Morgans Hotel Group Reports Second Quarter 2007 Results
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Morgans Hotel Group Reports Second Quarter 2007 Results
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Category: Worldwide -
This is a press release selected by our editorial committee and published online for free on 2007-08-07
Morgans Hotel Group Co. (NASDAQ: MHGC) ("MHG") today reported financial results for the second quarter 2007.
Highlights
For the second quarter 2007, revenue per available room ("RevPAR") for Comparable Hotels(1) increased by 10.9% from the second quarter 2006. The increase was driven by growth in both average daily rate ("ADR") and occupancy. Comparable Hotel ADR rose by 8.6% to $342.82 and occupancy grew by 2.1% to 82.1% for the second quarter. On a pro forma basis assuming that the acquisitions of Hard Rock and Mondrian Scottsdale had occurred on January 1, 2006, RevPAR would have increased by 11.6%, driven by ADR increases of 10.5%. Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA," as further described below) increased by 31% from the prior year period to $30.7 million. Excluding the results of Royalton, which was closed for renovation beginning in June 2007, Adjusted EBITDA rose by 35%.
"Our second quarter results reflect the strength of our brands and our markets, as well as the impact of our growth plan," said Ed Scheetz, President and Chief Executive Officer of MHG. "RevPAR growth at our Comparable Hotels during the second quarter was once again well in excess of industry averages, and we are beginning to realize the benefits of our significant investments in growth."
"Our Hard Rock acquisition made a significant contribution toward our EBITDA in the form of both management fees and our one-third equity interest. We are successfully implementing our operating plan, generating a 25% increase in ADR over the prior year, and a significant increase in food and beverage revenue. As a result of this increased revenue, we generated $2.6 million in management fees during the second quarter, bringing our year to date fees ahead of plan to $4.0 million in five months. We are proceeding with design plans for the expansion project, which is expected to more than double the size of the hotel."
"We are making significant progress with the repositioning of existing assets. Royalton in New York was closed for renovation in June, and we anticipate an early October grand re-opening with more luxurious rooms, an energetic lobby design and an exciting new restaurant. At Delano in South Beach, we are renovating the remaining 30% of the rooms, upgrading the spa and constructing a new nightclub and gym. We also anticipate commencing the renovation of Mondrian Los Angeles later this summer, with an April 2008 target completion date."
"We made significant progress with our brand growth and now have six Mondrian hotels open or under development. We entered into joint venture agreements to develop and manage Mondrian hotels in SoHo, New York, and in Chicago, two markets at the top of our target list. 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."
"With the combination of strong Comparable Hotel operating growth, targeted repositionings and aggressive expansion plans, we believe we are well positioned for the future."
Second Quarter Operating Results
RevPAR for MHG's Comparable Hotels was $281.46, an increase of 10.9%, or 9.1% excluding the effects of currency fluctuations ("Constant Dollars"), for the second quarter 2007 over the comparable period in 2006. The growth in RevPAR was driven by strong market trends in San Francisco and New York resulting in an 18.6% RevPAR increase at Clift and a 12.0% RevPAR increase at our New York hotels. Our two London hotels achieved a RevPAR increase of 13.9% (4.8% in Constant Dollars). The exchange rate of U.S. dollars to British pounds increased during the quarter, increasing ADR in U.S. dollars but temporarily reducing demand. Our Delano hotel achieved a 6.2% RevPAR increase. Construction activity began on a new nightclub and gym in May 2007, which reduced available meeting space. Prior to the construction, RevPAR rose by approximately 9% in April 2007.
At new hotels, MHG achieved significant ADR increases due to the implementation of revenue management strategies. For the second quarter, Hard Rock achieved a 94.5% occupancy rate and a $232.99 ADR. This represents a 15.6% increase in RevPAR over the comparable period last year when it was operated by prior management. The RevPAR growth was driven by a 17.8% increase in ADR. Mondrian Scottsdale achieved a 12.8% increase in RevPAR in the second quarter 2007 over the comparable period last year (MHG began operating the hotel in May 2006) driven by a 10.0% increase in ADR.
Adjusted EBITDA margins at Comparable Hotels increased by 30 basis points as compared to the second quarter 2006. Margins continued to be impacted by increased property insurance costs and were further impacted by the results at the new Suka restaurant at Sanderson, which opened in March 2007 and was in a ramp up stage. MHG has negotiated a new property insurance program, effective July 1 2007, covering the majority of its hotels, which is expected to reduce premiums by approximately $1 million over the next 12 months.
MHG recorded net income of $0.8 million for the second quarter of 2007, compared to net income of $3.7 million for the second quarter of 2006. Operating income increased by $2.2 million in the second quarter 2007 over the second quarter 2006. This was offset by higher interest expense of $2.8 million, primarily due to a non-cash gain in the fair market value of an interest rate hedge in the second quarter of 2006 and higher non-operating costs at both the consolidated and joint venture level.
Balance Sheet and Financing
As of June 30, 2007, consolidated debt, which includes long-term debt and capital lease obligations, was $591.2 million including $79.3 million of lease obligations related to Clift. Approximately 94% of MHG's long-term debt at June 30, 2007 was at fixed rates, either directly or as a result of hedging arrangements, and carried a weighted average interest rate of 6.7% with an average maturity of six years.
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 primary shares and 9.4 million secondary shares. MHG currently has 34.8 million shares outstanding. MHG realized $59.5 million in net proceeds, of which $35.0 million was used to repay all outstanding borrowings under the $225 million revolving credit facility with the remainder available for general corporate purposes.
As of June 30, 2007, MHG had approximately $230.4 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 include Mondrian South Beach, excess land and branding rights at Hard Rock, Echelon, the Delano expansion, Mondrian SoHo and Mondrian Chicago.
Development Activity
The following outlines the anticipated opening dates of our new projects and expected completion dates of our renovation projects:
2007 2008 2009 2010
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Royalton Renovations x
Delano Renovations x
Mondrian South Beach x
Mondrian Los Angeles Renovations x
Hard Rock Expansion x
Mondrian SoHo x
Mondrian Chicago x
Delano at Echelon x
Mondrian at Echelon x
On June 1, 2007, MHG announced a temporary closing of Royalton to begin a complete refurbishment and redesign of the property, which will entail thoughtfully re-imagined public spaces including the entrance, lobby, restaurant, bar, lounge areas, and hallways on the guestroom floors. Upon completion, the hotel will also feature three newly designed penthouses and upgraded guest rooms. MHG expects to re-open the property in October 2007. The closing of the hotel is not expected to have a material impact on MHG's financial condition or issued guidance for 2007.
Last fall, MHG announced the completion of the first phase of the Delano renovations, with 70% of the rooms refurbished. MHG is currently renovating the remaining 30% of the rooms, upgrading the spa and constructing a new nightclub and gym, and anticipates completing the renovations by November 2007.
Mondrian South Beach is also currently under renovation, with 330 units targeted to open in the second quarter of 2008. To date, MHG has received 198 non-refundable deposits to purchase condominiums, with a high percentage of the buyers indicating their desire to place the units in the hotel rental program.
In March 2007, MHG announced its large-scale renovation and expansion project at Hard Rock. Upon completion of the project, the new Hard Rock is expected to have an additional 950 guest rooms including an all-suite 15-story tower, expanded casino, pool and meeting spaces, as well as new food, beverage and entertainment amenities. The project also includes renovations to existing suites and common spaces.
On June 28, 2007, MHG announced a new joint venture with Cape Advisors Inc. to develop Mondrian SoHo, which is anticipated to have over 270 rooms, a bar, restaurant, ballroom, meeting rooms, exercise facility and a penthouse suite with outdoor space that can be used as a guest room or for private events. Mondrian SoHo is the sixth announced Mondrian. MHG contributed approximately $5 million for a 20% interest in the joint venture. Upon completion, MHG is expected to operate the hotel under a 10-year management contract with two 10-year extension options.
On June 4, 2007, MHG announced a new joint venture with M Development to develop Mondrian Chicago on the existing property of the Cedar Hotel, in the highly desirable Gold Coast region of Chicago. The hotel is expected to have 200 rooms, as well as significant space for a restaurant, bar, meeting rooms, an exercise facility, as well as outdoor food and beverage operations. MHG will have a 49% interest in the joint venture. Upon completion, MHG is expected to operate the hotel under a 20-year management contract with two 5-year extension options.
On June 19, 2007, MHG participated in a groundbreaking ceremony at Echelon, the multi-property resort destination planned with Boyd Gaming. Scheduled to open in the third quarter of 2010, Echelon is expected to span 87 acres to include Hotel Echelon and the Suites at Echelon; Delano and Mondrian Las Vegas; and Shangri-La Las Vegas. MHG's portion of the project, Mondrian and Delano, are expected to feature approximately 860 and 550 rooms, respectively, with a diverse collection of rooms, suites, lofts and bungalows. Plans call for each hotel to feature its own destination restaurants, nightlife venues, pools and gardens, and to have direct access to the gaming, retail, dining and entertainment offerings of Echelon. Delano is expected to feature a lobby bar and one of our historically successful restaurants, and Mondrian is expected to include an innovative nightlife venue, private pool and meeting and conference space to appeal to both business and leisure guests.
The projects described above are subject to a number of risks, including risks related to obtaining financing on favorable terms, if at all, construction delays, complications in obtaining necessary zoning, occupancy and other governmental permits and cost overruns. If any of these problems occur, development costs for a project may increase or we may choose not to develop a property at all.
Guidance For 2007
The statements below represent MHG's outlook for its business for the fiscal year ending December 31, 2007. Based upon the second quarter 2007 results and upon MHG's expectations for continued growth in the U.S. economy, moderate hotel supply growth, demand growth in the luxury lodging sector and in our markets and moderate inflation levels, 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:
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Comparable Hotel RevPAR Growth: 9% to 11%
Total Revenues: In excess of $300 million
Adjusted EBITDA: In excess of $110 million
Due to the ramp up at Hard Rock and Mondrian Scottsdale and the renovations at existing hotels, MHG believes that the projected 2007 Adjusted EBITDA level is not indicative of the normalized "run rate" Adjusted EBITDA of the portfolio.
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