Attached files
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EX-10.4 - EXHIBIT 10.4 - Morgans Hotel Group Co. | c21858exv10w4.htm |
EX-32.2 - EXHIBIT 32.2 - Morgans Hotel Group Co. | c21858exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Morgans Hotel Group Co. | c21858exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Morgans Hotel Group Co. | c21858exv32w1.htm |
EX-10.1 - EXHIBIT 10.1 - Morgans Hotel Group Co. | c21858exv10w1.htm |
EX-10.3 - EXHIBIT 10.3 - Morgans Hotel Group Co. | c21858exv10w3.htm |
EX-10.2 - EXHIBIT 10.2 - Morgans Hotel Group Co. | c21858exv10w2.htm |
EX-31.1 - EXHIBIT 31.1 - Morgans Hotel Group Co. | c21858exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - Morgans Hotel Group Co. | Financial_Report.xls |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33738
Morgans Hotel Group Co.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
16-1736884 (I.R.S. employer identification no.) |
|
475 Tenth Avenue | ||
New York, New York (Address of principal executive offices) |
10018 (Zip Code) |
212-277-4100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of the registrants common stock, par value $0.01 per share,
as of November 8, 2011 was 30,731,457.
TABLE OF CONTENTS
2
Table of Contents
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of a company. We may from time to time make
written or oral statements that are forward-looking, including statements contained in this
report and other filings with the Securities and Exchange Commission and in reports to our
stockholders. These forward-looking statements reflect our current views about future events and
are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our
actual results to differ materially from those expressed in any forward-looking statement. Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements. Important risks
and factors that could cause our actual results to differ materially from any forward-looking
statements include, but are not limited to, the risks discussed in the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2010 and other documents filed by the Company with
the Securities and Exchange Commission from time to time; 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.
3
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
Morgans Hotel Group Co.
Consolidated Balance Sheets
(in thousands, except per share data)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Property and equipment, net |
$ | 283,811 | $ | 291,078 | ||||
Goodwill |
54,057 | 53,691 | ||||||
Investments in and advances to unconsolidated joint ventures |
5,063 | 20,450 | ||||||
Assets held for sale, net |
| 194,964 | ||||||
Investment in property held for non-sale disposition, net |
| 9,775 | ||||||
Cash and cash equivalents |
12,829 | 5,250 | ||||||
Restricted cash |
7,148 | 28,783 | ||||||
Accounts receivable, net |
8,250 | 6,018 | ||||||
Related party receivables |
5,186 | 3,830 | ||||||
Prepaid expenses and other assets |
7,202 | 7,007 | ||||||
Deferred tax asset, net |
81,421 | 80,144 | ||||||
Other, net |
15,834 | 13,786 | ||||||
Total assets |
$ | 480,801 | $ | 714,776 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Debt and capital lease obligations |
$ | 433,267 | $ | 558,779 | ||||
Mortgage debt of property held for non-sale disposition |
| 10,500 | ||||||
Accounts payable and accrued liabilities |
32,353 | 23,604 | ||||||
Debt obligation, accounts payable and accrued liabilities of assets held for sale |
| 107,161 | ||||||
Accounts payable and accrued liabilities of property held for non-sale
disposition |
| 1,162 | ||||||
Distributions and losses in excess of investment in unconsolidated joint ventures |
272 | 1,509 | ||||||
Deferred gain on asset sales |
77,792 | | ||||||
Other liabilities |
14,291 | 13,866 | ||||||
Total liabilities |
557,975 | 716,581 | ||||||
Commitments and contingencies
|
||||||||
Preferred securities, $.01 par value; liquidation preference $1,000 per share,
75,000 shares authorized and issued at September 30, 2011 and December 31, 2010,
respectively |
53,319 | 51,118 | ||||||
Common stock, $.01 par value; 200,000,000 shares authorized; 36,277,495 shares
issued at September 30, 2011 and December 31, 2010, respectively |
363 | 363 | ||||||
Additional paid-in capital |
289,971 | 297,554 | ||||||
Treasury stock, at cost, 5,555,654 and 5,985,045 shares of common stock at
September 30, 2011 and December 31, 2010, respectively |
(89,155 | ) | (92,688 | ) | ||||
Accumulated comprehensive loss |
(3,683 | ) | (3,194 | ) | ||||
Accumulated deficit |
(336,360 | ) | (265,874 | ) | ||||
Total Morgans Hotel Group Co. stockholders deficit |
(85,545 | ) | (12,721 | ) | ||||
Noncontrolling interest |
8,371 | 10,916 | ||||||
Total deficit |
(77,174 | ) | (1,805 | ) | ||||
Total liabilities and stockholders deficit |
$ | 480,801 | $ | 714,776 | ||||
See accompanying notes to these consolidated financial statements.
4
Table of Contents
Morgans Hotel Group Co.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(unaudited)
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended Sept. 30, | Ended Sept. 30, | Ended Sept. 30, | Ended Sept. 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 26,432 | $ | 35,100 | $ | 90,951 | $ | 99,443 | ||||||||
Food and beverage |
15,575 | 16,017 | 49,216 | 51,062 | ||||||||||||
Other hotel |
1,271 | 2,077 | 5,020 | 6,730 | ||||||||||||
Total hotel revenues |
43,278 | 53,194 | 145,187 | 157,235 | ||||||||||||
Management fees and other income |
3,408 | 4,547 | 10,112 | 14,079 | ||||||||||||
Total revenues |
46,686 | 57,741 | 155,299 | 171,314 | ||||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
8,263 | 11,061 | 29,122 | 31,377 | ||||||||||||
Food and beverage |
13,664 | 14,426 | 41,901 | 42,526 | ||||||||||||
Other departmental |
870 | 1,322 | 3,117 | 3,834 | ||||||||||||
Hotel selling, general and administrative |
9,951 | 12,275 | 33,301 | 35,523 | ||||||||||||
Property taxes, insurance and other |
4,247 | 3,650 | 12,136 | 12,461 | ||||||||||||
Total hotel operating expenses |
36,995 | 42,734 | 119,577 | 125,721 | ||||||||||||
Corporate expenses, including stock compensation of
$1.4 million, $2.3 million, $7.4 million, and $8.9
million, respectively |
7,037 | 8,045 | 25,920 | 27,270 | ||||||||||||
Depreciation and amortization |
4,833 | 8,173 | 17,405 | 23,529 | ||||||||||||
Restructuring, development and disposal costs |
2,125 | 1,064 | 10,518 | 2,930 | ||||||||||||
Impairment loss on receivables from unconsolidated
joint venture |
| 5,499 | | 5,499 | ||||||||||||
Total operating costs and expenses |
50,990 | 65,515 | 173,420 | 184,949 | ||||||||||||
Operating loss |
(4,304 | ) | (7,774 | ) | (18,121 | ) | (13,635 | ) | ||||||||
Interest expense, net |
8,775 | 8,319 | 27,783 | 33,058 | ||||||||||||
Equity in loss of unconsolidated joint ventures |
12,794 | 1,435 | 23,187 | 9,437 | ||||||||||||
Gain on asset sales |
(1,101 | ) | | (1,721 | ) | | ||||||||||
Other non-operating expenses |
616 | 20,299 | 2,885 | 35,491 | ||||||||||||
Loss before income tax expense |
(25,388 | ) | (37,827 | ) | (70,255 | ) | (91,621 | ) | ||||||||
Income tax expense |
230 | 420 | 523 | 994 | ||||||||||||
Net loss from continuing operations |
(25,618 | ) | (38,247 | ) | (70,778 | ) | (92,615 | ) | ||||||||
(Loss) income from discontinued operations, net of taxes |
| (281 | ) | 485 | 16,474 | |||||||||||
Net loss |
(25,618 | ) | (38,528 | ) | (70,293 | ) | (76,141 | ) | ||||||||
Net loss attributable to noncontrolling interest |
799 | 1,451 | 2,007 | 2,033 | ||||||||||||
Net loss attributable to Morgans Hotel Group |
(24,819 | ) | (37,077 | ) | (68,286 | ) | (74,108 | ) | ||||||||
Preferred stock dividends and accretion |
2,285 | 2,164 | 6,701 | 6,357 | ||||||||||||
Net loss attributable to common stockholders |
(27,104 | ) | (39,241 | ) | (74,987 | ) | (80,465 | ) | ||||||||
Other comprehensive loss: |
||||||||||||||||
Unrealized (loss) gain on valuation of swap/cap
agreements, net of tax |
(12 | ) | 1,055 | (7 | ) | 11,058 | ||||||||||
Share of unrealized loss on valuation of swap
agreements from unconsolidated joint venture, net of
tax |
(1,444 | ) | (1,274 | ) | (423 | ) | (1,274 | ) | ||||||||
Realized loss on settlement of swap/cap agreements, net
of tax |
| (830 | ) | | (5,971 | ) | ||||||||||
Foreign currency translation gain (loss), net of tax |
52 | (179 | ) | (57 | ) | 77 | ||||||||||
Comprehensive loss |
$ | (28,508 | ) | $ | (40,469 | ) | $ | (75,474 | ) | $ | (76,575 | ) | ||||
(Loss) income per share: |
||||||||||||||||
Basic and diluted continuing operations |
$ | (0.89 | ) | $ | (1.29 | ) | $ | (2.41 | ) | $ | (3.18 | ) | ||||
Basic and diluted discontinued operations |
$ | (0.00 | ) | $ | (0.01 | ) | $ | 0.02 | $ | 0.54 | ||||||
Basic and diluted attributable to common stockholders |
$ | (0.89 | ) | $ | (1.30 | ) | $ | (2.39 | ) | $ | (2.64 | ) | ||||
Weighted average number of common shares outstanding: |
||||||||||||||||
Basic and diluted |
30,617 | 30,162 | 31,359 | 30,470 |
See accompanying notes to these consolidated financial statements.
5
Table of Contents
Morgans Hotel Group Co.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended Sept. 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (70,293 | ) | $ | (76,141 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities (including discontinued operations): |
||||||||
Depreciation |
15,850 | 21,992 | ||||||
Amortization of other costs |
1,555 | 1,537 | ||||||
Amortization of deferred financing costs |
7,784 | 4,343 | ||||||
Amortization of discount on convertible notes |
1,708 | 1,708 | ||||||
Amortization of deferred gain on asset sales |
(1,721 | ) | | |||||
Stock-based compensation |
7,384 | 8,892 | ||||||
Accretion of interest on capital lease obligation |
1,451 | 3,317 | ||||||
Equity in losses from unconsolidated joint ventures |
23,187 | 9,437 | ||||||
Impairment loss on receivable from unconsolidated joint venture |
| 5,499 | ||||||
Gain on disposal of property held for non-sale disposition |
| (17,766 | ) | |||||
Impairment and loss on disposal of assets |
1,182 | | ||||||
Change in value of warrants |
| 32,902 | ||||||
Change in value of interest rate caps and swaps, net |
35 | 26 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, net |
33 | (2,133 | ) | |||||
Related party receivables |
(1,348 | ) | (289 | ) | ||||
Restricted cash |
20,234 | (18,718 | ) | |||||
Prepaid expenses and other assets |
2,533 | 2,031 | ||||||
Accounts payable and accrued liabilities |
2,430 | (330 | ) | |||||
Other liabilities |
| (150 | ) | |||||
Discontinued operations |
(843 | ) | 1,053 | |||||
Net cash provided by (used in) operating activities |
11,161 | (22,790 | ) | |||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment |
(7,861 | ) | (10,602 | ) | ||||
Deposits to capital improvement escrows, net |
1,091 | 716 | ||||||
Distributions from unconsolidated joint ventures |
1,622 | 206 | ||||||
Proceeds from asset sales, net |
267,162 | | ||||||
Proceeds from sale of joint venture, net |
2,500 | | ||||||
Purchase of interest in food and beverage joint ventures, net of cash acquired |
(19,291 | ) | | |||||
Investments in and settlement related to unconsolidated joint ventures |
(9,479 | ) | (4,340 | ) | ||||
Net cash provided by (used in) investing activities |
235,744 | (14,020 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from debt |
193,992 | | ||||||
Payments on debt and capital lease obligations |
(426,159 | ) | | |||||
Debt issuance costs |
(5,744 | ) | (167 | ) | ||||
Cash paid in connection with vesting of stock based awards |
(588 | ) | (772 | ) | ||||
Cost of issuance of preferred stock |
| (246 | ) | |||||
Distributions to holders of noncontrolling interests in consolidated subsidiaries |
(827 | ) | (1,019 | ) | ||||
Net cash used in financing activities |
(239,326 | ) | (2,204 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
7,579 | (39,014 | ) | |||||
Cash and cash equivalents, beginning of period |
5,250 | 68,956 | ||||||
Cash and cash equivalents, end of period |
$ | 12,829 | $ | 29,942 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 18,568 | $ | 27,703 | ||||
Cash paid for taxes |
$ | 784 | $ | 19 | ||||
Non-cash Investing Activities |
||||||||
Acquisition of interest in unconsolidated joint ventures: |
||||||||
Furniture, fixture and equipment |
$ | (706 | ) | $ | | |||
Other assets and liabilities, net |
2,999 | | ||||||
Distributions and losses in excess of investment in unconsolidated joint ventures |
(1,587 | ) | | |||||
Cash included in purchase of interest in food and beverage joint ventures |
$ | 706 | $ | | ||||
See accompanying notes to these consolidated financial statements.
6
Table of Contents
Morgans Hotel Group Co.
Notes to Consolidated Financial Statements
(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) comprised 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 exchanged for 45,935
shares of the Companys common stock. As of September 30, 2011, 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 September 30, 2011 are as follows:
Number of | ||||||||||
Hotel Name | Location | Rooms | Ownership | |||||||
Hudson |
New York, NY | 834 | (1 | ) | ||||||
Morgans |
New York, NY | 114 | (2 | ) | ||||||
Royalton |
New York, NY | 168 | (2 | ) | ||||||
Mondrian SoHo |
New York, NY | 270 | (3 | ) | ||||||
Delano South Beach |
Miami Beach, FL | 194 | (4 | ) | ||||||
Mondrian South Beach |
Miami Beach, FL | 328 | (5 | ) | ||||||
Shore Club |
Miami Beach, FL | 309 | (6 | ) | ||||||
Mondrian Los Angeles |
Los Angeles, CA | 237 | (7 | ) | ||||||
Clift |
San Francisco, CA | 372 | (8 | ) | ||||||
Ames |
Boston, MA | 114 | (9 | ) | ||||||
Sanderson |
London, England | 150 | (10 | ) | ||||||
St Martins Lane |
London, England | 204 | (10 | ) | ||||||
Hotel Las Palapas |
Playa del Carmen, Mexico | 75 | (11 | ) |
7
Table of Contents
(1) | 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. |
|
(2) | Operated under a management contract; wholly-owned until May 23, 2011, when the hotel was
sold to a third-party. |
|
(3) | Operated under a management contract and owned through an unconsolidated joint venture in
which the Company held a minority ownership interest of approximately 20% at September 30,
2011 based on cash contributions. See note 4. |
|
(4) | Wholly-owned hotel. |
|
(5) | Owned through a 50/50 unconsolidated joint venture. See note 4. |
|
(6) | Operated under a management contract and owned through an unconsolidated joint venture in
which the Company held a minority ownership interest of approximately 7% as of September 30,
2011. See note 4. |
|
(7) | Operated under a management contract; wholly-owned until May 3, 2011, when the hotel was
sold to a third-party. |
|
(8) | The hotel is operated under a long-term lease which is accounted for as a financing. See note
6. |
|
(9) | Operated under a management contract and owned through an unconsolidated joint venture in
which the Company held a minority interest ownership of approximately 31% at September 30,
2011 based on cash contributions. See note 4. |
|
(10) | Owned through a 50/50 unconsolidated joint venture. In October 2011, the Company entered into
a definitive agreement to sell its equity interests in the joint venture. The transaction is
expected to close in the fourth quarter of 2011. See note 4. |
|
(11) | Operated under a management contract. |
Restaurant Joint Venture
Prior to June 20, 2011, the food and beverage operations of certain of the hotels were
operated under 50/50 joint ventures with a third party restaurant operator, China Grill Management
Inc. (CGM). The joint ventures operated, and CGM managed, certain restaurants and bars at Delano
South Beach, Mondrian Los Angeles, Mondrian South Beach, Morgans, Sanderson and St Martins Lane.
The food and beverage joint ventures at hotels the Company owned were consolidated, as the Company
believed that it was the primary beneficiary of these entities. The Companys partners share of
the results of operations of these food and beverage joint ventures were recorded as noncontrolling
interests in the accompanying consolidated financial statements. The food and beverage joint
ventures at hotels in which the Company had a joint venture ownership interest were accounted for
using the equity method, as the Company did not believe it exercised control over significant asset
decisions such as buying, selling or financing, and the Company was not the primary beneficiary of
the entities.
On June 20, 2011, pursuant to an omnibus agreement, subsidiaries of the Company acquired from
affiliates of CGM the 50% interests CGM owned in the Companys food and beverage joint ventures for
approximately $20 million (the CGM Transaction). CGM has agreed to continue to manage the food
and beverage operations at these properties for a transitional period pursuant to short-term
cancellable management agreements while the Company reassesses its food and beverage strategy.
As a result of the CGM Transaction, the Company owns 100% of the former food and beverage
joint venture entities located at Morgans, Delano South Beach, Sanderson and St Martins Lane, all
of which are consolidated in the Companys consolidated financial statements. Prior to the
completion of the CGM Transaction, the Company accounted for the food and beverage entities located
at Sanderson and St Martins Lane using the equity method of accounting. See note 4.
The Companys resulting ownership interests in the remaining two of these food and beverage
ventures, covered by the CGM Transaction, relating to the food and beverage operations at Mondrian
Los Angeles and Mondrian South Beach, was less than 100%, and were reevaluated in accordance with
ASC 810-10, Consolidation (ASC 810-10). The Company concluded that these two ventures did not
meet the requirements of a variable interest entity and accordingly, these investments in joint
ventures were accounted for using the equity method, as the Company does not believe it exercises
control over significant asset decisions such as buying, selling or financing. See note 4. Prior to
the completion of the CGM Transaction, the Company consolidated the Mondrian Los Angeles food and
beverage entity, as it exercised control and was the primary beneficiary of the venture.
8
Table of Contents
On August 5, 2011, an affiliate of Pebblebrook Hotel Trust (Pebblebrook), the company that
purchased Mondrian Los Angeles in May 2011 (as discussed in note 12), exercised its option to
purchase the Companys remaining ownership interest in the food and beverage operations at Mondrian
Los Angeles for approximately $2.5 million. As a result of Pebblebrooks exercise of this purchase
option, the Company no longer has any ownership interest in the food and beverage operations at
Mondrian Los Angeles.
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 and variable interest entities in which the Company is
determined to be the primary beneficiary. All intercompany balances and transactions have been
eliminated in consolidation. Entities which the Company does not control through voting interest
and entities which are variable interest entities of which the Company is not the primary
beneficiary, are accounted for under the equity method, if the Company can exercise significant
influence.
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 reflects 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
three and nine months ended September 30, 2011 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2011. 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, 2010.
Effective January 1, 2010, the Financial Accounting Standards Board (FASB) amended the
guidance in ASC 810-10, for determining whether an entity is a variable interest entity and
requiring the performance of a qualitative rather than a quantitative analysis to determine the
primary beneficiary of a variable interest entity. Under this guidance, an entity would be required
to consolidate a variable interest entity if it has (i) the power to direct the activities that
most significantly impact the entitys economic performance and (ii) the obligation to absorb
losses of the variable interest entity or the right to receive benefits from the variable interest
entity that could be significant to the variable interest entity. Adoption of this guidance on
January 1, 2010 did not have a material impact on the consolidated financial statements.
Assets Held for Sale
The Company considers properties to be assets held for sale when management approves and
commits to a formal plan to actively market a property or a group of properties for sale and the
sale is probable. Upon designation as an asset held for sale, the Company records the carrying
value of each property or group of properties at the lower of its carrying value, which includes
allocable goodwill, or its estimated fair value, less estimated costs to sell, and the Company
stops recording depreciation expense. Any gain realized in connection with the sale of the
properties for which the Company has significant continuing involvement, such as through a
long-term management agreement, is deferred and recognized over the initial term of the related
management agreement.
The operations of the properties held for sale prior to the sale date are recorded in
discontinued operations unless the Company has continuing involvement, such as through a management
agreement, after the sale.
Investments in and Advances to Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures using the equity
method as it does not exercise control over significant asset decisions such as buying, selling or
financing nor is it the primary beneficiary under ASC 810-10, as discussed above. Under the equity
method, the Company increases its investment for its proportionate share of net income and
contributions to the joint venture and decreases its
investment balance by recording its proportionate share of net loss and distributions. For
investments in which there is recourse or unfunded commitments to provide additional equity,
distributions and losses in excess of the investment are recorded as a liability.
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Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes, which
requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax and financial reporting basis of assets and
liabilities and for loss and credit carry forwards. Valuation allowances are provided when it is
more likely than not that the recovery of deferred tax assets will not be realized.
The Companys deferred tax assets are recorded net of a valuation allowance when, based on the
weight of available evidence, it is more likely than not that some portion or all of the recorded
deferred tax assets will not be realized in future periods. Decreases to the valuation allowance
are recorded as reductions to the Companys provision for income taxes and increases to the
valuation allowance result in additional provision for income taxes. The realization of the
Companys deferred tax assets, net of the valuation allowance, is primarily dependent on estimated
future taxable income. A change in the Companys estimate of future taxable income may require an
addition to or reduction from the valuation allowance. The Company has established a reserve on a
portion of its deferred tax assets based on anticipated future taxable income and tax strategies
which may include the sale of hotel properties or an interest therein. When the Company sells a
wholly-owned hotel subject to a long-term management contract, the pretax gain is deferred and is
recognized over the life of the contract. In such instances, the Company establishes a deferred tax
asset on the deferred gain and recognizes the related tax benefit through the tax provision. In May
2011, the Company used a portion of its tax net operating loss carryforwards to offset the gains on
the sale of Royalton, Morgans and Mondrian Los Angeles.
All of the Companys foreign subsidiaries are subject to local jurisdiction corporate income
taxes. Income tax expense is reported at the applicable rate for the periods presented.
Income taxes for the three and nine months ended September 30, 2011 and 2010, were computed
using the Companys effective tax rate.
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 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 caps as part of its interest rate risk management strategy.
Interest rate caps 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.
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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 as a component of interest expense. 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.
As of September 30, 2011 and December 31, 2010, the estimated fair market value of the
Companys cash flow hedges is immaterial.
In connection with the London Sale Agreement, defined below in footnote 4, on November 2,
2011, Walton, on behalf of itself and the Company, entered into a foreign currency forward contract to effectively fix
the currency conversion rate on half of the expected net sales proceeds at an exchange rate of 1.592 US
dollars to GBP.
Credit-risk-related Contingent Features
The Company has entered into agreements with each of its derivative counterparties in
connection with the interest rate caps and hedging instruments related to the Convertible Notes, as
defined and 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 8,
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).
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 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.
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Although the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by itself and its counterparties. However, as of September
30, 2011 and December 31, 2010, the Company assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative positions and 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 $6.00 exercise price of the warrants was subject to certain reductions
if the Company had issued shares of common stock below $6.00 per share. The exercise price
adjustments were not triggered prior to the expiration of such right on October 15, 2010. 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. Accordingly, the warrant
liability was classified as a Level 3 fair value measure. On October 15, 2010, this liability was
reclassified into equity, per ASC 815-10-15, Derivatives and Hedging, Embedded Derivatives (ASC
815-10-15).
In connection with its Outperformance Award Program, as discussed in note 7, the Company
issued OPP LTIP Units (as defined in note 7) which were initially fair valued on the date of grant,
and on September 30, 2011, utilizing a Monte Carlo simulation to estimate the probability of the
performance vesting conditions being satisfied. The Monte Carlo simulation used a statistical
formula underlying the Black-Scholes and binomial formulas and such simulation was run
approximately 100,000 times. As the Company has the ability to settle the vested OPP LTIP Units
with cash, these awards are not considered to be indexed to the Companys stock price and must be
accounted for as liabilities at fair value.
Although the Company has determined that the majority of the inputs used to value the OPP LTIP
Units fall within Level 1 of the fair value hierarchy, the Monte Carlo simulation model utilizes
Level 3 inputs, such as estimates of the Companys volatility. Accordingly, the OPP LTIP Unit
liability was classified as a Level 3 fair value measure.
During the three and nine months ended September 30, 2011, the Company recognized non-cash
impairment charges of $1.6 million and $4.0 million, respectively, related to the Companys
investment in Mondrian SoHo, through equity in
loss from joint ventures. The Companys estimated fair value relating to this impairment assessment
was based primarily upon Level 3 measurements, including a discounted cash flow analysis to
estimate the fair value of the assets taking into account the assets expected cash flow, holding
period and estimated proceeds from the disposition of assets, as well as market and economic
conditions.
Fair Value of Financial Instruments
As mentioned below and in accordance with ASC 825-10, Financial Instruments, and ASC 270-10,
Presentation, Interim Reporting, 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.
The Companys financial instruments include cash and cash equivalents, accounts receivable,
restricted cash, accounts payable and accrued liabilities, and fixed and variable rate debt.
Management believes the carrying
amount of the aforementioned financial instruments, excluding fixed-rate debt, is a reasonable
estimate of fair value as of September 30, 2011 and December 31, 2010 due to the short-term
maturity of these items or variable market interest rates.
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The fair market value of the Companys $222.6 million of fixed rate debt, excluding
capitalized lease obligations and including the Convertible Notes at face value, as of September
30, 2011 and December 31, 2010 was approximately $205.7 million and $248.6 million, respectively,
using market interest rates.
Stock-based Compensation
The Company accounts for stock based employee compensation using the fair value method of
accounting described 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. For awards under
the Companys Outperformance Award Program, discussed in note 7, long-term incentive awards, the
total compensation expense is based on the estimated fair value using the Monte Carlo pricing
model. Compensation expense is recorded ratably over the vesting period, if any. Stock compensation
expense recognized for the three months ended September 30, 2011 and 2010 was $1.4 million and $2.3
million, respectively. Stock compensation expense recognized for the nine months ended September
30, 2011 and 2010 was $7.4 million and $8.9 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
(deficit) 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 and comprehensive loss.
The membership units in Morgans Group, the Companys operating company, owned by the Former
Parent are presented as noncontrolling interest in Morgans Group in the consolidated balance sheets
and were approximately $8.4 million and $10.6 million as of September 30, 2011 and December 31,
2010, 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, less than $0.3 million was recorded as noncontrolling interest as of December
31, 2010, which represents the Companys joint venture partners interest in food and beverage
ventures at certain of the Companys hotels.
Reclassifications
Certain prior year financial statement amounts have been reclassified to conform to the
current year presentation, including discontinued operations, discussed in note 9, and assets held
for sale, discussed in note 12.
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New Accounting Pronouncements
Accounting Standards Update No. 2011-04 Fair Value Measurement (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU
No. 2011-04) generally provides a uniform framework for fair value measurements and related
disclosures between GAAP and International Financial Reporting Standards (IFRS). Additional
disclosure requirements in the update include: (1) for Level 3 fair value measurements,
quantitative information about unobservable inputs used, a description of the valuation processes
used by the entity, and a qualitative discussion about the sensitivity of the measurements to
changes in the unobservable inputs; (2) for an entitys use of a nonfinancial asset that is
different from the assets highest and best use, the reason for the difference; (3) for financial
instruments not measured at fair value but for which disclosure of fair value is required, the fair
value hierarchy level in which the fair value measurements were determined; and (4) the disclosure
of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be
effective for interim and annual periods beginning on or after December 15, 2011. The Company does
not believe ASU 2011-04 will have a material impact on its financial statements.
Accounting Standards Update No. 2011-05 Comprehensive Income (Topic 220): Presentation of
Comprehensive Income (ASU No. 2011-05) amends existing guidance by allowing only two options for
presenting the components of net income and other comprehensive income: (1) in a single continuous
financial statement, statement of comprehensive income or (2) in two separate but consecutive
financial statements, consisting of an income statement followed by a separate statement of other
comprehensive income. Also, items that are reclassified from other comprehensive income to net
income must be presented on the face of the financial statements. ASU No. 2011-05 requires
retrospective application, and it is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011, with early adoption permitted. The Company believes the
adoption of this update may provide additional detail on the consolidated financial statements when
applicable, but will not have any other impact on the Companys financial statements.
Accounting Standards Update No. 2011-08 Intangibles Goodwill and Other (Topic 350):
Testing Goodwill for Impairment (ASU No. 2011-08) amends existing guidance by giving an entity
the option to first assess qualitative factors to determine whether it is more likely than not
(that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less
than its carrying amount. If this is the case, companies will need to perform a more detailed
two-step goodwill impairment test which is used to identify potential goodwill impairments and to
measure the amount of goodwill impairment losses to be recognized, if any. ASU No. 2011-08 will be
effective for annual and interim goodwill impairment tests performed for fiscal years beginning
after December 15, 2011, with early adoption permitted. The Company does not believe the adoption
of this update will have a material impact on its financial statements.
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 Morgans Group membership units (which may be converted to cash, or at
the Companys option, common stock) held by third parties at September 30, 2011, warrants issued to
the Investors, unvested restricted stock units, LTIP Units (as defined in note 7), stock options,
and OPP LTIP Units and shares issuable upon conversion of outstanding Convertible Notes (as defined
in note 6) 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.
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The table below details the components of the basic and diluted loss per share calculations
(in thousands, except for per share data):
Three Months | Three Months | |||||||
Ended | Ended | |||||||
Sept. 30, 2011 | Sept. 30, 2010 | |||||||
Numerator: |
||||||||
Net loss from continuing operations |
$ | (25,618 | ) | $ | (38,247 | ) | ||
Net loss from discontinued operations |
| (281 | ) | |||||
Net loss |
(25,618 | ) | (38,528 | ) | ||||
Net loss attributable to noncontrolling interest |
799 | 1,451 | ||||||
Net loss attributable to Morgans Hotel Group Co. |
(24,819 | ) | (37,077 | ) | ||||
Less: preferred stock dividends and accretion |
2,285 | 2,164 | ||||||
Net loss attributable to common shareholders |
$ | (27,104 | ) | $ | (39,241 | ) | ||
Denominator, continuing and discontinued operations: |
||||||||
Weighted average basic common shares outstanding |
30,617 | 30,162 | ||||||
Effect of dilutive securities |
| | ||||||
Weighted average diluted common shares outstanding |
30,617 | 30,162 | ||||||
Basic and diluted loss from continuing operations per share |
$ | (0.89 | ) | $ | (1.29 | ) | ||
Basic and diluted loss from discontinued operations per share |
$ | 0.00 | $ | (0.01 | ) | |||
Basic and diluted loss available to common stockholders per
common share |
$ | (0.89 | ) | $ | (1.30 | ) | ||
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
Sept. 30, 2011 | Sept. 30, 2010 | |||||||
Numerator: |
||||||||
Net loss from continuing operations |
$ | (70,778 | ) | $ | (92,615 | ) | ||
Net income from discontinued operations |
485 | 16,474 | ||||||
Net loss |
(70,293 | ) | (76,141 | ) | ||||
Net loss attributable to noncontrolling interest |
2,007 | 2,033 | ||||||
Net loss attributable to Morgans Hotel Group Co. |
(68,286 | ) | (74,108 | ) | ||||
Less: preferred stock dividends and accretion |
6,701 | 6,357 | ||||||
Net loss attributable to common shareholders |
$ | (74,987 | ) | $ | (80,465 | ) | ||
Denominator, continuing and discontinued operations: |
||||||||
Weighted average basic common shares outstanding |
31,359 | 30,470 | ||||||
Effect of dilutive securities |
| | ||||||
Weighted average diluted common shares outstanding |
31,359 | 30,470 | ||||||
Basic and diluted loss from continuing operations per share |
$ | (2.41 | ) | $ | (3.18 | ) | ||
Basic and diluted income from discontinued operations per share |
$ | 0.02 | $ | 0.54 | ||||
Basic and diluted loss available to common stockholders per
common share |
$ | (2.39 | ) | $ | (2.64 | ) | ||
4. Investments in and Advances to Unconsolidated Joint Ventures
The Companys investments in and advances to unconsolidated joint ventures and its equity in
earnings (losses) of unconsolidated joint ventures are summarized as follows (in thousands):
Investments
As of | As of | |||||||
Sept. 30, | December 31, | |||||||
Investment | 2011 | 2010 | ||||||
Mondrian South Beach |
$ | 3,313 | $ | 5,817 | ||||
Morgans Hotel Group Europe Ltd. |
| 1,366 | ||||||
Mondrian SoHo |
| | ||||||
Ames |
| 10,709 | ||||||
Mondrian South Beach food and beverage MC South Beach (1) |
1,592 | | ||||||
Other |
158 | 2,558 | ||||||
Total investments in and advances to unconsolidated joint ventures |
$ | 5,063 | $ | 20,450 | ||||
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As of | As of | |||||||
Sept. 30, | December 31, | |||||||
Investment | 2011 | 2010 | ||||||
Restaurant Venture SC London (2) |
$ | | $ | (1,509 | ) | |||
Morgans Hotel Group Europe Ltd. |
(272 | ) | | |||||
Hard Rock Hotel & Casino (3) |
| | ||||||
Total losses from and distributions
in excess of investment in
unconsolidated joint ventures |
$ | (272 | ) | $ | (1,509 | ) | ||
(1) | Following the CGM Transaction, the Companys ownership interest in this food and beverage
joint venture is less than 100%, and based on the Companys evaluation, this venture does not
meet the requirements of a variable interest entity. Accordingly, this joint venture is
accounted for using the equity method. |
|
(2) | Until June 20, 2011, the Company had a 50% ownership interest in the SC London restaurant
venture. In connection with the CGM Transaction, the Company owns 100% of the SC London
restaurant venture, which is consolidated into the Companys financial statements effective
June 20, 2011, the date the CGM Transaction closed. |
|
(3) | Until March 1, 2011, the Company had a partial ownership interest in the Hard Rock and
managed the property pursuant to a management agreement that was terminated in connection with
the Hard Rock settlement (discussed below). |
Equity in income (loss) of unconsolidated joint ventures
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
Investment | Sept. 30, 2011 | Sept. 30, 2010 | Sept. 30, 2011 | Sept. 30, 2010 | ||||||||||||
Morgans Hotel Group Europe Ltd. |
$ | 499 | $ | 1041 | $ | 1,392 | $ | 2,540 | ||||||||
Restaurant Venture SC London (1) |
| (136 | ) | (510 | ) | (584 | ) | |||||||||
Mondrian South Beach |
(1,025 | ) | (1,576 | ) | (2,503 | ) | (1,808 | ) | ||||||||
Mondrian South Beach food and
beverage MC South Beach (2) |
(108 | ) | | (108 | ) | | ||||||||||
Ames |
(10,597 | ) | (86 | ) | (11,062 | ) | (577 | ) | ||||||||
Mondrian SoHo |
(1,565 | ) | (680 | ) | (4,026 | ) | (9,015 | ) | ||||||||
Hard Rock Hotel & Casino (3) |
| | (6,376 | ) | | |||||||||||
Other |
2 | 2 | 6 | 7 | ||||||||||||
Total equity in loss from
unconsolidated joint ventures |
$ | (12,794 | ) | $ | (1,435 | ) | $ | (23,187 | ) | $ | (9,437 | ) | ||||
(1) | Until June 20, 2011, the Company had a 50% ownership interest in the SC London restaurant
venture. As a result of the CGM Transaction, the Company now owns 100% of the SC London
restaurant venture, which is consolidated into the Companys financial statements effective
June 20, 2011, the date the CGM Transaction closed. |
|
(2) | Following the CGM Transaction, the Companys ownership interest in this food and beverage
joint venture is less than 100%, and based on the Companys evaluation, this venture does not
meet the requirements of a variable interest entity. Accordingly, this joint venture is
accounted for using the equity method. |
|
(3) | Until March 1, 2011, the Company had a partial ownership interest in the Hard Rock and
managed the property pursuant to a management agreement that was terminated in connection with
the Hard Rock settlement (discussed below). Reflects the period operated in 2011. |
Morgans Hotel Group Europe Limited
As of September 30, 2011, 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 nine months ended September 30, 2011 and 2010.
On July 15, 2010, the joint venture refinanced in full its then outstanding £99.3 million
mortgage debt with a new £100 million loan maturing in July 2015 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. As
of September 30, 2011, Morgans Europe had outstanding mortgage
debt of £99.3 million, or
approximately $154.8 million at the exchange rate of 1.56 US dollars to GBP at September 30, 2011.
Net income or loss and cash distributions or contributions are allocated to the partners in
accordance with ownership interests. The Company accounts for this investment under the equity
method of accounting.
On
October 7, 2011, subsidiaries of the Company and Walton entered into an agreement (the
London Sale Agreement) to sell their respective equity interests in the joint venture for an
aggregate of £192 million (or approximately $300.0 million at the exchange rate of 1.56 US dollars
to GBP at September 30, 2011) to Capital Hills Hotels Limited. On closing of the transaction, the
Company will continue to operate the hotels under long-term management agreements that, including
extension options, extend the term of the existing management agreements to 2041 from 2027. The
transaction is expected to close in the fourth quarter of 2011 and is subject to satisfaction of
customary closing conditions. The Company expects to receive net proceeds of approximately $70
million, depending on foreign currency exchange rates and working
capital adjustments, after the joint venture applies a portion of the proceeds from the sale to retire the
£99.5 million of outstanding mortgage debt secured by the hotels and after payment of closing
costs. The joint venture partners have received a £10 million security deposit, which is
non-refundable except in the event of a default by the seller.
On
November 2, 2011, Walton, on behalf of itself and the Company, entered into a foreign currency forward contract
to effectively fix the currency conversion rate on half of the
expected net sales proceeds at an
exchange rate of 1.592 US dollars to GBP.
Mondrian South Beach
On August 8, 2006, the Company entered into a 50/50 joint venture 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
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 50/50 joint venture
partners was funded at closing, and subsequently each member also contributed $8.0 million of
additional equity. The Company and an affiliate of its joint venture partner provided additional
mezzanine financing of approximately $22.5 million in total to the joint venture to fund completion
of the construction 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 from the mortgage lenders 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 when the loan matured in
April 2010, as discussed below.
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In April 2010, the joint venture amended the non-recourse financing secured by the property
and extended the maturity date for up to seven years through extension options until April 2017,
subject to certain conditions. 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.
Morgans Group and affiliates of its joint venture partner have agreed to provide standard
non-recourse carve-out guaranties and provide certain limited indemnifications for the Mondrian
South Beach mortgage and mezzanine loans. In the event of a default, the lenders recourse is
generally limited to the mortgaged property or related equity interests, subject to standard
non-recourse carve-out guaranties for bad boy type acts. Morgans Group and affiliates of its
joint venture partner also agreed to guaranty the joint ventures obligation to reimburse certain
expenses incurred by the lenders and indemnify the lenders in the event such lenders incur
liability as a result of any third-party actions brought against Mondrian South Beach. Morgans
Group and affiliates of its joint venture partner have also guaranteed the joint ventures
liability for the unpaid principal amount of any seller financing note provided for condominium
sales if such financing or related mortgage lien is found unenforceable, provided they shall not
have any liability if the seller financed unit becomes subject again to the lien of the lenders
mortgage or title to the seller financed unit is otherwise transferred to the lender or if such
seller financing note is repurchased by Morgans Group and/or affiliates of its joint venture at the
full amount of unpaid principal balance of such seller financing note. In addition, although
construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and
affiliates of its joint venture partner may have continuing obligations under construction
completion guaranties until all outstanding payables due to construction vendors are paid. As of
September 30, 2011, there are remaining payables outstanding to vendors of approximately $1.1
million. The Company believes that payment under these guaranties is not probable and the fair
value of the guarantee is not material.
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. In the event of a default under the mortgage or mezzanine loan, the joint venture partners
are obligated to purchase selected condominium units, at agreed-upon sales prices, having aggregate
sales prices equal to 1/2 of the lesser of $28.0 million, which is the face amount outstanding on
the mezzanine loan, or the then outstanding principal balance of the mezzanine loan. The joint
venture is not currently in an event of default under the mortgage or mezzanine loan. The Company
has not recognized a liability related to the construction completion or the condominium purchase
guarantees.
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.
The Mondrian South Beach joint venture was determined to be a variable interest entity as
during the process of refinancing the ventures mortgage in April 2010, its equity investment at
risk was considered insufficient to permit the entity to finance its own activities. Management
determined that the Company is not the primary beneficiary of this variable interest entity as the
Company does not have a controlling financial interest in the entity. The Companys maximum
exposure to losses as a result of its involvement in the Mondrian South Beach variable interest
entity is limited to its current investment, outstanding management fee receivable and advances in
the form of mezzanine financing. The Company is not committed to providing financial support to
this variable interest entity, other than as contractually required and all future funding is
expected to be provided by the joint venture partners in accordance with their respective
percentage interests in the form of capital contributions or mezzanine financing, or by third
parties.
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 $4.3 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.
Based on the decline in market conditions following the inception of the joint venture and
more recently, the need for additional funding to complete the hotel, the Company wrote down its
investment in Mondrian SoHo to zero in June 2010 and recorded an impairment charge through equity
in loss of unconsolidated joint ventures.
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On July 31, 2010, the lender amended the debt financing on the property to provide for, among
other things, extensions of the maturity date of the mortgage loan secured by the hotel to November
2011 with extension options through 2015, subject to certain conditions including a minimum debt
service coverage test calculated, as defined, based on ratios of net operating income to debt
service for the three months ended September 30, 2011 of 1:1 or greater.
In addition to new funds provided by the lender, Cape Advisors Inc. made cash and other
contributions to the joint venture, and the Company agreed to provide up to $3.2 million of
additional funds to be treated as a loan with priority over the equity, to complete the project.
The Company has contributed the full amount of this priority loan, as
well as additional funds of $1.1, all
of which were considered impaired and recorded as impairment charges through equity in loss of
unconsolidated joint ventures during the periods funds were contributed. As of September 30, 2011,
the Companys investment balance in the joint venture was zero.
The joint venture believes the hotel has achieved the required 1:1 coverage ratio as of
September 30, 2011 and subject to other customary conditions,
the maturity of this debt can be extended to
November 2012. The joint venture has additional extension options available in 2012 subject to
similar conditions, including a minimum debt service coverage test calculated, as defined, based on
ratios of net operating income to debt service for the twelve months ended September 30, 2012 of
1.1:1.0 or greater.
Certain affiliates of the Companys joint venture partner have agreed to provide a standard
non-recourse carve-out guaranty for bad boy type acts and a completion guaranty to the lenders
for the Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture
partner and its affiliates up to 20% of such entities guaranty obligations, provided that each
party is fully responsible for any losses incurred as a result of its own gross negligence or
willful misconduct.
The Mondrian SoHo opened in February 2011 and has 270 guest rooms, a restaurant, bar and other
facilities. The Company has a 10-year management contract with two 10-year extension options to
operate the hotel.
As of December 31, 2010, the Mondrian SoHo joint venture was determined to be a variable
interest entity, but the Company was not its primary beneficiary and, therefore, consolidation of
this joint venture is not required. In February 2011, when Mondrian SoHo opened, the Company
determined that the joint venture was an operating business. The Company continues to account for
its investment in Mondrian SoHo using the equity method of accounting.
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 $11.8 million in equity through September 30, 2011
for an approximately 31% interest in the joint venture. The joint venture obtained a loan for $46.5
million secured by the hotel, which was outstanding as of September 30, 2011. The project also
qualified for federal and state historic rehabilitation tax credits which were sold for
approximately $16.9 million.
In September 2011, the joint venture partners funded their pro rata shares of the debt service
reserve account, of which the Companys contribution was $0.3 million, and exercised the one remaining
extension option available on the mortgage debt. As a result, the mortgage debt secured by Ames
will mature on October 9, 2012.
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Based on current economic conditions and the upcoming mortgage debt maturity, the joint
venture concluded that the hotel was impaired as of September 30, 2011, and recorded a $49.9
million impairment charge. The Company wrote down its investment in Ames to zero and recorded an
impairment charge through equity in loss of unconsolidated joint ventures of $10.6 million.
Shore Club
The Company operates Shore Club under a management contract and owned a minority ownership
interest of approximately 7% at September 30, 2011. 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 in U.S. federal
district court. In October 2010, the federal court dismissed the case for lack of jurisdiction. In
November 2010, the lender initiated foreclosure proceedings in state court. The Company continues
to operate the hotel pursuant to the management agreement during these proceedings. However, there
can be no assurances the Company will continue to operate the hotel once foreclosure proceedings
are complete.
MC South Beach and SC Sunset
On June 20, 2011, the Company completed the CGM Transaction, pursuant to which subsidiaries of
the Company acquired from affiliates of CGM the 50% interests CGM owned in the Companys food and
beverage joint ventures for approximately $20.0 million. CGM has agreed to continue to manage the
food and beverage operations at these properties for a transitional period pursuant to short-term
cancellable management agreements while the Company reassess its food and beverage strategy.
The Companys ownership interest in one of the food and beverage ventures covered by the CGM
Transaction, MC South Beach LLC (MC South Beach) at Mondrian South Beach, is less than 100%, and
was reevaluated in accordance with ASC 810-10. The Company concluded that this venture did not meet
the requirements of a variable interest entity and accordingly, this investment in the joint
venture is accounted for using the equity method, as the Company does not believe it exercises
control over significant asset decisions such as buying, selling or financing.
At the closing of the CGM Transaction, the Companys ownership interest in another food and
beverage venture covered by the CGM Transaction, Sunset Restaurant LLC (SC Sunset) at Mondrian
Los Angeles, was also less than 100%, and was reevaluated at the time in accordance with ASC
810-10. The Company initially concluded that this venture did not meet the requirements of a
variable interest entity and accordingly, this investment in joint venture was accounted for using
the equity method. Subsequently, on August 5, 2011, an affiliate of Pebblebrook, the company that
purchased Mondrian Los Angeles in May 2011 (as discussed in note 12), exercised its option to
purchase the Companys remaining ownership interest in the food and beverage operations at Mondrian
Los Angeles for approximately $2.5 million. As a result of Pebblebrooks exercise of this purchase
option, the Company no longer has any ownership interest in the food and beverage operations at
Mondrian Los Angeles.
Hard Rock Hotel & Casino
Formation and Hard Rock Credit Facility
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 (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 comprised of a senior mortgage loan and three mezzanine
loans, which provided for a $760.0 million acquisition loan that was used to fund the acquisition,
of which $110.0 million was subsequently repaid according to the terms of the loan, and a
construction loan of up to $620.0 million, which was fully drawn for the expansion project at the
Hard Rock. Morgans Group provided a standard non-recourse, carve-out guaranty for each of the
mortgage and mezzanine loans.
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Following the formation of Hard Rock Hotel Holdings, LLC, additional cash contributions were
made by both the DLJMB Parties and the Morgans Parties, including disproportionate cash
contributions by the DLJMB Parties. Prior to the Hard Rock settlement, discussed below, the DLJMB
Parties had contributed an aggregate of $424.8 million in cash and the Morgans Parties had
contributed an aggregate of $75.8 million in cash. In 2009, the Company wrote down the Companys
investment in Hard Rock to zero.
Hard Rock Settlement Agreement
On January 28, 2011, subsidiaries of Hard Rock Hotel Holdings, LLC received a notice of
acceleration from the NRFC HRH Holdings, LLC (the Second Mezzanine Lender) pursuant to the First
Amended and Restated Second Mezzanine Loan Agreement, dated as of December 24, 2009 (the Second
Mezzanine Loan Agreement), between such subsidiaries and the Second Mezzanine Lender, declaring
all unpaid principal and accrued interest under the Second Mezzanine Loan Agreement immediately due
and payable.
On February 6, 2011, subsidiaries of Hard Rock Hotel Holdings, LLC, Vegas HR Private Limited
(the Mortgage Lender), Brookfield Financial, LLC-Series B (the First Mezzanine Lender), the
Second Mezzanine Lender, Morgans Group, certain affiliates of DLJMB, and certain other related
parties entered into a Standstill and Forbearance Agreement.
On March 1, 2011, Hard Rock Hotel Holdings, LLC, the Mortgage Lender, the First Mezzanine
Lender, the Second Mezzanine Lender, the Morgans Parties and certain affiliates of DLJMB, as well
as Hard Rock Mezz Holdings LLC (the Third Mezzanine Lender) and other interested parties entered
into a comprehensive settlement to resolve the disputes among them and all matters relating to the
Hard Rock and related loans and guaranties. The settlement provided, among other things, for the
following:
| release of the non-recourse carve-out guaranties provided by the Company with
respect to the loans made by the Mortgage Lender, the First Mezzanine Lender, the Second
Mezzanine Lender and the Third Mezzanine Lender to the direct and indirect owners of the
Hard Rock; |
| termination of the management agreement pursuant to which the Companys
subsidiary managed the Hard Rock; |
| the transfer by Hard Rock Hotel Holdings, LLC to an affiliate of the First
Mezzanine Lender of 100% of the indirect equity interests in the Hard Rock; and |
| certain payments to or for the benefit of the Mortgage Lender, the First
Mezzanine Lender, the Second Mezzanine Lender, the Third Mezzanine Lender and the
Company. The Companys net payment was approximately $3.7 million. |
As a result of the settlement and completion of certain gaming de-registration procedures, the
Company is no longer subject to Nevada gaming regulations.
5. Other Liabilities
Other liabilities consist of the following (in thousands):
As of | As of | |||||||
Sept. 30, | December 31, | |||||||
2011 | 2010 | |||||||
OPP Liability (note 7) |
$ | 425 | $ | | ||||
Designer fee payable |
13,866 | 13,866 | ||||||
$ | 14,291 | $ | 13,866 | |||||
OPP Liability
As discussed further in note 7, the estimated fair value of the OPP LTIP Units liability was
approximately $0.4 million at September 30, 2011.
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Designer Fee Payable
As of September 30, 2011 and December 31, 2010, included in other liabilities was $13.9
million, which is related to a potential claim for a fee payable to a designer. The Former Parent had an exclusive
service agreement with a hotel designer, pursuant to which the designer has initiated various
claims related to the agreement. Although the Company is not a party to the agreement, it may have
certain contractual obligations or liabilities to the Former Parent in connection with the
agreement. 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 Company believes the probability of losses associated with this
claim in excess of the liability that is accrued of $13.9 million is remote and cannot reasonably
estimate of range of such additional losses, if any, at this time. 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.
6. Debt and Capital Lease Obligations
Debt and capital lease obligations consists of the following (in thousands):
As of | As of | |||||||||
Sept. 30, | December 31, | Interest rate at | ||||||||
Description | 2011 | 2010 | September 30, 2011 | |||||||
Notes secured by Hudson (a) |
$ | 115,000 | $ | 201,162 | 5.00% (LIBOR + 4.00%, LIBOR floor of 1.00%) |
|||||
Notes secured by equity interests in Henry Hudson
Holdings (a) |
| 26,500 | (a) | |||||||
Clift debt (b) |
86,484 | 85,033 | 9.60% | |||||||
Liability to subsidiary trust (c) |
50,100 | 50,100 | 8.68% | |||||||
Convertible Notes, face value of $172.5 million (d) |
165,576 | 163,869 | 2.38% | |||||||
Revolving credit facility (e) |
10,000 | 26,008 | 5.00% (LIBOR + 4.00%, LIBOR floor of 1.00%) |
|||||||
Capital lease obligations (f) |
6,107 | 6,107 | (f) | |||||||
Debt and capital lease obligation |
$ | 433,267 | $ | 558,779 | ||||||
Mortgage debt secured by assets held for sale
Mondrian Los Angeles (a) |
$ | | $ | 103,496 | ||||||
Notes secured by property held for non-sale
disposition (g) |
$ | | $ | 10,500 |
(a) Mortgage Agreements
Hudson Mortgage and Mezzanine Loan
On October 6, 2006, a subsidiary of the Company, Henry Hudson Holdings LLC (Hudson
Holdings), entered into a non-recourse mortgage financing secured by Hudson (the Hudson
Mortgage), and another subsidiary entered into a mezzanine loan related to Hudson, secured by a
pledge of the Companys equity interests in Hudson Holdings.
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Until amended as described below, the Hudson Mortgage bore interest at 30-day LIBOR plus
0.97%. The Company had entered into an interest rate swap on the Hudson Mortgage and the mezzanine
loan on Hudson which effectively fixed the 30-day LIBOR rate at approximately 5.0%. This interest
rate swap expired on July 15, 2010. The Company subsequently entered into a short-term interest
rate cap on the Hudson Mortgage that expired on September 12, 2010.
On October 1, 2010, Hudson Holdings entered into a modification agreement of the Hudson
Mortgage, together with promissory notes and other related security agreements, with Bank of
America, N.A., as trustee, for the lenders (the Amended Hudson Mortgage). This modification
agreement and related agreements extended the Hudson Mortgage until October 15, 2011. In connection
with the Amended Hudson Mortgage, on October 1, 2010, Hudson Holdings paid down a total of $16
million on its outstanding loan balances.
The interest rate on the Amended Hudson Mortgage was also amended to 30-day LIBOR plus 1.03%.
The interest rate on the Hudson mezzanine loan continued to bear interest at 30-day LIBOR plus
2.98%. The Company entered into interest rate caps expiring October 15, 2011 in connection with the
Amended Hudson Mortgage, which effectively capped the 30-day LIBOR rate at 5.3% on the Amended
Hudson Mortgage and effectively capped the 30-day LIBOR rate at 7.0% on the Hudson mezzanine loan.
The Amended Hudson Mortgage required the Companys subsidiary borrower to fund reserve
accounts to cover monthly debt service payments. The subsidiary borrower was also required to fund
reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the
operation and maintenance of Hudson. Reserves were deposited into restricted cash accounts and
released as certain conditions were met. In addition, all excess cash was required to be funded
into a curtailment reserve account. The subsidiary borrower was not permitted to have any
liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease
obligations and certain other liabilities.
On
August 12, 2011, certain of the Companys subsidiaries
entered into a new mortgage financing with Deutsche Bank Trust Company Americas and the other institutions party thereto
from time to time, as lenders, consisting of two mortgage loans, each secured by Hudson and treated
as a single loan once disbursed, in the following amounts: (1) a $115.0 million mortgage loan that
was funded at closing, and (2) a $20.0 million delayed draw term loan, which will be available to
be drawn over a 15-month period, subject to achieving a debt yield ratio of at least 9.5% (based on
net operating income for the prior 12 months) after giving
effect to each additional draw (collectively, the Hudson 2011
Mortgage Loan).
Proceeds from the Hudson 2011 Mortgage Loan, cash on hand and cash held in escrow were applied
to repay $201.2 million of outstanding mortgage debt under the Amended Hudson Mortgage,
repay $26.5 million
of outstanding indebtedness under the Hudson mezzanine loan, and pay fees and expenses in
connection with the financing.
The Hudson 2011 Mortgage Loan bears interest at a reserve adjusted blended rate of 30-day
LIBOR (with a minimum of 1.0%) plus 400 basis points. The Company maintains an interest rate cap
for the amount of the Hudson 2011 Mortgage Loan that will cap the LIBOR rate on the debt under the
Hudson 2011 Mortgage Loan at approximately 3.0% through the maturity date of the loan.
The Hudson 2011 Mortgage Loan matures on August 12, 2013. The Company has three one-year
extension options that will permit it to extend the maturity date of the Hudson 2011 Mortgage Loan
to August 12, 2016 if certain conditions are satisfied at each respective extension date. The first
two extension options require, among other things, the borrowers to maintain a debt service
coverage ratio of at least 1-to-1 for the 12 months prior to the applicable extension dates. The
third extension option requires, among other things, the borrowers to achieve a debt yield ratio of
at least 13.0% (based on net operating income for the prior 12 months).
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The Hudson 2011 Mortgage Loan provides that, in the event the debt yield ratio falls below
certain defined thresholds, all cash from the property is deposited into accounts controlled by the
lenders from which debt service, operating expenses and management fees are paid and from which
other reserve accounts may be funded. Any excess amounts are retained by the lenders until the
debt yield ratio exceeds the required thresholds for two consecutive calendar quarters.
Furthermore, if the Hudson manager is not reserving sufficient funds for property tax, ground rent,
insurance premiums, and capital expenditures in accordance with the hotel management agreement,
then the Companys subsidiary borrowers would be required to fund the reserve account for such purposes. The
Companys subsidiary borrowers are not permitted to have any indebtedness other than certain
permitted indebtedness customary in such transactions, including ordinary trade payables, purchase
money indebtedness and capital lease obligations, subject to limits.
The Hudson 2011 Mortgage Loan may be prepaid, in whole or in part, subject to payment of a
prepayment penalty for any prepayment prior to August 12, 2013. There is no prepayment premium
after August 12, 2013.
The Hudson 2011 Mortgage Loan contains restrictions on the ability of the borrowers to incur
additional debt or liens on their assets and on the transfer of direct or indirect interests in
Hudson and the owner of Hudson and other affirmative and negative covenants and events of default
customary for single asset mortgage loans. The Hudson 2011 Mortgage Loan is fully recourse to our
subsidiaries that are the borrowers under the loan. The loan is nonrecourse to us, Morgans Group
and our other subsidiaries, except for certain standard nonrecourse carveouts. Morgans Group has
provided a customary environmental indemnity and nonrecourse carveout guaranty under which it would
have liability with respect to the Hudson 2011 Mortgage Loan if certain events occur with respect
to the borrowers, including voluntary bankruptcy filings, collusive involuntary bankruptcy filings,
and violations of the restrictions on transfers, incurrence of additional debt, or encumbrances of
the property of the borrowers. The nonrecourse carveout guaranty requires Morgans Group to maintain
a net worth of at least $100 million (based on the estimated market value of our net assets) and
liquidity of at least $20 million.
Mondrian Los Angeles Mortgage
On October 6, 2006, a subsidiary of the Company, Mondrian Holdings LLC (Mondrian Holdings),
entered into a non-recourse mortgage financing secured by Mondrian Los Angeles (the Mondrian
Mortgage).
On October 1, 2010, Mondrian Holdings entered into a modification agreement of its Mondrian
Mortgage, together with promissory notes and other related security agreements, with Bank of
America, N.A., as trustee, for the lenders. This modification agreement and related agreements
amended and extended the Mondrian Mortgage (the Amended Mondrian Mortgage) until October 15,
2011. In connection with the Amended Mondrian Mortgage, on October 1, 2010, Mondrian Holdings paid
down a total of $17 million on its outstanding mortgage loan balance.
The
interest rate on the Amended Mondrian Mortgage was also amended to 30-day LIBOR plus
1.64%. The Company entered into an interest rate cap which expired on October 15, 2011 in
connection with the Amended Mondrian Mortgage which effectively capped the 30-day LIBOR rate at
4.25%.
On May 3, 2011, the Company completed the sale of Mondrian Los Angeles for $137.0 million to
Wolverines Owner LLC, an affiliate of Pebblebrook. The Company applied a portion of the proceeds
from the sale, along with approximately $9.2 million of cash in escrow, to retire the $103.5
million Mondrian Holdings Amended Mortgage.
(b) Clift Debt
In October 2004, Clift Holdings LLC (Clift Holdings), a subsidiary of the Company, sold the
Clift 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.
Due to the amount of the payments stated in the lease, which 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 the lease
payments and Clift Holdings stopped making the scheduled monthly payments. 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 lawsuit against the owners.
On September 17, 2010, the Company, Clift Holdings and another subsidiary of the Company, 495
Geary, LLC, entered into a settlement and release agreement with Hasina, LLC, Tarstone Hotels, LLC,
Kalpana, LLC, Rigg Hotel, LLC, and JRIA, LLC (collectively, the Lessors), and Tarsadia Hotels
(the Settlement and Release Agreement). The Settlement and Release Agreement, among other things,
effectively provided for the settlement of all outstanding litigation claims and disputes among the
parties relating to defaulted lease payments due with respect to the ground lease for the Clift and
reduced the lease payments due to Lessors for the period March 1, 2010 through February 29, 2012.
Clift Holdings and the Lessors also entered into an amendment to the lease, dated September 17,
2010 (Lease Amendment), to memorialize, among other things, the reduced annual lease payments of
$4.97 million from March 1, 2010 to February 29, 2012. Effective March 1, 2012, the annual rent
will be as stated in the lease agreement, which currently provides for base annual rent of
approximately $6.0 million per year through October 2014 increasing thereafter, at 5-year intervals
by a formula tied to increases in the Consumer Price Index, with a maximum increase of 40% and a
minimum of 20% at October 2014, and at each payment date thereafter, the maximum increase is 20%
and the minimum is 10%. The lease is non-recourse to the Company.
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Morgans Group also entered into an agreement, dated September 17, 2010 (the Limited
Guaranty, together with the Settlement and Release Agreement and Lease Amendment, the Clift
Settlement Agreements), whereby Morgans Group agreed to guarantee losses of up to $6 million
suffered by the Lessors in the event of certain bad boy type acts.
(c) 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.
Prior to the amendment described below, the Trust Notes agreement required that the Company
not fall below a fixed charge coverage ratio, defined generally as
consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA),
excluding Clifts EBITDA, over
consolidated interest expense, excluding Clifts interest expense, of 1.4 to 1.0 for four
consecutive quarters. On November 2, 2009, the Company amended the Trust Notes agreement to
permanently eliminate this financial covenant. The Company paid a one-time fee of $2.0 million in
exchange for the permanent removal of the covenant.
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 under the trust.
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.
(d) 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. The maximum conversion rate for each $1,000 principal
amount of Convertible Notes is 45.5580 shares of the Companys common stock representing a maximum
conversion price of approximately $21.95 per share of common stock.
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The Company follows ASC 470-20, Debt with Conversion and Other Options (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.
The equity component, recorded as additional paid-in capital, was determined to be $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.
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 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.
(e) Revolving Credit Facility
On October 6, 2006, the Company and certain of its subsidiaries entered into a revolving
credit facility with Wachovia Bank, National Association, as Administrative Agent, and the other
lenders party thereto, which was amended on August 5, 2009, (the Amended Revolving Credit
Facility).
The Amended Revolving Credit Facility provided for a maximum aggregate amount of commitments
of $125.0 million, divided into two tranches, which were secured by the mortgages on Morgans,
Royalton and Delano South Beach.
The Amended Revolving Credit Facility bore 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 had a borrowing margin of 3.75% per annum and base rate
loans have a borrowing margin of 2.75% per annum.
On May 23, 2011, in connection with the sale of Royalton and Morgans, the Company used a
portion of the sales proceeds to retire all outstanding debt under the Amended Revolving Credit
Facility. These hotels, along
with Delano South Beach, were collateral for the Amended Revolving Credit Facility, which
terminated with the sale of the properties securing the facility.
On
July 28, 2011, the Company and certain of its subsidiaries (collectively, the Borrowers), including Beach Hotel
Associates LLC (the Florida Borrower), entered into a secured
Credit Agreement (the Delano Credit Agreement), with Deutsche Bank Securities Inc. as sole lead
arranger, Deutsche Bank Trust Company Americas, as agent (the Agent), and the lenders party
thereto (the Lenders).
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The
Delano Credit Agreement provides commitments for a $100.0 million revolving credit
facility and includes a $15 million letter of credit sub-facility. The maximum amount of such
commitments available at any time for borrowings and letters of credit is determined according to a
borrowing base valuation equal to the lesser of (i) 55% of the appraised value of Delano (the
Florida Property) and (ii) the adjusted net operating income for the Florida Property divided by
11%. Extensions of credit under the Delano Credit Agreement are available for general corporate
purposes. The commitments under the Delano Credit Agreement may be increased by up to an additional
$10 million during the first two years of the facility, subject to certain conditions, including
obtaining commitments from any one or more lenders to provide such additional commitments. The
commitments under the Delano Credit Agreement terminate on July 28, 2014, at which time all
outstanding amounts under the Delano Credit Agreement will be due and payable.
As of September 30, 2011, the Company had $10.0 million outstanding under the Delano Credit
Agreement and an additional $10.0 million letter of credit outstanding related to the Companys key
money investment in the 310-room Mondrian-branded hotel, to be the lifestyle hotel destination in
the 1,000 acre destination resort metropolis, Baha Mar Resort, in Nassau, The Bahamas. In August
2011, the Company entered into a hotel management and residential licensing agreement related to
this project.
The obligations of the Borrowers under the Delano Credit Agreement are guaranteed by the
Company and a subsidiary of the Company. Such obligations are also secured by a mortgage on the
Florida Property and all associated assets of the Florida Borrower, as well as a pledge of all
equity interests in the Florida Borrower.
The interest rate applicable to loans under the Delano Credit Agreement is a floating rate of
interest per annum, at the Borrowers election, of either LIBOR (subject to a LIBOR floor of 1.00%)
plus 4.00%, or a base rate plus 3.00%. In addition, a commitment fee of 0.50% applies to the unused
portion of the commitments under the Delano Credit Agreement.
The Borrowers ability to borrow under the Delano Credit Agreement is subject to ongoing
compliance by the Company and the Borrowers with various customary affirmative and negative
covenants, including limitations on liens, indebtedness, issuance of certain types of equity,
affiliated transactions, investments, distributions, mergers and asset sales. In addition, the
Delano Credit Agreement requires that the Company and the Borrowers maintain a fixed charge
coverage ratio (consolidated EBITDA to consolidated fixed charges) of no less than (i) 1.05 to 1.00
at all times on or prior to June 30, 2012 and (ii) 1.10 to 1.00 at all times thereafter. As of
September 30, 2011, the Companys fixed charge coverage ratio under the Delano Credit Agreement was
1.59x.
The Delano Credit Agreement also includes customary events of default, the occurrence of
which, following any applicable cure period, would permit the Lenders to, among other things,
declare the principal, accrued interest and other obligations of the Borrowers under the Delano
Credit Agreement to be immediately due and payable.
(f) Capital Lease Obligations
The Company has leased two condominium units at Hudson from unrelated third-parties, which are
reflected as capital leases. One of the leases requires the Company to make annual payments,
currently $582,180 (subject to increases due to increases in the Consumer Price Index) from
acquisition through November 2096. This lease also allows the Company to purchase the unit at fair
market value after November 2015.
The second lease requires the Company to make annual payments, currently $328,128 (subject to
increases due to increases in the Consumer Price Index) through December 2098. The Company has
allocated both of the leases payments between the land and building based on their estimated fair
values. The portion of the payments allocated to building has been capitalized at the present value
of the future minimum lease payments. The portion of the payments allocable to land is treated as
operating lease payments. The imputed interest rate
on both of these leases is 8%, which is based on the Companys incremental borrowing rate at
the time the lease agreement was executed. The capital lease obligations related to the units
amounted to approximately $6.1 million as of September 30, 2011 and December 31, 2010.
Substantially all of the principal payments on the capital lease obligations are due at the end of
the lease agreements.
(g) Notes secured by property held for non sale disposition
An indirect subsidiary of the Company had issued a $10.0 million interest only non-recourse
promissory note to the seller of the property across from the Delano South Beach which was due on
January 24, 2011 and secured by the property. Additionally, a separate indirect subsidiary of the
Company had issued a $0.5 million interest only non-recourse promissory note to an affiliate of the
seller which was also due on January 24, 2011 and secured with a pledge of the equity interests in
the Companys subsidiary that owned the property. In January 2011, the Companys indirect
subsidiary transferred its interests in the property across the street from Delano South Beach to
SU Gale Properties, LLC (the Gale Transaction). As a result of the Gale Transaction, the Company
was released from the $10.5 million of non-recourse mortgage and mezzanine indebtedness.
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7. Omnibus Stock Incentive Plan
RSUs, LTIPs and Stock Options
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). 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. 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 Restated 2007 Incentive Plan) which, among other
things, increased the number of shares reserved for issuance under the plan by up to 1,860,000
shares to a total of 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 Restated 2007 Incentive Plan (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.
The Amended 2007 Incentive Plan provides 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 Amended 2007
Incentive Plan included directors, officers and employees of the Company. 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.
During the third quarter of 2011, the Company granted newly hired employees an aggregate of
42,360 RSUs. A summary of stock-based incentive awards as of September 30, 2011 is as follows (in
units, or shares, as applicable):
Restricted Stock | ||||||||||||
Units | LTIP Units | Stock Options | ||||||||||
Outstanding as of January 1, 2011 |
805,334 | 2,271,437 | 1,506,337 | |||||||||
Granted during 2011 |
379,280 | 300,000 | 1,300,000 | |||||||||
Distributed/exercised during 2011 |
(286,309 | ) | (219,053 | ) | | |||||||
Forfeited during 2011 |
(168,142 | ) | | (481,597 | ) | |||||||
Outstanding as of September 30, 2011 |
730,163 | 2,352,384 | 2,324,470 | |||||||||
Vested as of September 30, 2011 |
221,029 | 2,043,532 | 1,024,740 | |||||||||
As
of September 30, 2011 and December 31, 2010, there were approximately $10.3 million and $6.8
million, respectively, of total unrecognized compensation costs
related to unvested RSUs, LTIP Units and
options.
As of September 30, 2011, the weighted-average period over which this unrecognized
compensation expense will be recorded is approximately 1.3 years.
Total stock compensation expense related to RSUs, LTIPs and options, which is included in
corporate expenses on the accompanying consolidated statements of operations and comprehensive
loss, was $1.3 million and $2.3 million for the three months ended September 30, 2011 and 2010,
respectively, and $7.0 million and $8.9 million for the nine months ended September 30, 2011 and
2010, respectively.
Outperformance Award Program
In connection with the Companys senior management changes announced in March 2011, the
Compensation Committee of the Board of Directors of the Company implemented an Outperformance Award
Program, which is a long-term incentive plan intended to provide the Companys senior management
with the ability to earn cash or equity awards based on the Companys level of return to
shareholders over a three-year period.
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Pursuant to the Outperformance Award Program, each of the Companys newly hired senior
managers, Messrs. Hamamoto, Gross, Flannery and Gery, will receive, an award (an Award), in each
case reflecting the participants right to receive a participating percentage (the Participating
Percentage) in an outperformance pool if the Companys total return to shareholders (including
stock price appreciation plus dividends) increases by more than 30% (representing a compounded
annual growth rate of approximately 9% per annum) over a three-year period from March 20, 2011 to
March 20, 2014 (or a prorated hurdle rate over a shorter period in the case of certain changes of
control), of a new series of outperformance long-term incentive units (the OPP LTIP Units, as
described below), subject to vesting and the achievement of certain performance targets.
The total return to shareholders will be calculated based on the average closing price of the
Companys common shares on the 30 trading days ending on the Final Valuation Date (as defined
below). The baseline value of the Companys common shares for purposes of determining the total
return to shareholders will be $8.87, the closing price of the Companys common shares on March 18,
2011. The Participation Percentages granted to Messrs. Hamamoto, Gross, Flannery and Gery are 35%,
35%, 10% and 10%, respectively.
Each of the current participants Awards vests on March 20, 2014 (or earlier in the event of
certain changes of control) (the Final Valuation Date), contingent upon each participants
continued employment, except for certain accelerated vesting events described below.
The aggregate dollar amount available to all participants is equal to 10% of the amount by
which the Companys March 20, 2014 valuation exceeds 130% (subject to proration in the case of
certain changes of control) of the Companys March 20, 2011 valuation (the Total Outperformance
Pool) and the dollar amount payable to each participant (the Participation Amount) is equal to
such participants Participating Percentage in the Total Outperformance Pool. Following the Final
Valuation Date, the participant will either forfeit existing OPP LTIP Units or receive additional
OPP LTIP Units so that the value of the vested OPP LTIP Units of the participant are equivalent to
the participants Participation Amount.
Participants will forfeit any unvested Awards upon termination of employment; provided,
however, that in the event a participants employment terminates because of death or disability, or
employment is terminated by the Company without Cause or by the participant for Good Reason, as
such terms are defined in the participants employment agreements, the participant will not forfeit
the Award and will receive, following the Final Valuation Date, a Participation Amount reflecting
his partial service. If the Final Valuation Date is accelerated by reason of certain change of
control transactions, each participant whose Award has not previously been forfeited will receive a
Participation Amount upon the change of control reflecting the amount of time since the effective
date of the program, which was March 20, 2011.
OPP LTIP Units represent a special class of membership interest in the operating company,
Morgans Group, which are structured as profits interests for federal income tax purposes.
Conditioned upon minimum allocations to the capital accounts of the OPP LTIP Units for federal
income tax purposes, each vested OPP LTIP Unit may be converted, at the election of the holder,
into one Class A Unit in Morgans Group upon the receipt of shareholder approval for the shares of
common stock underlying the OPP LTIP Units.
During the six-month period following the Final Valuation Date, Morgans Group may redeem some
or all of the vested OPP LTIP Units (or Class A Units into which they were converted) at a price
equal to the common
share price (based on a 30-day average) on the Final Valuation Date. From and after the
one-year anniversary of the Final Valuation Date, for a period of six months, participants will
have the right to cause Morgans Group to redeem some or all of the vested OPP LTIP Units at a price
equal to the greater of the common share price at the Final Valuation Date (determined as described
above) or the then current common share price (calculated as determined in Morgans Groups limited
liability company agreement). Thereafter, beginning 18 months after the Final Valuation Date, each
of these OPP LTIP Units (or Class A Units into which they were converted) is redeemable at the
election of the holder for: (1) cash equal to the then fair market value of one share of the
Companys common stock, or (2) at the option of the Company, one share of common stock, in the
event the Company then has shares available for that purpose under its shareholder-approved equity
incentive plans. Participants are entitled to receive distributions on their vested OPP LTIP Units
if any distributions are paid on the Companys common stock following the Final Valuation Date.
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The OPP LTIP Units were valued at approximately $7.3 million on the date of grant utilizing a
Monte Carlo simulation to estimate the probability of the performance vesting conditions being
satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and
binomial formulas and such simulation was run approximately 100,000 times. For each simulation, the
payoff is calculated at the settlement date, which is then discounted to the award date at a
risk-free interest rate. The average of the values over all simulations is the expected value of
the unit on the award date. Assumptions used in the valuations included factors associated with the
underlying performance of the Companys stock price and total shareholder return over the term of
the performance awards including total stock return volatility and risk-free interest.
As the Company has the ability to settle the vested OPP LTIP Units with cash, these Awards are
not considered to be indexed to the Companys stock price and must be accounted for as liabilities
at fair value. As of September 30, 2011, the fair value of the OPP LTIP Units were approximately
$2.4 million and compensation expense relating to these OPP LTIP Units is being recorded over the
vesting period. The fair value of the OPP LTIP Units were estimated on the date of grant using the
following assumptions in the Monte-Carlo valuation: expected price volatility for the Companys
stock of 50%; a risk free rate of 1.46%; and no dividend payments over the measurement period. The
fair value of the OPP LTIP Units were estimated on September 30, 2011 using the following
assumptions in the Monte-Carlo valuation: expected price volatility for the Companys stock of 50%;
a risk free rate of 0.69%; and no dividend payments over the measurement period.
Total stock compensation expense related to the OPP LTIP Units, which is included in corporate
expenses on the accompanying consolidated statements of operations and comprehensive loss, was less
than $0.1 million for the three months ended September 30, 2011 and $0.4 million for the nine
months ended September 30, 2011.
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 accrue any and all dividend payments, and as of September 30, 2011, the Company had
undeclared and unpaid dividends of $12.8 million. 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 securities,
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 note 2, 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 had 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 was subject
to certain reductions if, any time prior to October 15, 2010, the Company issued shares of common
stock below $6.00 per share. Per ASC 815-40-15, as the strike price was adjustable until the first
anniversary of issuance, the warrants were not considered indexed to the Companys stock until that
date. Therefore, through October 15, 2010, the Company accounted for the warrants as liabilities at
fair value. On October 15, 2010, the Investors rights under this warrant exercise price adjustment
expired, at which
time the warrants met the scope exception in ASC 815-10-15 and are accounted for as equity
instruments indexed to the Companys stock. At October 15, 2010, the warrants were reclassified to
equity and will no longer be adjusted periodically to fair value.
The exercise price and number of shares subject to the warrants are both subject to
anti-dilution adjustments.
Under the Securities Purchase Agreement, the Investors have consent rights over certain
transactions for so long as they collectively own or have the right to purchase through exercise of
the warrants 6,250,000 shares of the Companys common stock, including (subject to certain
exceptions and limitations):
| the sale of substantially all of the Companys assets to a third party; |
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| the acquisition by the Company of a third party where the equity investment by the
Company is $100 million or greater; |
| the acquisition of the Company by a third party; or |
| any change in the size of the Companys Board of Directors to a number below 7 or above
9. |
Subject to certain exceptions, the Investors may not transfer any Series A Preferred
Securities, warrants or common stock until October 15, 2012. The Investors are also subject to
certain standstill arrangements as long as they beneficially own over 15% of the Companys common
stock.
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 September 30, 2011, the value of the Series A
Preferred Securities was $53.3 million, which includes accretion of $5.3 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 agreed to use
their good faith efforts to endeavor to raise a private investment fund (the Fund). The purpose
of the Fund was to invest in hotel real estate projects located in North America. The Company
was to 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.
The Fund Formation Agreement terminated by its terms on January 30, 2011 due to the failure to
close a fund with $100 million of aggregate capital commitments by that date, and the 5,000,000
contingent warrants issued to the Fund Manager were forfeited in their entirety on October 15, 2011
due to the failure to close a fund with $250 million of aggregate capital commitments by that date.
For so long as the Investors collectively own or have the right to purchase through exercise
of the warrants (assuming a cash rather than a cashless exercise) 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. Effective March 20, 2011 when Mr. Gross was appointed Chief Executive
Officer of the Company, the Investors nominated, and the Companys Board of Directors elected, Ron
Burkle as a member of the Companys Board of Directors.
On April 21, 2010, the Company entered into a Waiver Agreement (the Waiver Agreement) with
the Investors. The Waiver Agreement allowed 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. From April 21, 2010 to July 21, 2010, the
Investors purchased $88 million of the Convertible Notes. 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.
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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 December 31, 2010 balance sheet. Additionally, the
Company reclassified the hotels results of operations and cash flows to discontinued operations on
the Companys statements of operations and comprehensive loss and cash flows.
Additionally, in January 2011, an indirect subsidiary of the Company transferred its interests
in the property across the street from Delano South Beach to SU Gale Properties, LLC. As a result
of this transaction, the Company was released from $10.5 million of non-recourse mortgage and
mezzanine indebtedness previously consolidated on the Companys balance sheet. The property across
the street from Delano South Beach was a development property.
The following sets forth the discontinued operations of Mondrian Scottsdale and the property
across the street from Delano South Beach for the three and nine months ended September 30, 2011
and 2010 (in thousands):
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
Sept. 30, 2011 | Sept. 30, 2010 | Sept. 30, 2011 | Sept. 30, 2010 | |||||||||||||
Operating revenues |
$ | | $ | | $ | | $ | 1,594 | ||||||||
Operating expenses |
| (175 | ) | (35 | ) | (2,105 | ) | |||||||||
Interest expense |
| (291 | ) | | (1,026 | ) | ||||||||||
Depreciation and amortization expense |
| | | (268 | ) | |||||||||||
Income tax benefit (expense) |
| 185 | (323 | ) | 459 | |||||||||||
Gain on disposal |
| | 843 | 17,820 | ||||||||||||
(Loss) income from discontinued operations |
$ | | $ | (281 | ) | $ | 485 | $ | 16,474 | |||||||
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 $3.4 million and $4.5 million for the three months ended
September 30, 2011 and 2010, respectively, and $10.1 million and $14.1 million for the nine months
ended September 30, 2011 and 2010, respectively.
As of September 30, 2011 and December 31, 2010, the Company had receivables from these
affiliates of approximately $5.2 million and $3.8 million, respectively, which are included in
related party receivables on the accompanying consolidated balance sheets.
11. Litigation
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 alleged 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 demanded damages of approximately $15.9 million
plus costs and expenses.
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The Company believes that a foreclosure based on a payment default does not create one of the
limited circumstances under which Morgans Group 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. On July 9, 2010, Petra moved for summary judgment on the ground that the loan
documents unambiguously establish Morgans Groups obligation under the guaranty. The Company
opposed Petras motion for summary judgment, and cross-moved for summary judgment in favor of the
Company on grounds that the guaranty was not triggered by a foreclosure resulting from a payment
default. On December 20, 2010, the court granted the Companys motion for summary judgment
dismissing the complaint, and denied the plaintiffs motion for summary judgment. Petra thereafter
appealed the decision. On May 19, 2011, the appellate court unanimously affirmed the trial courts
grant of summary judgment in the Companys favor and the dismissal of Petras complaint. Petra then
petitioned the New York Court of Appeals for permission to appeal further and the Company opposed
that petition. On September 22, 2011, the Court of Appeals denied Petras request for leave to
appeal.
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.
Environmental
As a holder of real estate, the Company is subject to various environmental laws of federal
and local governments. Compliance by the Company with existing laws has not had an adverse effect
on the Company and management does not believe that it will have a material adverse impact in the
future. However, the Company cannot predict the impact of new or changed laws or regulations on its
current investment or on investments that may be made in the future.
12. Deferred Gain on Assets Sold
On May 3, 2011, pursuant to a purchase and sale agreement, Mondrian Holdings sold Mondrian Los
Angeles for $137.0 million to Pebblebrook. The Company applied a portion of the proceeds from the
sale, along with approximately $9.2 million of cash in escrow, to retire the $103.5 million
Mondrian Holdings Amended Mortgage. Net proceeds, after the repayment of debt and closing costs,
were approximately $40 million. The Company continues to operate the hotel under a 20-year
management agreement with one 10-year extension option.
On May 23, 2011, pursuant to purchase and sale agreements, Royalton LLC, a subsidiary of the
Company, sold Royalton for $88.2 million to Royalton 44 Hotel, L.L.C., an affiliate of FelCor
Lodging Trust, Incorporated, and Morgans Holdings LLC, a subsidiary of the Company, sold Morgans
for $51.8 million to Madison 237 Hotel, L.L.C., an affiliate of FelCor Lodging Trust, Incorporated.
The Company applied a portion
of the proceeds from the sale to retire the outstanding balance on the Amended Revolving
Credit Facility. Net proceeds, after the repayment of debt and closing costs, were approximately
$93 million. The Company continues to operate the hotels under a 15-year management agreement with
one 10-year extension option.
The Company has reclassified the individual assets and liabilities of Mondrian Los Angeles,
Royalton and Morgans to assets held for sale on its December 31, 2010 balance sheet.
The
Company recorded deferred gains of approximately $11.3 million,
$12.6 million and $56.1
million, respectively, related to the sales of Royalton, Morgans and Mondrian Los Angeles. As the
Company has significant continuing involvement through long-term management agreements, the gains
on sales are deferred and recognized over the initial term of the related management agreement. For
the three months ended September 30, 2011, the Company recorded a gain of $1.1 million. For the
nine months ended September 30, 2011, the Company recorded a gain of $1.7 million.
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The Companys hotel management agreements for Royalton and Morgans contain performance tests
that stipulate certain minimum levels of operating performance. These performance test provisions
give the Company the option to fund a shortfall in operating performance. If the Company chooses
not to fund the shortfall, the hotel owner has the option to terminate the management agreement. As
of September 30, 2011, an insignificant amount was recorded in accrued expenses related to these
performance test provisions.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes
appearing elsewhere in this Quarterly Report on Form 10-Q for the nine months ended September 30,
2011. 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, 2010.
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, Europe and other international locations. Over our 27-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 wholly-owned hotels, or Owned Hotels, consisting, as of September 30, 2011, of
Hudson in New York, Delano South Beach in Miami Beach, and Clift in San Francisco; |
| our wholly-owned food and beverage operations, or Owned F&B Operations, consisting, as
of September 30, 2011, of certain food and beverage operations located at Royalton, Morgans
and Hudson in New York, Delano South Beach in Miami Beach, Clift in San Francisco, and
Sanderson and St Martins Lane, both in London; |
| our hotels in which we own partial interests, or Joint Venture Hotels, consisting, as
of September 30, 2011, of our London hotels (Sanderson and St Martins Lane), Mondrian South
Beach and Shore Club in Miami Beach, Ames in Boston and Mondrian SoHo in New York; |
| our management company subsidiary, Morgans Hotel Group Management LLC, or MHG
Management Company, and certain non-U.S. management company affiliates, through which we
manage our portfolio of hotels that we manage with no ownership interest, or Managed
Hotels, consisting of Royalton and Morgans in New York, Mondrian in Los Angeles and Hotel
Las Palapas in Playa del Carmen, Mexico; |
| our investment in unconsolidated food and beverage operations, or F&B Ventures,
consisting, as of September 30, 2011, of certain food and beverage operations located at
Mondrian South Beach in Miami Beach; |
| our investments in hotels under development and other proposed properties; and |
| the rights and obligations contributed to Morgans Group, our operating company, in the
formation and structuring transactions described in note 1 to the consolidated financial
statements, included elsewhere in this report. |
Our Joint Venture Hotels as of September 30, 2011 are operated 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; |
| Mondrian South Beach August 2026; |
| Ames November 2024; and |
||
| Mondrian SoHo February 2021 (with two 10-year extensions at our option, subject to
certain conditions). |
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Our Managed Hotels as of September 30, 2011 are operated under management agreements which
expire as follows:
| Mondrian Los Angeles May 2031 (with one 10-year extension at our option); |
| Royalton May 2026 (with one 10-year extension at our option, subject to certain
conditions); |
| Morgans May 2026 (with one 10-year extension at our option, subject to certain
conditions); and |
| Hotel Las Palapas in Playa del Carmen, Mexico December 2014 (with one automatic
five-year extension, so long as we are not in default under the management agreement). |
We have also signed management agreements to manage various other hotels that are in
development, including a Delano project in Cabo San Lucas, Mexico, a Delano project on the Aegean
Sea in Turkey, a hotel project in the Highline area in New York City, a Mondrian project in Doha,
Qatar, and a Mondrian project in The Bahamas. However, financing has not been obtained for some of
these hotel projects, and there can be no assurances that all of these projects will be developed
as planned.
Our management agreements may be subject to early termination in specified circumstances. For
example, our hotel management agreements for Royalton and Morgans contain performance tests that
stipulate certain minimum levels of operating performance. These performance test provisions
provide us the option to fund a shortfall in operating performance. If we choose not to fund the
shortfall, the hotel owner has the option to terminate the management agreement. As of September
30, 2011, an insignificant amount was recorded in accrued expenses related to these performance
test provisions. 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 or certain other related events.
In March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings
against the property in U.S. federal district court. In October 2010, the federal court dismissed
the case for lack of jurisdiction. In November 2010, the lender initiated foreclosure proceedings
in state court. We continue to operate the hotel pursuant to the management agreement during these
proceedings. However, there can be no assurances we will continue to operate the hotel once
foreclosure proceedings are complete.
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 driven by occupancy
of our hotels and the popularity of our bars and restaurants with our local customers. In
June 2011, we acquired from affiliates of China Grill Management Inc. (CGM) the 50%
interests CGM owned in our food and beverage joint ventures for $20.0 million (the CGM
Transaction). As a result of the CGM Transaction, we have begun to record 100% of the
food and beverage revenue, and related expenses, for our Owned F&B Operations. |
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| 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 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.
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 recent global economic downturn, the impact
of seasonality in 2010 and to date through 2011, was not as significant as in prior periods and may remain
less pronounced throughout 2011 and into 2012 depending on the
timing and strength of the economic recovery.
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. |
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| 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 losses
on asset disposals as part of major renovation projects, the write-off of abandoned
development projects resulting primarily from events generally outside managements control
such as the recent tightness of the credit markets, our restructuring initiatives and
severance costs related to our restructuring initiatives. These items do not relate to the
ongoing operating performance of our assets. |
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. |
| Gain on asset sales.
We recorded deferred gains of approximately $11.3 million, $12.6
million and $56.1 million, respectively, related to the sales of Royalton, Morgans and
Mondrian Los Angeles, as discussed in note 12 of our consolidated financial statements. As
we have significant continuing involvement with these hotels through long-term management
agreements, the gains on sales are deferred and recognized over the initial term of the
related management agreement. |
| Other non-operating (income) expenses include costs associated with executive
terminations not related to restructuring initiatives, costs of 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 during 2010 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 periods ended September 30, 2011 and 2010 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. We established a reserve on the
deferred tax assets based on the ability to utilize net operating loss carryforwards. |
| Noncontrolling interest. Noncontrolling interest constitutes the percentage of
membership units in Morgans Group, our operating company, owned by Residual Hotel Interest
LLC, our former parent, as discussed in note 1 of our consolidated financial statements, as
well as our third-party food and beverage joint venture partners interest in the profits
and losses of our F&B Ventures. |
| Income (loss) from discontinued operations, net of tax. In March 2010, the mortgage
lender foreclosed on Mondrian Scottsdale 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. In January 2011, we recognized income from the transfer of the property across
the street from Delano South Beach. |
| 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 note 8 of our consolidated financial
statements. |
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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 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 employment growth weakened substantially during this period as
compared to the lodging demand and revenues we experienced prior to the fourth quarter of 2008.
After this extremely difficult recessionary period, the outlook for the U.S. and global economies
improved in 2010 and that improvement has continued into 2011.
However, to date, the recovery has not been particularly robust, as spending by businesses and consumers remains restrained,
and there are still several trends which make our lodging performance difficult to forecast,
including shorter booking lead times at our hotels.
We
have experienced positive business trends in 2011, with improvement in demand and average
daily rate compared to the prior year in most of our major markets. These trends continued during
the third quarter of 2011, with increased occupancies accompanied by increases in average daily rate
resulting in strong increases in RevPAR performance in most of our hotels for the third quarter
compared to the same period in 2010. However, we experienced some
market-specific softening in demand during the
third quarter of 2011 in New York and London and overall our operating results are still below
pre-recessionary levels.
As demand has strengthened, we are focusing on revenue enhancement by actively managing rates
and availability. With increased demand, the ability to increase pricing will be a critical
component in driving profitability. Through these uncertain times, our strategy and focus continues
to be to preserve profit margins by maximizing revenue, increasing our market share and managing
costs. Our strategy includes re-energizing our food and beverage offerings by taking action to
improve key facilities with a focus on driving higher beverage to food ratios and re-igniting the
buzz around our nightlife and lobby scenes.
The pace of new lodging supply has increased over the past two years as many projects
initiated before the economic downturn came to fruition. For example, we witnessed new competitive
luxury and boutique properties opening in 2008, 2009 and 2010 in some of our markets, particularly
in Los Angeles, Miami Beach and New York, which have impacted our performance in these markets and
may continue to do so. However, we believe the timing of new development projects may be affected
by the severe recession, ongoing uncertain economic conditions and reduced availability of
financing compared to pre-recession periods. These factors may dampen the pace of new supply
development, including our own, in the next few years.
For 2011, 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, although we
believe there will continue to be less credit available and on less favorable terms than were
obtainable in pre-recessionary periods. Given the current state of the credit markets, some of our
development projects 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.
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Recent Developments.
Delano Credit Facility. On July 28, 2011, we entered into a new $100 million senior secured
revolving credit facility with borrowing capacity of up to $110 million, secured by Delano South
Beach (the Delano Credit Facility). Borrowings under the Delano Credit Facility are subject to a
borrowing base test and upon closing, our availability was $100.0 million. The interest rate is
LIBOR plus 4.0%, subject to a LIBOR floor of 1.0%. The Delano Credit Facility matures in three
years and contains standard financial covenants, including a minimum fixed charge coverage ratio of
1.05x in the first year and 1.10x thereafter.
Baha Mar Development Deal. In August 2011, we entered into a hotel management and residential
licensing agreement for a 310-room Mondrian-branded hotel, to be the lifestyle hotel destination in
the 1,000 acre destination resort metropolis, Baha Mar Resort, in Nassau, The Bahamas. This hotel
is expected to represent the fifth Mondrian hotel in the expansion of our iconic brand. Upon
completion and opening of the hotel, we will operate Mondrian at Baha Mar pursuant to a 20-year
management agreement. The hotel is scheduled to open in late 2014. We are required to fund
approximately $10 million of key money just prior to and at opening of the hotel. At signing, this
amount was funded into escrow and was subsequently replaced with a $10 million standby letter of
credit for up to 48 months, which is outstanding as of September 30, 2011.
Mondrian Los Angeles Food and Beverage Sale. On August 5, 2011, an affiliate of Pebblebrook
Hotel Trust (Pebblebrook), the company that purchased Mondrian Los Angeles in May 2011, exercised
its option to purchase our remaining ownership interest in the food and beverage operations at
Mondrian Los Angeles for approximately $2.5 million. As a result of Pebblebrooks exercise of this
purchase option, we no longer have any ownership interest in the food and beverage operations at
Mondrian Los Angeles.
Hudson Mortgage Loan. On August 12, 2011, certain of our subsidiaries entered into a new
mortgage financing with Deutsche Bank Trust Company Americas and the other institutions party
thereto from time to time, as lenders, consisting of two mortgage loans, each secured by Hudson and
treated as a single loan once disbursed, in the following amounts: (1) a $115.0 million mortgage
loan that was funded at closing, and (2) a $20.0 million delayed draw term loan, which will be
available to be drawn over a 15-month period, subject to achieving a debt yield ratio of at least
9.5% (based on net operating income for the prior 12 months) after giving effect to each additional
draw (collectively, the Hudson 2011 Mortgage Loan).
Proceeds from the Hudson 2011 Mortgage Loan, cash on hand and cash held in escrow were applied
to repay $201.2 million of outstanding mortgage debt under the Hudson Holdings Amended Mortgage (as
defined in Debt) prior first mortgage loan (the 2006 Hudson Mortgage Loan) secured by
Hudsonandand andnn repay $26.5 million of outstanding indebtedness under the Hudson mezzanine loan,
and pay fees and expenses in connection with the financing.
London hotels sales. On October 7, 2011, our subsidiary, Royalton Europe Holdings LLC
(Royalton Europe), and Walton MG London Hotels Investors V, L.L.C. (Walton MG London), each of
which owns a 50% equity interest in the joint venture that owns the Sanderson and St Martins Lane
hotels, entered into an agreement (the London Sale Agreement) to sell their respective equity
interests in the joint venture for an aggregate of
£192 million (or approximately $300 million at the
exchange rate of 1.56 US dollars to GBP at September 30, 2011) to
Capital Hills Hotels Limited, a Middle Eastern investor with other global hotel holdings. Also
parties to the London Sale Agreement were Morgans Group LLC, as guarantor for Royalton Europe, and
Walton Street Real Estate Fund V, L.P., as guarantor for Walton MG London. On closing of the
transaction, we will continue to operate the hotels under long-term management agreements that,
including extension options, extend the term of the existing management agreements to 2041 from
2027. The transaction is expected to close in the fourth quarter of 2011 and is subject to
satisfaction of customary closing conditions.
We
expect to receive net proceeds of approximately $70 million,
depending on foreign currency exchange rates and working capital
adjustments, after the joint venture
applies a portion of the proceeds from the sale to retire the £99.5 million of outstanding mortgage
debt secured by the hotels and after payment of closing costs. The joint venture partners have
received a £10 million security deposit, which is non-refundable except in the event of a default
by a seller.
On November 2, 2011, Walton MG London, on behalf of itself and us,
entered into a foreign currency forward contract to effectively fix
the currency conversion rate on half of the expected net sales
proceeds at an exchange rate of 1.592 US dollars to GBP.
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Operating Results
Comparison of Three Months Ended September 30, 2011 to Three Months Ended September 30, 2010
The following table presents our operating results for the three months ended September 30,
2011 and 2010, including the amount and percentage change in these results between the two periods.
The consolidated operating results for the three months ended September 30, 2011 is comparable to
the consolidated operating results for the three months ended September 30, 2010, with the
exception of Mondrian Los Angeles, which we owned until May 3, 2011, Royalton and Morgans, which we
owned until May 23, 2011, the Hard Rock Hotel & Casino in Las Vegas (Hard Rock), which we managed
until March 1, 2011, Mondrian SoHo, which opened in February 2011, the completion of the CGM
Transaction in June 2011, resulting in our full ownership of certain food and beverage operations
previously owned through a 50/50 joint venture, and the management of the San Juan Water and Beach
Club, which terminated effective July 13, 2011. The consolidated operating results are as follows:
Three Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | Changes | Changes | |||||||||||||
2011 | 2010 | ($) | (%) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 26,432 | $ | 35,100 | $ | (8,668 | ) | (24.7 | )% | |||||||
Food and beverage |
15,575 | 16,017 | (442 | ) | (2.8 | ) | ||||||||||
Other hotel |
1,271 | 2,077 | (806 | ) | (38.8 | ) | ||||||||||
Total hotel revenues |
43,278 | 53,194 | (9,916 | ) | (18.6 | ) | ||||||||||
Management fee and other income |
3,408 | 4,547 | (1,139 | ) | (25.0 | ) | ||||||||||
Total revenues |
46,686 | 57,741 | (11,055 | ) | (19.1 | ) | ||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
8,263 | 11,061 | (2,798 | ) | (25.3 | ) | ||||||||||
Food and beverage |
13,664 | 14,426 | (762 | ) | (5.3 | ) | ||||||||||
Other departmental |
870 | 1,322 | (452 | ) | (34.2 | ) | ||||||||||
Hotel selling, general and administrative |
9,951 | 12,275 | (2,324 | ) | (18.9 | ) | ||||||||||
Property taxes, insurance and other |
4,247 | 3,650 | 597 | 16.4 | ||||||||||||
Total hotel operating expenses |
36,995 | 42,734 | (5,739 | ) | (13.4 | ) | ||||||||||
Corporate expenses, including stock compensation |
7,037 | 8,045 | (1,008 | ) | (12.5 | ) | ||||||||||
Depreciation and amortization |
4,833 | 8,173 | (3,340 | ) | (40.9 | ) | ||||||||||
Restructuring, development and disposal costs |
2,125 | 1,064 | 1,061 | 99.7 | ||||||||||||
Impairment loss on receivables from
unconsolidated joint venture |
| 5,499 | (5,499 | ) | (1 | ) | ||||||||||
Total operating costs and expenses |
50,990 | 65,515 | (14,525 | ) | (22.2 | ) | ||||||||||
Operating loss |
(4,304 | ) | (7,774 | ) | 3,470 | (44.6 | ) | |||||||||
Interest expense, net |
8,775 | 8,319 | 456 | 5.5 | ||||||||||||
Equity in loss of unconsolidated joint venture |
12,794 | 1,435 | 11,359 | (1 | ) | |||||||||||
Gain on asset sales |
(1,101 | ) | | (1,101 | ) | (1 | ) | |||||||||
Other non-operating expenses |
616 | 20,299 | (19,683 | ) | (97.0 | ) | ||||||||||
Loss before income tax expense |
(25,388 | ) | (37,827 | ) | 12,439 | (32.9 | ) | |||||||||
Income tax expense |
230 | 420 | (190 | ) | (45.2 | ) | ||||||||||
Net loss from continuing operations |
(25,618 | ) | (38,247 | ) | 12,629 | (33.0 | ) | |||||||||
Loss from discontinued operations, net of tax |
| (281 | ) | 281 | (1 | ) | ||||||||||
Net loss |
(25,618 | ) | (38,528 | ) | 12,910 | (33.5 | ) | |||||||||
Net loss attributable to non controlling interest |
799 | 1,451 | (652 | ) | (44.9 | ) | ||||||||||
Net loss attributable to Morgans Hotel Group Co. |
(24,819 | ) | (37,077 | ) | 12,258 | (33.1 | ) | |||||||||
Preferred stock dividends and accretion |
2,285 | 2,164 | 121 | 5.6 | ||||||||||||
Net loss attributable to common stockholders |
$ | (27,104 | ) | $ | (39,241 | ) | $ | 12,137 | (30.9 | )% | ||||||
(1) | Not meaningful. |
41
Table of Contents
Total Hotel Revenues. Total hotel revenues decreased 18.6% to $43.3 million for the three
months ended September 30, 2011 compared to $53.2 million for the three months ended September 30,
2010. The components of RevPAR from our Owned Hotels, which consisted of
Hudson, Delano South Beach and Clift for the three months ended
September 30, 2011 and 2010, are
summarized as follows:
Three Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | Change | Change | |||||||||||||
2011 | 2010 | ($) | (%) | |||||||||||||
Occupancy |
87.2 | % | 87.0 | % | | 0.2 | % | |||||||||
ADR |
$ | 235 | $ | 219 | $ | 16 | 7.4 | % | ||||||||
RevPAR |
$ | 205 | $ | 191 | $ | 14 | 7.7 | % |
RevPAR from our Owned Hotels increased 7.7.% to $205 for the three months ended September 30,
2011 compared to $191 for the three months ended September 30, 2010.
Rooms revenue decreased 24.7% to $26.4 million for the three months ended September 30, 2011
compared to $35.1 million for the three months ended September 30, 2010. This decrease was
primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding
the operating results of these three hotels during all periods presented, our Owned Hotels rooms
revenue increased 7.8%, which was directly attributable to the increase in RevPAR presented above.
Food and beverage revenue decreased 2.8% to $15.6 million for the three months ended September
30, 2011 compared to $16.0 million for the three months ended September 30, 2010. This decrease
was primarily due to the impact of the sale in May 2011 of three hotels we previously owned.
Partially offsetting this decrease was an increase related to the CGM Transaction and the
consolidation of previously unconsolidated food and beverage operations at our London hotels.
Other hotel revenue decreased 38.8% to $1.3 million for the three months ended September 30,
2011 compared to $2.1 million for the three months ended September 30, 2010. This decrease was
primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding
the operating results of these three hotels during all periods presented, our Owned Hotels other
hotel revenue decreased 5.3% primarily due to decreased telephone revenues at Hudson as a result of
a policy change in June 2011 to no longer charge for internet connectivity and a slight decrease in
revenues related to our ancillary services, such as our spa at Delano South Beach, as guests are
still spending conservatively in light of the uncertain economic recovery.
Management Fee and Other Income. Management fee and other income decreased by 25.0% to $3.4
million for the three months ended September 30, 2011 compared to $4.5 million for the three months
ended September 30, 2010. This decrease was primarily attributable to the termination of our
management agreement at Hard Rock effective March 1, 2011 in connection with the Hard Rock
settlement, as discussed further in note 4 to the consolidated financial statements.
Operating Costs and Expenses
Rooms expense decreased 25.3% to $8.3 million for the three months ended September 30, 2011
compared to $11.1 million for the three months ended September 30, 2010. This decrease was
primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding
the operating results of these three hotels during all periods presented, our Owned Hotels rooms
expense increased 8.5% as a result of the increase in rooms revenue attributable to increased
occupancy and increased costs at Hudson primarily due to a rooms renewal project that we undertook
during the quarter which resulted in increased labor and rooms supply expenses.
Food and beverage expense decreased 5.3% to $13.7 million for the three months ended September
30, 2011 compared to $14.4 million for the three months ended September 30, 2010. This decrease was
primarily due to the impact of the sale in May 2011 of three hotels we previously owned, as well as
a decrease in food and beverage expenses at Hudson as a result of the primary restaurant being
closed for lunch during the third quarter of 2011. Partially offsetting this decrease was an
increase related to the CGM Transaction and the consolidation of previously unconsolidated food and
beverage operations at our London hotels.
Other departmental expense decreased 34.2% to $0.9 million for the three months ended
September 30, 2011 compared to $1.3 million for the three months ended September 30, 2010. This
decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously
owned. Excluding the operating results of these three hotels during all periods presented, our
Owned Hotels experienced a decrease of 14.5% as a direct result of the decrease in other hotel
revenue noted above.
Hotel selling, general and administrative expense decreased 18.9% to $10.0 million for the
three months ended September 30, 2011 compared to $12.3 million for the three months ended
September 30, 2010. This
decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously
owned. Excluding the operating results of these hotels during all periods presented, our Owned
Hotels selling, general and administrative expense increased 2.3%.
42
Table of Contents
Property taxes, insurance and other expense increased 16.4% to $4.2 million for the three
months ended September 30, 2011 compared to $3.7 million for the three months ended September 30,
2010. This increase was primarily due to an increase in property tax assessments at Hudson during
the three months ended September 30, 2011 as compared to the same period in 2010.
Corporate expenses, including stock compensation decreased 12.5% to $7.0 million for the three
months ended September 30, 2011 compared to $8.0 million for the three months ended September 30,
2010. This decrease was primarily due to a decrease in stock compensation expense recognized during
the three months ended September 30, 2011 as a result of the accelerated vesting of unvested equity
awards granted to our former Chief Executive Officer and our former President in connection with
their separation from the Company in March 2011, which would have normally vested throughout the
year.
Depreciation and amortization decreased 40.9% to $4.8 million for the three months ended
September 30, 2011 compared to $8.2 million for the three months ended September 30, 2010. This
decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously
owned. Excluding the operating results of these three hotels during all periods presented, our
Owned Hotels depreciation and amortization increased 7.1% as a result of depreciation on renovation
and capital improvements at Hudson and Delano South Beach, which were incurred during 2010 and
2011.
Restructuring, development and disposal costs increased to $2.1 million for the three months
ended September 30, 2011 compared to $1.1 million for the three months ended September 30, 2010.
The increase in expense was primarily due to severance costs related to employee and executive
restructurings incurred during the three months ended September 30, 2011, for which there was no
comparable costs incurred during the three months ended September 30, 2010.
Impairment loss on receivables from unconsolidated joint venture decreased to zero for the
three months ended September 30, 2011 compared to $5.5 million for the three months ended September
30, 2010. During 2010, we recorded an impairment charge on uncollectible receivables for which
there was no comparable charge during the three months ended September 30, 2011.
Interest expense, net increased 5.5% to $8.8 million for the three months ended September 30,
2011 compared to $8.3 million for the three months ended September 30, 2010. This increase was
primarily due to financing fees associated with the repayment and refinancing of the loan secured
by Hudson in August 2011.
Equity in loss of unconsolidated joint ventures increased to $12.8 million for the three
months ended September 30, 2011 compared to $1.4 million for the three months ended September 30,
2010. This change was primarily a result of our recognition in September 2011 of a $10.6 million
impairment charge on our investment in Ames for which there was no comparable impairment charge in
2010. Based on current economic conditions and the October 2012 mortgage debt maturity, the joint
venture concluded that Ames was impaired as of September 30, 2011, and recorded a $49.9 million
impairment charge. We wrote down our investment in Ames to zero.
The components of RevPAR from our comparable Joint Venture Hotels for the three months ended
September 30, 2011 and 2010, which includes Sanderson, St Martins Lane, Shore Club, Mondrian South
Beach and Ames, but excludes the Hard Rock, which we managed until March 1, 2011, Mondrian SoHo,
which opened in February 2011, and San Juan Water and Beach Club in Isla Verde, Puerto Rico, which
we managed until July 13, 2011, are summarized as follows (in constant dollars):
Three Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | Change | Change | |||||||||||||
2011 | 2010 | ($) | (%) | |||||||||||||
Occupancy |
68.9 | % | 63.4 | % | | 8.6 | % | |||||||||
ADR |
$ | 290 | $ | 290 | $ | | (0.1 | )% | ||||||||
RevPAR |
$ | 200 | $ | 184 | $ | 16 | 8.5 | % |
43
Table of Contents
Gain on asset sales resulted in income of $1.1 million for the three months ended September
30, 2011. This income was related to the recognition of gains we recorded on the sales of Royalton,
Morgans and Mondrian
Los Angeles in 2011. As we have significant continuing involvement with these hotels through
long-term management agreements, the gains on sales are deferred and recognized over the initial
term of the related management agreement. There were no comparable asset sales in 2010.
Other non-operating expense decreased to $0.6 million for the three months ended September 30,
2011 as compared to $20.3 million for the three months ended September 30, 2010. The decrease was
primarily due to a change in accounting for the warrants issued to the Investors, as defined below
in Derivative Financial Instruments, in connection with our Series A preferred securities.
During the three months ended September 30, 2010, we recorded $19.1 million in expenses related to
these warrants for which there was no similar expense recorded during the three months ended
September 30, 2011. For further discussion, see notes 2 and 8 of our consolidated financial
statements.
Income tax expense decreased 45.2% to $0.2 million for the three months ended September 30,
2011 as compared to $0.4 million for the three months ended September 30, 2010. The change was
primarily due to lower state and local taxes during the three months ended September 30, 2011 as
compared to the same period in 2010.
Loss from discontinued operations, net of tax was $0.3 million for the three months ended
September 30, 2010. There were no discontinued operations during the three months ended September
30, 2011.
44
Table of Contents
Operating Results
Comparison of Nine Months Ended September 30, 2011 to Nine Months Ended September 30, 2010
The following table presents our operating results for the nine months ended September 30,
2011 and 2010, including the amount and percentage change in these results between the two periods.
The consolidated operating results for the nine months ended September 30, 2011 is comparable to
the consolidated operating results for the nine months ended September 30, 2010, with the exception
of Mondrian Los Angeles, which we owned until May 3, 2011, Royalton and Morgans, which we owned
until May 23, 2011, Hard Rock, which we managed until March 1, 2011, Mondrian SoHo, which opened in
February 2011, the completion of the CGM Transaction in June 2011, resulting in our full ownership
of certain food and beverage operations previously owned through a 50/50 joint venture, and the
management of the San Juan Water and Beach Club, which terminated effective July 13, 2011. The
consolidated operating results are as follows:
Nine Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | Changes | Changes | |||||||||||||
2011 | 2010 | ($) | (%) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 90,951 | $ | 99,443 | $ | (8,492 | ) | (8.5 | )% | |||||||
Food and beverage |
49,216 | 51,062 | (1,846 | ) | (3.6 | ) | ||||||||||
Other hotel |
5,020 | 6,730 | (1,710 | ) | (25.4 | ) | ||||||||||
Total hotel revenues |
145,187 | 157,235 | (12,048 | ) | (7.7 | ) | ||||||||||
Management fee and other income |
10,112 | 14,079 | (3,967 | ) | (28.2 | ) | ||||||||||
Total revenues |
155,299 | 171,314 | (16,015 | ) | (9.3 | ) | ||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
29,122 | 31,377 | (2,255 | ) | (7.2 | ) | ||||||||||
Food and beverage |
41,901 | 42,526 | (625 | ) | (1.5 | ) | ||||||||||
Other departmental |
3,117 | 3,834 | (717 | ) | (18.7 | ) | ||||||||||
Hotel selling, general and administrative |
33,301 | 35,523 | (2,222 | ) | (6.3 | ) | ||||||||||
Property taxes, insurance and other |
12,136 | 12,461 | (325 | ) | (2.6 | ) | ||||||||||
Total hotel operating expenses |
119,577 | 125,721 | (6,144 | ) | (4.9 | ) | ||||||||||
Corporate expenses, including stock compensation |
25,920 | 27,270 | (1,350 | ) | (5.0 | ) | ||||||||||
Depreciation and amortization |
17,405 | 23,529 | (6,124 | ) | (26.0 | ) | ||||||||||
Restructuring, development and disposal costs |
10,518 | 2,930 | 7,588 | (1 | ) | |||||||||||
Impairment loss on receivables from
unconsolidated joint ventures |
| 5,499 | (5,499 | ) | (1 | ) | ||||||||||
Total operating costs and expenses |
173,420 | 184,949 | (11,529 | ) | (6.2 | ) | ||||||||||
Operating loss |
(18,121 | ) | (13,635 | ) | (4,486 | ) | 32.9 | |||||||||
Interest expense, net |
27,783 | 33,058 | (5,275 | ) | (16.0 | ) | ||||||||||
Equity in loss of unconsolidated joint venture |
23,187 | 9,437 | 13,750 | (1 | ) | |||||||||||
Gain on asset sales |
(1,721 | ) | | (1,721 | ) | (1 | ) | |||||||||
Other non-operating expenses |
2,885 | 35,491 | (32,606 | ) | (91.9 | ) | ||||||||||
Loss before income tax expense |
(70,255 | ) | (91,621 | ) | 21,366 | (23.3 | ) | |||||||||
Income tax expense |
523 | 994 | (471 | ) | (47.4 | ) | ||||||||||
Net loss from continuing operations |
(70,778 | ) | (92,615 | ) | 21,837 | (23.6 | ) | |||||||||
Income from discontinued operations, net of tax |
485 | 16,474 | (15,989 | ) | (97.1 | ) | ||||||||||
Net loss |
(70,293 | ) | (76,141 | ) | 5,848 | (7.7 | ) | |||||||||
Net loss attributable to non controlling interest |
2,007 | 2,033 | (26 | ) | (1.3 | ) | ||||||||||
Net loss attributable to Morgans Hotel Group Co. |
(68,286 | ) | (74,108 | ) | 5,822 | (7.9 | ) | |||||||||
Preferred stock dividends and accretion |
(6,701 | ) | (6,357 | ) | (344 | ) | (5.4 | ) | ||||||||
Net loss attributable to common stockholders |
$ | (74,987 | ) | $ | (80,465 | ) | $ | 5,478 | (6.8 | )% | ||||||
(1) | Not meaningful. |
45
Table of Contents
Total Hotel Revenues. Total hotel revenues decreased 7.7% to $145.2 million for the nine
months ended September 30, 2011 compared to $157.2 million for the nine months ended September 30,
2010. The components of RevPAR from our Owned Hotels, which consisted, as of September 30, 2011, of
Hudson, Delano South Beach and Clift, for the nine months ended September 30, 2011 and 2010 are
summarized as follows:
Nine Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | Change | Change | |||||||||||||
2011 | 2010 | ($) | (%) | |||||||||||||
Occupancy |
83.1 | % | 80.7 | % | | 3.0 | % | |||||||||
ADR |
$ | 239 | $ | 226 | $ | 13 | 5.8 | % | ||||||||
RevPAR |
$ | 199 | $ | 182 | $ | 17 | 8.9 | % |
RevPAR from our Owned Hotels increased 8.9% to $199 for the nine months ended September 30,
2011 compared to $182 for the nine months ended September 30, 2010.
Rooms revenue decreased 8.5% to $91.0 million for the nine months ended September 30, 2011
compared to $99.4 million for the nine months ended September 30, 2010. This decrease was primarily
due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the
operating results of these three hotels during all periods presented, our Owned Hotels rooms
revenue increased 9.1%, which was directly attributable to the increase in RevPAR, as presented
above.
Food and beverage revenue decreased 3.6% to $49.2 million for the nine months ended September
30, 2011 compared to $51.1 million for the nine months ended September 30, 2010. This decrease was
primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Slightly
offsetting this decrease was an increase related to the CGM Transaction and the consolidation of
previously unconsolidated food and beverage operations at our London hotels.
Other hotel revenue decreased 25.4% to $5.0 million for the nine months ended September 30,
2011 compared to $6.7 million for the nine months ended September 30, 2010. This decrease was
primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding
the operating results for these three hotels during all periods presented, our Owned Hotels other
hotel revenue decreased 12.6% primarily due to decreased revenues related to ancillary services,
such as our spa at Delano South Beach, as guests are still spending conservatively in light of the
uncertain economic recovery.
Management Fee and Other Income. Management fee and other income decreased by 28.2% to $10.1
million for the nine months ended September 30, 2011 compared to $14.1 million for the nine months
ended September 30, 2010. This decrease was primarily attributable to the termination of our
management agreement at Hard Rock effective March 1, 2011 in connection with the Hard Rock
settlement, as discussed further in note 4 to our consolidated financial statements.
Operating Costs and Expenses
Rooms expense decreased 7.2% to $29.1 million for the nine months ended September 30, 2011
compared to $31.4 million for the nine months ended September 30, 2010. This decrease was primarily
due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the
operating results of these three hotels during all periods presented, our Owned Hotels rooms
expense increased 11.1% as a result of the increase in occupancy, noted above. In addition, we
experienced an increase at Hudson related to the rooms renewal project, discussed above, and
increased travel agent commissions as rooms were sold through commissionable channels.
Food and beverage expense decreased 1.5% to $41.9 million for the nine months ended September
30, 2011 compared to $42.5 million for the nine months ended September 30, 2010. This decrease was
primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Partially
offsetting this decrease was an increase related to the CGM Transaction and the consolidation of
previously unconsolidated food and beverage operations at our London hotels.
Other departmental expense decreased 18.7% to $3.1 million for the nine months ended September
30, 2011 compared to $3.8 million for the nine months ended September 30, 2010. This decrease was
primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding
the operating results for these three hotels during all periods presented, our Owned Hotels
experienced a decrease of 9.2% as a direct result of the decrease in other hotel revenue noted
above.
Hotel selling, general and administrative expense decreased 6.3% to $33.3 million for the nine
months ended September 30, 2011 compared to $35.5 million for the nine months ended September 30,
2010. This
decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously
owned. Excluding the operating results of these hotels during all periods presented, our Owned
Hotels selling, general and administrative expense increased by 6.8% as a result of increased
selling and marketing initiatives implemented across our hotel portfolio.
46
Table of Contents
Property taxes, insurance and other expense decreased 2.6% to $12.1 million for the nine
months ended September 30, 2011 compared to $12.5 million for the nine months ended September 30,
2010. This slight decrease was primarily due to the impact of the sale in May 2011 of three hotels
we previously owned. Excluding the operating results of these three hotels during all periods
presented, our Owned Hotels property taxes, insurance and other expense increased 6.5% primarily
due to an increase in property tax assessments at Hudson during the nine months ended September 30,
2011 as compared to the same period in 2010.
Corporate expenses, including stock compensation decreased 5.0% to $25.9 million for the nine
months ended September, 2011 compared to $27.3 million for the nine months ended September 30,
2010. This decrease was primarily due to a decrease in stock compensation expense recognized during
the nine months ended September 30, 2011, primarily due to previously granted higher valued awards
becoming fully vested in 2010, as compared to the value of the awards vesting in 2011.
Depreciation and amortization decreased 26.0% to $17.4 million for the nine months ended
September 30, 2011 compared to $23.5 million for the nine months ended September 30, 2010. This
decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously
owned. Excluding the operating results of these three hotels during all periods presented, our
Owned Hotels depreciation and amortization increased 5.5% as a result of as a result of
depreciation on renovation and capital improvements at Hudson and Delano South Beach, which were
incurred during 2010 and 2011.
Restructuring, development and disposal costs increased to $10.5 million for the nine months
ended September 30, 2011 compared to $2.9 million for the nine months ended September 30, 2010. The
increase in expense was primarily due to severance costs related to employee and executive
restructurings incurred during the nine months ended September 30, 2011, for which there was no
comparable costs incurred during the nine months ended September 30, 2010.
Impairment loss on receivables from unconsolidated joint venture decreased to zero for the
nine months ended September 30, 2011 compared to $5.5 million for the nine months ended September
30, 2010. During 2010, we recorded an impairment charge on uncollectible receivables for which
there was no comparable charge during the nine months ended September 30, 2011.
Interest expense, net decreased 16.0% to $27.8 million for the nine months ended September 30,
2011 compared to $33.1 million for the nine months ended September 30, 2010. This decrease was
primarily due to the expiration in July 2010 of the interest rate swaps related to the loans
secured by the Hudson and Mondrian Los Angeles hotels, which had fixed our interest expense on
those loans during the nine months ended September 30, 2010 at a much higher rate than the rates
applicable during the nine months ended September 30, 2011. Partially offsetting this decrease was
an increase in financing fees incurred in 2011 related to the repayment of the mortgage and
mezzanine debt secured by Hudson and Mondrian Los Angeles and the restructuring of our revolving
credit facility.
Equity in loss of unconsolidated joint ventures increased to $23.2 million for the nine months
ended September 30, 2011 compared to $9.4 million for the nine months ended September 30, 2010.
During September 2011, we recognized a $10.6 million impairment loss on our investment in Ames, in
March 2011 we recognized additional impairment losses and expenses related to the Hard Rock
settlement, described in the notes to consolidated financial statements, and throughout 2011, we have recognized approximately $4.0 million in impairment losses
on our investment in Mondrian SoHo. In June 2010, we recorded an $8.3 million impairment charge on
our investment in Mondrian SoHo.
47
Table of Contents
The components of RevPAR from our comparable Joint Venture Hotels for the nine months ended
September 30, 2011 and 2010, which includes Sanderson, St Martins Lane, Shore Club, Mondrian South
Beach and Ames, but excludes the Hard Rock, which we managed until March 1, 2011, Mondrian SoHo,
which opened in February 2011, and San Juan Water and Beach Club in Isla Verde, Puerto Rico, which
we managed until July 13, 2011, are summarized as follows (in constant dollars):
Nine Months Ended | ||||||||||||||||
Sept. 30, | Sept. 30, | Change | Change | |||||||||||||
2011 | 2010 | ($) | (%) | |||||||||||||
Occupancy |
68.4 | % | 63.8 | % | | 7.1 | % | |||||||||
ADR |
$ | 313 | $ | 306 | $ | 7 | 2.1 | % | ||||||||
RevPAR |
$ | 214 | $ | 196 | $ | 18 | 9.4 | % |
Gain on asset sales resulted in income of $1.7 million for the nine months ended September 30,
2011. This income was related to the recognition of gains we recorded on the sales of Royalton,
Morgans and Mondrian Los Angeles in 2011. As we have significant continuing involvement with these
hotels through long-term management agreements, the gains on sales are deferred and recognized over
the initial term of the related management agreement. There were no comparable hotel sales in
2010.
Other non-operating expense decreased 91.9% to $2.9 million for the nine months ended
September 30, 2011 as compared to $35.5 million for the nine months ended September 30, 2010. The
decrease was primarily due to a change in accounting for warrants issued to the Investors, defined
below in Derivative Financial Instruments, in connection with the Series A preferred
securities. During the nine months ended September 30, 2010, we recorded $32.9 million of expense
related to these warrants for which there was no similar expense recorded during the nine months
ended September 30, 2011. For further discussion, see notes 2 and 8 of our consolidated financial
statements.
Income tax expense decreased 47.4% to $0.5 million for the nine months ended September 30,
2011 as compared to $1.0 million for the nine months ended September 30, 2010. The change was
primarily due to lower state and local taxes during the nine months ended September 30, 2011 as
compared to the same period in 2010.
Income from discontinued operations, net of tax resulted in income of $0.5 million for the
nine months ended September 30, 2011 compared to income of $16.5 million for the nine months ended
September 30, 2010. The income recorded in 2011 relates to the transfer of our ownership interests
in the property across the street from Delano South Beach to a third party. The income recorded in
2010 was primarily a result of the gain recognized on disposal of Mondrian Scottsdale in March
2010.
Liquidity and Capital Resources
As of September 30, 2011, we had approximately $12.8 million in cash and cash equivalents, and
the maximum amount of borrowings available under our new revolving
credit facility, was $100.0
million, of which $10.0 million of borrowings were outstanding and $10.0 million of letters of
credit were posted. As of September 30, 2011, total restricted cash was $7.1 million.
On October 7, 2011, we entered into the London Sale Agreement, as discussed above in Recent
Trends and Developments. The transaction is expected to close in the fourth quarter of 2011. We
anticipate receiving net proceeds of approximately $70.0 million from the sale.
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 by us or our consolidated subsidiaries
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, and capital commitments associated with certain of
our development projects and existing hotels.
We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as
determined pursuant to our debt or lease agreements related to such hotels, with the exception of
Delano South Beach. Our Joint Venture Hotels and our Managed Hotels generally are subject to
similar obligations under our management agreements or under debt agreements related to such
hotels. 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, the F&B Ventures require between 2% to 4% of gross revenues of the restaurant of
restricted cash to be to set aside for future replacement or refurbishment of furniture, fixtures
and equipment.
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We
intend to utilize the majority of our liquidity to fund
growth and development efforts, renovations at existing hotels and infrastructure improvements.
We are focused on growing our portfolio, primarily with our core brands, in major gateway
markets and key resort destinations. In August, we entered into a hotel management and residential licensing agreement for
a 310-room Mondrian-branded hotel, to be the lifestyle hotel destination in the 1,000 acre
destination resort metropolis, Baha Mar Resort, in Nassau, The Bahamas. The hotel is scheduled to
open in late 2014. We are required to fund approximately $10 million of key money just prior to and
at opening of the hotel. We have a $10.0 million standby letter of credit outstanding on the Delano
Credit Facility for up to 48 months to cover this obligation.
We intend to spend approximately $8 to $10 million on projects at Delano South Beach and
approximately $18 to $20 million at Hudson. At Delano South Beach, we plan to upgrade the exclusive bungalows and suites, improve
public areas, including the pool, restaurant and bar space, and create additional meeting space.
This work was begun in the third quarter of 2011 and will continue
into early 2012.
At
Hudson, we intend to convert a minimum of 23 single room dwelling units (SRO units) into guest rooms at a cost of approximately
$130,000 per room, significantly below recent trading prices of hotel rooms in New York
City. Additionally, we plan to upgrade the Hudson rooms with new furniture and fixtures, lighting
and technology, and completely renovate the hotel corridors. We anticipate the
renovation work will commence during New Yorks seasonally slow first quarter of 2012 continuing
through mid-year.
In addition to reserve funds for capital expenditures, our Owned Hotels debt and lease
agreements also require us to deposit cash into escrow accounts for taxes, insurance and debt
service payments.
Historically, we have satisfied our 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, or succeed in selling any assets, on terms acceptable to us or at all. We may
require additional borrowings to satisfy these liquidity requirements. See also Other Liquidity
Matters below for additional liquidity that may be required in the short-term, depending on market
and other circumstances.
Long-Term Liquidity Requirements. We generally consider our long-term liquidity requirements
to consist of those items that are expected to be incurred by us or our consolidated subsidiaries
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.
Our Series A preferred securities issued in October 2009 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 September 30, 2011, have not
declared any dividends. We have the option to redeem any or all of the Series A preferred
securities at any time.
Other long-term liquidity requirements include our obligations under our Convertible Notes,
defined below under Debt, our obligations under our trust preferred securities, and our
obligations under the Clift lease, each as described under Debt. Historically, we have
satisfied our long-term liquidity requirements through various sources of capital, including 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 challenging 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.
We anticipate we will need to renovate Clift in the next few years, which will require capital
and will most likely be funded by owner equity contributions, debt financing, possible asset sales,
future operating cash flows or a combination of these sources.
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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 Joint Venture Hotels, as discussed
below.
Mondrian South Beach Mortgage and Mezzanine Agreements. The non-recourse mortgage loan and
mezzanine loan agreements related to Mondrian South Beach matured on August 1, 2009. In April 2010,
the Mondrian South Beach joint venture amended the non-recourse financing and mezzanine loan
agreements secured by Mondrian South Beach and extended the maturity date for up to seven years
through extension options until April 2017, subject to certain conditions.
Morgans Group and affiliates of our joint venture partner have agreed to provide standard
non-recourse carve-out guaranties and provide certain limited indemnifications for the Mondrian
South Beach mortgage and mezzanine loans. In the event of a default, the lenders recourse is
generally limited to the mortgaged property or related equity interests, subject to standard
non-recourse carve-out guaranties for bad boy type acts. Morgans Group and affiliates of our
joint venture partner also agreed to guaranty the joint ventures obligation to reimburse certain
expenses incurred by the lenders and indemnify the lenders in the event such lenders incur
liability as a result of any third-party actions brought against Mondrian South Beach. Morgans
Group and affiliates of our joint venture partner have also guaranteed the joint ventures
liability for the unpaid principal amount of any seller financing note provided for condominium
sales if such financing or related mortgage lien is found unenforceable, provided they shall not
have any liability if the seller financed unit becomes subject again to the lien of the lender
mortgage or title to the seller financed unit is otherwise transferred to the lender or if such
seller financing note is repurchased by Morgans Group and/or affiliates of our joint venture at the
full amount of unpaid principal balance of such seller financing note. In addition, although
construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and
affiliates of our joint venture partner may have continuing obligations under construction
completion guaranties until all outstanding payables due to construction vendors are paid. As of
September 30, 2011, there are remaining payables outstanding to vendors of approximately $1.1
million. We believe that payment under these guaranties is not probable and the fair value of the
guarantee is not material.
We and affiliates of our joint venture partner also have an agreement to purchase
approximately $14 million each of condominium units under certain conditions, including an event of
default. In the event of a default under the mortgage or mezzanine loan, the joint venture partners
are obligated to purchase selected condominium units, at agreed-upon sales prices, having aggregate
sales prices equal to 1/2 of the lesser of $28.0 million, which is the face amount outstanding on
the mezzanine loan, or the then outstanding principal balance of the mezzanine loan. The joint
venture is not currently in an event of default under the mortgage or mezzanine loan. We have not
recognized a liability related to the construction completion or the condominium purchase
guarantees.
Mondrian SoHo. The mortgage loan on the Mondrian SoHo property matured in June 2010. On July
31, 2010, the lender amended the debt financing on the property to provide for, among other things,
extensions of the maturity date of the mortgage loan secured by the hotel to November 2011 with
extension options through 2015, subject to certain conditions including a minimum debt service
coverage test calculated, as defined, based on ratios of net operating income to debt service for
the three months ended September 30, 2011 of 1:1 or greater. The joint venture believes the hotel
has achieved the required 1:1 coverage ratio as of September 30,
2011 and subject to other customary
conditions,
the maturity of this debt can be extended to November 2012. The joint venture has additional
extension options available in 2012 subject to similar conditions including a minimum debt service
coverage test calculated, as defined, based on ratios of net operating income to debt service for
the twelve months ended September 30, 2012 of 1.1:1.0 or greater.
Certain affiliates of our joint venture partner have agreed to provide a standard non-recourse
carve-out guaranty for bad boy type acts and a completion guaranty to the lenders for the
Mondrian SoHo loan, for
which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to
20% of such entities guaranty obligations, provided that each party is fully responsible for any
losses incurred as a result of its respective gross negligence or willful misconduct.
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Mondrian SoHo opened in February 2011, and we are operating the hotel under a 10-year
management contract with two 10-year extension options. There may be cash shortfalls from the
operations of the hotel from time to time and there may not be enough operating cash flow to cover
debt service payments in all months going forward, which could require additional contributions by
the joint venture partners.
Ames in Boston. As of September 30, 2011, the ownership joint ventures outstanding mortgage
debt secured by the hotel was $46.5 million. In October 2010, the mortgage loan matured, and the
joint venture did not satisfy the conditions necessary to exercise the first of two remaining
one-year extension options available under the loan, which included funding a debt service reserve
account, among other things. As a result, the mortgage lender for Ames served the joint venture
with a notice of default and acceleration of debt. In February 2011, the joint venture reached an
agreement with the lender whereby the lender waived the default, reinstated the loan and extended
the loan maturity date until October 9, 2011. In September 2011, the joint venture partners funded
their pro rata shares of the debt service reserve account, of which our contribution was $0.3
million, and exercised the one remaining extension option available on the mortgage debt. As a
result, the mortgage debt secured by Ames will mature on October 9, 2012.
Other Possible Uses of Capital. We have a number of development projects signed or under
consideration, some of which may require equity investments, key money or credit support from us.
Comparison of Cash Flows for the Nine Months Ended September 30, 2011 to the Nine Months ended
September 30, 2010
Operating Activities. Net cash provided by operating activities was $11.2 million for the nine
months ended September 30, 2011 as compared to net cash used in operating activities of $22.8
million for the nine months ended September 30, 2010. This increase in cash was primarily due to a
release of deposits from the curtailment reserve escrow account as a result of our repayment of the
Hudson mortgage loan in August 2011.
Investing Activities. Net cash provided by investing activities amounted to $235.7 million for
the nine months ended September 30, 2011 as compared to net cash used in investing activities of
$14.0 million for the nine months ended September 30, 2010. The change was primarily related to the
net proceeds we received from the sale of Mondrian Los Angeles, Royalton and Morgans during May
2011 slightly offset by the purchase of joint venture interests in certain food and beverage
entities in the CGM Transaction.
Financing Activities. Net cash used in financing activities amounted to $239.3 million for the
nine months ended September 30, 2011 as compared to $2.2 million for the nine months ended
September 30, 2010. This increase in the use of cash was primarily due to the repayment of debt
associated with the three hotels we sold during May 2011 and the repayment of the Hudson mortgage
and mezzanine loans in August 2011, for which there was no comparable transaction during 2010.
Debt
Hudson Mortgage and Mezzanine Loan. On October 6, 2006, our subsidiary, Henry Hudson Holdings
LLC (Hudson Holdings), entered into a non-recourse mortgage financing secured by Hudson ( the
Hudson Mortgage), and another subsidiary entered into a mezzanine loan related to Hudson, secured
by a pledge of our equity interests in Hudson Holdings.
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Until amended as described below, the Hudson Mortgage bore interest at 30-day LIBOR plus
0.97%. We had entered into an interest rate swap on the Hudson Mortgage and the mezzanine loan on
Hudson which effectively fixed the 30-day LIBOR rate at approximately 5.0%. This interest rate swap
expired on July 15, 2010. We subsequently entered into a short-term interest rate cap on the Hudson
Mortgage that expired on September 12, 2010.
On October 1, 2010, Hudson Holdings entered into a modification agreement of the Hudson
Mortgage, together with promissory notes and other related security agreements, with Bank of
America, N.A., as trustee, for the lenders (the Amended Hudson Mortgage). This modification
agreement and related agreements extended the Hudson Mortgage until October 15, 2011. In connection
with the Amended Hudson Mortgage, on October 1, 2010, Hudson Holdings paid down a total of $16
million on its outstanding loan balances.
The interest rate on the Amended Hudson Mortgage was also amended to 30-day LIBOR plus 1.03%.
The interest rate on the Hudson mezzanine loan continued to bear interest at 30-day LIBOR plus
2.98%. We entered into interest rate caps expiring October 15, 2011 in connection with the Amended
Hudson Mortgage, which effectively capped the 30-day LIBOR rate at 5.3% on the Amended Hudson
Mortgage and effectively capped the 30-day LIBOR rate at 7.0% on the Hudson mezzanine loan.
The Amended Hudson Mortgage required our subsidiary borrower to fund reserve accounts to cover
monthly debt service payments. The subsidiary borrower was also required to fund reserves for
property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and
maintenance of Hudson. Reserves were deposited into restricted cash accounts and released as
certain conditions were met. In addition, all excess cash was required to be funded into a
curtailment reserve account. The subsidiary borrower was not permitted to have any liabilities
other than certain ordinary trade payables, purchase money indebtedness, capital lease obligations
and certain other liabilities.
On August 12, 2011, certain of our subsidiaries entered into the Hudson 2011 Mortgage Loan
with Deutsche Bank Trust Company Americas and the other institutions party thereto from time to
time, as lenders, consisting of two mortgage loans, each secured by Hudson and treated as a single
loan once disbursed, in the following amounts: (1) a $115.0 million mortgage loan that was funded
at closing, and (2) a $20.0 million delayed draw term loan, which will be available to be drawn
over a 15-month period, subject to achieving a debt yield ratio of at least 9.5% (based on net
operating income for the prior 12 months) after giving effect to each additional draw.
Proceeds from the Hudson 2011 Mortgage Loan, cash on hand and cash held in escrow were applied
to repay $201.2 million of outstanding mortgage debt under the Amended Hudson Mortgage, prior first
mortgage loan (the 2006 Hudson Mortgage Loan) secured by Hudsonandand andnn repay $26.5 million
of outstanding indebtedness under the Hudson mezzanine loan, and pay fees and expenses in
connection with the financing.
The Hudson 2011 Mortgage Loan bears interest at a reserve adjusted blended rate of 30-day
LIBOR (with a minimum of 1.0%) plus 400 basis points. We maintain an interest rate cap for the
amount of the Hudson 2011 Mortgage Loan that will cap the LIBOR rate on the debt under the Hudson
2011 Mortgage Loan at approximately 3.0% through the maturity date of the loan.
The Hudson 2011 Mortgage Loan matures on August 12, 2013. We have three one-year extension
options that will permit us to extend the maturity date of the Hudson 2011 Mortgage Loan to August
12, 2016 if certain conditions are satisfied at each respective extension date. The first two
extension options require, among other things, the borrowers to maintain a debt service coverage
ratio of at least 1-to-1 for the 12 months prior to the applicable extension dates. The third
extension option requires, among other things, the borrowers to achieve a debt yield ratio of at
least 13.0% (based on net operating income for the prior 12 months).
The Hudson 2011 Mortgage Loan provides that, in the event the debt yield ratio falls below
certain defined thresholds, all cash from the property is deposited into accounts controlled by the
lenders from which debt service, operating expenses and management fees are paid and from which
other reserve accounts may be funded. Any excess amounts are retained by the lenders until the
debt yield ratio exceeds the required thresholds for two consecutive calendar quarters.
Furthermore, if the Hudson manager is not reserving sufficient funds for property tax, ground rent,
insurance premiums, and capital expenditures in accordance with the hotel management agreement,
then our subsidiary borrowers would be required to fund the reserve account for such purposes. Our
subsidiary borrowers are not permitted to have any indebtedness other than certain permitted
indebtedness customary in such transactions, including ordinary trade payables, purchase money
indebtedness and capital lease obligations, subject to limits.
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The Hudson 2011 Mortgage Loan may be prepaid, in whole or in part, subject to payment of a
prepayment penalty for any prepayment prior to August 12, 2013. There is no prepayment premium
after August 12, 2013.
The Hudson 2011 Mortgage Loan contains restrictions on the ability of the borrowers to incur
additional debt or liens on their assets and on the transfer of direct or indirect interests in
Hudson and the owner of Hudson and other affirmative and negative covenants and events of default
customary for single asset mortgage loans. The Hudson 2011 Mortgage Loan is fully recourse to our
subsidiaries that are the borrowers under the loan. The loan is nonrecourse to us, Morgans Group
and our other subsidiaries, except for certain standard nonrecourse carveouts. Morgans Group has
provided a customary environmental indemnity and nonrecourse carveout guaranty under which it would
have liability with respect to the Hudson 2011 Mortgage Loan if certain events occur with respect
to the borrowers, including voluntary bankruptcy filings, collusive involuntary bankruptcy filings,
and violations of the restrictions on transfers, incurrence of additional debt, or encumbrances of
the property of the borrowers. The nonrecourse carveout guaranty requires Morgans Group to maintain
a net worth of at least $100 million (based on the estimated market value of our net assets) and
liquidity of at least $20 million.
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 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.
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 liability balance of $86.5 million at September 30, 2011.
Due to the amount of the payments stated in the lease, which increase periodically, and the
economic environment in which the hotel operates, 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 our subsidiary to make lease payments from time to time. On March 1, 2010,
however, we discontinued subsidizing the lease payments and stopped making the scheduled monthly
payments. On May 4, 2010, the lessors under the Clift ground lease filed a lawsuit against Clift
Holdings LLC, which the court dismissed on June 1, 2010. On June 8, 2010, the lessors filed a new
lawsuit and on June 17, 2010, we and our subsidiary filed an affirmative lawsuit against the
lessors.
On September 17, 2010, we and our subsidiaries entered into a settlement and release agreement
with the lessors under the Clift ground lease, which among other things, effectively provided for
the settlement of all outstanding litigation claims and disputes among the parties relating to
defaulted lease payments due with respect to the ground lease for the Clift and reduced the lease
payments due to the lessors for the period March 1, 2010 through February 29, 2012. Effective March
1, 2012, the annual rent will be as stated in the lease agreement, which currently provides for
base annual rent of approximately $6.0 million per year through October 2014 increasing thereafter,
at 5-year intervals by a formula tied to increases in the Consumer Price Index, with a maximum
increase of 40% and a minimum of 20% at October 2014, and at each payment date thereafter, the
maximum increase is 20% and the minimum is 10%. The lease is non-recourse to us. Morgans Group also
entered into a limited guaranty, whereby Morgans Group agreed to guarantee losses of up to $6
million suffered by the lessors in the event of certain bad boy type acts.
Convertible Notes. On October 17, 2007, we completed an offering of $172.5 million aggregate
principal amount of 2.375% Senior Subordinated Convertible Notes (Convertible Notes), in a
private offering, which included an additional issuance of $22.5 million in aggregate principal
amount of Convertible Notes as a result of the initial purchasers exercise in full of their
overallotment option. The Convertible Notes are senior subordinated unsecured obligations of the
Company and are guaranteed on a senior subordinated basis by our operating company, Morgans Group.
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).
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We follow 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 is
amortized over the period the debt is expected to remain outstanding as additional interest
expense. 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.
Amended Revolving Credit Facility. On October 6, 2006, we and certain of our subsidiaries
entered into a revolving credit facility with Wachovia Bank, National Association, as
Administrative Agent, and the lenders thereto, which was amended on August 5, 2009, and which we
refer to as our amended revolving credit facility.
The amended revolving credit facility provided for a maximum aggregate amount of commitments
of $125.0 million, divided into two tranches, which were secured by mortgages on Morgans, Royalton
and Delano South Beach.
The amended revolving credit facility bore 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.
On May 23, 2011, in connection with the sale of Royalton and Morgans, we used a portion of the
sales proceeds to retire all outstanding debt under the amended revolving credit facility. These
hotels, along with Delano South Beach, were collateral for the amended revolving credit facility,
which terminated upon the sale of any of the properties securing the facility.
Delano Credit Facility. On July 28, 2011, we and certain of our subsidiaries (collectively, the Borrowers), including Beach
Hotel Associates LLC (the Florida Borrower), entered into a secured
Credit Agreement (the Delano Credit Agreement), with Deutsche Bank Securities Inc. as sole lead
arranger, Deutsche Bank Trust Company Americas, as agent (the Agent), and the lenders party
thereto (the Lenders).
The Delano Credit Agreement provides commitments for a $100 million revolving credit facility
and includes a $15 million letter of credit sub-facility. The maximum amount of such commitments
available at any time for borrowings and letters of credit is determined according to a borrowing
base valuation equal to the lesser of (i) 55% of the appraised value of Delano (the Florida
Property) and (ii) the adjusted net operating income for the Florida Property divided by 11%.
Extensions of credit under the Delano Credit Agreement are available for general corporate
purposes. The commitments under the Delano Credit Agreement may be increased by up to an additional
$10 million during the first two years of the facility, subject to certain conditions, including
obtaining commitments from any one or more lenders to provide such additional commitments. The
commitments under the Delano Credit Agreement terminate on July 28, 2014, at which time all
outstanding amounts under the Delano Credit Agreement will be due and payable. Our availability
under the Delano Credit Agreement was $100.0 million as of September 30, 2011, of which $10.0
million of borrowings were outstanding, and approximately $10.0 million of letters of credit were
posted.
The obligations of the Borrowers under the Delano Credit Agreement are guaranteed by us. Such
obligations are also secured by a mortgage on the Florida Property and all associated assets of the
Florida Borrower, as well as a pledge of all equity interests in the Florida Borrower.
The interest rate applicable to loans under the Delano Credit Agreement is a floating rate of
interest per annum, at the Borrowers election, of either LIBOR (subject to a LIBOR floor of 1.00%)
plus 4.00%, or a base rate plus 3.00%. In addition, a commitment fee of 0.50% applies to the unused
portion of the commitments under the Delano Credit Agreement.
The Borrowers ability to borrow under the Delano Credit Agreement is subject to ongoing
compliance by us and the Borrowers with various customary affirmative and negative covenants,
including limitations on liens, indebtedness, issuance of certain types of equity, affiliated
transactions, investments, distributions, mergers and asset sales. In addition, the Delano Credit
Agreement requires that we and the Borrowers maintain a fixed charge coverage ratio (consolidated
EBITDA to consolidated fixed charges) of no less than (i) 1.05 to 1.00 at all
times on or prior to June 30, 2012 and (ii) 1.10 to 1.00 at all times thereafter. As of
September 30, 2011, our fixed charge coverage ratio was 1.59x.
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The Delano Credit Agreement also includes customary events of default, the occurrence of
which, following any applicable cure period, would permit the Lenders to, among other things,
declare the principal, accrued interest and other obligations of the Borrowers under the Delano
Credit Agreement to be immediately due and payable.
Hudson Capital Leases. We lease two condominium units at Hudson which are reflected as capital
leases with balances of $6.1 million at September 30, 2011. Currently annual lease payments total
approximately $900,000 and are subject to increases in line with inflation. The leases expire in
2096 and 2098.
Mondrian Los Angeles Mortgage. On October 6, 2006, our subsidiary, Mondrian Holdings LLC
(Mondrian Holdings), entered into a non-recourse mortgage financing secured by Mondrian Los
Angeles (the Mondrian Mortgage).
On October 1, 2010, Mondrian Holdings entered into a modification agreement of its Mondrian
Mortgage, together with promissory notes and other related security agreements, with Bank of
America, N.A., as trustee, for the lenders. This modification agreement and related agreements
amended and extended the Mondrian Mortgage (the Amended Mondrian Mortgage) until October 15,
2011. In connection with the Amended Mondrian Mortgage, on October 1, 2010, Mondrian Holdings paid
down a total of $17 million on its outstanding mortgage loan balance.
The interest rate on the Amended Mondrian Mortgage was also amended to 30-day LIBOR plus
1.64%. We entered into an interest rate cap which expired on October 15, 2011 in connection with
the Amended Mondrian Mortgage which effectively capped the 30-day LIBOR rate at 4.25%.
On May 3, 2011, we completed the sale of Mondrian Los Angeles for $137.0 million to Wolverines
Owner LLC, an affiliate of Pebblebrook. We applied a portion of the proceeds from the
sale, along with approximately $9.2 million of cash in escrow, to retire the $103.5 million
Mondrian Holdings Amended Mortgage.
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 recent global economic
downturn, the impact of seasonality in 2010 and to date through 2011, was not as significant as in
prior periods and may remain less pronounced throughout 2011 and into 2012 depending on the timing
and strength of the 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, 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 or lease agreements related to such hotels, with the exception of
Delano South Beach. Our Joint Venture Hotels and our Managed Hotels generally are subject to
similar obligations under our management agreements or under debt agreements related to such
hotels. These capital expenditures relate primarily to the periodic replacement or refurbishment of
furniture, fixtures and equipment. Such agreements typically require the hotel owners 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, the F&B Ventures require the ventures to set aside restricted cash of
between 2% to 4% of gross revenues of the restaurant. As of September 30, 2011, approximately $1.8
million was available in restricted cash reserves for future capital expenditures under these
obligations related to our Owned Hotels.
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We intend to spend approximately $8 to $10 million on projects at Delano South Beach and
approximately $18 to $20 million at Hudson. At Delano South Beach, we plan to upgrade the exclusive bungalows and suites, improve
public areas, including the pool, restaurant and bar space, and create additional meeting space.
This work was begun in the third quarter of 2011 and will continue into early 2012.
At
Hudson, we intend to convert a minimum of 23 SRO units into guest rooms at a cost of approximately $4
million, or $130,000 per room, significantly below recent trading prices of hotel rooms in New York
City. Additionally, we plan to upgrade the Hudson rooms with new furniture and fixtures, lighting
and technology, and install new carpeting and lighting in the hotel corridors. We anticipate the
renovation work will commence during New Yorks seasonally slow first quarter of 2012 continuing
through mid-year.
Additionally, we anticipate we will need to renovate Clift in the next few years which will
require capital and will most likely be funded by owner equity contributions, debt financing,
possible asset sales, future operating cash flows or a combination of these sources.
The Hudson 2011 Mortgage Loan provides that, in the event the debt yield ratio falls below
certain defined thresholds, all cash from the property is deposited into accounts controlled by the
lenders from which debt service, operating expenses and management fees are paid and from which
other reserve accounts may be funded. Any excess amounts are retained by the lenders until the
debt yield ratio exceeds the required thresholds for two consecutive calendar quarters.
Furthermore, if the Hudson manager is not reserving sufficient funds for property tax, ground rent,
insurance premiums, and capital expenditures in accordance with the hotel management agreement,
then our subsidiary borrowers would be required to fund the reserve account for such purposes. Our
subsidiary borrowers are not permitted to have any indebtedness other than certain permitted
indebtedness customary in such transactions, including ordinary trade payables, purchase money
indebtedness and capital lease obligations, subject to limits.
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.
We use some derivative financial instruments, primarily interest rate caps, to manage our
exposure to interest rate risks related to our floating rate debt. We do not use derivatives for
trading or speculative purposes and only enter into contracts with major financial institutions
based on their credit rating and other factors. The fair value of our interest rate caps was
insignificant as of September 30, 2011.
In connection with the sale of the Convertible Notes, 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.
On October 15, 2009, we entered into a securities purchase agreement with Yucaipa American
Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P., which we refer to
collectively as the Investors. Under the securities purchase agreement, we issued and sold to the
Investors (i) 75,000 shares of the our Series A preferred securities, $1,000 liquidation preference
per share, and (ii) warrants to purchase
12,500,000 shares of the Companys 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 price and number of shares subject to the warrant
are both subject to anti-dilution adjustments.
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We and Yucaipa American Alliance Fund II, LLC, an affiliate of the Investors, as the fund
manager, also entered into a real estate fund formation agreement on October 15, 2009 pursuant to
which we and the fund manager agreed to use good faith efforts to endeavor to raise a private
investment fund. In connection with the 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.
The fund formation agreement terminated by its terms on January 30, 2011 due to the failure to
close a fund with $100 million of aggregate capital commitments by that date, and the 5,000,000
contingent warrants issued to the fund manager were forfeited in their entirety on October 15, 2011
due to the failure to close a fund with $250 million of aggregate capital commitments by that date.
Off-Balance Sheet Arrangements
As of September 30, 2011, we have unconsolidated joint ventures that we account for using the
equity method of accounting, most of which have mortgage or related debt, as described below. In
some cases, we provide non-recourse carve-out guaranties of joint venture debt, which guaranty is
only triggered in the event of certain bad boy acts, and other limited liquidity or credit
support, as described below.
Morgans Europe. As of September 30, 2011, we owned 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.
On July 15, 2010, Morgans Europe venture refinanced in full its then outstanding £99.3 million
mortgage debt with a new £100 million loan maturing in July 2015 that is non-recourse to us and is
secured by Sanderson and St Martins Lane. As of September 30, 2011, Morgans Europe had outstanding
mortgage debt of £99.3 million, or approximately $154.8 million at the exchange rate of 1.56 US
dollars to GBP at September 30, 2011. As discussed above in Recent Trends and Developments,
in October 2011, we and Walton MG London entered into the London Sale Agreement to sell the equity
interests in Morgans Europe for an aggregate of £192 million. The transaction is expected to
close in the fourth quarter of 2011 and is subject to customary closing conditions. We expect to
receive net proceeds of approximately $70 million, depending on
foreign currency exchange rates and working capital adjustments, after Morgans Europe applies a portion of the
proceeds from the sale to repay this outstanding debt. After completion of the sale, we will
continue to manage the hotels under long-term management agreements.
Morgans Europes net income or loss and cash distributions or contributions are allocated to
the partners in accordance with ownership interests. At September 30, 2011, we had a negative
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 $0.5 million
and income of $1.0 million for the three months ended September 30, 2011 and 2010, respectively,
and income of $1.4 million and $2.5 million for the nine months ended September 30, 2011 and 2010,
respectively.
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.
In April 2010, the Mondrian South Beach joint venture amended its non-recourse financing
secured by the property and extended the maturity date for up to seven years, through extension
options until April 2017, subject to certain conditions. In April 2010, in connection with the loan
amendment, 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. As of
September 30, 2011, the joint ventures outstanding mortgage and
mezzanine debt was $87.5 million, which
does not include the $28.0 million mezzanine loan provided by the joint venture partners, which in
effect is on par with the lenders mezzanine debt.
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Morgans Group and affiliates of our joint venture partner have agreed to provide standard
non-recourse carve-out guaranties and provide certain limited indemnifications for the Mondrian
South Beach mortgage and mezzanine loans. In the event of a default, the lenders recourse is
generally limited to the mortgaged property
or related equity interests, subject to standard non-recourse carve-out guaranties for bad
boy type acts. Morgans Group and affiliates of our joint venture partner also agreed to guaranty
the joint ventures obligation to reimburse certain expenses incurred by the lenders and indemnify
the lenders in the event such lenders incur liability as a result of any third-party actions
brought against Mondrian South Beach. Morgans Group and affiliates of our joint venture partner
have also guaranteed the joint ventures liability for the unpaid principal amount of any seller
financing note provided for condominium sales if such financing or related mortgage lien is found
unenforceable, provided they shall not have any liability if the seller financed unit becomes
subject again to the lien of the lenders mortgage or title to the seller financed unit is
otherwise transferred to the lender or if such seller financing note is repurchased by Morgans
Group and/or affiliates of our joint venture at the full amount of unpaid principal balance of such
seller financing note. In addition, although construction is complete and Mondrian South Beach
opened on December 1, 2008, Morgans Group and affiliates of our joint venture partner may have
continuing obligations under construction completion guaranties until all outstanding payables due
to construction vendors are paid. As of September 30, 2011, there are remaining payables
outstanding to vendors of approximately $1.1 million. We believe that payment under these
guaranties is not probable and the fair value of the guarantee is not material. For further
discussion, see note 4 of our consolidated financial statements.
The Mondrian South Beach joint venture was determined to be a variable interest entity as
during the process of refinancing the ventures mortgage in April 2010, its equity investment at
risk was considered insufficient to permit the entity to finance its own activities. In April 2010,
each of the joint venture partners provided an additional $2.75 million of mezzanine financing to
the joint venture in order to complete a refinancing of the outstanding mortgage debt of the
venture. We determined that we are not the primary beneficiary of this variable interest entity as
we do not have a controlling financial interest in the entity. Our maximum exposure to losses as
result of our involvement in the Mondrian South Beach variable interest entity is limited to our
current investment, outstanding management fee receivable and advances in the form of mezzanine
financing. We have not committed to providing financial support to this variable interest entity,
other than as contractually required and all future funding is expected to be provided by the joint
venture partners in accordance with their respective ownership interests in the form of capital
contributions or mezzanine financing, or by third parties.
We account for this investment under the equity method of accounting. At September 30, 2011,
our investment in Mondrian South Beach was $3.3 million. Our equity in loss of Mondrian South Beach
was $1.0 million and $1.6 million for the three months ended September 30, 2011 and 2010,
respectively. Our equity in loss of Mondrian South Beach was $2.5 million and $1.8 million for the
nine months ended September 30, 2011 and 2010, respectively.
Ames in Boston. On June 17, 2008, we, Normandy Real Estate Partners, and 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 September 30,
2011, we had an approximately 31% economic interest in the joint venture.
As of September 30, 2011, the joint ventures outstanding mortgage debt secured by the hotel
was $46.5 million. In September 2011, the joint venture partners funded their pro rata shares of the debt service
reserve account, of which our contribution was $0.3 million, and exercised the one remaining
extension option available on the mortgage debt. As a result, the mortgage debt secured by Ames
will mature October 9, 2012.
Based on current economic conditions and the October 2012 mortgage debt maturity, we wrote down
our investment in Ames in September 2011 and recorded an impairment charge through equity in loss
of unconsolidated joint ventures of $10.6 million.
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Our equity in loss of Ames was $10.6 million and $0.1 million for the three months ended
September 30, 2011 and 2010, respectively. Our equity in loss of Ames was $11.1 million and $0.6
million for the nine months ended September 30, 2011 and 2010, respectively.
Mondrian SoHo. In June 2007, we contributed approximately $5.0 million for a 20% equity
interest in a joint venture with Cape Advisors Inc. to develop a Mondrian hotel in the SoHo
neighborhood of New York. The joint venture obtained a loan of $195.2 million to acquire and
develop the hotel. We subsequently loaned an additional $4.3 million to the joint venture. As a
result of the decline in general market conditions and real estate values since the inception of
the joint venture, and more recently, the need for additional funding to complete the hotel, in
June 2010, we wrote down our investment in Mondrian SoHo to zero. All of our subsequent fundings in
2010 and 2011, all of which are in the form of loans, have been impaired, and as of September 30,
2011, our investment balance in Mondrian SoHo is zero.
The mortgage loan on the property 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 to November 2011 with extension options through 2015, subject to certain conditions
including a minimum debt service coverage test calculated, as defined, based on ratios of net
operating income to debt service for the three months ended September 30, 2011 of 1:1 or greater.
The joint venture believes the hotel has achieved the required 1:1 coverage ratio as of
September 30, 2011 and subject to other customary conditions,
the maturity of this debt can be extended to November
2012. The joint venture has additional extension options available in 2012 subject to similar
conditions including a minimum debt service coverage test calculated, as defined, based on ratios
of net operating income to debt service for the twelve months ended
September 30, 2012 of 1.1:1.0 or
greater.
Certain affiliates of our joint venture partner have agreed to provide a standard non-recourse
carve-out guaranty for bad boy type acts and a completion guaranty to the lenders for the
Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and
its affiliates up to 20% of such entities guaranty obligations, provided that each party is fully
responsible for any losses incurred as a result of its respective gross negligence or willful
misconduct.
In July 2010, the joint venture partners each agreed to provide additional funding to the
joint venture in proportionate to their equity interest in order to complete the project. At that
time, the Mondrian SoHo joint venture was determined to be a variable interest entity as its equity
investment at risk was considered insufficient to permit the entity to finance its own activities.
Further, we determined that we were not the primary beneficiary of this variable interest entity as
we do not have a controlling financial interest in the entity. In February 2011, the hotel opened
and as such, we determined that the joint venture was an operating business.
We continue to account for our investment in Mondrian SoHo using the equity method of
accounting. The loss we recorded, due to impairment charges and operating results, on our
investment in Mondrian SoHo was $1.6 million and $0.7 million for the three months ended September
30, 2011 and 2010, respectively, and $4.0 million and $9.0 million for the nine months ended
September 30, 2011 and 2010, respectively.
Mondrian SoHo opened in February 2011, and we are operating the hotel under a 10-year
management contract with two 10-year extension options.
Shore Club. As of September 30, 2011, 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 in U.S. federal district court. In October 2010, the federal court dismissed the case for
lack of jurisdiction. In November 2010, the lender initiated foreclosure proceedings in state
court. We continue to operate the hotel pursuant to the management agreement during these
proceedings. However, there can be no assurances we will continue to operate the hotel once
foreclosure proceedings are complete.
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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. 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 consider properties to be assets held for sale when management approves and commits to a
formal plan to actively market a property or group of properties for sale and the sale is probable.
Upon designation as an asset held for sale, we record the carrying value of each property or group
of properties at the lower of its carrying value, which includes allocable goodwill, or its
estimated fair value, less estimated costs to sell, and we stop recording depreciation expense. Any
gain realized in connection with the sale of the properties for which we has significant continuing
involvement, such as through a long-term management agreement, is deferred and recognized over the
initial term of the related management agreement. The operations of the properties held for sale
prior to the sale date are recorded in discontinued operations unless we have continuing
involvement, such as through a management agreement, after the sale.
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, 2010.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Quantitative and Qualitative Disclosures About Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent
upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes
in market prices and interest rates. Some of our outstanding debt has a variable interest rate. As
described in Managements Discussion and Analysis of Financial Results of Operations Derivative
Financial Instruments above, we use some derivative financial instruments, primarily interest rate
caps, to manage our exposure to interest rate risks related to our floating rate debt. We do not
use derivatives for trading or speculative purposes and only enter into contracts with major
financial institutions based on their credit rating and other factors. As of September 30, 2011,
our total outstanding consolidated debt, including capital lease obligations, was approximately
$433.3 million, of which approximately $125.0 million, or 28.9%, was variable rate debt. At
September 30, 2011, the one month LIBOR rate was 0.24%.
As of September 30, 2011, the $125.0 million of variable rate debt consists of our outstanding
balances of $115.0 million on the Hudson Mortgage Loan and $10.0 million on the Delano Credit Facility. In connection
with the Hudson 2011 Mortgage Loan, an interest rate cap for 3.0% in the amount of approximately
$135.0 million, the full amount available under the mortgage after certain hurdles are met, as
discussed above in Debt, was entered into in August 2011, and was outstanding as of September
30, 2011. This interest rate cap matures in August 2013. As of September 30, 2011, we have $115.0
million outstanding on the Hudson 2011 Mortgage Loan. If market rates of interest on this $115.0
million 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 $1.2 million annually and the
maximum annual amount the interest expense would increase on this variable rate debt is $3.2
million due to our interest rate cap agreement, which would reduce future pre-tax earnings and cash
flows by the same amount annually. If market rates of interest on this $115.0 million variable rate
decrease by 1.0%, the decrease in interest expense would increase pre-tax earnings and cash flow by
approximately $1.2 million annually.
The Delano Credit facility does not have
a derivative financial instrument associated with it. If market rates of interest on the $10.0 million or variable rate debt outstanding on the
Delano Credit Facility increase by 1.0%, or 100 basis points, the increase in interest expense
would reduce future pre-tax earnings and cash flows by approximately $0.1 million annually. If
market rates of interest on this $10.0 million variable rate decrease by 1.0%, the decrease in
interest expense would increase pre-tax earnings and cash flow by approximately $0.1 million
annually.
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As
of September 30, 2011, our fixed rate debt, excluding capital
lease obligations, of $302.2
million consisted of the trust notes underlying our trust preferred securities, the Convertible
Notes, 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 at September 30, 2011 would decrease by approximately $27.6 million.
If market rates of interest decrease by 1.0%, or 100 basis points, the fair value of our fixed rate
debt at September 30, 2011 would increase by $33.2 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 caps and hedging instruments related to the Convertible Notes, providing that in
the event we either default or are capable of being declared in default on any of our indebtedness,
then we could also be declared in default on our derivative obligations.
Currency Exchange Risk
As we have international operations with our two London hotels and the hotel we manage in
Mexico, currency exchange risks between the U.S. dollar and the British pound and the U.S. dollar
and Mexican peso, respectively, arise as a normal part of our business. We reduce these risks by
transacting these businesses in their local currency. As of September 30, 2011, we had a 50%
ownership in Morgans Europe, and a change in prevailing rates would have an impact on the value of
our equity in Morgans Europe. A change in the exchange rate between the U.S. dollar and the British
pound would also impact the amount of proceeds that we expect from the sale of our interests in
Morgans Europe, which is expected to close in the fourth quarter of 2011. The U.S. dollar/British
pound and U.S. dollar/Mexican peso currency exchanges are currently the only currency exchange
rates to which we are directly exposed.
In connection with the London Sale Agreement, on November 2, 2011, Walton MG London, on behalf of
itself and us,
entered into a foreign currency forward contract to effectively fix
the currency conversion rate on
half of the expected net sales proceeds at an exchange rate of 1.592 US dollars to GBP.
Generally, we do not enter into forward or option contracts to manage our exposure applicable
to day-to-day 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,
with the exception of the transactions contemplated by the London Sale Agreement, in connection with which
we entered into a foreign currency forward contract, as discussed above
due to the material nature of the transaction.
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 September 30, 2011 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. |
Litigation
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 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 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
alleged 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 pursuant to the guaranty. Petra demanded 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 would have recourse liability under the guaranty. On May
27, 2010, we answered Petras complaint, denying any obligation to make payment under the guaranty.
On July 9, 2010, Petra moved for summary judgment on the ground that the loan documents
unambiguously establish Morgans Groups obligation under the guaranty. We opposed Petras motion
for summary judgment, and cross-moved for summary judgment in favor of us on grounds that the
guaranty was not triggered by a foreclosure resulting from a payment default. On December 20, 2010,
the court granted our motion for summary judgment dismissing the complaint, and denied the
plaintiffs motion for summary judgment. Petra thereafter appealed the decision. On May 19, 2011,
the appellate court unanimously affirmed the trial courts grant of summary judgment in our favor
and the dismissal of Petras complaint. Petra then petitioned the New York Court of Appeals for
permission to appeal further and we opposed that petition. On September 22, 2011, the Court of
Appeals denied Petras request for leave to appeal.
Other Litigation
We are involved in various lawsuits and administrative actions in the normal course of
business. In managements opinion, disposition of these lawsuits is not expected to have a material
adverse effect on our financial position, results of operations or liquidity.
ITEM 1A. | RISK FACTORS. |
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2010. These risks and uncertainties have the potential to materially
affect our business, financial condition, results of operations, cash flows, projected results and
future prospects.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | REMOVED AND 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.
Morgans Hotel Group Co. | ||||
/s/ Michael J. Gross
|
||||
Chief Executive Officer | ||||
/s/ Richard Szymanski
|
||||
Chief Financial Officer and Secretary |
November 9, 2011
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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 | 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) |
|||
4.5 | 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) |
|||
4.6 | 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) |
|||
4.7 | Indenture related to the Senior Subordinated Convertible Notes
due 2014, dated as of October 17, 2007, by and among Morgans
Hotel Group Co., Morgans Group LLC and The Bank of New York, as
trustee (including form of 2.375% Senior Subordinated
Convertible Note due 2014) (incorporated by reference to Exhibit
4.1 of the Companys Current Report on Form 8-K filed on October
17, 2007) |
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Exhibit | ||||
Number | Description | |||
4.8 | 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) |
|||
4.9 | Registration Rights Agreement, dated as of October 17, 2007,
between Morgans Hotel Group Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to
Exhibit 4.2 of the Companys Current Report on Form 8-K filed on
October 17, 2007) |
|||
4.10 | Form of Warrant for Warrants issued under Securities Purchase
Agreement to Yucaipa American Alliance Fund II, L.P. and Yucaipa
American Alliance (Parallel) Fund II, L.P. (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on Form
8-K filed on October 16, 2009) |
|||
4.11 | Warrant, dated October 15, 2009, issued to Yucaipa American
Alliance Fund II, LLC (incorporated by reference to Exhibit 4.2
to the Companys Current Report on Form 8-K filed on October 16,
2009) |
|||
4.12 | Warrant, dated October 15, 2009, issued to Yucaipa American
Alliance Fund II, LLC (incorporated by reference to Exhibit 4.3
to the Companys Current Report on Form 8-K filed on October 16,
2009) |
|||
4.13 | Form of Amended Common Stock Purchase Warrants issued under
Securities Purchase Agreement to Yucaipa American Alliance Fund
II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P.
(incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K filed on December 14, 2009) |
|||
4.14 | Amendment No. 1 to Common Stock Purchase Warrant issued under
the Real Estate Fund Formation Agreement to Yucaipa American
Alliance Fund II, LLC, dated as of December 11, 2009
(incorporated by reference to Exhibit 4.2 to the Companys
Current Report on Form 8-K filed on December 14, 2009) |
|||
4.15 | Amendment No. 1 to Common Stock Purchase Warrant issued under
the Real Estate Fund Formation Agreement to Yucaipa American
Alliance Fund II, LLC, dated as of December 11, 2009
(incorporated by reference to Exhibit 4.3 to the Companys
Current Report on Form 8-K filed on December 14, 2009) |
|||
10.1 | * | Amendment No. 2 to Amended and Restated Limited Liability
Company Agreement of Morgans Group LLC, dated as of September
15, 2011 and effective as of October 15, 2009 |
||
10.2 | * | Amendment No. 3 to Amended and Restated Limited Liability
Company Agreement of Morgans Group LLC, dated as of September
15, 2011 |
||
10.3 | * | Loan and Security Agreement, dated as of August 12, 2011, by and
among Henry Hudson Holdings LLC, 58th Street Bar
Company LLC and Hudson Leaseco LLC (collectively, the Borrower),
the institutions from time to time a party thereto, as Lenders,
and Deutsche Bank Trust Company Americas, as Administrative
Agent for Lenders |
||
10.4 | * | Amended, Restated and Consolidated Mortgage, Assignment of
Leases and Rents, Hotel Revenue and Security Agreement, dated as
of August 12, 2011, by Henry Hudson Holdings LLC, Hudson Leaseco
LLC and 58th Street Bar Company LLC, for the benefit
of Deutsche Bank Trust Company Americas, as Administrative Agent
for the benefit of the lenders from time to time party to the
Loan and Security Agreement |
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Exhibit | ||||
Number | Description | |||
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. |
66