Morgans Hotel Group Co., Q3 2008 Earnings Call Transcript

Nov.20.08 | About: Morgans Hotel (MHGC)

Morgans Hotel Group Co., (NASDAQ:MHGC)

Q3 2008 Earnings Call

November 5, 2008 5:00 pm ET

Executives

Jennifer Foley - Public Relations Director

David Hamamoto - Chairman

Fred Kleisner - President and Chief Executive Officer

Rich Szymanski - Chief Financial Officer

Marc Gordon - Chief Investment Officer

Analysts

Celeste Brown - Morgan Stanley

Will Marks - JMP Securities

Amanda Bryant - Merrill Lynch

David Katz - Oppenheimer Funds

Lee Cooperman - Omega Advisors

Operator

Good afternoon, and welcome to the Morgans Hotel Group Co., third quarter 2008 earnings conference call. My name is Julianne, and I will be your conference operator today. (Operator Instructions). I would now like to turn the call over to Jennifer Foley of Morgans Hotel Group.

Jennifer Foley

Thank you for joining us on our third quarter 2008 conference call. Joining us for today's conference call are David Hamamoto, Chairman of the board; Fred Kleisner, President and Chief Executive Officer; Rich Szymanski, Chief Financial Officer; and Marc Gordon, Chief Investment Officer of Morgans Hotel Group.

Before we begin, I need to remind everyone that part of our discussion this afternoon will include forward-looking statements. They are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to the company's filings at the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on the company's operating results, performance, and financial condition. With that, I will pass the call on to David.

David Hamamoto

Before turning the call over to Fred for a discussion of the company's results, I'd like to make a few brief comments. You've all heard a great deal recently about what a difficult operating environment it is for the hotel industry right now and that certainly is true. That said, what is clear based on the results today is that MHG continues to navigate this challenging environment well and is in fact outperforming its peers in RevPAR, operating margins, and other key measures. Fred, Rich, and the entire management team have done a very good job anticipating the downturn and effectively managing the business. The cost-saving initiative that they have implemented over the last three quarters lowered operating expenses and improved the company's operating margins at system-wide comparable hotels.

Liquidity is a general concern in this market. However, I believe that MHG is in a very solid position in terms of its balance sheet, cash, and financial obligations. The company is generating significant cash flow with limited financial commitments and no significant near-term consolidated debt maturities. On top of this, we have three unencumbered hotels which generated approximately $32 million in EBITDA in the last 12 months. I am confident that the smart efficiency initiatives that Fred and his team have and will continue to put in place in combination with truly unique assets and a compelling long-term growth strategy which recognizes the reality of the capital markets will position the company for long-term value creation.

We are frustrated, as I know many of you are, that MHG's current stock price does not reflect the value of the company that we see on so many levels, not the least of which is the value of our physical assets. MHG has some of the most compelling brands in the market, an experienced management team with a strong track record of execution, and a clear strategy for realistically growing this company going forward.

With the recently renovated Mondrian in LA and Morgans properties back online, four fully-funded new projects under development that are scheduled to open before the end of 2009, and a pipeline of signed agreements, our brand should only grow stronger from here.

We're optimistic the market will recognize MHG's intrinsic value in the coming weeks and months as we continue to execute on our business strategy. With that, I'll turn the call over to Fred.

Fred Kleisner

Today we'll be reviewing the financial highlights for the quarter and also take you through the proactive steps that our management team has implemented in the first three quarters of this year and in the current quarter to ensure improved efficiency and financial stability during the current economic crisis.

There are several areas that we'll be emphasizing during these remarks. First, we have a strong balance sheet. We have significant liquidity available, positive net cash flow, no significant consolidated maturities until 2010 with extension options to 2011, and we have no meaningful deferred maintenance in any of our properties, and limited capital commitments on new projects. We have undertaken significant operating expense reductions through the year. In anticipation of the current turndown and to improve operational efficiency, we made significant further reductions as we enter the fourth quarter. And finally, during the quarter, our owned comparable hotels outperformed the industry. Our core properties outperformed their competitive sets, and we're confident in our ability to efficiently manage our business notwithstanding the effects of the downside of the cycle and what it is showing us today.

Before we talk about the quarter, I'd like to review our balance sheet and cost-savings initiatives. Then I'll turn the call over to Rich who'll provide a detailed discussion of our financial results as well as further details on the key points I just reviewed. After that, we'll be happy to take your questions.

In terms of our balance sheet, we believe we're in a strong position and have ample liquidity to make it through this challenging cycle. Let me quickly touch on four aspects of this.

First, at the end of the third quarter, we had over $250 million in liquidity comprised of $75 million in cash and $182 million in funds available under our revolving credit facility.

Second, as I referenced a few minutes ago, we have significantly reduced our capital commitments. With the return of our $30 million deposit and elimination of approximately $41 million in future funding at Echelon in Las Vegas, we only have about $30 million in future funding obligations for development projects.

Third, we generated $34 million in cash flow over the trailing 12 months and would expect a positive impact as built-in growth from now-completed renovations at Mondrian in LA and Morgans in New York come back online. In addition, over the past two quarters, we've generated $6 million in cost savings or an annual run rate in savings of $12 million per year. Because of the company's ability to be nimble and the collective experience of our management team, we can continue to move very quickly to identify and execute sustainable improvements in efficiency and productivity. Last week, we implemented restructuring efforts that will reduce operating costs by an additional $10 million annually. I'll provide more details on that initiative in a few minutes.

Fourth, we are fully prepared to manage our debt obligations and have significant cushion to do so. One of our 2009 maturities, the mortgage on Gale in Miami, has just been extended to 2010.

We believe that our prudent approach to cost reduction, cash flow generation, and our balance sheet has resulted in a solid financial position for the company as we head into the fourth quarter. Even as the economy continues to worsen, we are comfortable that we have more than enough liquidity to meet our expected cash needs through the downside of the cycle and protect shareholder value.

Turning to our third quarter results, we believe our ability to continue to outperform the market despite the current economic trends clearly demonstrates the strength of our company and our brands. Value to our shareholders is further demonstrated by our ability to generate strong flow-through of revenue to the EBITDA line. We ended the quarter with nearly 9.4% RevPAR growth at our own comparable hotels and nearly 2% system-wide comparable RevPAR growth. These results are more impressive when you compare them to the decrease of 1.1% for the US hotel industry average RevPAR during the quarter.

Adjusted EBITDA excluding hotels under construction increased by 7.8%, which is four times the system-wide RevPAR growth. At our non-comparable hotels, we had approximately $4 million in estimated EBITDA displacement from renovations in this quarter alone. With the completion of Mondrian LA and Morgans' renovations, we now have all of our owned hotel rooms fully renovated, and as we say at Morgans, Reimagined. Looking ahead, we have blocked in business model growth coming from these now-completed renovations.

As David alluded to a few minutes ago, our management team has operated through many cycles. We know what it takes to maximize revenue potential while at the same time streamlining costs. David, Rich, Marc, and I have more than a century of combined experience in the hospitality industry with a broad base of direct experience in operations, development, finance, and investment. I have personally been in the business for more than four decades and have helped navigate hotels, resorts, and hotel companies through five previous downward cycles, the first of which was in 1969.

We have been effectively executing our efficiency initiatives since the beginning of the year and we're not easing our grip on the wheel one bit. In late 2007, we developed a multiphase contingency plan in anticipation of a downward economy. We started rolling out that plan on January 1 of this year and implemented a second round of reductions in April when it became clear the market was softening further.

Immediately after September 15, we could see the trend lines were becoming increasingly difficult at a more rapid pace. Because our contingency plans were already in place, we immediately implemented the next step of our cost-adjustment plan, a broad downsizing of corporate SG&A, and direct hotel expenses. This was completed last week and it resulted in an estimated cost savings of approximately $10 million including $6 million at our corporate office.

We estimate that the 2008 run rate combined with the 2009 anticipated savings will result in total cost reductions of approximately $22 million or 20% of the 2008 adjusted EBITDA. Be assured that we have revenue plans in place to drive our RevPAR as well.

Our efficiency initiatives are designed from the beginning to drive EBITDA margins, and indeed they have. In Q3, we reduced operating expenses by 1%, and it resulted in posting an operating margin improvement of 90 basis points at system-wide comparable hotels. This is the second consecutive quarter we've improved EBITDA margins, and we believe these adjustments are absolutely sustainable.

Looking ahead, if we see further slippage in business trends, we're prepared with further adjustment plans that will continue to be based on the highly targeted scalpel approach.

In this regard, and with great emphasis, allow me to note that we've taken great care to ensure that the cost savings we've achieved so far do not impact the quality of our guests' experience. We measure this carefully in two ways. The first is our guest experience tracking survey. Over the last three quarters, guest satisfaction metrics have gone up on a quarter-by-quarter basis. This is particularly true where we have renovated our properties. The second measure is our RevPAR fair market share index in our competitive sets. According to Smith Travel Guide Associates' report, MHG's RevPAR in our competitive sets grew by 300 basis points in the third quarter led by New York and Miami. Our ability to further streamline our business while maintaining and in some cases even improving the customer experience demonstrates the strength of our underlying business model and our laser focus on the unique characteristic of our brands.

We offer a truly differentiated customer experience in 24-hour gateway locations and selected resort destinations that have historically been among the best-performing markets. We have some of the most distinguished brands in the industry and within our markets we are located in the most sought-after locations with high barriers to entry by new supply.

While location demand may vary from year to year in our 24-hour gateway markets, supply is historically the limiting factor. Finally, we believe from having multiple demand generators, we believe our brands and our properties appeal equally to both domestic and international travelers, as well as corporate and leisure travelers.

We believe it's for these reasons that our hotels have generally continued to outperform their competitive sets through September and October. This is particularly true in New York and Miami, two markets which have accounted for 63% of our hotel EBITDA this year.

Turning to our growth strategy, we're confident in our ability to drive future results through the continued execution of our strategy and effective management of our balance sheet. We have built-in EBITDA growth for 2009 coming from renovations we just completed at our Mondrian LA and Morgans Properties which are terrific executions of these iconic brands.

The completion of these projects has put 350 rooms back into service and represented an estimated $10 million in EBITDA displacement in 2008, which we'll talk more about shortly. Built-in growth is also expected to come from our four current development projects; The Mondrian in South Beach, Mondrian in SoHo in New York, Ames in Boston, and the Hard Rock expansion in Las Vegas. Importantly, each of these projects under construction is already financed and is expected to open by the end of 2008 for Mondrian in South Beach and by the end of 2009 for the other three projects.

We're excited to say that the opening of the Mondrian in South Beach is scheduled for next month, December 4. This property is impressive in its daring design and a great example of the expansion potential of our brand portfolio. Much of the revenue generated by this property is expected to come in the form of management fees.

Mondrian SoHo is under construction in New York City, and we're targeting a Q4 2009 opening date. Ames in Boston, which represents a new addition to our brand portfolio, is expected to also open in Q4 of '09. The renovation and expansion of Hard Rock Hotel and Casino in Las Vegas is well underway, and we're on track to open in Q4 of '09.

Similar to Mondrian, our strategy for this investment focuses on the generation of significant management fees that we expect will double to approximately $15 million to $16 million annually once the expansion is up and running at full capacity.

On the international front, we are seeing great demand for our brands from potential partners in key markets around the world. Over time, we believe this will represent an increasingly significant aspect of our growth story as we leverage the models and brands we built in the United States and London into other gateway cities.

For instance, we recently signed management and brand license agreements for Delano, Dubai. This represents an important expansion of our brand and revenue strategy. In addition to a hotel management agreement, we signed a contract to brand and manage Delano Residences.

We received an upfront $1.5 million branding fee in the quarter and we did all of this without investing any equity. We anticipate announcing similar deals in other major international cities in the future. We expect this strategy to be a strong driver of license and management fees over time with little or no investment on our part.

I'd also mention that with a troubled economy we expect there will be unique opportunities to expand by offering brand-based solutions to distressed hotel owners. In these situations, we can offer our management expertise, our systems, and our brands in order to positively impact their bottom line, again, with little or no investment from us. So we're watching that market closely to identify opportunities. We're going to be agile; we're nimble, but I also want to stress we're only going to pursue these if we believe it makes sense for our brands and our shareholders.

I'd like to say a few words about guidance. Looking at October performance, we've seen the crisis in financial markets lead to a clear pullback in demand. Expecting continued challenging, even possibly worsening market conditions, we've decided to reduce our annual guidance. We feel it's best to assume the trends in October will continue through the quarter. Rich will elaborate this in a few minutes. Notwithstanding these difficult economic times, as I mentioned earlier, I believe we're in a solid position as we move forward.

Cost-saving initiatives and growth projects we have in place are key drivers of our strategy to deliver value to our shareholders. Our board continues to evaluate our strategy and opportunities available to the company, particularly in the context of current environment. We'll continue our policy of open and productive dialog with our investors, and we'll continue to keep you apprised of our progress.

With that in mind, I'd like to briefly address an issue raised by the media in recent months. That is the company's policy regarding potential takeover offers. As you know, it's our policy not to comment on rumors and speculation in the market. However, I can assure you that if MHG receives a credible offer to acquire the company our policy is to submit it to our Board of Directors, which gives its full and proper consideration as part of its commitment to act in the best interests of the company and all its shareholders. Among the factors the board would consider would be the conditionality of the offer and its terms. I should also note that our board is comprised of a super majority of independent directors. They, along with our inside directors, take their fiduciary duties very seriously. Again, our policy is not to comment on rumors in the market. So we'll not be in a position to comment further on this call.

With that, Rich will now walk you through the details of our financial picture.

Rich Szymanski

I'd like to focus on three topics; our third quarter earnings, our full-year guidance, and a detailed review of our liquidity position.

First, the earnings. Our adjusted EBITDA for the quarter was $21.2 million, in line with our internal target. Excluding the hotels under renovation in both years, this represents a 7.8% increase over the comparable period in the prior year. RevPAR for our comparable hotels for the third quarter was $247, an increase of 1.9% over the prior year's third quarter, or 3.5% in constant dollars. Strong international travel trends in New York and Miami helped drive these results. We continue to believe that the diversity of demand along with low supply growth in our principle markets should continue to enable us to outperform the industry.

As we have done all year, we kept a close watch on operating costs. For the quarter, operating costs at comparable hotels decreased by 1% resulting in a 90-basis-point improvement in operating margins. This is the second consecutive quarter where we have reduced comparable hotel operating costs, and as Fred discussed previously, we've taken action to further reduce costs both at the properties and at corporate.

Through the first three quarters of 2008, we were in line to achieve our EBITDA guidance of $106 million to $111 million for the year. Since the middle of September, we've experienced a slowdown in travel and demand in our markets. We are assuming that the late September and October market trends continue for the remainder of the quarter and are therefore lowering our EBITDA target to $97 million to $100 million for 2008. Please keep in mind that this amount reflects an estimated $12 million to $15 million in EBITDA displacement due to the renovations at Mondrian in LA and at Morgans and the expansion project at the Hard Rock. With the completion of both Mondrian LA and Morgans in September, we now have all of our owned hotel rooms fully renovated.

A critical issue facing all companies today is liquidity and the preservation of capital. And as both David and Fred mentioned earlier, we believe Morgans is in a strong position in this regard. To illustrate this, I would like to walk through a detailed analysis of our liquidity, focusing on our cash position, commitments, cash flow, covenants, and maturities of our debt.

We finished the third quarter with approximately $60 million in consolidated cash and cash equivalents. This amount was bolstered by the return of our $30 million deposit in September related to the Echelon project in Las Vegas. In addition to our $60 million of corporate cash, our share of excess cash in our London joint venture is approximately $15 million at today's exchange rate. We've not been able to distribute this cash in the past due to regulatory restrictions and have now implemented a structure which we anticipate will enable us to distribute the cash by year-end.

As of September 30th, we had commitments to fund projects of approximately $30 million. This includes approximately $10 million to fund the completion of Mondrian in South Beach of which we've already funded $5 million. In addition, it includes 2009 projects, which are $11 million, to fund the letter of credit posted for the Hard Rock expansion and $4 million to create 30 new hotel rooms at Hudson in midtown Manhattan at a cost per room of under $200,000. And with the major renovation projects complete, we also have no significant deferred maintenance in our owned hotels.

We completed our $30 million share repurchase program in October having spent $15 million of it in on October. While we will not rule out further share repurchases, liquidity is our highest priority today.

And, over the 12-month period ended September 30, 2008, we generated significant operating cash flow. Our consolidated operations generated $78 million of EBITDA during that period, our consolidated adjusted interest expense was $32 million, and our normal maintenance CapEx is about $12 million. That results in cash flow of approximately $34 million over the last 12 months or roughly $1 per share during that period.

We have several cushions against this cash flow should the recession be deeper or longer than expected. First, as I mentioned before, our trailing cash flow includes out-of-service rooms at Mondrian LA and Morgans and ramp-up at Royalton. As Fred mentioned, we estimate the EBITDA impact to be approximately $10 million over the past 12 months just from getting the rooms back in service and it could be more if include a return on the $50 million of capital spent.

Second, in October, we implemented a restructuring, which we estimate reduces costs by approximately $10 million annually, and this is in addition to the reductions we've achieved in the previous three quarters equal to an annual run rate of $12 million.

Our third cushion is the impact of new hotels, which will add EBITDA primarily in the form of management fees. In 2009, we anticipate Mondrian in South Beach, Mondrian in SoHo, Ames in Boston, and the Hard Rock expansion all contributing additional management fees. And, as an example, if the Mondrian in LA was a managed hotel, it would have generated $3 million in fees in its last full years of operation prior to its renovation.

While we are not prepared at this point to give guidance for 2009, we have spent a considerable amount of time analyzing various downsized scenarios. Based on historical performance, we estimate that each point of RevPAR decline would impact EBITDA by approximately $2 million. Therefore, with the cushions from the renovated rooms back in service and the cost reductions which we've put into place, which together aggregate approximately $20 million, we estimate that we could absorb a 10% RevPAR decrease and still maintain our trailing 12-month cash flow of $34 million after debt service.

We also believe we are in good shape with our debt covenants. The only two instruments with financial covenants are the $50 million trust preferred note and our revolving line of credit. They both contain 12-month EBITDA to interest covenants, calculated for consolidated operations only, with some adjustments. The trust preferred ratio is 1.4 times and the line of credit is 1.75 times, and as of September 30th, we're at 2.4 times. In addition, the line of credit has a debt to EBITDA covenant of 7 times today, going to 6 times in 2009. And, under this covenant, debt is net of cash and excludes the convertible notes, the trust preferred notes, and Clift capitalized lease. Our ratio as of September 30 was 4.6 times, well within the 2009 covenant.

We realize that, should EBITDA drop significantly, access to the line of credit may be limited due to the corporate covenants. We therefore have not planned to draw on the revolver in any of our downsized scenarios. The revolver is secured by the three hotels in premier locations; Delano in South Beach, Royalton, and Morgans in New York. And, under the line of credit, the hotels have a borrowing capacity of $189 million on a standalone basis before considering any corporate covenants. And as part of our strategy to further increase liquidity, we may seek permanent mortgage financing on one or more of these hotels.

With regard to consolidated debt maturities, we recently extended a $10 million mortgage on the Gale to January 2010, and we are evaluating options with regard to our non-recourse mortgage on the Mondrian in Scottsdale. We also have $370 million of mortgages on Hudson and Mondrian LA due in October 2010. These mortgages may be extended to October 2011 if the hotel has a 1.55 times debt service coverage ratio for the second and third quarters combined of 2010. And based on our current estimate of long-term market conditions and downsized sensitivities built into our business model, management is confident that we will qualify for an extension.

In summary, the steps we've taken in recent months to complete our renovations on time and on budget, to reduce capital commitments on new projects, and to take a proactive approach to cost reduction have put us in solid financial shape. Our cash position of $75 million as of September 30th can more than support our current commitments of $30 million. We generated significant cash flow, $34 million, over the past 12 months to September 30th, and with over $20 million of projected additional EBITDA from cost reductions and rooms back in service, we have built-in cushions against the downturn. Our near-term consolidated debt maturities are not significant, financial covenant compliance is well within the ranges, and we have three unencumbered hotels. We will continue to take a conservative approach to liquidity.

With that, I'll turn it back to Fred.

Fred Kleisner

I'd like to close by emphasizing again our belief that we're in a strong position to successfully navigate the current downturn. We have strong liquidity and are cash flow positive. We have significantly reduced our capital commitments and are effectively dealing with our debt maturities. We have implemented proactive and targeted cost-saving initiatives over the last year that we estimate will result in over $22 million in annual run-rate savings as we move into the challenging of 2009. And importantly, we delivered solid results in the third quarter, outperforming our peers despite the slowdown in the economy.

We'll continue to anticipate and act on the trends of the economy so that we remain in the best possible position. I'm confident that our balance sheet preparedness will allow us to proceed into 2009 and beyond with plenty of room to breathe and continue to execute on our growth strategy. The model and brands we're building are unique, differentiated, and well positioned. We believe our prospects for long-term growth are strong.

Financing is in place for all of our current development projects that are under construction, and we're pursuing compelling growth opportunities internationally that focus on high-margin management fees.

As we move forward with all of this, we are singularly committed to creating long-term value for our shareholders. To the continued execution of our strategy and the strength of our brands, we're confident in our ability to do so, even in this challenging economic environment.

With that, we'd like to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

Thanks for running through all the debt and the covenant stuff, very helpful. First, Fred or Rich, maybe, can you just help us think about considering what a big piece of your revenue and profitability is, what's happening with the food and the restaurants and bars at your properties? Is that dropping off dramatically or is that keeping up?

Fred Kleisner

It is not dropping dramatically. During the quarter, our food and beverage revenues were flat to slightly down, but we didn't find it dropping off dramatically.

Celeste Brown - Morgan Stanley

But as we got into October, did that slow as much as hotel demand or did it hold up a little bit better?

Fred Kleisner

Actually occupancy maintained, the slippage has been in rate that we've seen in the marketplace; mostly companies that are reacting with great sensitivity to everything that's occurred after September 15th. Beverage revenues have remained stable or gone up, that's our high-margin area. A little bit of slippage in restaurants, but not significant.

Celeste Brown - Morgan Stanley

So, generally it's outperforming the hotel side of things.

Fred Kleisner

Yes.

Celeste Brown - Morgan Stanley

And then, in terms of thinking about the cost cutting, you've removed $10 million. Do we think about that as if that's going to offset a normal 3% or 4% expense growth or is that something we could just subtract out of this year's cost base?

Fred Kleisner

As you model, bear in mind that the net effect in Q3 and in Q2 was a reduction in total operating expenses of 1% or 100 basis points. So the answer to your question is yes, I'd take that out of your model. Bear in mind the $10 million was an additional amount we implemented in the last 10 days over and above the to-date run rate of $12 million for a total of $22 million in total cost reductions that will carry into 2009 for an annual run rate. I'd emphasize these are sustainable reductions.

Celeste Brown - Morgan Stanley

But don't you have some natural cost growth with the union contracts and things like that or increases in corporate compensation?

Fred Kleisner

You can look at line items where there will be certain impacts. However, the way we've structured our efficiencies is to look first at a macro basis in relationship to obligations we may have such as bargaining unit agreements. The net effect, however, it's always best to look at the actual numbers in Q2 and Q3, and we went through various adjustments in certain expenses that did by commodity go up. The net effect, however, was, in each quarter a reduction in year-over-year operating expenses of 100 basis points.

Celeste Brown - Morgan Stanley

Okay. I just wanted to make sure that's sustainable through next year. Sorry to push you on it.

Fred Kleisner

You bet it is; both hands on the wheel at 10 and 4.

Celeste Brown - Morgan Stanley

In terms of the new properties that are open, particularly the Mondrian South Beach, which will be open for a full year, can you just help us think about what kind of impact that might have? I think we all had an idea back when things were better, but I know it's harder to launch a property in this kind of environment. We saw some interesting promotions to get some people down there, but can you just help a little bit with direction on that property?

Fred Kleisner

In terms of launching it, you mean?

Celeste Brown - Morgan Stanley

Yes, in terms of how much does it reduce your own expectation, without giving us a number, of what the possibility could be for earnings out of the Mondrian South Beach next year?

Rich Szymanski

That's a difficult one to answer, without giving you guidance as to what the property will do next year, but we have a number of promotions. Our marketing team is focused on it. We think the property is gorgeous, and we're very excited about it. And as I said before without making any predictions on this property, a Mondrian of this size, if you take a look at the Mondrian at LA, it would have generated $3 million of management fees had it been a managed property, and without making any predictions here, we look forward to this property doing well.

Fred Kleisner

As we mentioned on the call, we'll be opening the property on December 4. We've always taken a, "lights, camera, action" approach. Our guest rooms will be finished. The hotel is quite simply spectacular. Marcel Wanders has introduced a great hotel in a market that we continue, as we look at decreasing market trends in the general southeast area, we see in general our assets are running against those market trends to date. We're confident that the strength of our Mondrian name and our sister hotels in the same market are going to be significant contributors to that success.

Rich Szymanski

And that's a good point Fred makes about the sister hotels. Delano has held up very well and the tie-in between Delano and the Mondrian I think will work very well for us.

Operator

Your next question is from the line of Will Marks with JMP Securities.

Will Marks - JMP Securities

You mentioned, I think, in the last comments about flat occupancies, and you're seeing it more in rate. Is that accurate to date? In October, you're really not seeing a hit to occupancies?

Fred Kleisner

It's a relatively narrow hit to occupancy. I think a better way to put it, Will, is the heavier effect on negative RevPAR in October trends is in the area of rate. We've taken a very conservative approach and we have the benefit of full hindsight; we're one of the last hotel companies to report results, to see what's going on in October. We've taken the conservative approach to say we're going to assume those trends are going to continue through the end of the quarter and into next year, but demand has slipped a bit; however, we feel that as RevPAR drops it will be more on the rate-driven side than on the occupancy side.

Will Marks - JMP Securities

And is that unique? I think, with New York in particular, we are starting to see some occupancy declines.

Fred Kleisner

Well, I'll tell you what we are seeing. Again, we're not doing a Q4 call at this point. However, we can say that, as we look at our competitive sets during the 31 days of October, our hotels as we expected are performing at the top of each competitive set. There is clearly far less slippage that we're seeing by comparison to our competitive set occupants in New York and in Miami, in particular.

Will Marks - JMP Securities

Okay. A couple more questions, one on the displacement; you continue to refer to $12 million to $15 million of EBITDA displacement. I'm wondering if that's a current figure based on current conditions; or how should we look at that in light of this new environment?

Rich Szymanski

The $12 million to $15 million, $10 million of it was pretty much in the books and done, with Morgans and Mondrian LA, and just how we arrived at that, we just looked at what it did two years ago and when it was open fully. So, when we look at our downside scenarios, we sort of add that back and then take whatever number or whatever percentage downward that we model off that. So that's sort of what we count as our base and then we back off that.

Fred Kleisner

Will, consider that a gross number. We then apply our sensitivity analysis to that in our downward analyses.

Will Marks - JMP Securities

So, if we add that to your current guidance and then take the 1% for every 1% hit, it's double in EBITDA? That's how we should be looking at it?

Rich Szymanski

Yes, that’s fair, and we are not assuming a return on the capital invested either; when we plan our downside scenarios; that's the way we model it.

Will Marks - JMP Securities

And then you layer in the cost savings on top of that?

Rich Szymanski

Right.

Will Marks - JMP Securities

My last question is just on maintenance CapEx; can you give us any indication on '09? Are you cutting that back?

Fred Kleisner

Where we have mortgages in place, there are funding obligations. However, we have three hotels that are debt-free and therefore we have a significant amount of discretion with regard to CapEx. Having said that, it's not real smart to bleed the property. We're in a great position because we have just renovated each of our hotels. I can't think of a time in my career that I've had an entire company where our guest rooms are all in great shape; our hotels are all in great shape. Therefore, we have the ability to manage cash. We haven't built that in yet because we could take a far more aggressive approach with regard to the CapEx needs that drive the business needs as we look at next year. We've been very careful in that regard. Where we look to spend what cash we have available are in strong-return projects like literally expanding, building an addition to Hudson Hotel of 30 rooms at $200,000 per unit, that's a fairly good investment in midtown Manhattan.

Rich Szymanski

I think the fact that everything's renovated will help us greatly. So there are really no long-term big projects. So, we can be very flexible, look at the projects, look at what we're spending quarter to quarter, and should we want to reduce it, we could. So we do have that flexibility.

Operator

Your next question is from the line of Amanda Bryant with Merrill Lynch.

Amanda Bryant - Merrill Lynch

What, if any, refinancings do you face on the unconsolidated JVs; in particular, the Hard Rock and the South Beach project over the next two years? And then, as a follow-up, given your significant presence in New York and certainly the stresses in the financial services industry, how do you think about maybe remixing your business over the next several quarters?

Fred Kleisner

Let's take the last point that you've asked since that's a business point, and I'll let Marc and Rich deal with the issues on refinancings in non-consolidated JVs. One fortunate thing about our three operating hotels in New York is none of them are in locations that have singular dependence on any particular market segment. They're broad-based and deep markets. And, in particular, we have no significant dependence on the financial services market. We're in the theater district, the fashion district, and in midtown. That allows us to rebalance our market mix as is where is. As an example, we have not called on the financial service market generators since January. We could see what was going on. Where we see a stronger growth is from healthcare, from pharmaceuticals; certainly the fashion areas and the retail areas have continued to show strong demand generation, and we have not seen any significant decrease in travel from Europe or South America, from South America to South Beach and from Europe to New York.

I'll let the guys deal with the discussion of non-consolidated JV debt; Hard Rock and Mondrian South Beach.

Rich Szymanski

The Hard Rock, the debt is due in 2010, and there's an extension option there. I'll let Marc discuss Mondrian South Beach.

Marc Gordon

Mondrian South Beach comes due in the tail end of 2009, and we are working with the lender currently on an extension. We, the ownership joint venture of which we're a part, are working with the lender on an extension.

Amanda Bryant - Merrill Lynch

Okay. So you'd probably push for a one-year extension on that?

Marc Gordon

Actually, the deal that's on the table is beyond one year, but given that it's not done, I don't want to get into a terrible amount of detail at the moment, but hopefully in a relatively short while we'll be able to make an announcement on that.

Fred Kleisner

Our target is Q4 '08 to make an announcement on that.

Operator

Your next question is from the line of David Katz with Oppenheimer.

David Katz - Oppenheimer Funds

I wanted to just get some color on a couple of markets. Firstly, the Scottsdale property looked like it was a little bit tough. And then, if you could give us some thoughts on what you're seeing at your London properties that would help. And then I have one other quick one.

Fred Kleisner

Scottsdale has been a challenging market. It is not a major contributor, EBITDA wise, to the company at this time nor do I expect it to be any time soon. We have gone in as a management team from our corporate office and reengineered our approach to managing that hotel for efficiency and changed the senior management. We feel we have a very firm handle on that hotel, but David, I wouldn't want to mislead you. I'm very comfortable with every one of the markets in which we operate with the exception of Scottsdale. That's the bad news. The good news is that it has no appreciable or material effect on the company or its future.

On London, we've had a negative effect from the exchange rate this year. A great deal of our business is US-based. We've had to rethink our sales solicitation effort to go after European continental business along with American business. London has been down a bit; however, our properties are in good shape and they're at great locations. It's a matter of refocusing our sales staff in London. I don't have any significant or long-term concerns on the production from those properties.

David Katz - Oppenheimer Funds

Okay. And, then, if I can just ask one other question, there is exposure to condos, right? Mondrian South Beach?

Fred Kleisner

Correct.

David Katz - Oppenheimer Funds

Can you just sort of help us with the parameters of what that exposure is and where you're at?

Marc Gordon

David, the project in South Beach is the only one we have in construction today that has any for sale component. I think we've given statistics in the past as to how we're doing there. We've closed on 78 of the units and about 150 of them are under firm contracts with non-refundable deposits. So the sales effort has been pretty positive. And in fact an important statistic is that within the last 60 days nine of those closings have occurred. So it's not as if it's in the distant historical past, but it's current. We believe we will be able to convert the bulk of the firm contracts to closings as soon as we open, which is obviously just a short mile away from now. The capitalization of the project is not dependent on sales. If there are no more sales, we'll own a building that will have some sold condos and will ultimately be largely operated as a hotel although I do expect that over time we will sell the additional units, but I don't think that's a likely scenario. I think we will end up closing on a significant portion of the contracts and we will continue to market for sale those that don't close and the few that are under contract today.

Operator

Your next question is from the line of Lee Cooperman with Omega Advisors.

Lee Cooperman - Omega Advisors

This is not a trick question and not designed in all honesty to be a nasty question, but I'm trying to figure out whether your stock price has declined more rapidly than business value or less rapidly than business value. It's a three-part question. Prior to the release today, I calculate that we have spent $87 million buying back stock at an average price of $16.18. I think now we're up to about $104.8 million in total. Tell me if that is right. And what is the average price we paid? So the first question is; do I have the right numbers?

The second question basically is, in your humble opinion, and by the way I think you're doing a very fine job in running the company in a very difficult environment. So I'm sincere when I say that it's not designed to be a nasty question. I'm curious. When we were buying it back at $16 or $17 a share very recently, I assume we did it because we felt that the business was being mis-valued by the marketplace. And I would assume therefore you would probably respond, do that you think the stock price is disassociated from the fundamental value of the business; so I'd like to kind of hear you articulate that, and secondly if I take all the moving parts you folks have talked about this afternoon, it sounds to me like we still expect to generate some significant free cash flow in the coming 12 months. Or do I kind of misread that? So, any help you could be in those two areas, I'd appreciate it.

David Hamamoto

I think you're right that if we hadn't bought the stock back at $16 a share, we would have been better off and we'd be buying it back at today's price, which could mean we'd buy back a lot more of the float, but I think the reason we did it is we do believe that the underlying real estate value supports a price in excess of our average share buyback price, which I think, Rich, is around, I believe, is around $16 a share?

Rich Szymanski

I think you're in the ballpark, Lee.

Lee Cooperman - Omega Advisors

And that's a total of $104.8 million?

Rich Szymanski

Yeah, about $105 million, right.

Lee Cooperman – Omega Advisors

Right.

David Hamamoto

I think some of the things that we tried to point out in terms of the value is that three of the assets that we own are unencumbered at $32 million of EBITDA. They're in high-barrier-to-entry markets; two hotels in New York and the Delano; put a multiple on that, and there's a significant value, way above where the stock price is trading just on those three assets. So, I think we continue to believe that the asset value is there. Obviously, a lot of the stocks in the market today are trading as if the companies are going to go out of business. And that's why we tried to focus on liquidity, and we've done extensive analysis with significant EBITDA deterioration to make sure that we've got the liquidity to make it through the cycle. And ultimately, we believe that the underlying value is there to support the company both in terms of its asset value and also the value of the brands.

Lee Cooperman - Omega Advisors

I'm not an expert in this business and I'm relatively new to the company, but I think the last 12 months' cash flow you said was about $34 million after debt service. And you said that we had some bank savings between cost reductions and the rooms out of service that we could withstand a 10% decline in RevPAR and still be flat. So, is it fair to assume that unless we have a very draconian environment that you would anticipate generating free cash flow over the next 12 months?

Rich Szymanski

Yes, correct.

Lee Cooperman - Omega Advisors

And the third question is, again, this is a thought; conceptually, we're in a very difficult environment and I think most of these repurchase programs have been very, very misguided. How risky would it be for you to take one of these hotels? I assume that these three hotels you own that are on mortgage, that are prize properties, are worth several hundred million dollars in the aggregate. Putting a mortgage against one of them and taking half the money and buying back stock at 25% of what you paid for it four months ago and the other half of the money being put aside for liquidity needs. I mean, isn't that the real intelligent thing to do, unless you think that the stock price properly reflects the change in the business climate?

Fred Kleisner

Yes, Lee. That is the right approach. In fact, what we mentioned earlier is we are carefully evaluating the placement of mortgage debt on one or more of our three unencumbered assets. We think that at low leverage that's a smart thing for us to do. We also feel that where we have available cash our view is the same as your analysis; that the stock price has dropped far faster than the value of our business. Having said all of that our first priority on cash is to retain cash.

David Hamamoto

I think liquidity is the most important thing, but I think to the extent we put long-term financing on these assets and generated incremental liquidity, we'd be in a position where we felt comfortable spending on discretionary items, and it's clear at this price level that the best investment that we can make is buying back our own stocks.

Lee Cooperman - Omega Advisors

Thank you, I congratulate you, I know it's a tough environment; you're doing a very good job.

Operator

There are no further questions at this time. I would now like to turn the conference back over to Mr. Fred Kleisner for any closing remarks.

Fred Kleisner

I have just one last thing to say. I want to thank you all for joining us today, the day after Election Day; I didn't know who would turn out. We look forward to speaking to you again as we turn the year. Thank you.

Operator

Thank you for participating in today's Morgans Hotel Group Co., third quarter 2008 earnings conference call. You may now disconnect.

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