Morgans Hotel Group announces Q2 2014 results

NEW YORK, NY – Morgans Hotel Group Co today reported financial results for the quarter ended June 30, 2014.

Second Quarter 2014 Operating Results

Adjusted EBITDA for the second quarter of 2014 was $14.8 million, a 17.7% increase over the same period in 2013. Excluding a termination fee related to Ames in Boston of $0.9 million, which was recorded in the second quarter of 2013, Adjusted EBITDA increased 26.7% in the second quarter of 2014 over the same period in 2013. The Company’s Owned Hotels generated strong operating results during the second quarter of 2014 as compared to the same period in 2013, led by 36.8% increase in EBITDA at Delano South Beach.

RevPAR at System-Wide Comparable Hotels, all of which are located in the United States, increased by 6.4% in the second quarter of 2014 from the comparable period in 2013, driven by a 3.4% increase in occupancy and 2.9% increase in average daily rate (“ADR”).

RevPAR from System-Wide Comparable Hotels in New York increased 2.8% in the second quarter of 2014 over the same period in 2013, led by an increase in occupancy of 2.5%. RevPAR at Hudson increased by 0.5% during the second quarter of 2014 as compared to the same period in 2013. Occupancy at Hudson increased by 2.5% to 94.9% year-over-year reflecting strong demand, while ADR declined 1.9% as a major nearby competitor was under renovation in 2013 and fully operational in 2014. Mondrian SoHo’s RevPAR increased by 7.9% during the second quarter of 2014 as compared to the same period in 2013, driven by a 4.2% increase in ADR.

RevPAR from System-Wide Comparable Hotels in Miami increased 11.8% in the second quarter of 2014 as compared to the same period in 2013. This increase was led by Delano South Beach, which experienced a RevPAR increase of 14.0% primarily as a result of a 9.5% increase in occupancy.

The Company’s System-Wide Comparable Hotels on the West Coast generated 10.2% RevPAR growth in the second quarter of 2014 as compared to the same period in 2013, led by Clift, where RevPAR increased by 11.2%.

The Company’s managed hotels in London, Sanderson and St Martins Lane, are non-comparable due to a major room renovation that began in the first quarter of 2014 resulting in a decrease in RevPAR of approximately 27.5% in average dollars due to rooms being out of service during the second quarter of 2014.

Management fees decreased $2.0 million, or 25.4%, during the second quarter of 2014 as compared to the same period in 2013, due in part to a $0.9 million termination fee related to Ames in Boston that the Company received during the second quarter of 2013. In addition, management fees declined as a result of a decrease in food and beverage management fees due primarily to revisions in the management fee structure with MGM effective January 1, 2014 to a more incentive based model.

Hotel operating expenses increased by just 0.7% on a 5.2% increase in hotel revenues due primarily to cost-saving initiatives implemented in May 2014. As a result, operating margins at the Company’s Owned Hotels and leased food and beverage operations increased approximately 320 basis points during the second quarter of 2014 as compared to the same period in 2013.

Corporate expenses, excluding stock compensation expense, decreased by $1.8 million, or 25.7%, during the second quarter of 2014 as compared to the same period in 2013. This decline in expenses was primarily the result of cost saving initiatives undertaken by the Company, including the corporate workforce reduction in March 2014.

Interest expense increased by $1.4 million, or 11.9%, during the second quarter of 2014 as compared to the same period in 2013, primarily due to the new financing secured by Hudson and Delano South Beach in February 2014, which resulted in a larger debt balance outstanding during the second quarter of 2014 as compared to the second quarter of 2013.

The Company recorded a net loss of $9.7 million for the second quarter of 2014 compared to a net loss of $16.0 million for the second quarter of 2013 primarily due to improved operating results and margins and decreased corporate expenses.

Balance Sheet and Liquidity

The Company’s total consolidated debt at June 30, 2014, excluding the Clift lease, was $615.6 million.

At June 30, 2014, the Company had approximately $133.0 million in cash and cash equivalents.

In July and August 2014, the Company repurchased $11.7 million of outstanding Convertible Notes at a discount of approximately $0.1 million plus accrued interest. As of August 7, 2014, the Company has $72.8 million of outstanding Convertible Notes, which mature on October 15, 2014. The Company intends to utilize cash on hand to retire the Convertible Notes.

As of June 30, 2014, the Company had $391.0 million of remaining Federal tax net operating loss carryforwards to offset future income, including gains on future asset sales.

Development

At Hudson, the Company is currently converting eight additional single room dwelling units (“SROs”), together with other space, into 12 new guest rooms. The Company anticipates 10 of these new guestrooms will be completed in the third quarter in 2014, with the remaining two completed in the fourth quarter, at a total cost of approximately $2.3 million. After this conversion is complete, the Company will have 60 SROs remaining at Hudson, which it intends to convert into guest rooms in the future.

The Company currently expects to open two high-profile hotels in the third quarter of 2014. Delano Las Vegas, a 1,117 room hotel at Mandalay Bay, is expected to open in early September and will be operated under a license agreement with MGM. Mondrian London, a 359 room hotel on the South Bank of the Thames, is expected to open on September 30, 2014, and will be operated under a long-term management agreement.

Additionally, the Company has a franchise agreement for 10 Karakoy, a 71-room Morgans Original in Istanbul, Turkey which is expected to open by the end of 2014 and a management agreement for a Mondrian in Doha, Qatar which is expected to open in the second quarter of 2015.