Morgans Hotel Group Reports Fourth Quarter Adjusted EBITDA Up 47.9%

Morgans Hotel Group Co. (NASDAQ: MHGC) reported financial results for the quarter and year ended December 31, 2012.  The Company will host a conference call to review the results on Friday, March 1, 2013 at 9:00 am.

• Adjusted EBITDA was $12.7 million in the fourth quarter of 2012, a 47.9% increase over the same period in 2011 due primarily to 38.8% and 33.5% increases in EBITDA at Delano South Beach and Hudson, respectively, two of the Company's wholly-owned hotels.
• Operating margins at the Company's Owned Hotels, which include Delano South Beach, Hudson and Clift, increased 700 basis points during the fourth quarter of 2012 as compared to the same period in 2011. 
• Revenue per available room ("RevPAR") for System-Wide Comparable Hotels increased by 7.2% in actual dollars, or 6.6% in constant dollars, during the fourth quarter of 2012 from the comparable period in 2011.   RevPAR for System-Wide Comparable Hotels located in the United States increased 8.3% during the fourth quarter of 2012 as compared to the same period in 2011. 
• RevPAR at the Company's three non-comparable Morgans Hotel Group hotels, Delano South Beach, Hudson and Mondrian SoHo, increased 17.8%, 5.7%, and 11.3%, respectively, during the fourth quarter of 2012 as compared to the same period in 2011. 
• In November 2012, the Company entered into a new $180.0 million nonrecourse mortgage loan secured by Hudson. 

Michael Gross, CEO of the Company, said: "In the fourth quarter we began to see increasing benefits from investments in our product and service offerings, leading to significant improvement in year-over-year EBITDA performance.  At Hudson and Delano South Beach, where we completed significant renovations in 2012, results were particularly strong and operating margins were up 700 basis points in the fourth quarter.  We are seeing these positive fourth quarter trends continue into 2013, with January's System-Wide Comparable Hotels RevPAR up 18% over the prior year.  Our development pipeline continues to be strong and includes eight hotels scheduled to open over the next three years, three of which are scheduled to open in early 2014. We believe these new hotels will allow us to generate increasing EBITDA margins due to a high degree of operating leverage in our model. We are confident about the year ahead and remain focused on increasing returns at our existing properties, growing our management and brand portfolio globally, and increasing shareholder value."

Fourth Quarter 2012 Operating Results

Adjusted EBITDAfor the fourth quarter of 2012 was $12.7 million, an increase of $4.1 million from the same period in 2011, due primarily to strong performances at Delano South Beach and Hudson, both of which underwent significant renovations during late 2011 and 2012.  EBITDA at Delano South Beach and Hudson increased by 38.8% and 33.5%, respectively, as the Company continues to focus on market share and margin improvement.  Additionally, the Company's Adjusted EBITDA was positively impacted by a full quarter of The Light Group's operating results. 

RevPAR at System-Wide Comparable Hotels increased by 7.2% in actual dollars, or 6.6% in constant dollars, in the fourth quarter of 2012 from the comparable period in 2011.  RevPAR for System-Wide Comparable Hotels located in the United States increased 8.3% during the fourth quarter of 2012 as compared to the same period in 2011. 

RevPAR from the System-Wide Comparable Hotels in the Northeastern United States, which consist of Morgans, Royalton and Ames, increased by 3.2% in the fourth quarter of 2012 as compared to the same period in 2011.  Each hotel in the region was affected differently by Hurricane Sandy but overall, business was strong, particularly in December 2012 with RevPAR increases of 9% or greater during the month at the Company's comparable New York City hotels.   For non-Comparable Hotels, Mondrian SoHo continues to ramp up with RevPAR increasing by 11.3% in the fourth quarter of 2012 from the comparable period in 2011, despite being closed for one week due to Hurricane Sandy. At Hudson, with all 834 guest rooms renovated, the hotel generated a 5.7% RevPAR increase during the fourth quarter of 2012, despite its restaurant being closed due to renovations.

RevPAR from the System-Wide Comparable Hotels in Miami, which consist of Mondrian South Beach and Shore Club, increased 13.2 % in the fourth quarter of 2012 as compared to the same period in 2011, driven by a 10.2% increase in occupancy. Delano South Beach, which is a non-comparable hotel in 2012, generated a 17.8% increase in RevPAR driven by a very strong December and holiday season.

The Company's two West Coast hotels generated an 8.5% RevPAR growth in the fourth quarter of 2012 as compared to the same period in 2011, led by Mondrian Los Angeles. In London, RevPAR increased by 3.5%, or 1.4% in constant dollars, during the fourth quarter of 2012, despite the difficult economic climate. 

Management fees increased by 47.5% in the fourth quarter of 2012 as compared to the same period in 2011.  This increase was primarily the result of the Company's acquisition of 90% of The Light Group in November 2011.   

Operating margins at the Company's Owned Hotels, which consist of Delano South Beach, Hudson and Clift, increased 700 basis points during the fourth quarter of 2012 as compared to the same period in 2011.

Interest expense increased by $6.9 million during the fourth quarter of 2012 as compared to the same period in 2011, primarily due to the write-off of deferred financing fees and payment of termination costs associated with the refinancing of the Hudson in November 2012.    

MHG recorded a net loss of $12.3 million for the fourth quarter of 2012 compared to a net loss of $17.1 million for the fourth quarter of 2011, due primarily to improved operating margins at Delano South Beach and Hudson and a full quarter of management fee income from The Light Group.

Full Year Operating Results

For the full year 2012, Adjusted EBITDA was $22.9 million, a decline of 23.2% from 2011, primarily due to the impact of the Company's sale of its ownership interests in Mondrian Los Angeles, Royalton, Morgans, Sanderson and St Martins Lane in 2011.  For the year, RevPAR for System-Wide Comparable Hotels increased by 4.3%, or 4.6% in constant dollars, in 2012 from the comparable period in 2011, driven primarily by a 3.4% increase in average daily rate ("ADR"), or 3.8% in constant dollars.  MHG recorded a net loss of $55.7 million for the year ended December 31, 2012 compared to a net loss of $85.4 million in the same period in 2011, which included approximately $21.0 million of impairment charges recognized related to the Company's unconsolidated joint ventures.  

Renovations

At Hudson, the Company spent most of 2012 renovating all the guest rooms and corridors and converting SRO units into new guest rooms.  The rooms renovation was completed in September 2012.  The Company also converted 32 SRO units into guest rooms during December 2012 and January 2013 at an estimated cost of approximately $150,000 per room, bringing the total number of guest rooms at Hudson to 866 as of January 31, 2013.  In November 2012, MHG launched Hudson Lodge, a winter pop-up venue at the hotel's private park.  Additionally, in February 2013, the Company opened a new restaurant at Hudson, Hudson Common, which is a modern-day beer hall and burger joint featuring a wide selection of local craft beers, inventive preparations of classic American fare, and soda shop-inspired specialty cocktails. In 2012, the Company spent approximately $27.7 million on room, corridor and restaurant renovations and has spent an additional approximately $4 million to complete these projects at Hudson in 2013.

Development

In September 2012, the Company opened Delano Marrakech, which marks the beginning of the rollout of its development pipeline.  MHG currently has signed management agreements for seven hotels and a license agreement for another, that are scheduled to open over the next three years, with three of these hotels scheduled to open in early 2014 – Mondrian London, Mondrian Doha and Delano Las Vegas.  In addition, Mondrian Baha Mar and Delano Moscow are currently under construction. 

With a strong infrastructure in place, the Company expects the incremental EBITDA margins for newly signed management agreements and hotels in its pipeline to approximate 90%. 

In August 2012, the Company acquired the leasehold interests in three restaurants at Mandalay Bay in Las Vegas from an existing tenant. The Company has recently opened two of these food and beverage venues.  Red Square, a premier dinner, cocktail, and nightlife destination, opened in December 2012 and Citizens Kitchen & Bar, which offers classic American comfort food, opened in January 2013.  MHG is also in the process of reconcepting the third restaurant at Mandalay Bay, which it plans to introduce in the second quarter of 2013. The Light Group manages, or will manage, these restaurants. 

Balance Sheet and Liquidity

MHG's total consolidated debt at December 31, 2012, excluding the Clift lease, was $449.0 million with a weighted average interest rate of 6.07%. At December 31, 2012, MHG had $5.8 million of cash and cash equivalents and $57.9 million available under its revolving credit facility.  As of December 31, 2012, total restricted cash held pursuant to certain debt or lease requirements was $21.2 million, which included $2.9 million for the completion of the Hudson SRO unit conversions and Hudson Common, all of which was released to MHG in February 2013. 

In November 2012, the Company entered into a new $180.0 million nonrecourse mortgage loan secured by Hudson. The proceeds were used to retire the previous mortgage loan on Hudson of $115.0 million, repay $36.0 million of indebtedness outstanding under the Company's credit facility, and fund reserves required under the new loan, with the remainder available for general corporate purposes.  The loan bears interest at a reserve adjusted blended rate of 30-day LIBOR (with a minimum of 0.50%) plus 840 basis points and matures on February 9, 2014. The Company has a one-year extension option that will permit it to extend the maturity date to February 9, 2015, if certain conditions are satisfied at the extension date. The new mortgage loan may be prepaid at any time, in whole or in part, subject to payment of a prepayment penalty for any prepayment prior to November 9, 2013. There is no prepayment premium after November 9, 2013.

As of December 31, 2012, MHG has approximately $282.6 million of remaining federal tax net operating loss carryforwards to offset future income, including gains on asset sales.  In addition, the Company has various state and local net operating losses of approximately $385.7 million, in aggregate, available to offset future taxable state or local income including gains on asset sales, to the extent available in the applicable state or local tax jurisdiction.  The Company has begun a sales process for Delano in South Beach and would use the proceeds from any sale for debt reduction, growth and general working capital purposes.  In addition, the Company believes it has significant value available to it in Hudson. 

Guidance

Looking ahead, based on the trends the Company is seeing in its markets, MHG projects RevPAR growth at System-wide Comparable Hotels to be in the 6% to 8% range in 2013.  The Company is not providing overall EBITDA guidance at this time. However, the Company believes that it could potentially add $8 to $10 million of EBITDA at Hudson in 2013 given the $6 million of EBITDA lost in 2012 due to rooms out of service, the new SRO units and the new restaurant, and that there is potential for further EBITDA growth at Hudson from the upgraded room product.

Definitions

"System-Wide Comparable Hotels" includes all Morgans Hotel Group hotels operated by MHG, except for hotels added or under major renovation during the current or the prior year, development projects and discontinued operations.  System-Wide Comparable Hotels for the quarter  and year ended December 31, 2012 and 2011 excludes Hudson and Delano South Beach, which were both undergoing renovations beginning in the third quarter of 2011 and continuing into 2012, the Hard Rock Hotel & Casino in Las Vegas ("Hard Rock"), which effective March 1, 2011 was no longer partially owned or managed by MHG, Mondrian SoHo, which opened in late February 2011, the San Juan Water and Beach Club, which was no longer managed by MHG effective July 13, 2011, Delano Marrakech, which opened in September 2012, and Hotel Las Palapas, which is not a Morgans Hotel Group branded hotel.   

"EBITDA" means earnings before interest, income taxes, depreciation and amortization, as further defined below.

 "Adjusted EBITDA" means adjusted earnings before interest, taxes, depreciation and amortization as further defined below.

About Morgans Hotel Group

Morgans Hotel Group Co. (NASDAQ: MHGC) is widely credited as the creator of the first "boutique" hotel and a continuing leader of the hotel industry's boutique sector. Morgans Hotel Group operates Delano in South Beach and Marrakech, Mondrian in Los Angeles, South Beach and New York, Hudson in New York, Morgans and Royalton in New York, Shore Club in South Beach, Clift in San Francisco, Ames in Boston, Sanderson and St Martins Lane in London, and a hotel in Playa del Carmen, Mexico.  Morgans Hotel Group has ownership interests or owns several of these hotels. Morgans Hotel Group has other property transactions in various stages of completion, including Delano properties in Las Vegas, Nevada; Cesme, Turkey and Moscow, Russia; Mondrian properties in London, England; Istanbul, Turkey; Doha, Qatar and Nassau, The Bahamas; and a Hudson in London, England. Morgans Hotel Group also owns a 90% controlling interest in The Light Group, a leading lifestyle food and beverage company. 

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