Morgans Hotel Group Co. (NASDAQ: MHGC) ('MHG') today reported financial results for the fourth quarter and year ended December 31, 2007, highlighted by double digit increases in revenue per available room ('RevPAR'), higher operating margins and new unit growth.
Highlights
• RevPAR for Comparable Hotels1 increased by 14.1% from the fourth quarter 2006, driven by 10.4% growth in average daily rate ('ADR').
• Adjusted earnings before interest, taxes, depreciation and amortization ('Adjusted EBITDA,' as further described below) increased by 30.2% from the prior year period to $34.2 million, despite having three owned hotels in various stages of renovation.
• Operating margins at Comparable Hotels increased by 230 basis points as compared to the fourth quarter of 2006.
• The Company raised $142.7 million in cash from the issuance of convertible notes.
• Since the beginning of the fourth quarter, the Company has repurchased 2.8 million shares of its stock for nearly $50 million.
• The grand reopening of the Royalton in New York was held in October 2007 with upgraded luxurious rooms, a redesigned lobby and an exciting new restaurant. ADR increased by 20.8% in the fourth quarter of 2007 as compared to the same period in the prior year.
• The upgrades at Delano in South Beach were completed, which included the renovation of the remaining 30% of rooms, the complete renovation of the Agua spa, a new fitness center, and the addition of the Florida room, MHG's new lounge designed by Lenny Kravitz and Kravitz Design.
• The Company received a gaming license from the Nevada Gaming Commission in January 2008 and began operating the casino at Hard Rock in March 2008.
• In January 2008, the Company entered into an agreement to manage a Mondrian hotel in Palm Springs, California, bringing the number of Mondrian hotels open or under development to seven.
1 'Comparable Hotels' includes all hotels operated by MHG except for hotels added during or after the relevant comparison period for the prior year, hotels under renovation and development projects. Comparable Hotels for the fourth quarter 2007 excludes Royalton, which was closed for renovation from June 2007 through early October 2007, Mondrian LA, which was under renovation in the fourth quarter of 2007, Mondrian Scottsdale, which was added in May 2006 and under renovation in 2006, and the Hard Rock Hotel & Casino in Las Vegas ('Hard Rock'), which was added in February 2007.
'Our results for the quarter were outstanding, with RevPAR growth once again well in excess of industry averages,' said Fred Kleisner, President and Chief Executive Officer of MHG. 'Our customers' reaction to our recent upgrades at Delano and Royalton has been exceptional as proven by our ability to drive higher room rates. Encouraged by the early returns on these hotels, we are looking forward to our repositioning projects at Mondrian LA, Morgans and Hard Rock this year.'
'We believe we are well positioned to navigate the current economic environment and to continue to grow the company. Our gateway markets are generally characterized by diversity in demand including the ability to attract foreign travel and minimal growth in supply. The luxury market has been the best performer over the past several years and we benefit from the strength of our brands and the uniqueness of our product. We have a well-defined growth plan, with a primary focus on adding new Mondrian and Delano hotels and repositioning and utilizing excess capacity at existing hotels. With recent financings in 2007 that raised approximately $200 million in net cash proceeds, we anticipate funding our committed pipeline through existing cash balances and free cash flow.'
'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.'
Fourth Quarter Operating Results
RevPAR for MHG's Comparable Hotels was $327.87, an increase of 14.1%, or 12.4% excluding the effects of currency fluctuations ('Constant Dollars'), for the fourth quarter 2007 over the comparable period in 2006. At Comparable Hotels, ADR increased by 10.4% to $403.35 and occupancy increased by 3.3% to 81.3% in the fourth quarter of 2007. Adjusted EBITDA margins at Comparable Hotels increased by approximately 230 basis points for the fourth quarter of 2007 over the same period in the prior year due to the significant RevPAR growth.
The growth in RevPAR was driven by strong market trends in Miami, San Francisco and New York. MHG's hotels benefited from both strong business and leisure demand, including an increase in foreign travel in MHG's key gateway markets. The Delano hotel in South Beach, which was under renovation in October and November in both 2007 and 2006, achieved a 34.0% RevPAR increase in the fourth quarter of 2007 as compared to the fourth quarter of 2006. For the full year, Delano generated a RevPAR increase of 20.1% resulting in a return on investment of 29% on the capital spent on the partial renovation in 2006. The Royalton hotel in New York, which was closed for renovations from June through early October 2007, generated an ADR increase of 20.8% in the fourth quarter of 2007 as compared to the fourth quarter of 2006.
Adjusted EBITDA increased by 30.2% to $34.2 million for the quarter ended December 31, 2007. Adjusted EBITDA included approximately $1.4 million of one time pre-opening expenses related to the grand reopening of Royalton and the opening of the Florida Room lounge at Delano. Adjusted EBITDA was also affected by lower than expected income related to the lease of the casino operation at Hard Rock (MHG had a 33.3% joint venture interest as of December 31, 2007), as the casino's income was approximately $1.9 million below the prior year's quarter. In March 2008, after receiving the necessary approvals from the Nevada Gaming Commission, the lease with the third party was terminated and MHG began operating the casino.
MHG recorded a net loss of $6.1 million for the fourth quarter of 2007, compared to a net loss of $1.1 million for the fourth quarter of 2006, primarily due to equity in losses at unconsolidated joint ventures related to interest and development expenses at the Hard Rock joint venture.
Operating Results for the Twelve Months Ended December 31, 2007
RevPAR for MHG's Comparable Hotels was $288.24, an increase of 14.5%, or 12.3% excluding the effects of currency fluctuations ('Constant Dollars'), in 2007 over 2006. At Comparable Hotels, ADR increased by 10.7% to $357.59 and occupancy increased by 3.4% to 80.6% in 2007. Adjusted EBITDA margins at Comparable Hotels increased by approximately 90 basis points in 2007 over 2006.
Adjusted EBITDA increased by 29.5% to $110.1 million in 2007. Adjusted EBITDA included approximately $1.6 million of one time pre-opening expenses.
MHG recorded a net loss of $14.8 million in 2007 compared to a net loss of $13.9 million in 2006.
Balance Sheet and Financing
As of December 31, 2007, consolidated debt, which includes long-term debt and capital lease obligations, was $729.2 million including $80.1 million of lease obligations related to Clift. In addition, MHG had cash and cash equivalents of $122.7 million. There were no borrowings outstanding under the Company's $225 million revolving credit facility. All of MHG's long-term debt at December 31, 2007 was at fixed rates, either directly or as a result of hedging arrangements.
As of December 31, 2007, MHG had approximately $234.5 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') which had 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.
During the fourth quarter of 2007, the Company repurchased 1.6 million shares of its common stock at an average price of $18.22 for a total of $29.0 million. In the first quarter of 2008, the Company repurchased an additional 1.2 million shares of its common stock at an average price of $16.54 for a total of $19.2 million.
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