does not absorb
a majority of the expected losses, nor is it entitled to a majority of the expected residual
returns. Accordingly, the Trust is not consolidated into the Companys financial statements. The
Company accounts for the investment in the common stock of the Trust under the equity method of
accounting.
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(e) Revolving Credit Facility
On October 6, 2006, the Company and certain of its subsidiaries entered into a revolving
credit facility which included a letter of credit sub-facility and swingline sub-facility
(collectively, the Revolving Credit Facility) with Wachovia Bank, National Association, as
Administrative Agent, and the other lenders party thereto.
On August 5, 2009, the Company and certain of its subsidiaries entered into an amendment to
the Revolving Credit Facility (the Amended Revolving Credit Facility).
Among other things, the Amended Revolving Credit Facility:
| deleted the financial covenant requiring the Company to maintain certain leverage
ratios; |
| revised the fixed charge coverage ratio (defined generally as the ratio of
consolidated EBITDA excluding Mondrian Scottsdales EBITDA for the periods ending June
30, 2009 and September 30, 2009 and Clifts EBITDA for all periods to consolidated
interest expense excluding Mondrian Scottsdales interest expense for the periods ending
June 30, 2009 and September 30, 2009 and Clifts interest expense for all periods) that
the Company is required to maintain for each four-quarter period to no less than 0.90 to
1.00 from the previous fixed charge coverage ratio of no less than 1.75 to 1.00. As of
June 30, 2010, the Companys fixed charge coverage ratio under the Amended Revolving
Credit Facility was 1.18x; |
| limits defaults relating to bankruptcy and judgments to certain events involving
the Company, Morgans Group and subsidiaries that are parties to the Amended Revolving
Credit Facility; |
| prohibits capital expenditures with respect to any hotels owned by the Company,
the borrowers, as defined, or subsidiaries, other than maintenance capital expenditures
for any hotel not exceeding 4% of the annual gross revenues of such hotel and certain
other exceptions; |
| revised certain provisions related to permitted indebtedness, including, among
other things, deleting certain provisions permitting unsecured indebtedness and
indebtedness for the acquisition or expansion of hotels; |
| prohibits repurchases of the Companys common equity interests by the Company or
Morgans Group; |
| 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 as
of June 30, 2009 and/or for the four fiscal quarters ended June 30, 2009 under the
Revolving Credit Facility before it was amended. |
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 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.
Following appraisals in March 2010, total availability under the Amended Revolving Credit Facility
as of June 30, 2010 was $122.3 million, of which the outstanding principal balance was $23.5
million, and approximately $2.0 million of letters of credit were posted, all allocated to the
Florida Tranche.
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The Amended Revolving Credit Facility bears interest at a fluctuating rate measured by
reference to, at the Companys election, either LIBOR (subject to a LIBOR floor of 1%) or a base
rate, plus a borrowing margin.
LIBOR loans have a borrowing margin of 3.75% per annum and base rate loans have a borrowing
margin of 2.75% per annum. The Amended Revolving Credit Facility also provides for the payment of a
quarterly unused facility fee equal to the average daily unused amount for each quarter multiplied
by 0.5%.
The owners of the New York Properties, wholly-owned subsidiaries of the Company, have paid all
mortgage recording and other taxes required for the mortgage on the New York Properties to secure
in full the amount available under the New York Tranche. The commitments under the Amended
Revolving Credit Facility terminate on October 5, 2011, at which time all outstanding amounts under
the Amended Revolving Credit Facility will be due.
The Amended Revolving Credit Facility provides for customary events of default, including:
failure to pay principal or interest when due; failure to comply with covenants; any representation
proving to be incorrect; defaults relating to acceleration of, or defaults on, certain other
indebtedness of at least $10.0 million in the aggregate; certain insolvency and bankruptcy events
affecting the Company, Morgans Group or certain subsidiaries of the Company that are party to the
Amended Revolving Credit Facility; judgments in excess of $5.0 million in the aggregate affecting
the Company, Morgans Group and certain subsidiaries of the Company that are party to the Amended
Revolving Credit Facility; the acquisition by any person of 40% or more of any outstanding class of
capital stock having ordinary voting power in the election of directors of the Company; and the
incurrence of certain ERISA liabilities in excess of $5.0 million in the aggregate.
(f) October 2007 Convertible Notes Offering
On October 17, 2007, the Company issued $172.5 million aggregate principal amount of 2.375%
Senior Subordinated Convertible Notes (the Convertible Notes) in a private offering. Net proceeds
from the offering were approximately $166.8 million.
The Convertible Notes are senior subordinated unsecured obligations of the Company and are
guaranteed on a senior subordinated basis by the Companys operating company, Morgans Group. The
Convertible Notes are convertible into shares of the Companys common stock under certain
circumstances and upon the occurrence of specified events.
Interest on the Convertible Notes is payable semi-annually in arrears on April 15 and October
15 of each year, beginning on April 15, 2008, and the Convertible Notes mature on October 15, 2014,
unless previously repurchased by the Company or converted in accordance with their terms prior to
such date. The initial conversion rate for each $1,000 principal amount of Convertible Notes is
37.1903 shares of the Companys common stock, representing an initial conversion price of
approximately $26.89 per share of common stock. The initial conversion rate is subject to
adjustment under certain circumstances.
On January 1, 2009, the Company adopted ASC 470-20, which clarifies the accounting for
convertible notes payable. ASC 470-20 requires the proceeds from the issuance of convertible notes
to be allocated between a debt component and an equity component. The debt component is measured
based on the fair value of similar debt without an equity conversion feature, and the equity
component is determined as the residual of the fair value of the debt deducted from the original
proceeds received. The resulting discount on the debt component is amortized over the period the
debt is expected to be outstanding as additional interest expense. ASC 470-20 required retroactive
application to all periods presented. The equity component, recorded as additional paid-in capital,
was $9.0 million, which represents the difference between the proceeds from issuance of the
Convertible Notes and the fair value of the liability, net of deferred taxes of $6.4 million as of
the date of issuance of the Convertible Notes.
In connection with the issuance of the Convertible Notes, the Company entered into convertible
note hedge transactions with respect to the Companys common stock (the Call Options) with
Merrill Lynch Financial Markets, Inc. and Citibank, N.A. (collectively, the Hedge Providers). The
Call Options are exercisable solely in connection with any conversion of the Convertible Notes and
pursuant to which the Company will receive shares of the Companys common stock from the Hedge
Providers equal to the number of shares issuable to the holders of the Convertible Notes upon
conversion. The Company paid approximately $58.2 million for the Call Options.
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In connection with the sale of the Convertible Notes, the Company also entered into separate
warrant transactions with Merrill Lynch Financial Markets, Inc. and Citibank, N.A., whereby the
Company issued warrants (the Warrants) to purchase 6,415,327 shares of common stock, subject to
customary anti-dilution adjustments, at
an exercise price of approximately $40.00 per share of common stock. The Company received
approximately $34.1 million from the issuance of the Warrants.
The Company recorded the purchase of the Call Options, net of the related tax benefit of
approximately $20.3 million, as a reduction of additional paid-in capital and the proceeds from the
Warrants as an addition to additional paid-in capital in accordance with EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Companys
Own Stock, which has been subsequently codified in ASC 815-30, Derivatives and Hedging, Cash Flow
Hedges.
In February 2008, the Company filed a registration statement with the Securities and Exchange
Commission to cover the resale of shares of the Companys common stock that may be issued from time
to time upon the conversion of the Convertible Notes.
(g) Mortgage Debt of Discontinued Operation
In May 2006, the Company obtained a $40.0 million non-recourse mortgage and mezzanine
financing on Mondrian Scottsdale, which accrued interest at LIBOR plus 2.3%, and for which Morgans
Group had provided a standard non-recourse carve-out guaranty. In June 2009, the non-recourse
mortgage and mezzanine loans matured and the Company discontinued subsidizing the debt service. The
lender foreclosed on the property and terminated the Companys management agreement related to the
property with an effective termination date of March 16, 2010.
7. Omnibus Stock Incentive Plan
On February 9, 2006, the Board of Directors of the Company adopted the Morgans Hotel Group Co.
2006 Omnibus Stock Incentive Plan (the 2006 Stock Incentive Plan). The 2006 Stock Incentive Plan
provided for the issuance of stock-based incentive awards, including incentive stock options,
non-qualified stock options, stock appreciation rights, shares of common stock of the Company,
including restricted stock units (RSUs) and other equity-based awards, including membership units
in Morgans Group which are structured as profits interests (LTIP Units), or any combination of
the foregoing. The eligible participants in the 2006 Stock Incentive Plan included directors,
officers and employees of the Company. An aggregate of 3,500,000 shares of common stock of the
Company were reserved and authorized for issuance under the 2006 Stock Incentive Plan, subject to
equitable adjustment upon the occurrence of certain corporate events. On April 23, 2007, the Board
of Directors of the Company adopted, and at the annual meeting of stockholders on May 22, 2007, the
stockholders approved, the Companys 2007 Omnibus Incentive Plan (the 2007 Incentive Plan), which
amended and restated the 2006 Stock Incentive Plan and increased the number of shares reserved for
issuance under the plan by up to 3,250,000 shares to a total of 6,750,000 shares. Awards other than
options and stock appreciation rights reduce the shares available for grant by 1.7 shares for each
share subject to such an award. On April 10, 2008, the Board of Directors of the Company adopted,
and at the annual meeting of stockholders on May 20, 2008, the stockholders approved, an Amended
and Restated 2007 Omnibus Incentive Plan (the Amended 2007 Incentive Plan) which, among other
things, increased the number of shares reserved for issuance under the plan by 1,860,000 shares
from 6,750,000 shares to 8,610,000 shares. On November 30, 2009, the Board of Directors of the
Company adopted, and at a special meeting of stockholders of the Company held on January 28, 2010,
the Companys stockholders approved, an amendment to the Amended 2007 Incentive Plan to increase
the number of shares reserved for issuance under the plan by 3,000,000 shares to 11,610,000 shares.
On April 5, 2010, the Compensation Committee of the Board of Directors of the Company issued
an aggregate of 409,703 LTIP units to the Companys named executive officers under the Amended 2007
Incentive Plan. All grants vest one-third of the amount granted on each of the first three
anniversaries of the grant date so long as the recipient continues to be an eligible participant.
The estimated fair value of each such LTIP unit granted was $6.76 at the grant date.
On April 22, 2010, the Compensation Committee of the Board of Directors of the Company issued
an aggregate of 198,100 RSUs to employees under the Amended 2007 Incentive Plan. All grants vest
one-third of the amount granted on each of the first three anniversaries of the grant date so long
as the recipient continues to be an eligible participant. The estimated fair value of each such RSU
granted was $8.10 at the grant date.
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On May 20, 2010, the Company issued an aggregate of 58,135 RSUs to the Companys non-employee
directors under the Amended 2007 Incentive Plan, which vested immediately upon grant. The fair
value of each such RSU was $6.02 at the grant date.
A summary of stock-based incentive awards as of June 30, 2010 is as follows (in units, or
shares, as applicable):
Restricted Stock | ||||||||||||
Units | LTIP Units | Stock Options | ||||||||||
Outstanding as of January 1, 2010 |
1,265,332 | 2,018,659 | 1,659,279 | |||||||||
Granted during 2010 |
256,235 | 453,619 | | |||||||||
Distributed/exercised during 2010 |
(294,232 | ) | (193,139 | ) | | |||||||
Forfeited during 2010 |
(122,148 | ) | (7,702 | ) | (141,874 | ) | ||||||
Outstanding as of June 30, 2010 |
1,105,187 | 2,271,437 | 1,517,405 | |||||||||
Vested as of June 30, 2010 |
216,025 | 1,343,894 | 1,267,974 | |||||||||
As of June 30, 2010 and December 31, 2009, there were approximately $11.4 million and $13.3
million, respectively, of total unrecognized compensation costs related to unvested share awards.
As of June 30, 2010, the weighted-average period over which the unrecognized compensation expense
will be recorded is approximately 14 months.
Total stock compensation expense, which is included in corporate expenses on the accompanying
consolidated statements of operations, was $2.8 million and $2.5 million for the three months ended
June 30, 2010 and 2009, respectively, and $6.6 million and $5.6 million for the six months ended
June 30, 2010 and 2009, respectively.
8. Preferred Securities and Warrants
On October 15, 2009, the Company entered into a Securities Purchase Agreement (the Securities
Purchase Agreement) with the Investors. Under the Securities Purchase Agreement, the Company
issued and sold to the Investors (i) 75,000 shares of the Companys Series A Preferred Securities,
$1,000 liquidation preference per share (the Series A Preferred Securities), and (ii) warrants to
purchase 12,500,000 shares of the Companys common stock at an exercise price of $6.00 per share.
The Series A Preferred Securities have an 8% dividend rate for the first five years, a 10%
dividend rate for years six and seven, and a 20% dividend rate thereafter. The Company has the
option to redeem any or all of the Series A Preferred Securities at par at any time. The Series A
Preferred Securities have limited voting rights and only vote on the authorization to issue senior
preferred, amendments to their certificate of designations, amendments to the Companys charter
that adversely affect the Series A Preferred Securities and certain change in control transactions.
As discussed in notes 2 and 5, the warrants to purchase 12,500,000 shares of the Companys
common stock at an exercise price of $6.00 per share have a 7-1/2 year term and are exercisable
utilizing a cashless exercise method only, resulting in a net share issuance. Until October 15,
2010, the Investors have certain rights to purchase their pro rata share of any equity or debt
securities offered or sold by the Company. In addition, the $6.00 exercise price of the warrants is
subject to certain reductions if, any time prior to the first anniversary of the warrant issuance,
the Company issues shares of common stock below $6.00 per share. The exercise of the warrants is
also subject to an exercise cap which effectively limits the Investors beneficial ownership of the
Companys common stock to 9.9% at any one time, unless the Company is 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 the Companys common stock, including (subject to certain
exceptions and limitations):
| the sale of substantially all of the Companys assets to a third party; |
| the acquisition by the Company of a third party where the equity investment by the
Company is $100 million or greater; |
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| the acquisition of the Company by a third party; or |
| any change in the size of the Companys Board of Directors to a number below 7 or above
9. |
Subject to certain exceptions, the Investors may not transfer any Series A Preferred
Securities, warrants or common stock until October 15, 2012. The Investors are also subject to
certain standstill arrangements as long as they beneficially own over 15% of the Companys common
stock. Until October 15, 2010, the Investors have certain rights to purchase their pro rata share
of any equity or debt securities offered or sold by the Company.
In connection with the investment by the Investors, the Company paid to the Investors a
commitment fee of $2.4 million and reimbursed the Investors for $600,000 of expenses.
The Company calculated the fair value of the Series A Preferred Securities at its net present
value by discounting dividend payments expected to be paid on the shares over a 7-year period using
a 17.3% rate. The Company determined that the market discount rate of 17.3% was reasonable based on
the Companys best estimate of what similar securities would most likely yield when issued by
entities comparable to the Company.
The initial carrying value of the Series A Preferred Securities was recorded at its net
present value less costs to issue on the date of issuance. The carrying value will be periodically
adjusted for accretion of the discount. As of June 30, 2010, the value of the Series A Preferred
Securities was $49.8 million, which includes the accretion of $1.7 million.
The Company calculated the estimated fair value of the warrants using the Black-Scholes
valuation model, as discussed in note 2.
The Company and Yucaipa American Alliance Fund II, LLC, an affiliate of the Investors (the
Fund Manager), also entered into a Real Estate Fund Formation Agreement (the Fund Formation
Agreement) on October 15, 2009 pursuant to which the Company and the Fund Manager have agreed to
use their good faith efforts to endeavor to raise a private investment fund (the Fund). The
purpose of the Fund will be to invest in hotel real estate projects located in North America. The
Company will be offered the opportunity to manage the hotels owned by the Fund under long-term
management agreements. In connection with the Fund Formation Agreement, the Company issued to the
Fund Manager 5,000,000 contingent warrants to purchase the Companys common stock at an exercise
price of $6.00 per share with a 7-1/2 year term. These contingent warrants will only become
exercisable if the Fund obtains capital commitments in certain amounts over certain time periods
and also meets certain further capital commitment and investment thresholds. The exercise of these
contingent warrants is also subject to an exercise cap which effectively limits the Fund Managers
beneficial ownership (which is considered jointly with the Investors beneficial ownership) of the
Companys common stock to 9.9% at any one time, subject to certain exceptions. The exercise price
and number of shares subject to these contingent warrants are both subject to anti-dilution
adjustments. As of June 30, 2010, no contingent warrants have been issued and no value has been
assigned to the warrants, as the Company cannot determine the probability that the Fund will be
raised. In the event the Fund is raised and contingent warrants are issued, the Company will
determine the value of the contingent warrants in accordance with ASC 505-50, Equity-Based Payments
to Non-Employees. We cannot provide any assurances that the Fund will be raised.
For so long as the Investors collectively own or have the right to purchase through exercise
of the warrants 875,000 shares of the Companys common stock, the Company has agreed to use its
reasonable best efforts to cause its Board of Directors to nominate and recommend to the Companys
stockholders the election of a person nominated by the Investors as a director of the Company and
to use its reasonable best efforts to ensure that the Investors nominee is elected to the
Companys Board of Directors at each such meeting. If that nominee is not elected by the Companys
stockholders, the Investors have certain observer rights and, in certain circumstances, the
dividend rate on the Series A Preferred Securities increases by 4% during any time that an
Investors nominee is not a member of the Companys Board of Directors. Effective October 15, 2009,
the Investors nominated and the Companys Board of Directors elected Michael Gross as a member of
the Companys Board of Directors.
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On April 21, 2010, the Company entered into a Waiver Agreement (the Waiver Agreement) with
the Investors. The Waiver Agreement permits the purchase by the Investors of up to $88 million in
aggregate principal amount of the Convertible Notes within six months of April 21, 2010 and subject
to the limitations and conditions set forth therein. Pursuant to the Waiver Agreement, in the event
an Investor proposes to sell the Convertible Notes at a time when the market price of a share of
the Companys common stock exceeds the then effective conversion price of the Convertible Notes,
the Company is granted certain rights of first refusal for the purchase of the same from the
Investors. In the event an Investor proposes to sell the Convertible Notes at a time when the
market price of a share of the Companys common stock is equal to or less than the then effective
conversion price of the Convertible Notes, the Company is granted certain rights of first offer to
purchase the same from the Investors.
9. Discontinued Operations
In May 2006, the Company obtained a $40.0 million non-recourse mortgage and mezzanine
financing on Mondrian Scottsdale, which accrued interest at LIBOR plus 2.3%, and for which Morgans
Group had provided a standard non-recourse carve-out guaranty. In June 2009, the non-recourse
mortgage and mezzanine loans matured and the Company discontinued subsidizing the debt service. The
lender foreclosed on the property and terminated the Companys management agreement related to the
property with an effective termination date of March 16, 2010.
The Company has reclassified the individual assets and liabilities to the appropriate
discontinued operations line items on its June 30, 2010 and December 31, 2009 balance sheets.
Additionally, the Company reclassified the hotels results of operations and cash flows to
discontinued operations on the Companys statements of operations and cash flows. For the six
months ended June 30, 2010, the Company recorded income from discontinued operations of
approximately $17.2 million.
The following sets forth the discontinued operations for the three and six months ended June
30, 2010 and 2009, related to the Companys discontinued operations (in thousands):
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
Operating revenues |
$ | | $ | 1,835 | $ | 1,594 | $ | 4,884 | ||||||||
Operating expenses |
(82 | ) | (2,243 | ) | (1,804 | ) | (4,682 | ) | ||||||||
Interest expense |
(11 | ) | (274 | ) | (177 | ) | (551 | ) | ||||||||
Depreciation and
amortization expense |
| (294 | ) | (268 | ) | (586 | ) | |||||||||
Income tax benefit |
| 400 | | 383 | ||||||||||||
(Loss) gain on disposal |
(133 | ) | | 17,820 | | |||||||||||
(Loss) income from
discontinued
operations |
$ | (226 | ) | $ | (576 | ) | $ | 17,165 | $ | (552 | ) | |||||
10. Related Party Transactions
The Company earned management fees, chain services fees and fees for certain technical
services and has receivables from hotels it owns through investments in unconsolidated joint
ventures. These fees totaled approximately $5.1 million and $3.9 million for the three months ended
June 30, 2010 and 2009, respectively, and $9.5 million and $7.3 million for the six months ended
June 30, 2010 and 2009, respectively.
As of June 30, 2010 and December 31, 2009, the Company had receivables from these affiliates
of approximately $9.6 million and $9.5 million, respectively, which are included in related party
receivables on the accompanying consolidated balance sheets.
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Guaranty for Hard Rock Debt
On December 24, 2009, Morgans Group, together with DLJMB, as guarantors, entered into an
amendment of the non-recourse carve-out guaranty, dated August 1, 2008, related to the non-recourse
loan, secured by approximately 11-acres of unused land owned by a Hard Rock subsidiary, increasing
the amount of such guaranty to $53.9 million,
which guaranty is only triggered in the event of certain bad boy acts. In the Companys
joint venture agreement, DLJMB has agreed to be responsible for 100% of any liability under the
guaranty subject to certain conditions. The Companys Chairman of the Board, is also Chairman of
the Board, President, Chief Executive Officer and equity holder of NorthStar Realty Finance Corp.,
which is a participant lender in the loan. The Company believes that this guaranty does not pose a
material risk to the Companys financial position or results.
11. Litigation
Potential Litigation
The Company understands that Mr. Philippe Starck has attempted to initiate arbitration
proceedings in the London Court of International Arbitration regarding an exclusive service
agreement that he entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel
Group LLC) in February 1998 regarding the design of certain hotels now owned by the Company and its
subsidiaries. The Company is not a party to these proceedings at this time. See note 5.
Hard Rock Financial Advisory Agreement
In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (Credit
Suisse) for $9.4 million related to the Financial Advisory Agreement the Company entered into with
Credit Suisse in July 2006. Under the terms of the financial advisory agreement, Credit Suisse
received a transaction fee for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint
venture. The transaction fee, which was paid by the Hard Rock joint venture at the closing of the
acquisition of the Hard Rock and related assets in February 2007, was based upon an agreed upon
percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The
invoice received in July 2008 alleges that as a result of events subsequent to the closing of the
Hard Rock acquisition transactions, Credit Suisse is due additional transaction fees. The Company
believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.
Petra Litigation Regarding Scottsdale Mezzanine Loan
On April 7, 2010, Petra CRE CDO 2007-1, LTD, a Cayman Islands Exempt Company (Petra), filed
a complaint against Morgans Group LLC in the Supreme Court of the State of New York County of New
York in connection with an approximately $14.0 million non-recourse mezzanine loan made on December
1, 2006 by Greenwich Capital Financial Products Company LLC (the Original Lender) to Mondrian
Scottsdale Mezz Holding Company LLC, a wholly-owned subsidiary of Morgans Group LLC. The mezzanine
loan relates to the Scottsdale, Arizona property previously owned by the Company. In connection
with the mezzanine loan, Morgans Group LLC entered into a so-called bad boy guaranty providing
for recourse liability under the mezzanine loan in certain limited circumstances. Pursuant to an
assignment by the Original Lender, Petra is the holder of an interest in the mezzanine loan. The
complaint alleges that the foreclosure of the Scottsdale property by a senior lender on March 16,
2010 constitutes an impermissible transfer of the property that triggered recourse liability of
Morgans Group LLC pursuant to the guaranty. Petra demands damages of approximately $15.9 million
plus costs and expenses.
The Company believes that a foreclosure based on a payment default does not create one of the
limited circumstances under which Morgans Group LLC would have recourse liability under the
guaranty. On May 27, 2010, the Company answered Petras complaint, denying any obligation to make
payment under the guaranty. It also requested relevant documents from Petra. On July 9, 2010,
Petra moved for summary judgment on the ground that the loan documents unambiguously establish
Morgans Groups obligation under the guaranty. Petra also moved to stay discovery pending
resolution of its motion. The Company will oppose Petras motion for summary judgment, and will
continue to defend this lawsuit vigorously. However, it is not possible to predict the outcome of
the lawsuit.
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Clift Lawsuit
Due to the amount of the payments stated in the lease, which will increase periodically, and
the economic environment in which the hotel operates, Clift Holdings had not been operating Clift
at a profit and Morgans Group had been funding cash shortfalls sustained at Clift in order to
enable Clift Holdings to make lease payments from time to time. On March 1, 2010, however, the
Company discontinued subsidizing Clift Holdings and Clift Holdings
stopped making the scheduled monthly payment. Under the lease, the owners recourse is limited
to Clift Holdings, which has no substantial assets other than its leasehold interest in Clift.
On May 4, 2010, Hasina, LLC, Kalpana, LLC, Rigg Hotel, LLC, JRIA LLC and Tarstone Hotels, LLC
(the Hasina plaintiffs) filed a complaint against Clift Holdings in the San Francisco Superior
Court regarding Clift Holdings non-payment of the Clift obligations. The complaint demands, among
other things, approximately $1.0 million for overdue payments, $16,318 for each day that Clift
Holdings does not vacate the premises, attorneys fees and possession of the property. On June 1,
2010, the court dismissed that lawsuit after Clift Holdings filed a motion to dismiss it. On June
8, 2010, the Hasina plaintiffs filed a new lawsuit alleging substantially the same claims alleged
in the May 4 complaint. Clift Holdings has filed another motion to dismiss and that motion is
currently set to be heard on August 24, 2010.
On June 17, 2010, the Company and Clift Holdings filed an affirmative civil lawsuit against
Tarsadia Hotels, Inc., Hasina, LLC, Kalpana, LLC, Rigg Hotel, LLC, JRIA LLC, Tarstone Hotels, LLC
(collectively, the Tarsadia defendants). The suit alleges that the Tarsadia defendants agreed to
negotiate in good faith with the Company and Clift Holdings to reduce the payments due under the
lease, but that they breached that agreement by failing to negotiate at all and instead marketing
the property for sale.
The Company has been in discussions with the owners regarding resolution of this issue, but
there can be no assurance that such discussions will be successful.
Other Litigation
The Company is involved in various lawsuits and administrative actions in the normal course of
business. In managements opinion, disposition of these lawsuits is not expected to have a material
adverse effect on our financial position, results of operations or liquidity.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes
appearing elsewhere in this Quarterly Report on Form 10-Q for the six months ended June 30, 2010.
In addition to historical information, this discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to, those set forth under Risk Factors and elsewhere in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Overview
We are a fully integrated hospitality company that operates, owns, acquires, develops and
redevelops boutique hotels primarily in gateway cities and select resort markets in the United
States and Europe. Over our 26-year history, we have gained experience operating in a variety of
market conditions.
The historical financial data presented herein is the historical financial data for:
| our Owned Hotels, consisting of Morgans, Royalton and Hudson in New York, Delano South
Beach in Miami, Mondrian Los Angeles in Los Angeles, and Clift in San Francisco; |
| our Joint Venture Hotels, consisting of our London hotels (Sanderson and St Martins
Lane), Hard Rock in Las Vegas, Mondrian South Beach and Shore Club in South Beach, Miami,
and Ames in Boston; |
| our non-Morgans Hotel Group branded hotels which we manage independently, consisting of
the San Juan Water and Beach Club in Isla Verde, Puerto Rico and Hotel Las Palapas in Playa
del Carmen, Mexico; |
| our investments in hotels under construction, such as Mondrian SoHo, and our investment
in other proposed properties; |
| our investment in certain joint venture food and beverage operations at our Owned
Hotels and Joint Venture Hotels, discussed further below; |
||
| our management company subsidiary, MHG Management Company; and |
| the rights and obligations contributed to Morgans Group in the formation and
structuring transactions described in note 1 to the consolidated financial statements,
included elsewhere in this report. |
As of June 30, 2010, we consolidate the results of operations for all of our Owned Hotels and
certain food and beverage operations at three of our Owned Hotels, which are operated under 50/50
joint ventures with restaurateur Jeffrey Chodorow. We consolidate the food and beverage joint
ventures as we believe that we are the primary beneficiary of these entities. Our partners share
of the results of operations of these food and beverage joint ventures are recorded as
noncontrolling interest in the accompanying consolidated financial statements.
We own partial interests in the Joint Venture Hotels and certain food and beverage operations
at three of the Joint Venture Hotels, Sanderson, St Martins Lane and Mondrian South Beach. We
account for these investments using the equity method as we believe we do not exercise control over
significant asset decisions such as buying, selling or financing nor are we the primary beneficiary
of the entities. Under the equity method, we increase our investment in unconsolidated joint
ventures for our proportionate share of net income and contributions and decrease our investment
balance for our proportionate share of net losses and distributions.
As of June 30, 2010, we operated the following Joint Venture Hotels under management
agreements which expire as follows:
| Sanderson June 2018 (with one 10-year extension at our option); |
||
| St Martins Lane June 2018 (with one 10-year extension at our option); |
||
| Shore Club July 2022; |
||
| Hard Rock February 2027 (with two 10-year extensions); |
||
| Mondrian South Beach August 2026; and |
||
| Ames November 2024. |
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In addition to the Joint Venture Hotels, we also manage two non-Morgans Hotel Group branded
hotels. In October 2009, we began managing the San Juan Water and Beach Club in Isla Verde, Puerto
Rico under a 10-year management agreement. As of June 30, 2010, we had contributed approximately
$0.7 million for an approximately 25% ownership interest in the San Juan Water and Beach Club. In
December, we began managing Hotel Las Palapas in Playa del Carmen, Mexico under a five-year
management agreement with one five-year extension, which is automatic so long as we are not in
default under the management agreement. We do not have an ownership interest in Hotel Las Palapas.
We have also signed an agreement to manage Mondrian SoHo once development is complete. We have
signed management agreements to manage various other hotels that are in development, including a
Mondrian Palm Springs project, but we are unsure of the future of the development of these hotels
as financing has not yet been obtained.
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.
These management agreements may be subject to early termination in specified circumstances.
For instance, beginning 12 months following the year of completion of the expansion of the Hard
Rock, our Hard Rock management agreement may be terminated if the Hard Rock fails to achieve an
EBITDA hurdle, as defined in the management agreement. There can be no assurances that we will
satisfy this or other performance tests in our management agreements, many of which may be beyond
our control, or that our management agreements will not be subject to early termination. Several of
our hotels are also subject to substantial mortgage and mezzanine debt, and in some instances our
management fee is subordinated to the debt and our management agreements may be terminated by the
lenders on foreclosure.
Factors Affecting Our Results of Operations
Revenues. Changes in our revenues are most easily explained by three performance indicators
that are commonly used in the hospitality industry:
| Occupancy; |
||
| Average daily room rate (ADR); and |
| Revenue per available rooms (RevPAR), which is the product of ADR and average daily
occupancy; but does not include food and beverage revenue, other hotel operating revenue
such as telephone, parking and other guest services, or management fee revenue. |
Substantially all of our revenue is derived from the operation of our hotels. Specifically,
our revenue consists of:
| Rooms revenue. Occupancy and ADR are the major drivers of rooms revenue. |
| Food and beverage revenue. Most of our food and beverage revenue is earned by our 50/50
restaurant joint ventures and is driven by occupancy of our hotels and the popularity of
our bars and restaurants with our local customers. |
| Other hotel revenue. Other hotel revenue, which consists of ancillary revenue such as
telephone, parking, spa, entertainment and other guest services, is principally driven by
hotel occupancy. |
| Management fee related parties revenue and other income. We earn fees under our
management agreements. These fees may include management fees as well as reimbursement for
allocated chain services. |
Fluctuations in revenues, which tend to correlate with changes in gross domestic product, are
driven largely by general economic and local market conditions but can also be impacted by major
events, such as terrorist attacks or natural disasters, which in turn affect levels of business and
leisure travel.
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The seasonal nature of the hospitality business can also impact revenues. For example, our
Miami hotels are generally strongest in the first quarter, whereas our New York hotels are
generally strongest in the fourth quarter. However, given the global economic downturn, the impact
of seasonality in 2009 was not as significant as in prior periods.
In addition to economic conditions, supply is another important factor that can affect
revenues. Room rates and occupancy tend to fall when supply increases, unless the supply growth is
offset by an equal or greater increase in demand. One reason why we focus on boutique hotels in key
gateway cities is because these markets have significant barriers to entry for new competitive
supply, including scarcity of available land for new development and extensive regulatory
requirements resulting in a longer development lead time and additional expense for new
competitors.
Finally, competition within the hospitality industry can affect revenues. Competitive factors
in the hospitality industry include name recognition, quality of service, convenience of location,
quality of the property, pricing, and range and quality of food services and amenities offered. In
addition, all of our hotels, restaurants and bars are located in areas where there are numerous
competitors, many of whom have substantially greater resources than us. New or existing competitors
could offer significantly lower rates or more convenient locations, services or amenities or
significantly expand, improve or introduce new service offerings in markets in which our hotels
compete, thereby posing a greater competitive threat than at present. If we are unable to compete
effectively, we would lose market share, which could adversely affect our revenues.
Operating Costs and Expenses. Our operating costs and expenses consist of the costs to provide
hotel services, costs to operate our management company, and costs associated with the ownership of
our assets, including:
| Rooms expense. Rooms expense includes the payroll and benefits for the front office,
housekeeping, concierge and reservations departments and related expenses, such as laundry,
rooms supplies, travel agent commissions and reservation expense. Like rooms revenue,
occupancy is a major driver of rooms expense, which has a significant correlation with
rooms revenue. |
| Food and beverage expense. Similar to food and beverage revenue, occupancy of our
hotels and the popularity of our restaurants and bars are the major drivers of food and
beverage expense, which has a significant correlation with food and beverage revenue. |
| Other departmental expense. Occupancy is the major driver of other departmental
expense, which includes telephone and other expenses related to the generation of other
hotel revenue. |
| Hotel selling, general and administrative expense. Hotel selling, general and
administrative expense consist of administrative and general expenses, such as payroll and
related costs, travel expenses and office rent, advertising and promotion expenses,
comprising the payroll of the hotel sales teams, the global sales team and advertising,
marketing and promotion expenses for our hotel properties, utility expense and repairs and
maintenance expenses, comprising the ongoing costs to repair and maintain our hotel
properties. |
| Property taxes, insurance and other. Property taxes, insurance and other consist
primarily of insurance costs and property taxes. |
| Corporate expenses, including stock compensation. Corporate expenses consist of the
cost of our corporate office, net of any cost recoveries, which consists primarily of
payroll and related costs, stock-based compensation expenses, office rent and legal and
professional fees and costs associated with being a public company. |
| Depreciation and amortization expense. Hotel properties are depreciated using the
straight-line method over estimated useful lives of 39.5 years for buildings and five years
for furniture, fixtures and equipment. |
| Restructuring, development and disposal costs include costs incurred related to our
restructuring initiatives, charges associated with disposals of assets as part of major
renovation projects and the write-off of abandoned development projects resulting primarily
from events generally outside managements control such as the current tightness of the
credit markets. These items do not relate to the ongoing operating performance of our
assets. |
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Other Items
| Interest expense, net. Interest expense, net includes interest on our debt and
amortization of financing costs and is presented net of interest income and interest
capitalized. |
| Equity in (income) loss of unconsolidated joint ventures. Equity in (income) loss of
unconsolidated joint ventures constitutes our share of the net profits and losses of our
Joint Venture Hotels and our investments in hotels under development. Further, we and our
joint venture partners review our Joint Venture Hotels for other-than-temporary declines in
market value. In this analysis of fair value, we use discounted cash flow analysis to
estimate the fair value of our investment taking into account expected cash flow from
operations, holding period and net proceeds from the dispositions of the property. Any
decline that is not expected to be recovered is considered other-than-temporary and an
impairment charge is recorded as a reduction in the carrying value of the investment. |
| Other non-operating (income) expenses include costs associated with financings,
litigation and settlement costs and other items that relate to the financing and investing
activities associated with our assets and not to the ongoing operating performance of our
assets, both consolidated and unconsolidated, as well as the change in fair market value of
our warrants issued in connection with the Yucaipa transaction. |
| Income tax expense (benefit). All of our foreign subsidiaries are subject to local
jurisdiction corporate income taxes. Income tax expense is reported at the applicable rate
for the periods presented. We are subject to Federal and state income taxes. Income taxes
for the six months ended June 30, 2010 and 2009 were computed using our calculated
effective tax rate. We also recorded net deferred taxes related to cumulative differences
in the basis recorded for certain assets and liabilities. |
| Noncontrolling interest. Noncontrolling interest constitutes our third-party food and
beverage joint venture partners interest in the profits of the restaurant ventures at
certain of our hotels as well as the percentage of membership units in Morgans Group, our
operating company, owned by Residual Hotel Interest LLC, our former parent, as discussed in
note 2 of our consolidated financial statements. |
| Income (loss) from discontinued operations, net of tax. In March 2010, Mondrian
Scottsdale was foreclosed and we were terminated as the propertys manager. As such, we
have recorded the income or loss earned from Mondrian Scottsdale in the income (loss) from
discontinued operations, net of tax, on the accompanying consolidated financial statements. |
| Preferred stock dividends and accretion. Dividends attributable to our outstanding
preferred stock and the accretion of the fair value discount on the issuance of the
preferred stock are reflected as adjustments to our net loss to arrive at net loss
attributable to common stockholders, as discussed in notes 5 and 8 of our consolidated
financial statements. |
Most categories of variable operating expenses, such as operating supplies and certain labor
such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to
increases in occupancy are accompanied by increases in most categories of variable operating costs
and expenses. Increases in RevPAR attributable to improvements in ADR typically only result in
increases in limited categories of operating costs and expenses, primarily credit card and travel
agent commissions. Thus, improvements in ADR have a more significant impact on improving our
operating margins than occupancy.
Notwithstanding our efforts to reduce variable costs, there are limits to how much we can
accomplish because we have significant costs that are relatively fixed costs, such as depreciation
and amortization, labor costs and employee benefits, insurance, real estate taxes, interest and
other expenses associated with owning hotels that do not necessarily decrease when circumstances
such as market factors cause a reduction in our hotel revenues.
Recent Trends and Developments
Recent Trends. Starting in the fourth quarter of 2008 and continuing throughout the first
three quarters of 2009, the weakened U.S. and global economies resulted in considerable negative
pressure on both consumer and business spending.
As a result, lodging demand and revenues, which are primarily driven by growth in GDP, business investment and unemployment growth weakened
substantially during this period as compared to the lodging demand and revenues we experienced prior to the fourth quarter of 2008.
While the outlook for the U.S. and global
economies have improved,
unemployment remains persistently high and
spending by businesses and consumers remains cautious. In addition, there
are still several trends which make the full year 2010 lodging performance difficult to forecast,
including shorter booking
lead times at our hotels.
We experienced positive trends in the first half of 2010 as we saw improvement in demand in
key gateway markets, particularly in New York and London, most notably in the form of increasing
occupancy in those markets in the first and second quarters accompanied by increases in average
daily rate in the second quarter of 2010. However, our operating results were still below
pre-recessionary levels.
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As demand strengthens, we are focusing on revenue enhancement by actively managing rates and
availability. As demand begins to return, the ability to increase pricing will be a critical
component in driving profitability. Through these challenging times, our strategy and focus
continues to be to preserve profit margins by maximizing revenue, increasing our market share and
managing costs.
We are also actively managing costs at each of our properties and our corporate office.
Through our multi-phased contingency plan, we reduced hotel operating expenses and corporate
expenses during 2008 and 2009. We continue to focus on containing operating costs without affecting
the guest experience. We believe that these cost reduction plans have resulted and will continue to
result in significant savings, although market conditions may require increases in certain areas.
While the pace of new lodging supply in various phases of development has increased over
the past several quarters, we believe the timing of many of these projects may be affected by the
ongoing uncertain and weak economic conditions and the reduced availability of financing. These
factors may dampen the pace of new supply development, including our own, in 2010. Nevertheless, we
did witness new competitive luxury and boutique properties opening in 2008, 2009 and through the
first six months of 2010 in some of our markets, particularly in Los Angeles, Miami Beach, Las
Vegas and New York, which have impacted our performance in these markets and may continue to do so.
For the remainder of 2010, we believe that if various economic forecasts projecting continued
modest expansion are accurate, this may lead to a gradual and modest increase in lodging demand for
both leisure and business travel, although we expect there to be continued pressure on rates, as
leisure and business travelers alike continue to focus on cost containment. As such, there can be
no assurances that any increases in hotel revenues or earnings at our properties will occur, or be
sustained, or that any losses will not increase for these or any other reasons.
We believe that the global credit market conditions will also gradually improve during the
remainder of 2010, although we believe there will continue to be less credit available and on less
favorable terms than were obtainable in prior years. Given the current state of the credit markets,
some of our joint venture projects, such as Mondrian Palm Springs, may not be able to obtain
adequate project financing in a timely manner or at all. If adequate project financing is not
obtained, the joint ventures or developers, as applicable, may seek additional equity investors to
raise capital, limit the scope of the project, defer the project or cancel the project altogether.
Recent Developments.
Mondrian South Beach Debt Restructuring. In April 2010, the Mondrian South Beach joint venture
amended the non-recourse financing secured by Mondrian South Beach and extended the maturity date
for up to seven years until April 2017. Among other things, the amendment allows the joint venture
to accrue all interest for a period of two years and a portion thereafter and gives the joint
venture the ability to provide seller financing to qualified condominium buyers up to 80% of the
condominium purchase price. The amendment also provides that approximately $28 million of mezzanine
financing invested in the property be elevated in the capital structure to become, in effect, on
par with the lenders mezzanine debt so that the joint venture receives at least 50% of all returns
in excess of the first mortgage.
Waiver Agreement with Yucaipa. On April 21, 2010, we entered into a Waiver Agreement (the
Waiver Agreement) with Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance
(Parallel) Fund II, L.P. (collectively, the Investors). The Waiver Agreement permits the purchase
by the Investors of up to $88 million in aggregate principal amount of our 2.375% Senior
Subordinated Convertible Notes due 2014 (the Convertible Notes) within six months of April 21,
2010 and subject to the limitations and conditions set forth therein. Pursuant to the Waiver
Agreement, in the event an Investor proposes to sell the Convertible Notes at a time when the
market price of a share of our common stock exceeds the then effective conversion price of the
Convertible Notes, we are granted certain rights of first refusal for the purchase of the same from
the Investors. In the event an Investor proposes to sell the Convertible Notes at a time when the
market price of a share of our common stock is equal to or less than the then effective conversion
price of the Convertible Notes, we are granted certain rights of first offer to purchase the same
from the Investors.
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Amendment to the Amended and Restated Stockholder Protection Rights Agreement. On April 21,
2010, our board of directors resolved to amend the Amended and Restated Stockholder Protection
Rights Agreement (the Rights Agreement), dated as of October 1, 2009, between us and Mellon
Investor Services LLC (Mellon), as Rights Agent, in connection with the entry into the Waiver
Agreement to exempt the ownership of the Convertible Notes by any person from the determination of
the beneficial ownership of our common stock by such person under the Rights Agreement for so long
as the Convertible Notes have not been acquired in the two years
preceding October 17, 2014 and provided further that at the time the Convertible Notes were
acquired the market price of the shares of our common stock did not exceed the conversion price
applicable to the Convertible Notes. Thereafter, on April 21, 2010, we and Mellon entered into
Amendment No. 2 to the Rights Agreement (Amendment No. 2) to amend the definition of Beneficial
Owner to reflect such exemption.
Forbearance Agreement on Mortgage Agreements. On July 9, 2010, we entered into forbearance
agreements with the lenders which hold the mortgage loans secured by our Hudson and Mondrian Los
Angeles hotels. The forbearance agreements effectively extend the maturities of the loans until
September 12, 2010 allowing us and the lenders additional time to complete the negotiation and
documentation of the appropriate amendments to further extend the loans. There can be no assurance
that we will be successful in extending the maturity of these mortgage loans.
Refinancing of London Joint Venture Debt. On July 15, 2010, the joint venture that owns
Sanderson and St Martins Lane refinanced in full the mortgage debt secured by the hotels with a new
loan maturing in July 2015. The previous loan was scheduled to mature in November 2010. The new
financing is a £100 million loan that is non-recourse to us and is secured by the two London
hotels. The joint venture also entered into a swap agreement that effectively fixes the interest
rate at 5.22% for the term of the loan, a reduction in interest rate of approximately 105 basis
points compared with the previous mortgage debt.
Additional Funding to Complete Development of Mondrian SoHo and Extension of Debt. On July 31,
2010, the joint venture developing a Mondrian in SoHo, amended the debt financing on the project to, among other things, provide for
extensions of the maturity date of the mortgage loan secured by the hotel for up to five years
through extension options, subject to certain conditions. In addition to new funds being provided
by the lender, our joint venture partner is making cash and other contributions to the joint
venture, and we will provide up to $3.2 million of additional funds to complete the project. Our
contribution will be treated as a loan with priority over the equity.
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Operating Results
Comparison of Three Months Ended June 30, 2010 to Three Months Ended June 30, 2009
The following table presents our operating results for the three months ended June 30, 2010
and 2009, including the amount and percentage change in these results between the two periods. The
consolidated operating results for the three months ended June 30, 2010 is comparable to the
consolidated operating results for the three months ended June 30, 2009, with the exception of the
Hard Rock, which was under renovation and expansion during 2009, Ames in Boston, which opened in
November 2009, San Juan Water and Beach Club, which we began managing in October 2009, and Hotel
Las Palapas, which we began managing in December 2009. The consolidated operating results are as
follows:
Three Months Ended | ||||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | Changes ($) | Changes (%) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 35,093 | $ | 30,137 | $ | 4,956 | 16.4 | % | ||||||||
Food and beverage |
17,549 | 18,403 | (854 | ) | (4.6 | ) | ||||||||||
Other hotel |
2,444 | 2,150 | 294 | 13.7 | ||||||||||||
Total hotel revenues |
55,086 | 50,690 | 4,396 | 8.7 | ||||||||||||
Management fee-related parties and other
income |
5,103 | 3,863 | 1,240 | 32.1 | ||||||||||||
Total revenues |
60,189 | 54,553 | 5,636 | 10.3 | ||||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
10,291 | 9,918 | 373 | 3.8 | ||||||||||||
Food and beverage |
14,184 | 13,826 | 358 | 2.6 | ||||||||||||
Other departmental |
1,260 | 1,483 | (223 | ) | (15.0 | ) | ||||||||||
Hotel selling, general and administrative |
11,811 | 11,164 | 647 | 5.8 | ||||||||||||
Property taxes, insurance and other |
4,711 | 4,078 | 633 | 15.5 | ||||||||||||
Total hotel operating expenses |
42,257 | 40,469 | 1,788 | 4.4 | ||||||||||||
Corporate expenses, including stock
compensation |
9,220 | 7,488 | 1,732 | 23.1 | ||||||||||||
Depreciation and amortization |
8,011 | 8,116 | (105 | ) | (1.3 | ) | ||||||||||
Restructuring, development and disposal costs |
1,189 | 653 | 536 | 82.1 | ||||||||||||
Total operating costs and expenses |
60,677 | 56,726 | 3,951 | 7.0 | ||||||||||||
Operating loss |
(488 | ) | (2,173 | ) | 1,685 | (77.5 | ) | |||||||||
Interest expense, net |
12,680 | 11,768 | 912 | 7.7 | ||||||||||||
Equity in loss of unconsolidated joint venture |
7,739 | 1,895 | 5,844 | (1 | ) | |||||||||||
Other non-operating expense |
241 | 496 | (255 | ) | (51.4 | ) | ||||||||||
Loss before income tax expense (benefit) |
(21,148 | ) | (16,332 | ) | (4,816 | ) | 29.5 | |||||||||
Income tax expense (benefit) |
131 | (6,969 | ) | 7,100 | (1 | ) | ||||||||||
Net loss |
(21,279 | ) | (9,363 | ) | (11,916 | ) | (1 | ) | ||||||||
Net loss (income) attributable to non
controlling interest |
434 | (115 | ) | 549 | (1 | ) | ||||||||||
Net loss from continuing operations |
(20,845 | ) | (9,478 | ) | (11,367 | ) | (1 | ) | ||||||||
Loss from discontinued operations |
(226 | ) | (579 | ) | 353 | (61.0 | ) | |||||||||
Net loss |
(21,071 | ) | (10,057 | ) | (11,014 | ) | (1 | ) | ||||||||
Preferred stock dividends and accretion |
2,114 | | 2,114 | (1 | ) | |||||||||||
Net loss attributable to common stockholders |
$ | (23,185 | ) | $ | (10,057 | ) | $ | (13,128 | ) | (1 | ) | |||||
(1) | Not meaningful. |
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Total Hotel Revenues. Total hotel revenues increased 8.7% to $55.1 million for the three
months ended June 30, 2010 compared to $50.7 million for the three months ended June 30, 2009. The
components of RevPAR from our Owned Hotels for the three months ended June 30, 2010 and 2009,
excluding discontinued operations, are summarized as follows:
Three Months Ended | ||||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | Change ($) | Change (%) | |||||||||||||
Occupancy |
84.4 | % | 78.4 | % | | 7.7 | % | |||||||||
ADR |
$ | 239 | $ | 224 | $ | 15 | 6.5 | % | ||||||||
RevPAR |
$ | 201 | $ | 176 | $ | 25 | 14.7 | % |
RevPAR from our Owned Hotels increased 14.7% to $201 for the three months ended June 30, 2010
compared to $176 for the three months ended June 30, 2009.
Rooms revenue increased 16.4% to $35.1 million for the three months ended June 30, 2010
compared to $30.1 million for the three months ended June 30, 2009, which is directly attributable
to the increase in occupancy and ADR shown above. Strong corporate travel, particularly in New
York, was a key factor in the increase.
Food and beverage revenue decreased 4.6% to $17.5 million for the three months ended June 30,
2010 compared to $18.4 million for the three months ended June 30, 2009. The decrease was primarily
attributable to a 6.6% decline in food and beverage revenue at Hudson during the three months ended
June 30, 2010 as compared to the same period in 2009, as the primary restaurant was being
re-concepted and was under renovation from January 2010 until May 2010. The new restaurant, Hudson
Hall, opened in late May 2010. Additionally, food and beverage revenue was down 11.2 % at Mondrian
Los Angeles, primarily due to bad weather and increased competitive supply in the market, which
impacted operations at the Asia de Cuba and Skybar outdoor venues.
Other hotel revenue increased 13.7% to $2.4 million for the three months ended June 30, 2010
compared to $2.2 million for the three months ended June 30, 2009. The overall increase was
primarily attributable to the increase in lodging demand, as demonstrated above in our increase in
occupancy and ADR. Generally, as occupancy increases, ancillary revenues at our hotels increase as
well. Additionally, we have installed new wireless infrastructures into certain of our Owned
Hotel, which has contributed to an increase in internet revenues.
Management Fee Related Parties and Other Income. Management fee related parties and
other income increased by 32.1% to $5.1 million for the three months ended June 30, 2010 compared
to $3.9 million for the three months ended June 30, 2009. This increase is primarily attributable
to an increase in management fees earned at Hard Rock due to the property expansion project that
was underway during 2009 and resulted in 490 new rooms that opened in July 2009 and an additional
374 new rooms that opened in December 2009. Additionally, an increase also occurred due to
management fees earned at Ames, which opened in November 2009, the San Juan Water and Beach Club,
which we began managing in October 2009, and Hotel Las Palapas, which we began managing in December
2009.
Operating Costs and Expenses
Rooms expense increased 3.8% to $10.3 million for the three months ended June 30, 2010
compared to $9.9 million for the three months ended June 30, 2009. This increase is a direct result
of the increase in rooms revenue attributed to increased occupancy.
Food and beverage expense increased 2.6% to $14.2 million for the three months ended June 30,
2010 compared to $13.8 million for the three months ended June 30, 2009. This increase is primarily
due to a 13.3% increase in expenses at Royalton as a result of increased annual union wages and an
increase in state unemployment taxes as a result of the staff-level restructuring implemented in
2009.
Other departmental expense decreased 15.0% to $1.3 million for the three months ended June 30,
2010 compared to $1.5 million for the three months ended June 30, 2009. This decrease is consistent
with cost saving initiatives implemented in 2008 and 2009.
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Hotel selling, general and administrative expense increased 5.8% to $11.8 million for the
three months ended June 30, 2010 compared to $11.2 million for the three months ended June 30,
2009. This increase was primarily due to increased selling and marketing initiatives implemented
across our hotel portfolio.
Property taxes, insurance and other expense increased 15.5% to $4.7 million for the three
months ended June 30, 2010 compared to $4.1 million for the three months ended June 30, 2009. This
increase was primarily due to increases in property taxes at Hudson as a result of the expiration
of a property tax abatement, which will continue to be phased out over the next three years, fully
expiring in 2012.
Corporate expenses, including stock compensation increased 23.1% to $9.2 million for the three
months ended June 30, 2010 compared to $7.5 million for the three months ended June 30, 2009. This
increase is primarily due to restoring the bonus accruals to more normalized levels during the
three months ended June 30, 2010 as compared to the same period in 2009. Additionally, we
recognized a $0.3 million increase in stock compensation expense due to additional equity grants in
the third quarter of 2009 and second quarter of 2010.
Depreciation and amortization decreased 1.3% to $8.0 million for the three months ended June
30, 2010 compared to $8.1 million for the three months ended June 30, 2009. This decrease is
primarily the result of an adjustment recognized in the second quarter of 2009, which had no
significant effect on the financial statements.
Restructuring, development and disposal costs increased 82.1% to $1.2 million for the three
months ended June 30, 2010 compared to $0.7 million for the three months ended June 30, 2009. The
increase in the expense is primarily related to costs incurred to ready Hudson Hall, Hudsons new
restaurant concept for opening in 2010, slightly offset by a decrease in severance expenses
compared to severance expenses incurred during 2009 as part of our cost reduction plans.
Interest Expense, net. Interest expense, net increased 7.7% to $12.7 million for the three
months ended June 30, 2010 compared to $11.8 million for the three months ended June 30, 2009. This
increase is primarily due to an increase in financing fees incurred in late 2009 related to the
restructuring of our revolving credit facility, which impacts interest expense for the three months
ended June 30, 2010.
Equity in loss of unconsolidated joint ventures resulted in a loss of $7.7 million for the
three months ended June 30, 2010 compared to a loss of $1.9 million for the three months ended June
30, 2009. This change was primarily a result of the $8.3 million impairment charge we recognized on
our investment in Mondrian SoHo in June 2010. Slightly offsetting this increase in equity in loss
of unconsolidated joint ventures was a decrease in losses from Mondrian South Beach and an increase
in income from the London joint venture which owns Sanderson and St Martins Lane during the three
months ended June 30, 2010.
The components of RevPAR from our comparable Joint Venture Hotels for the three months ended
June 30, 2010 and 2009, which includes Sanderson, St Martins Lane, Shore Club, and Mondrian South
Beach, but excludes the Hard Rock, which was under renovation and expansion during 2009, and Ames
in Boston, which opened in November 2009, are summarized as follows (in constant dollars):
Three Months Ended | ||||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | Change ($) | Change (%) | |||||||||||||
Occupancy |
53.1 | % | 55.5 | % | | (4.4 | )% | |||||||||
ADR |
$ | 307 | $ | 294 | $ | 13 | 4.3 | % | ||||||||
RevPAR |
$ | 163 | $ | 163 | $ | | (0.3 | )% |
Other non-operating expense decreased 51.4% to $0.2 million for the three months ended June
30, 2010 as compared to $0.5 million for the three months ended June 30, 2009. The decrease is
primarily the result of the change in fair market value of the warrants issued to the Investors in
connection with the Series A Preferred Securities, discussed and defined below and in notes 5 and 8
of our consolidated financial statements.
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Income tax expense (benefit) resulted in an expense of $0.1 million for the three months ended
June 30, 2010 as compared to a benefit of $7.0 million for the three months ended June 30, 2009.
The change was primarily due to a valuation allowance recorded against the tax benefit for the
three months ended June 30, 2010.
Operating Results
Comparison of Six Months Ended June 30, 2010 to Six Months Ended June 30, 2009
The following table presents our operating results for the six months ended June 30, 2010 and
2009, including the amount and percentage change in these results between the two periods. The
consolidated operating results for the six months ended June 30, 2010 is comparable to the
consolidated operating results for the six months ended June 30, 2009, with the exception of Hard
Rock, which was under renovation and expansion during 2009, Ames in Boston, which opened in
November 2009, the San Juan Water and Beach Club, which we began managing in October 2009, and
Hotel Las Palapas, which we began managing in December 2009. The consolidated operating results are
as follows:
Six Months Ended | ||||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | Changes ($) | Changes (%) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 64,343 | $ | 57,007 | $ | 7,336 | 12.9 | % | ||||||||
Food and beverage |
35,045 | 36,959 | (1,914 | ) | (5.2 | ) | ||||||||||
Other hotel |
4,653 | 4,504 | 149 | 3.3 | ||||||||||||
Total hotel revenues |
104,041 | 98,470 | 5,571 | 5.7 | ||||||||||||
Management fee-related parties and other
income |
9,532 | 7,312 | 2,220 | 30.4 | ||||||||||||
Total revenues |
113,573 | 105,782 | 7,791 | 7.4 | ||||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
20,316 | 19,628 | 688 | 3.5 | ||||||||||||
Food and beverage |
28,100 | 27,693 | 407 | 1.5 | ||||||||||||
Other departmental |
2,512 | 2,964 | (452 | ) | (15.2 | ) | ||||||||||
Hotel selling, general and administrative |
23,248 | 22,186 | 1,062 | 4.8 | ||||||||||||
Property taxes, insurance and other |
8,811 | 8,293 | 518 | 6.2 | ||||||||||||
Total hotel operating expenses |
82,987 | 80,764 | 2,223 | 2.8 | ||||||||||||
Corporate expenses, including stock
compensation |
19,225 | 16,788 | 2,437 | 14.5 | ||||||||||||
Depreciation and amortization |
15,356 | 15,045 | 311 | 2.1 | ||||||||||||
Restructuring, development and disposal costs |
1,866 | 1,531 | 335 | 21.9 | ||||||||||||
Total operating costs and expenses |
119,434 | 114,128 | 5,306 | 4.6 | ||||||||||||
Operating loss |
(5,861 | ) | (8,346 | ) | 2,485 | (29.8 | ) | |||||||||
Interest expense, net |
25,297 | 22,949 | 2,348 | 10.2 | ||||||||||||
Equity in loss of unconsolidated joint venture |
8,002 | 2,438 | 5,564 | (1 | ) | |||||||||||
Other non-operating expense |
15,318 | 1,065 | 14,253 | (1 | ) | |||||||||||
Loss before income tax expense (benefit) |
(54,478 | ) | (34,798 | ) | (19,680 | ) | 56.6 | |||||||||
Income tax expense (benefit) |
299 | (15,125 | ) | 15,424 | (1 | ) | ||||||||||
Net loss |
(54,777 | ) | (19,673 | ) | (35,104 | ) | (1 | ) | ||||||||
Net loss (income) attributable to non
controlling interest |
581 | (418 | ) | 999 | (1 | ) | ||||||||||
Net loss from continuing operations |
(54,196 | ) | (20,091 | ) | (34,105 | ) | (1 | ) | ||||||||
Income (loss) from discontinued operations |
17,165 | (552 | ) | 17,717 | (1 | ) | ||||||||||
Net loss |
(37,031 | ) | (20,643 | ) | (16,388 | ) | 79.4 | |||||||||
Preferred stock dividends and accretion |
4,192 | | 4,192 | (1 | ) | |||||||||||
Net loss attributable to common stockholders |
$ | (41,223 | ) | $ | (20,643 | ) | $ | (20,580 | ) | 99.7 | ||||||
(1) | Not meaningful. |
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Total Hotel Revenues. Total hotel revenues increased 5.7% to $104.0 million for the six months
ended June 30, 2010 compared to $98.5 million for the six months ended June 30, 2009. The
components of RevPAR from our Owned Hotels for the six months ended June 30, 2010 and 2009,
excluding discontinued operations, are summarized as follows:
Six Months Ended | ||||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | Change ($) | Change (%) | |||||||||||||
Occupancy |
78.2 | % | 71.3 | % | | 9.8 | % | |||||||||
ADR |
$ | 237 | $ | 234 | $ | 3 | 1.3 | % | ||||||||
RevPAR |
$ | 186 | $ | 167 | $ | 19 | 11.1 | % |
RevPAR from our Owned Hotels increased 11.1% to $186 for the six months ended June 30, 2010
compared to $167 for the six months ended June 30, 2009.
Rooms revenue increased 12.9% to $64.3 million for the six months ended June 30, 2010 compared
to $57.0 million for the six months ended June 30, 2009, which is directly attributable to the
increase in occupancy and ADR shown above. Strong corporate travel, particularly in New York, was a
key factor in the increase.
Food and beverage revenue decreased 5.2% to $35.0 million for the six months ended June 30,
2010 compared to $37.0 million for the six months ended June 30, 2009. The decrease was primarily
attributable to a 15% decline in food and beverage revenue at Hudson during the six months ended
June 30, 2010 as compared to the same period in 2009, as the primary restaurant was being
re-concepted and was closed for renovations from January 2010 until May 2010. The new restaurant,
Hudson Hall, opened in late May 2010. Additionally, food and beverage revenue was down 6.2 % at
Mondrian Los Angeles, primarily due to increased competitive supply in the market, which impacted
operations of Asia de Cuba and Skybar.
Other hotel revenue increased 3.3% to $4.7 million for the six months ended June 30, 2010
compared to $4.5 million for the six months ended June 30, 2009. The overall increase was primarily
attributable to the increase in lodging demand, as demonstrated above in our increase in occupancy
and ADR. Generally, as occupancy increases, ancillary revenues at our hotels increase as well.
Additionally, we have installed new wireless infrastructures into certain of our Owned Hotel, which
has contributed to an increase in internet revenues.
Management Fee Related Parties and Other Income increased by 30.4% to $9.5 million for the
six months ended June 30, 2010 compared to $7.3 million for the six months ended June 30, 2009.
This increase is primarily attributable to an increase in management fees earned at Hard Rock due
to the property expansion project that was underway during 2009 and resulted in 490 new rooms that
opened in July 2009 and an additional 374 new rooms that opened in December 2009. Additionally, an
increase also occurred due to management fees earned at Ames, which opened in November 2009, the
San Juan Water and Beach Club, which we began managing in October 2009, and Hotel Las Palapas,
which we began managing in December 2009.
Operating Costs and Expenses
Rooms expense increased 3.5% to $20.3 million for the six months ended June 30, 2010 compared
to $19.6 million for the six months ended June 30, 2009. This increase is a direct result of the
increase in rooms revenue attributed to increased occupancy. We implemented cost cutting
initiatives at our hotels in 2008 and early 2009 which we intend to maintain as occupancy rebounds.
Food and beverage expense increased 1.5% to $28.1 million for the six months ended June 30,
2010 compared to $27.7 million for the six months ended June 30, 2009. This increase is primarily
due to a 9.3% increase in expenses at Royalton as a result of increased annual union wages and an
increase in state unemployment taxes as a result of the staff-level restructuring implemented in
2009. Offsetting this increase is a decrease in food and beverage expenses at Hudson as a result
of the primary restaurant being closed from January 2010 to May 2010 for re-concepting and
renovation, as discussed above.
Other departmental expense decreased 15.2% to $2.5 million for the six months ended June 30,
2010 compared to $3.0 million for the six months ended June 30, 2009. This decrease is consistent
with cost saving initiatives implemented in 2008 and 2009.
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Table of Contents
Hotel selling, general and administrative expense increased 4.8% to $23.2 million for the six
months ended June 30, 2010 compared to $22.2 million for the six months ended June 30, 2009. This
increase was primarily due to increased selling and marketing initiatives implemented across our
hotel portfolio.
Property taxes, insurance and other expense increased 6.2% to $8.8 million for the six months
ended June 30, 2010 compared to $8.3 million for the six months ended June 30, 2009. This increase
was primarily due to increases in property taxes at Hudson as a result of the expiration of a
property tax abatement, which will continue to be phased out over the next three years, fully
expiring in 2012. Slightly offsetting this increase was a decrease due to a property tax refund at
several of our New York hotels received in March 2010 for which there was no comparative refund
received in the same period in 2009.
Corporate expenses, including stock compensation increased by 14.5% to $19.2 million for the
six months ended June 30, 2010 compared to $16.8 million for the six months ended June 30, 2009.
This increase is primarily due to a $1.0 million increase in stock compensation expense as a result
of equity grants in the third quarter of 2009 and second quarter of 2010. Additionally, we
restored bonus accruals to more normalized levels during the six months ended June 30, 2010 as
compared to the same period in 2009.
Depreciation and amortization increased 2.1% to $15.4 million for the six months ended June
30, 2010 as compared to $15.0 million for the six months ended June 30, 2009. This slight increase
is primarily the result of maintenance capital incurred during 2010 and increased depreciation
expense on the recent lower level expansion at Hudson, Good Units, and the restaurant re-concept,
Hudson Hall, both of which occurred in the first half of 2010.
Restructuring, development and disposal costs increased 21.9% to $1.9 million for the six
months ended June 30, 2010 as compared to $1.5 million for the six months ended June 30, 2009. The
increase in the expense is primarily related to costs incurred to ready Hudson Hall, Hudsons new
restaurant concept, for opening in May 2010, slightly offset by a decrease in severance expenses
compared to severance expense incurred during 2009 as part of our cost reduction plans.
Interest expense, net increased 10.2% to $25.3 million for the six months ended June 30, 2010
compared to $22.9 million for the six months ended June 30, 2009. This increase is primarily due to
an increase in financing fees incurred in late 2009 related to the restructuring of our revolving
credit facility, which impacts interest expense for the six months ended June 30, 2010.
Equity in loss of unconsolidated joint ventures resulted in a loss of $8.0 million for the six
months ended June 30, 2010 compared to a loss of $2.4 million for the six months ended June 30,
2009. This change was primarily a result of the $8.3 million impairment charge we recognized on our
investment in Mondrian SoHo in June 2010. Slightly offsetting this increase in equity in loss of
unconsolidated joint ventures was an increase in income from the London joint venture which owns
Sanderson and St Martins Lane during the six months ended June 30, 2010. Additionally, we
experienced a decrease in losses from Mondrian South Beach.
The components of RevPAR from our comparable Joint Venture Hotels for the six months ended
June 30, 2010 and 2009, which includes Sanderson, St Martins Lane, Shore Club, and Mondrian South
Beach, but excludes the Hard Rock, which was under renovation and expansion during 2009, and Ames
in Boston, which opened in November 2009, are summarized as follows (in constant dollars):
Six Months Ended | ||||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | Change ($) | Change (%) | |||||||||||||
Occupancy |
57.4 | % | 57.3 | % | | 0.1 | % | |||||||||
ADR |
$ | 332 | $ | 315 | $ | 17 | 5.7 | % | ||||||||
RevPAR |
$ | 191 | $ | 180 | $ | 11 | 5.8 | % |
Other non-operating expense increased to $15.3 million for the six months ended June 30, 2010
as compared to $1.1 million for the six months ended June 30, 2009. The increase is primarily the
result of the loss on change in fair market value of the warrants issued to the Investors in
connection with the Series A Preferred Securities during 2010, discussed and defined below and in
notes 5 and 8 of our consolidated financial statements.
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Income tax expense (benefit) resulted in an expense of $0.3 million for the six months ended
June 30, 2010 compared to a benefit of $15.1 million for the six months ended June 30, 2009. The
change was primarily due to a valuation allowance recorded against the tax benefit for the six
months ended June 30, 2010.
Liquidity and Capital Resources
As of June 30, 2010, we had approximately $37.7 million in cash and cash equivalents and the
maximum amount of borrowings available under the Amended Revolving Credit Facility was $122.3
million, of which $23.5 million of borrowings were outstanding and $2.0 million of letters of
credit were posted.
We have both short-term and long-term liquidity requirements as described in more detail
below.
Liquidity Requirements
Short-Term Liquidity Requirements. We generally consider our short-term liquidity requirements
to consist of those items that are expected to be incurred within the next 12 months and believe
those requirements currently consist primarily of funds necessary to pay operating expenses and
other expenditures directly associated with our properties, including the funding of our reserve
accounts, capital commitments associated with certain of our development projects, and payment of
scheduled debt maturities, unless otherwise extended or refinanced.
We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as
determined pursuant to our debt, lease or management agreements related to such hotels, with the
exception of Delano South Beach, Royalton and Morgans. Our Joint Venture Hotels and non-Morgans
Hotel Group branded hotels generally are subject to similar obligations under debt agreements
related to such hotels, or under our management agreements. These capital expenditures relate
primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. Such
agreements typically require us to reserve funds at amounts equal to 4% of the hotels revenues and
require the funds to be set aside in restricted cash. In addition, our restaurant joint ventures
require the ventures to set aside restricted cash of between 2% to 4% of gross revenues of the
restaurant. Our Owned Hotels that were not subject to these reserve funding obligations Delano
South Beach, Royalton, and Morgans underwent significant room and common area renovations during
2006, 2007 and 2008, and as such, are not expected to require a substantial amount of capital
spending during 2010.
In addition to reserve funds for capital expenditures, our debt and lease agreements also
require us to deposit cash into escrow accounts for taxes, insurance and debt service payments. As
of June 30, 2010, total restricted cash was $33.4 million. This amount includes approximately $16.4
million in a curtailment reserve escrow account from the Hudson and Mondrian Los Angeles loans
which require that all excess cash be deposited into this account until such time as the debt
service coverage ratio improves above the requirement for two consecutive quarters.
Further, as of June 30, 2010, we have aggregate capital commitments or plans to fund joint
venture and owned development projects of approximately $5.0 million, which we expect to fund in
2010. On July 31, 2010, we funded approximately $0.6 million of this amount towards the
development of Mondrian SoHo, as discussed above in Recent Trends and Developments Recent
Developments Additional Funding to Complete Development of Mondrian SoHo and Extension of Debt.
Our $10.5 million interest-only, non-recourse promissory notes relating to the property across
the street from Delano South Beach matures January 24, 2011. The notes bear interest at 11.0%.
Effective April 25, 2010, we discontinued subsidizing the monthly scheduled interest payments under
these notes. We are reviewing the feasibility of the project, including whether the project
qualifies for various tax credits. We may consider development of the property if the proceeds
from the sale of the tax credits are available to fund a sufficient portion of the costs.
As of June 30, 2010, our non-recourse mortgage financing on Hudson and Mondrian Los Angeles,
discussed below in DebtMortgage Agreements, consisted of (i) a $217.0 million first mortgage
note secured by Hudson, (ii) a $26.5 million mezzanine loan secured by a pledge of the equity
interests in our subsidiary owning Hudson, and (iii) a $120.5 million first mortgage note secured
by Mondrian Los Angeles (collectively, the Mortgages). The initial maturity date of the Mortgages
was July 12, 2010, which date has been effectively extended to October 12,
2013 for the Hudson mezzanine loan, described below, and September 12, 2010 for the remainder
of the Mortgages through forbearance agreements.
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On July 9, 2010, we entered into forbearance agreements with the lenders that hold the first
mortgage notes of the Mortgages. The forbearance agreements effectively extend the maturities of
the first mortgage loans until September 12, 2010. We are in negotiations with the mortgage
lenders to extend the first mortgage loans. A portion of these loans may need to be repaid in
order to obtain an extension. There can be no assurance that we will be successful in extending or
refinancing the first mortgage loans on acceptable terms or at all.
Related to the Mortgages, our interest rate swaps in the notional amount of $370 million with
a LIBOR strike price of approximately 5.0% expired in July and were replaced by interest rate caps.
This should result in a significant reduction in interest expense, assuming the first mortgage
notes of the Mortgages are successfully extended and LIBOR rates continue to remain low.
On October 14, 2009, we entered into an agreement with one of our lenders which holds, among
other loans, the Hudson mezzanine loan. Under the agreement, we paid an aggregate of $11.2 million
to (i) reduce the principal balance of the mezzanine loan from $32.5 million to $26.5 million, (ii)
acquire interests in $4.5 million of 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 agreed to cooperate with us in our efforts to seek an extension of the $217.0
million Hudson mortgage loan and to consent to certain refinancings and other modifications of the
Hudson mortgage loan.
We expect to meet our short-term liquidity needs for the next 12 months through existing cash
balances and cash provided by our operations, assuming we are able to extend our existing debt due
in 2010. If necessary, we may also access additional borrowings under our Amended Revolving Credit
Facility. Additionally, we may secure other debt or equity financing opportunities. Given the
uncertain economic environment and continuing difficult conditions in the credit markets, however,
we may not be able to obtain such financings on terms acceptable to us or at all. See also
Potential Capital Expenditures and Liquidity Requirements below for additional liquidity that
may be required in the short-term, depending on market and other circumstances, including our
ability to refinance or extend existing debt.
Long-Term Liquidity Requirements. We generally consider our long-term liquidity requirements
to consist of those items that are expected to be incurred beyond the next 12 months and believe
these requirements consist primarily of funds necessary to pay scheduled debt maturities,
renovations and other non-recurring capital expenditures that need to be made periodically to our
properties and the costs associated with acquisitions and development of properties under contract
and new acquisitions and development projects that we may pursue.
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
accrue any and all dividend payments, and as of June 30, 2010, have not declared any dividends. We
have 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 prior to the escalation in dividend rate to 20% in 2017.
We are currently negotiating to extend the Hudson and
Mondrian Los Angeles loan agreements
to October 2011. There
are no further options to extend the Mortgages beyond October 2011. In addition, the
Amended Revolving Credit Facility expires in October 2011.
Historically, we have satisfied our long-term liquidity requirements through various sources
of capital, including borrowings under our revolving credit facility, our existing working capital,
cash provided by operations, equity and debt offerings, and long-term mortgages on our properties.
Other sources may include cash generated through asset dispositions and joint venture transactions.
Additionally, we may secure other financing opportunities. Given the
uncertain economic environment and continuing difficult conditions in the credit markets,
however, we may not be able to obtain such financings on terms acceptable to us or at all. We may
require additional borrowings to satisfy our long-term liquidity requirements.
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Although the credit and equity markets remain challenging, we believe that these sources of
capital will become available to us in the future to fund our long-term liquidity requirements.
However, our ability to incur additional debt is dependent upon a number of factors, including our
degree of leverage, borrowing restrictions imposed by existing lenders and general market
conditions. We will continue to analyze which source of capital is most advantageous to us at any
particular point in time.
Other Liquidity Matters
In addition to our expected short-term and long-term liquidity requirements, our liquidity
could also be affected by potential liquidity matters at our Owned Hotels or Joint Venture Hotels,
as discussed below.
Mondrian South Beach Mortgage and Mezzanine Agreements. The non-recourse mortgage loan and
mezzanine loan agreements related to the Mondrian South Beach matured on August 1, 2009. In April
2010, the Mondrian South Beach joint venture amended the non-recourse financing secured by Mondrian
South Beach and extended the maturity date for up to seven years until April 2017. See Recent
Trends and Developments Recent Developments Mondrian South Beach Debt Restructuring for
further discussion.
A standard non-recourse carve-out guaranty by Morgans Group is in place for the Mondrian South
Beach loans. In addition, although construction is complete and Mondrian South Beach opened on
December 1, 2008, approximately $4.8 million of construction and related costs remain unpaid as of
June 30, 2010, and we and affiliates of our joint venture partner may have continuing obligations
under a construction completion guaranty. We and affiliates of our joint venture partner also have
an agreement to purchase approximately $14 million each of condominium units under certain
conditions.
Hard Rock Debt Service. On December 24, 2009 our Hard Rock joint venture amended the loan
secured by the hotel and casino so that the maturity date 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 the maturity date is extendable until February 2014. Due to leverage and seasonality, Hard
Rocks cash flows have not been sufficient to cover debt service for the first half of 2010 and there were months
when the joint venture was forced to use its interest reserve fund. The joint venture anticipates it will not return
to a positive cash position at the earliest until the economic environment in Las Vegas has
improved from its current condition. In the event that the joint ventures expected sources of
liquidity do not meet the levels that management anticipates, then a further restructuring of debt may
be necessary.
There can be no assurances that the joint venture will be successful in achieving any such restructuring should it become necessary.
Other Possible Uses of Capital. We have a number of development projects under consideration
at our discretion.
Comparison of Cash Flows for the Six Months Ended June 30, 2010 to the Six Months ended June 30,
2009
Operating Activities. Net cash used in operating activities was $19.2 million for the six
months ended June 30, 2010 as compared to $9.3 million for the six months ended June 30, 2009. The
increase in cash used in operating activities is primarily due to deposits of excess cash flow at
Hudson and Mondrian Los Angeles into a curtailment reserve escrow account.
Investing Activities. Net cash used in investing activities amounted to $10.4 million for the
six months ended June 30, 2010 as compared to $11.8 million for the six months ended June 30, 2009.
The slight decrease in cash used in investing activities primarily relates to a decrease in
contributions to our investments in unconsolidated joint ventures.
Financing Activities. Net cash used in financing activities amounted to $1.7 million for the
six months ended June 30, 2010 as compared to net cash provided by financing activities of $137.5
million for the six months ended June 30, 2009. During the first quarter of 2009, we borrowed
monies under our revolving credit facility for general corporate purposes, for which there were no
comparable borrowings during the same period in 2010.
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Debt
Amended Revolving Credit Facility. On October 6, 2006, we and certain of our subsidiaries
entered into a revolving credit facility which included a letter of credit sub-facility and
swingline sub-facility with Wachovia Bank, National Association, as Administrative Agent, and the
lenders thereto. In 2009, we received notice that one of the lenders on the revolving credit
facility was taken over by the Federal Deposit Insurance Corporation. As such, the total initial
commitment amount on the revolving credit facility was reduced to approximately $220.0 million.
On August 5, 2009, we and certain of our subsidiaries entered into an amendment to the
revolving credit facility, which we refer to as the Amended Revolving Credit Facility.
Among other things, the Amended Revolving Credit Facility:
| deletes the financial covenant requiring us to maintain certain leverage ratios; |
| revises the fixed charge coverage ratio (defined generally as the ratio of
consolidated EBITDA excluding Mondrian Scottsdales EBITDA for the periods ending June
30, 2009 and September 30, 2009 and Clifts EBITDA for all periods to consolidated
interest expense excluding Mondrian Scottsdales interest expense for the periods ending
June 30, 2009 and September 30, 2009 and Clifts interest expense for all periods) that
we are required to maintain for each four-quarter period to no less than 0.90 to 1.00
from the previous fixed charge coverage ratio of no less than 1.75 to 1.00. As of June
30, 2010, our fixed charge coverage ratio was 1.18x; |
| limits defaults relating to bankruptcy and judgment to certain events involving
us, Morgans Group and subsidiaries that are parties to the Amended Revolving Credit
Facility; |
| prohibits capital expenditures with respect to any hotels owned by us, the
borrowers, 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; |
| 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 |
| provides 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 as
of June 30, 2009 and/or for the four fiscal quarters ended June 30, 2009 under the
revolving credit facility before it was amended. |
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 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.
Following appraisals in March 2010, total availability under the Amended Revolving Credit Facility
as of June 30, 2010 was $122.3 million, of which $23.5 million of borrowings were outstanding, and
approximately $2.0 million of letters of credit were posted, all allocated to the Florida Tranche.
We believe that, without the amendment, we would have had limited, if any, availability under the
revolving credit facility for the remainder of its term.
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The Amended Revolving Credit Facility bears interest at a fluctuating rate 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%.
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.
The owners of the New York Properties, our wholly-owned subsidiaries, have paid all mortgage
recording and other taxes required for the mortgage on the New York Properties to secure in full
the amount available under the New York Tranche. The commitments under the Amended Revolving Credit
Facility terminate on October 5, 2011, at which time all outstanding amounts under the Amended
Revolving Credit Facility will be due.
Mortgage Agreements. On October 6, 2006, our subsidiaries that own Hudson and Mondrian Los
Angeles entered into non-recourse mortgage financings with Wachovia Bank, National Association, as
lender, consisting of two separate mortgage loans and a mezzanine loan. As of June 30, 2010, the
Mortgages consisted of (i) a $217.0 million first mortgage note secured by Hudson, (ii) a $26.5
million mezzanine loan secured by a pledge of the equity interests in our subsidiary owning Hudson,
and (iii) a $120.5 million first mortgage note secured by Mondrian Los Angeles. As of June 30,
2010, the Mortgages bore interest at a blended rate of 30-day LIBOR plus 125 basis points. As of
June 30, 2010, we maintained swaps that effectively fixed the LIBOR rate on the debt under the
Mortgages at approximately 5.0% through the initial maturity date. The initial maturity date of
the Mortgages was July 12, 2010, which date has been effectively extended to October 12, 2013 for
the Hudson mezzanine loan, described below, and September 12, 2010 for the remainder of the
Mortgages through forbearance agreements.
On July 9, 2010, we entered into forbearance agreements with the lenders holding the first
mortgage notes secured by our Hudson and Mondrian Los Angeles hotels. The forbearance agreements
effectively extend the maturities of the loans until September 12, 2010. We are in negotiations
with the mortgage lenders to extend the first mortgage loans. A portion of these loans may need to
be repaid in order to obtain an extension. There can be no assurance that we will be successful
in extending or refinancing the first mortgage loans on acceptable terms or at all.
On October 14, 2009, we entered into an agreement with one of our lenders which holds, among
other loans, the Hudson mezzanine loan. Under the agreement, we paid an aggregate of $11.2 million
to (i) reduce the principal balance of the mezzanine loan from $32.5 million to $26.5 million, (ii)
acquire interests in $4.5 million of 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 agreed to cooperate with us in our efforts to seek an extension of the $217.0
million Hudson mortgage loan and to consent to certain refinancings and other modifications of the
Hudson mortgage loan.
The Mortgages require our subsidiary borrowers to fund reserve accounts to cover monthly debt
service payments. Those subsidiary borrowers are also required to fund reserves for property, sales
and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of
those hotels. Reserves are deposited into restricted cash accounts and are released as certain
conditions are met. As of March 31, 2010, our Mortgages had fallen below the required debt service
coverage and as such, all excess cash, once all other reserve accounts are completed, is funded
into a curtailment reserve fund. As of June 30, 2010, the balance in the curtailment reserve fund
was $16.4 million. Our subsidiary borrowers are not permitted to have any liabilities other than
certain ordinary trade payables, purchase money indebtedness, capital lease obligations and certain
other liabilities.
The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles.
Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt or
partnership interest debt. In addition, the Mortgages do not permit (i) transfers of more than 49%
of the interests in the subsidiary borrowers, Morgans
Group or the Company or (ii) a change in control of the subsidiary borrowers or in respect of
Morgans Group or the Company itself without, in each case, complying with various conditions or
obtaining the prior written consent of the lender.
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The Mortgages provide for events of default customary in mortgage financings, including, among
others, failure to pay principal or interest when due, failure to comply with certain covenants,
certain insolvency and receivership events affecting the subsidiary borrowers, Morgans Group or the
Company, and breach of the encumbrance and transfer provisions. In the event of a default under the
Mortgages, the lenders recourse is limited to the mortgaged property, unless the event of default
results from insolvency, a voluntary bankruptcy filing, a breach of the encumbrance and transfer
provisions, or certain other bad acts, in which event the lender may also pursue remedies against
Morgans Group.
Notes to a Subsidiary Trust Issuing Preferred Securities. In August 2006, we formed a trust,
MHG Capital Trust I (the Trust), to issue $50.0 million of trust preferred securities in a
private placement. The sole assets of the Trust consist of the trust notes (the Trust Notes) due
October 30, 2036 issued by Morgans Group and guaranteed by Morgans Hotel Group Co. The Trust Notes
have a 30-year term, ending October 30, 2036, and bear interest at a fixed rate of 8.68% for the
first 10 years, ending October 2016, and thereafter will bear interest at a floating rate based on
the three-month LIBOR plus 3.25%. These securities are redeemable by the Trust at par beginning on
October 30, 2011.
The Trust Notes agreement previously required that we not fall below a fixed charge coverage
ratio, defined generally as the ratio of consolidated EBITDA, excluding Clifts EBITDA, over
consolidated interest expense, excluding Clifts interest expense, of 1.4 to 1.0 for four
consecutive quarters. On November 2, 2009, we amended the Trust Notes agreement to permanently
eliminate this financial covenant. We paid a one-time fee of $2.0 million in exchange for the
permanent removal of the covenant.
Clift. We lease Clift under a 99-year non-recourse lease agreement expiring in 2103. The lease
is accounted for as a financing with a balance of $86.1 million at June 30, 2010. The lease
payments are $6.0 million per year through October 2014 with inflationary increases at five-year
intervals thereafter beginning in October 2014.
Due to the amount of the payments stated in the lease, which will increase periodically, and
the economic environment in which the hotel operates, Clift Holdings LLC (Clift Holdings), our
subsidiary that leases Clift, had not been operating Clift at a profit and Morgans Group had been
funding cash shortfalls sustained at Clift in order to enable Clift Holdings to make lease payments
from time to time. On March 1, 2010, however, we discontinued subsidizing Clift Holdings and Clift
Holdings stopped making the scheduled monthly payments. Under the lease, the owners recourse is
limited to Clift Holdings, which has no substantial assets other than its leasehold interest in
Clift. We have been in discussions with the owners to restructure the payment obligations. However,
on May 4, 2010, the owners filed a lawsuit against Clift Holdings, which the court dismissed on
June 1, 2010. On June 8, 2010, the owners filed a new lawsuit and on June 17, 2010, we and Clift
Holdings filed an affirmative civil lawsuit. We have had discussion with the owners regarding
resolution of this litigation, but there can be no assurance that we will be successful in
restructuring the lease, resolving this litigation, or continuing to operate Clift.
Promissory Notes. The property across from the Delano South Beach has a $10.0 million interest
only non-recourse promissory note to the seller. Effective January 24, 2010, we extended the
maturity of the note until January 24, 2011. The note bears interest at 11.0%, but 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 we
extended to January 24, 2011, and continues to bear interest at 11%. The obligations under this
note are secured with a pledge of the equity interests in our subsidiary that owns the property.
Effective April 25, 2010, we discontinued subsidizing the monthly scheduled interest payments under
both notes. We are reviewing the feasibility of the project, including whether the project
qualifies for various tax credits. We may consider development of the property if the proceeds
from the sale of the tax credits are available to fund a sufficient portion of the costs.
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Convertible Notes. On October 17, 2007, we completed an offering of $172.5 million aggregate
principal amount of 2.375% Senior Subordinated Convertible Notes, which we refer to as the
Convertible Notes, in a private offering,
which included an additional issuance of $22.5 million in aggregate principal amount of
Convertible Notes as a result of the initial purchasers exercise in full of their overallotment
option. The Convertible Notes are senior subordinated unsecured obligations of the Company and are
guaranteed on a senior subordinated basis by our operating company, Morgans Group. The Convertible
Notes are convertible into shares of our common stock under certain circumstances and upon the
occurrence of specified events. The Convertible Notes mature on October 15, 2014, unless
repurchased by us or converted in accordance with their terms prior to such date.
In connection with the private offering, we entered into certain Convertible Note hedge and
warrant transactions. These transactions are intended to reduce the potential dilution to the
holders of our common stock upon conversion of the Convertible Notes and will generally have the
effect of increasing the conversion price of the Convertible Notes to approximately $40.00 per
share, representing a 82.23% premium based on the closing sale price of our common stock of $21.95
per share on October 11, 2007. The net proceeds to us from the sale of the Convertible Notes were
approximately $166.8 million (of which approximately $24.1 million was used to fund the Convertible
Note call options and warrant transactions).
On January 1, 2009, we adopted FSP 14-1, which clarifies the accounting for the Convertible
Notes payable and has subsequently been codified in Accounting Standard Codification (ASC)
470-20, Debt with Conversion and other Options (ASC 470-20). ASC 470-20 requires the proceeds
from the sale of the Convertible Notes to be allocated between a liability component and an equity
component. The resulting debt discount must be amortized over the period the debt is expected to
remain outstanding as additional interest expense. ASC 470-20 required retroactive application to
all periods presented. The equity component, recorded as additional paid-in capital, was $9.0
million, which represents the difference between the proceeds from issuance of the Convertible
Notes and the fair value of the liability, net of deferred taxes of $6.4 million, as of the date of
issuance of the Convertible Notes.
Joint Venture Debt. See Off-Balance Sheet Arrangements for descriptions of joint venture
debt.
Seasonality
The hospitality business is seasonal in nature. For example, our Miami hotels are generally
strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth
quarter. Quarterly revenues also may be adversely affected by events beyond our control, such as
the current recession, extreme weather conditions, terrorist attacks or alerts, natural disasters,
airline strikes, and other considerations affecting travel. Given the global economic downturn, the
impact of seasonality in 2009 and the first quarter of 2010 was not as significant as in prior
periods and may remain less pronounced for the remainder of 2010 depending on the timing and
strength of economic recovery.
To the extent that cash flows from operations are insufficient during any quarter, due to
temporary or seasonal fluctuations in revenues, we may have to enter into additional short-term
borrowings or increase our borrowings, if available, under our Amended Revolving Credit Facility to
meet cash requirements.
Capital Expenditures and Reserve Funds
We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as
determined pursuant to our debt and lease agreements related to such hotels, with the exception of
Delano South Beach, Royalton and Morgans. Our Joint Venture Hotels generally are subject to similar
obligations under debt agreements related to such hotels, or under our management agreements. These
capital expenditures relate primarily to the periodic replacement or refurbishment of furniture,
fixtures and equipment. Such agreements typically require us to reserve funds at amounts equal to
4% of the hotels revenues and require the funds to be set aside in restricted cash. In addition,
our restaurant joint ventures require the ventures to set aside restricted cash of between 2% to 4%
of gross revenues of the restaurant. As of June 30, 2010, $3.2 million was available in restricted
cash reserves for future capital expenditures under these obligations related to our Owned Hotels.
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The lenders under the Mortgages require our subsidiary borrowers to fund reserve accounts to
cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves
for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation
and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are
released as certain conditions are met. As of March 31, 2010, our Mortgages had fallen below the
required debt service coverage and as such, all excess cash, once all other reserve accounts are
completed, is funded into a curtailment reserve fund. As of June 30, 2010, the balance in the
curtailment reserve fund was $16.4 million. Our subsidiary borrowers are not permitted to have any
liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease
obligations, and certain other liabilities.
During 2006, 2007 and 2008, our Owned Hotels that were not subject to these reserve funding
obligations Delano South Beach, Royalton, and Morgans underwent significant room and common
area renovations, and as such, are not expected to require a substantial amount of capital during
2010. Management will evaluate the capital spent at these properties on an individual basis and
ensure that such decisions do not impact the overall quality of our hotels or our guests
experience.
Under the Amended Revolving Credit Facility, we are generally prohibited from funding capital
expenditures with respect to any hotels owned by us other than maintenance capital expenditures for
any hotel not exceeding 4% of the annual gross revenues of such hotel and certain other exceptions.
Derivative Financial Instruments
We use derivative financial instruments to manage our exposure to the interest rate risks
related to our variable rate debt. We do not use derivatives for trading or speculative purposes
and only enter into contracts with major financial institutions based on their credit rating and
other factors. We determine the fair value of our derivative financial instruments using models
which incorporate standard market conventions and techniques such as discounted cash flow and
option pricing models to determine fair value. We believe these methods of estimating fair value
result in general approximation of value, and such value may or may not be realized.
On February 22, 2006, we entered into an interest rate forward starting swap that effectively
fixed the interest rate on $285.0 million of mortgage debt at approximately 5.04% on Mondrian Los
Angeles and Hudson with an effective date of July 9, 2007 and a maturity date of July 9, 2010. This
derivative qualified for hedge accounting treatment per ASC 815-10, Derivatives and Hedging (ASC
815-10) and accordingly, the change in fair value of this instrument was recognized in accumulated
other comprehensive loss.
In connection with the Mortgages, we also entered into an $85.0 million interest rate swap
that effectively fixed the LIBOR rate on $85.0 million of the debt at approximately 5.0% with an
effective date of July 9, 2007 and a maturity date of July 15, 2010. This derivative qualified for
hedge accounting treatment per ASC 815-10 and accordingly, the change in fair value of this
instrument was recognized in accumulated other comprehensive loss.
In connection with the sale of the Convertible Notes (discussed above) we entered into call
options which are exercisable solely in connection with any conversion of the Convertible Notes and
pursuant to which we will receive shares of our common stock from counterparties equal to the
number of shares of our common stock, or other property, deliverable by us to the holders of the
Convertible Notes upon conversion of the Convertible Notes, in excess of an amount of shares or
other property with a value, at then current prices, equal to the principal amount of the converted
Convertible Notes. Simultaneously, we also entered into warrant transactions, whereby we sold
warrants to purchase in the aggregate 6,415,327 shares of our common stock, subject to customary
anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock.
The warrants may be exercised over a 90-day trading period commencing January 15, 2015. The call
options and the warrants are separate contracts and are not part of the terms of the Convertible
Notes and will not affect the holders rights under the Convertible Notes. The call options are
intended to offset potential dilution upon conversion of the Convertible Notes in the event that
the market value per share of the common stock at the time of exercise is greater than the exercise
price of the call options, which is equal to the initial conversion price of the Convertible Notes
and is subject to certain customary adjustments.
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In connection with the Yucaipa investment, discussed above, we issued warrants to the
Investors to purchase 12,500,000 shares of our common stock at an exercise price of $6.00 per
share. The warrants have a 7-1/2 year term and are exercisable utilizing a cashless exercise method
only, resulting in a net share issuance. The exercise of the warrants is 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.
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 also subject to
an exercise cap which effectively limits the Fund Managers beneficial ownership (which is
considered jointly with the Investors beneficial ownership) of our common stock to 9.9% at any one
time, subject to certain exceptions. The exercise price and number of shares subject to these
contingent warrants are both subject to anti-dilution adjustments.
Off-Balance Sheet Arrangements
Morgans Europe. We own interests in two hotels through a 50/50 joint venture known as Morgans
Europe. Morgans Europe owns two hotels located in London, England, St Martins Lane, a 204-room
hotel, and Sanderson, a 150-room hotel. Under a management agreement with Morgans Europe, we earn
management fees and a reimbursement for allocable chain service and technical service expenses.
Morgans Europes net income or loss and cash distributions or contributions are allocated to
the partners in accordance with ownership interests. At June 30, 2010, we had an investment in
Morgans Europe of $0.3 million. We account for this investment under the equity method of
accounting. Our equity in income of the joint venture amounted to income of $1.5 million and $0.2
million for the six months ended June 30, 2010 and 2009, respectively.
Morgans Europe had outstanding mortgage debt of £99.3 million, or approximately $149.7
million, as of June 30, 2010, which was scheduled to mature on November 24, 2010. On July 15, 2010,
the London joint venture refinanced this mortgage debt in full. See Recent Trends and
Developments Recent Developments Refinancing of London Joint Venture Debt for further
discussion.
Mondrian South Beach. We own a 50% interest in Mondrian South Beach, a recently renovated
apartment building which was converted into a condominium and hotel. Mondrian South Beach opened in
December 2008, at which time we began operating the property under a long-term management contract.
We account for this investment under the equity method of accounting. At June 30, 2010, our
investment in Mondrian South Beach was $13.2 million. Our equity in loss of Mondrian South Beach
was $0.2 million and $2.1 million for the six months ended June 30, 2010 and 2009, respectively.
The non-recourse mortgage loan and mezzanine loan agreements related to the Mondrian South
Beach matured on August 1, 2009. In April 2010, the Mondrian South Beach joint venture amended the
non-recourse financing secured by Mondrian South Beach and extended the maturity date for up to
seven years until April 2017. See Recent Trends and Developments Recent Developments
Mondrian South Beach Debt Restructuring for further discussion.
Hard Rock. As of June 30, 2010, we owned a 12.8% interest in the Hard Rock, based on cash
contribution 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 the DLJMB Parties. 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. We also manage the Hard Rock under a management agreement, for which we receive
a management fee, a chain service expense reimbursement based on a percentage of all non-gaming
revenue including rental income, and a fixed annual gaming facilities support fee. We can also earn
an incentive
management fee based on EBITDA, as defined, above certain levels. In December 2009, our Hard
Rock joint venture refinanced the acquisition, construction and land loans. As part of the debt
restructuring, we contributed an additional $3.0 million to the joint venture. We account for this
investment under the equity method of accounting. Additional amounts were not recognized in our
consolidated financial statements for the six months ended June 30, 2010 and 2009, as it exceeds
our investment balance and commitments to provide additional equity to the joint venture. At June
30, 2010, we had contributed an aggregate of $75.8 million in cash to the Hard Rock joint venture.
In 2009, we wrote down our investment to zero.
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Ames in Boston. On June 17, 2008 we, Normandy Real Estate Partners, and local partner Ames
Hotel Partners, entered into a joint venture to develop the Ames hotel in Boston. Upon the hotels
completion in November 2009, we began operating Ames under a 20-year management contract. As of
June 30, 2010, we had an approximately 31% economic interest in the joint venture and our
investment in the Ames joint venture was $10.7 million. Our equity in loss for the six months ended
June 30, 2010 was $0.5 million.
Mondrian SoHo. In June 2007, we contributed approximately $5.0 million for a 20% equity
interest in a joint venture with Cape Advisors Inc. which is developing a Mondrian hotel in the
SoHo neighborhood of New York City. We subsequently loaned an additional $3.3 million to the
venture. Based on the decline in general market conditions since the inception of the joint
venture and more recently, the need for additional funding to complete the hotel, we performed an
impairment analysis and concluded that our investment in the Mondrian SoHo joint venture was
impaired. As such, we recorded an $8.3 million impairment charge through our equity in loss of
unconsolidated joint ventures in the quarter ended June 30, 2010.
The joint venture obtained a loan of $195.2 million to acquire and develop the hotel, which
matured in June 2010. On July 31, 2010, the loan was amended to, among other things, provide for
extensions of the maturity date of the mortgage loan secured by the hotel for up to five years
through extension options, subject to certain conditions. See Recent Trends and Developments
Recent Developments Additional Funding to Complete Development of Mondrian SoHo and Extension of
Debt for further discussion.
Upon completion of the hotel, we expect to operate the hotel under a 10-year management
contract with two 10-year extension options.
Shore Club Mortgage. As of June 30, 2010, we owned approximately 7% of the joint venture that
owns Shore Club. On September 15, 2009, the joint venture received a notice of default on behalf of
the special servicer for the lender on the joint ventures mortgage loan for failure to make its
September monthly payment and for failure to maintain its debt service coverage ratio, as required
by the loan documents. On October 7, 2009, the joint venture received a second letter on behalf of
the special servicer for the lender accelerating the payment of all outstanding principal, accrued
interest, and all other amounts due on the mortgage loan. The lender also demanded that the joint
venture transfer all rents and revenues directly to the lender to satisfy the joint ventures debt.
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.
For further information regarding our off balance sheet arrangements, see note 4 to our
consolidated financial statements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America, or GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience,
information that is currently available to us and on various other assumptions that we believe are
reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or conditions. No
material changes to our critical accounting policies have occurred since December 31, 2009.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and Qualitative Disclosures About Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent
upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes
in market prices and interest rates. Some of our outstanding debt has a variable interest rate. As
described in Managements Discussion and Analysis of Financial Results of Operations Derivative
Financial Instruments above, we use some derivative financial instruments, primarily interest rate
swaps, to manage our exposure to interest rate risks related to our floating rate debt. We do not
use derivatives for trading or speculative purposes and only enter into contracts with major
financial institutions based on their credit rating and other factors. As of June 30, 2010, our
total outstanding consolidated debt, including capitalized lease obligations, was approximately
$703.0 million, of which approximately $387.5 million, or 55.1%, was variable rate debt.
We entered into hedging arrangements on $285.0 million of variable rate debt in connection
with the mortgage debt on Hudson and Mondrian Los Angeles, which matured on July 9, 2010 and
effectively fixed LIBOR at approximately 4.25%. At June 30, 2010, the one month LIBOR rate was
0.35%. These hedging arrangements have expired.
In connection with the Mortgages, we also entered into an $85.0 million interest rate swap
that effectively fixed the LIBOR rate at approximately 5.0% with an effective date of July 9, 2007
and a maturity date of July 15, 2010. On October 14, 2009, we entered into an agreement with one of
our lenders which holds the Hudson mezzanine loan and we paid $6.0 million to reduce the principal
balance of the mezzanine loan, resulting in a remaining $79.0 million of the debt to which the
interest rate swap was applicable. This interest rate swap has expired.
Our variable rate debt also consisted of $23.5 million outstanding under the Amended Revolving
Credit Facility at a rate of LIBOR plus 1.35% as of June 30, 2010. If market rates of interest on
this variable rate debt increase by 1.0% or 100 basis points, the increase in interest expense
would reduce future pre-tax earnings and cash flows by approximately $0.2 million annually. If
market rates of interest on this variable rate debt decrease by 0.35%, or 35 basis points, the
decrease in interest expense would increase pre-tax earnings and cash flow by approximately $0.1
million.
Our fixed rate debt consists of Trust Notes, the Convertible Notes, the promissory notes on
the property across the street from Delano South Beach, and the Clift lease. The fair value of some
of this debt is greater than the book value. As such, if market rates of interest increase by 1.0%,
or approximately 100 basis points, the fair value of our fixed rate debt would increase by
approximately $15.3 million. If market rates of interest decrease by 1.0%, or 100 basis points, the
fair value of our fixed rate debt would increase by $95.5 million.
Interest risk amounts were determined by considering the impact of hypothetical interest rates
on our financial instruments and future cash flows. These analyses do not consider the effect of a
reduced level of overall economic activity. If overall economic activity is significantly reduced,
we may take actions to further mitigate our exposure. However, because we cannot determine the
specific actions that would be taken and their possible effects, these analyses assume no changes
in our financial structure.
We have entered into agreements with each of our derivative counterparties in connection with
our interest rate swaps and hedging instruments related to the Convertible Notes, providing that in
the event we either default or are capable of being declared in default on any of our indebtedness,
then we could also be declared in default on our derivative obligations.
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Currency Exchange Risk
As we have international operations with our two London hotels, currency exchange risk between
the U.S. dollar and the British pound arises as a normal part of our business. We reduce this risk
by transacting this business in British pounds. A change in prevailing rates would have, however,
an impact on the value of our equity in Morgans Europe. The U.S. dollar/British pound currency
exchange is currently the only currency exchange rate to which we are directly exposed. Generally,
we do not enter into forward or option contracts to manage our exposure applicable
to net operating cash flows. We do not foresee any significant changes in either our exposure
to fluctuations in foreign exchange rates or how such exposure is managed in the future.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, an evaluation was performed under the
supervision and with the participation of our management, including the chief executive officer and
the chief financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and
Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and the
chief financial officer concluded that the design and operation of these disclosure controls and
procedures were effective as of the end of the period covered by this report.
There were no changes in our internal control over financial reporting (as defined in Exchange
Act Rule 13a-15) that occurred during the quarter ended June 30, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Potential Litigation
We understand that Mr. Philippe Starck has attempted to initiate arbitration proceedings in
the London Court of International Arbitration regarding an exclusive service agreement that he
entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel Group LLC) in
February 1998 regarding the design of certain hotels now owned by us. We are not a party to these
proceedings at this time. See note 5 of our consolidated financial statements.
Hard Rock Financial Advisory Agreement
In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (Credit
Suisse) for $9.4 million related to the Financial Advisory Agreement the Company entered into with
Credit Suisse in July 2006. Under the terms of the financial advisory agreement, Credit Suisse
received a transaction fee for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint
venture. The transaction fee, which was paid by the Hard Rock joint venture at the closing of the
acquisition of the Hard Rock and related assets in February 2007, was based upon an agreed upon
percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The
invoice received in July 2008 alleges that as a result of events subsequent to the closing of the
Hard Rock acquisition transactions, Credit Suisse is due additional transaction fees. The Company
believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.
Petra Litigation Regarding Scottsdale Mezzanine Loan
On April 7, 2010, Petra CRE CDO 2007-1, LTD, a Cayman Islands Exempt Company (Petra), filed
a complaint against Morgans Group LLC in the Supreme Court of the State of New York County of New
York in connection with an approximately $14.0 million non-recourse mezzanine loan made on December
1, 2006 by Greenwich Capital Financial Products Company LLC (the Original Lender) to Mondrian
Scottsdale Mezz Holding Company LLC, a wholly-owned subsidiary of Morgans Group LLC. The mezzanine
loan relates to the Scottsdale, Arizona property previously owned by us. In connection with the
mezzanine loan, Morgans Group LLC entered into a so-called bad boy guaranty providing for
recourse liability under the mezzanine loan in certain limited circumstances. Pursuant to an
assignment by the Original Lender, Petra is the holder of an interest in the mezzanine loan. The
complaint alleges that the foreclosure of the Scottsdale property by a senior lender on March 16,
2010 constitutes an impermissible transfer of the property that triggered recourse liability of
Morgans Group LLC pursuant to the guaranty. Petra demands damages of approximately $15.9 million
plus costs and expenses.
We believe that a foreclosure based on a payment default does not create one of the limited
circumstances under which Morgans Group LLC would have recourse liability under the guaranty. On
May 27, 2010, we answered Petras complaint, denying any obligation to make payment under the
guaranty. We also requested relevant documents from Petra. On July 9, 2010, Petra moved for
summary judgment on the ground that the loan documents unambiguously establish Morgans Groups
obligation under the guaranty. Petra also moved to stay discovery pending resolution of its
motion. We will oppose Petras motion for summary judgment, and will continue to defend this
lawsuit vigorously. However, it is not possible to predict the outcome of the lawsuit.
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Clift Lawsuit
Due to the amount of the payments stated in the lease, which will increase periodically, and
the economic environment in which the hotel operates, Clift Holdings had not been operating Clift
at a profit and Morgans Group had been funding cash shortfalls sustained at Clift in order to
enable Clift Holdings to make lease payments from time to time. On March 1, 2010, however, we
discontinued subsidizing Clift Holdings and Clift Holdings stopped making the scheduled monthly
payments. Under the lease, the owners recourse is limited to Clift Holdings, which has no
substantial assets other than its leasehold interest in Clift.
On May 4, 2010, Hasina, LLC, Kalpana, LLC, Rigg Hotel, LLC, JRIA LLC and Tarstone Hotels, LLC
(the Hasina plaintiffs) filed a complaint against Clift Holdings in the San Francisco Superior
Court regarding Clift Holdings non-payment of the Clift obligations. The complaint demands, among
other things, approximately $1.0 million for overdue payments, $16,318 for each day that Clift
Holdings does not vacate the premises, attorneys fees
and possession of the property. On June 1, 2010, the court dismissed that lawsuit after Clift
Holdings filed a motion to dismiss it. On June 8, 2010, the Hasina plaintiffs filed a new lawsuit
alleging substantially the same claims alleged in the May 4 complaint. Clift Holdings has filed
another motion to dismiss and that motion is currently set to be heard on August 24, 2010.
On June 17, 2010, we and Clift Holdings filed an affirmative civil lawsuit against Tarsadia
Hotels, Inc., Hasina, LLC, Kalpana, LLC, Rigg Hotel, LLC, JRIA LLC, Tarstone Hotels, LLC
(collectively, the Tarsadia defendants). The suit alleges that the Tarsadia defendants agreed to
negotiate in good faith with us and Clift Holdings to reduce the payments due under the lease, but
that they breached that agreement by failing to negotiate at all and instead marketing the property
for sale.
We have been in discussions with the owners regarding resolution of this issue, but there can
be no assurance that such discussions will be successful.
Other Litigation
We are involved in various lawsuits and administrative actions in the normal course of
business. In managements opinion, disposition of these lawsuits is not expected to have a material
adverse effect on our financial position, results of operations or liquidity.
Item 1A. Risk Factors.
In addition to the risk factor below and the other information set forth in this report, you
should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009. These risks and uncertainties have
the potential to materially affect our business, financial condition, results of operations, cash
flows, projected results and future prospects.
The change of control rules under Section 382 of the Internal Revenue Code may limit our ability to
use net operating loss carryforwards to reduce future taxable income.
We have net operating loss (NOL) carryforwards for federal and state income tax purposes.
Generally, NOL carryforwards can be used to reduce future taxable income. Our use of our NOL
carryforwards will be limited, however, under Section 382 of the Internal Revenue Code (the Code)
if we undergo a change in ownership of more than 50% of our capital stock over a three-year period
as measured under Section 382 of the Code. These complex change of ownership rules generally focus
on ownership changes involving stockholders owning directly or indirectly 5% or more of our stock,
including certain public groups of stockholders as set forth under Section 382 of the Code,
including those arising from new stock issuances and other equity transactions. We believe we
experienced an ownership change for these purposes in April 2008, but that the resulting annual
limit on our NOL carryforwards did not affect our ability to use the NOL carryforwards that we had
at the time of that ownership change. Our stock is actively traded and it is possible that we will
experience another ownership change within the meaning of Section 382 of the Code, measured for
this purpose by including transfers and issuances of stock that took place after the ownership
change that we believe occurred in April 2008. If we experienced another ownership change, the
resulting annual limit on the use of our NOL carryforwards (which would equal the product of the
applicable federal long-term tax-exempt rate, multiplied by the value of our capital stock
immediately before the ownership change, then increased by certain existing gains recognized within
5 years after the ownership change if we have a net built-in gain in our assets at the time of the
ownership change) could result in a meaningful increase in our federal and state income tax
liability in future years. Whether an ownership change occurs by reason of public trading in our
stock is not within our control and the determination of whether an ownership change has occurred
is complex. No assurance can be given that we have not already undergone, or that we will not in
the future undergo, another ownership change that would have a significant adverse effect on the
value of our stock. In addition, the possibility of causing an ownership change may reduce our
willingness to issue new stock to raise capital.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Reserved.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed in the accompanying Exhibit Index are filed as part of this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
August 9, 2010 | Morgans Hotel Group Co. |
|||
/s/ Fred J. Kleisner | ||||
Fred J. Kleisner | ||||
President and Chief Executive Officer | ||||
/s/ Richard Szymanski | ||||
Richard Szymanski | ||||
Chief Financial Officer and Secretary |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
2.1 | Agreement and Plan of Merger, dated May 11, 2006, by and
among Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard
Rock Hotel, Inc. and Peter Morton (incorporated by reference
to Exhibit 2.1 to the Companys Current Report on Form 8-K
filed on May 17, 2006) |
|||
2.2 | First Amendment to Agreement and Plan of Merger, dated as of
January 31, 2007, by and between Morgans Hotel Group Co., MHG
HR Acquisition Corp., Hard Rock Hotel, Inc., (solely with
respect to Section 1.6 and Section 1.8 thereof) 510
Development Corporation and (solely with respect to Section
1.7 thereof) Peter A. Morton (incorporated by reference to
Exhibit 2.1 to the Companys Current Report on Form 8-K filed
on February 6, 2007) |
|||
3.1 | Amended and Restated Certificate of Incorporation of Morgans
Hotel Group Co.(incorporated by reference to Exhibit 3.1 to
Amendment No. 5 to the Companys Registration Statement on
Form S-1 (File No. 333-129277) filed on February 6, 2006) |
|||
3.2 | Amended and Restated By-laws of Morgans Hotel Group Co.
(incorporated by reference to Exhibit 3.2 to Amendment No. 5
to the Companys Registration Statement on Form S-1 (File No.
333-129277) filed on February 6, 2006) |
|||
3.3 | Certificate of Designations for Series A Preferred Securities
(incorporated by reference to Exhibit 3.1 to the Companys
Current Report on Form 8-K filed on October 16, 2009) |
|||
4.1 | Specimen Certificate of Common Stock of Morgans Hotel Group
Co. (incorporated by reference to Exhibit 4.1 to Amendment
No. 3 to the Companys Registration Statement on Form S-1
(File No. 333-129277) filed on January 17, 2006) |
|||
4.2 | Junior Subordinated Indenture, dated as of August 4, 2006,
between Morgans Hotel Group Co., Morgans Group LLC and
JPMorgan Chase Bank, National Association (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K filed on August 11, 2006) |
|||
4.3 | Amended and Restated Trust Agreement of MHG Capital Trust I,
dated as of August 4, 2006, among Morgans Group LLC, JPMorgan
Chase Bank, National Association, Chase Bank USA, National
Association, and the Administrative Trustees Named Therein
(incorporated by reference to Exhibit 4.2 to the Companys
Current Report on Form 8-K filed on August 11, 2006) |
|||
4.4 | Stockholder Protection Rights Agreement, dated as of October
9, 2007, between Morgans Hotel Group Co. and Mellon Investor
Services LLC, as Rights Agent (incorporated by reference to
Exhibit 4.1 of the Companys Current Report on Form 8-K filed
on October 10, 2007) |
|||
4.5 | Amendment to the Stockholder Protection Rights Agreement,
dated July 25, 2008, between the Company and Mellon Investor
Services LLC, as Rights Agent (incorporated by reference to
Exhibit 4.1 of the Companys Current Report on Form 8-K filed
on July 30, 2008) |
|||
4.6 | Amended and Restated Stockholder Protection Rights Agreement,
dated as of October 1, 2009, between Morgans Hotel Group Co.
and Mellon Investor Services LLC, as Rights Agent (including
Forms of Rights Certificate and Assignment and of Election to
Exercise as Exhibit A thereto and Form of Certificate of
Designation and Terms of Participating Preferred Stock as
Exhibit B thereto) (incorporated by reference to Exhibit 4.1
of the Companys Current Report on Form 8-K filed on October
2, 2009) |
|||
4.7 | Amendment No. 1, dated as of October 15, 2009, to Amended and
Restated Stockholder Protection Rights Agreement, dated as of
October 1, 2009, between Morgans Hotel Group Co. and Mellon
Investor Services LLC, as Rights Agent (incorporated by
reference to Exhibit 4.4 to the Companys Current Report on
Form 8-K filed on October 16, 2009) |
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Table of Contents
Exhibit | ||||
Number | Description | |||
4.8 | Amendment No. 2, dated as of April 21, 2010, to Amended and
Restated Stockholder Protection Rights Agreement, dated as of
October 1, 2009, between Morgans Hotel Group Co. and Mellon
Investor Services LLC, as Rights Agent (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K filed on April 22, 2010) |
|||
4.9 | Indenture related to the Senior Subordinated Convertible
Notes due 2014, dated as of October 17, 2007, by and among
Morgans Hotel Group Co., Morgans Group LLC and The Bank of
New York, as trustee (including form of 2.375% Senior
Subordinated Convertible Note due 2014) (incorporated by
reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K filed on October 17, 2007) |
|||
4.10 | Supplemental Indenture, dated as of November 2, 2009, by and
among Morgans Group LLC, the Company and The Bank of New York
Mellon Trust Company, National Association (as successor to
JPMorgan Chase Bank, National Association), as Trustee
(incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K filed on November 4, 2009) |
|||
4.11 | Registration Rights Agreement, dated as of October 17, 2007,
between Morgans Hotel Group Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to
Exhibit 4.2 of the Companys Current Report on Form 8-K filed
on October 17, 2007) |
|||
10.1 | Waiver Agreement, dated as of April 21, 2010, by and among
Morgans Hotel Group Co., Yucaipa American Alliance Fund II,
L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P.
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed on April 22, 2010) |
|||
10.2 | Amendment No. 3 to Employment Agreement for Fred J. Kleisner,
effective as of March 31, 2010, by and between Morgans Hotel
Group Co. and Fred J. Kleisner (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on April 15, 2010) |
|||
10.3 | Morgans Hotel Group Co. Amended and Restated 2007 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed on February 1, 2010) |
|||
10.4 | Forbearance Agreement, dated July 9, 2010, by and between
Bank of America, N.A., as Trustee for the Registered Holders
of Wachovia Bank Commercial Mortgage Trust, Commercial
Mortgage Pass-Through Certificates, Series 2007-WHALE 8 and
Henry Hudson Holdings LLC, a Delaware limited liability
company, the Borrower (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K filed on
July 13, 2010) |
|||
10.5 | Forbearance Agreement, dated July 9, 2010, by and between
Bank of America, N.A., as Trustee for the Registered Holders
of Wachovia Bank Commercial Mortgage Trust, Commercial
Mortgage Pass-Through Certificates, Series 2007-WHALE 8 and
Mondrian Holdings LLC, a Delaware limited liability company,
the Borrower (incorporated by reference to Exhibit 10.2 to
the Companys Current Report on Form 8-K filed on July 13,
2010) |
|||
31.1 | Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002* |
|||
31.2 | Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002* |
|||
32.1 | Certification by the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002* |
|||
32.2 | Certification by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002* |
* | Filed herewith. |
59