Strong RevPAR Growth - Significant EBITDA Growth
Highlights
For the third quarter 2007, revenue per available room ('RevPAR') for Comparable Hotels1 increased by 11.5% from the third quarter 2006. The increase was driven by growth in both average daily rate ('ADR') and occupancy. Comparable Hotel ADR rose by 9.0% to $321.94 and occupancy grew by 2.3% to 80.8% for the third quarter. Adjusted earnings before interest, taxes, depreciation and amortization ('Adjusted EBITDA,' as further described below) increased by 34% from the prior year period to $24.0 million. Excluding the results of Royalton, which was closed for renovation during the quarter, Adjusted EBITDA rose by 46%. Adjusted EBITDA margins at Comparable Hotels increased by approximately 100 basis points as compared to the third quarter 2006.
MHG is making significant progress with the repositioning of its existing assets. Royalton in New York held its grand reopening in October with more luxurious rooms, a redesigned lobby and an exciting new restaurant. At Delano in South Beach, MHG is completing the renovation of the remaining 30% of rooms this month, completing the upgrade of the spa and gym, and building a new nightclub designed by Lenny Kravitz and Kravitz Design. MHG also began the renovation of Mondrian in Los Angeles in September, with a second quarter 2008 target completion date. In September, MHG opened a new Bungalow 8 nightclub at St Martins Lane in London. MHG intends to continue to capitalize on opportunities to add value to existing hotels including planned renovations of Morgans and the utilization of excess space at Hudson in New York.
'With the combination of strong Comparable Hotel operating growth, new projects underway and increased financial capacity, we believe we are well positioned for the future,' said David T. Hamamoto, Chairman of MHG. 'Since July, we have completed new financings which have raised over $200 million of net proceeds and positioned MHG for further growth. We have a well-defined growth plan, with a primary focus on our Mondrian and Delano brands. We now have six Mondrian hotels and two Delano hotels open or under development. We believe our business model of growing through minority equity investments with partners coupled with long-term management agreements should generate high returns on investment, with management fees alone having the potential to yield a significant return on invested capital.'
'We achieved another quarter of outstanding results, which reflects the strength of our brands and our presence in favorable markets,' said Fred Kleisner, interim President and Chief Executive Officer of MHG. 'RevPAR growth at our Comparable Hotels during the third quarter was once again well in excess of industry averages, and our new and renovated properties are further accelerating our growth.'
Third Quarter Operating Results
RevPAR for MHG's Comparable Hotels was $260.13, an increase of 11.5%, or 9.6% excluding the effects of currency fluctuations ('Constant Dollars'), for the third quarter 2007 over the comparable period in 2006. The growth in RevPAR was driven by strong market trends in Miami, New York and San Francisco. MHG's hotels benefited from both strong business and leisure demand, including an increase in foreign travel in MHG's key gateway markets in the quarter. The Delano hotel in South Beach continues to achieve high RevPAR growth following its partial renovation last year with RevPAR rising by 15.9% in the third quarter and 16.1% year to date. The Royalton hotel in New York was closed for renovations starting in June and just re-opened in October. During the last two weeks of October, when all the rooms were back in service, ADR was up 20.5% over the same period in October 2006.
At our new hotels, Hard Rock and Mondrian Scottsdale, MHG achieved significant ADR increases due to the implementation of revenue management strategies. For the third quarter 2007, Hard Rock achieved a 96.1% occupancy rate and a $226.48 ADR. This represents a 13.5% increase in ADR and an 11.6% increase in RevPAR over the comparable period last year when it was operated by prior management.
MHG recorded a net loss of $10.0 million for the third quarter of 2007, compared to a net loss of $0.7 million for the third quarter of 2006. Results included a non-cash charge for stock compensation expense of $7.3 million and other costs of $2.5 million in connection with the resignation of MHG's former CEO.
Balance Sheet and Financing
As of September 30, 2007, consolidated debt, which includes long-term debt and capital lease obligations, was $581.1 million including $79.4 million of lease obligations related to Clift. Approximately 95% of MHG's long-term debt at September 30, 2007 was at fixed rates, either directly or as a result of hedging arrangements.
On July 25, 2007, MHG completed a stock offering of 12.2 million shares at a price of $22.50, which included 2.8 million shares sold by MHG and 9.4 million shares sold by certain selling stockholders. MHG realized $59.5 million in net proceeds.
As of September 30, 2007, MHG had approximately $235.7 million invested in non-EBITDA producing assets including consolidated assets, equity investments in joint ventures and its proportionate share of joint venture debt. These projects included Mondrian South Beach, excess land and branding rights at Hard Rock, Mondrian Las Vegas, Delano Las Vegas, the Delano expansion, Mondrian SoHo and Mondrian Chicago.
On October 17, 2007, MHG issued $172.5 million of its 2.375% Senior Subordinated Convertible Notes (the 'Notes') in a private offering. The Notes are senior subordinated unsecured obligations of MHG and can be converted into shares of MHG's common stock under certain circumstances and upon the occurrence of specified events. The Notes are guaranteed on an unsecured senior subordinated basis by MHG's operating company, Morgans Group LLC. Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2008.
In connection with the issuance of the Notes, MHG entered into convertible note hedge and warrant transactions (the 'Hedge Transactions'). The Hedge Transactions are intended to reduce the potential dilution to holders of MHG common stock upon conversion of the Notes and generally have the effect of increasing the conversion price from the initial price of $26.89 up to approximately $40.00 per share. The net price paid for the Hedge Transactions was $24.1 million. MHG received net proceeds from the Notes offering of $142.7 million after fees and expenses and the net cost of the Hedge Transactions, and utilized $25.0 million to repay all outstanding borrowings under the revolving credit facility with the remainder available for general corporate purposes.
Guidance For 2007
The statements below represent MHG's outlook for its business for the fiscal year ending December 31, 2007. Based upon the third quarter 2007 results and upon MHG's expectations for continued growth in the U.S. economy, moderate inflation levels, moderate hotel supply growth, demand growth in the luxury lodging sector and in particular, in MHG's markets, MHG is maintaining its Comparable Hotel RevPAR growth target and reiterating its total revenues and Adjusted EBITDA expectations for the full year 2007 as follows:
2007 Guidance:
Comparable Hotel RevPAR Growth: 9% to 11%
Total Revenues: In excess of $300 million
Adjusted EBITDA: In excess of $110 million
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