Morgans Hotel Group Co. Q4 2008 Earnings Call Transcript

Morgans Hotel Group Co. (MHGC)

Q4 2008 Earnings Call

February 26, 2009 5:00 pm ET

Executives

Rich Szymanski – Chief Financial Officer

David Hamamoto – Chairman of the Board

Fred Kleisner – President and Chief Executive Officer

Marc Gordon – Chief Investment Officer

Analysts

Will Marks – JMP Securities

William Truelove – UBS

David Katz – Oppenheimer

Ryan [Malakar] – Morgan Stanley

Leon Cooperman – Omega Advisors

Steve Altebrando – Sidoti & Company

Presentation

Operator

Good afternoon. Welcome to the Morgans Hotel Group Company's fourth quarter 2008 earnings conference call. I would like to inform all participants that your lines will be in a listenonly mode. After the speakers' remarks, there will be a questionandanswer period. (Operator Instructions)

As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. I would now like to turn the call over to Mr. Rich Szymanski of Morgans Hotel Group. Please go ahead.

Rich Szymanski

Thank you. Good afternoon. Thank you for joining us on our fourth quarter 2008 conference call. Joining me on today's conference call are David Hamamoto, Chairman of the Board; Fred Kleisner, President and Chief Executive 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 forwardlooking statements. They are not guarantees of future performance; and therefore, undue reliance should not be placed upon them. We refer you to all the company's filings with 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 to David.

David Hamamoto

Thanks, Rich. Good afternoon. Before turning the call over to Fred for a discussion of the company's fourth quarter results, I'd like to make a few brief remarks. It should come as no surprise to anyone when I say that due to the significant downturn in the globe economy, the fourth quarter of 2008 became one of the most difficult operating environments the hotel industry has seen in a long time. This downward trend continued into the beginning of this year, and it is unlikely things will turn around in the near term.

In light of this, the Morgans management team and our dedicated employees continue to take a proactive and aggressive approach toward cost reductions in our balance sheet in order to ensure the financial stability of the business. With regard to cost reductions, we are taking all the necessary steps to right size the business for this difficult period while still maintaining excellent service and a unique experience for our clientele.

From a capital standpoint, we are taking decisive actions to manage our balance sheet and preserve our ability to fund our business through this economic storm. The company has limited capital commitments and no significant consolidated maturities in 2009 and three hotels that are currently unleveraged. In addition, as a preparatory measure for the possibility of a more severe downturn, we are pursuing other opportunities for additional liquidity to insure our financial position remains solid.

Morgans has some of the strongest brands in the industry, compelling assets, and an experienced management team with a track record and flexibility to successfully lead through this critical time. I am confident that Fred, Rich, and the rest of the team will continue to execute aggressively in the coming weeks and months ahead. I am also confident that they are effectively positioning the company so that we can realize the underlying validity of our brands and our properties when the economy turns around. With this, I will turn the call over to Fred.

Fred Kleisner

Thanks, David. Good afternoon, everyone. Thank you for joining us for our fourth quarter 2008 earnings conference call. There are several topics I'd like to address in today's call. First, I'd like to take a few moments to touch on the current economic and industry environment. Then I'd like to update you on our liquidity position and review our top line fourth quarter results. After that, I will provide you an update on our recent expense reductions and revenue enhancement initiatives.

As David mentioned, 2008 ended on a very difficult note, the fourth quarter being one of the most difficult quarters in the hotel industry in recent memory. The economy moved to crisis mode, commencing September 15. This led to a pullback in demand in the fourth quarter, and we've seen that trend continue and deepen as we entered the first two months of this year.

It's not something that is specific to Morgans, the hotel industry, or even this country. It is a worldwide crisis. Recovery will come, however, its timing at this time is not possible to predict. The only thing I know with certainty is that we have already instituted, as we've shown in our yearend results, appropriate and targeted steps to deal with this downturn and we're fully prepared to do more.

Focusing on the fourth quarter results for the hospitality sector, revPAR was down dramatically across the industry. The luxury segment in particular dropped 17% in the fourth quarter. Clearly, market conditions have called for aggressive action by companies throughout the hospitality industry.

Two of our top markets, New York and Las Vegas, experienced significant drop in demand in the fourth quarter. It's important to note that our properties generally fared better than their competitive sets due to the strength of our brands and the focused sales effort and our focus on revenue enhancement.

While no capital structure is bulletproof, we believe ours is among is strongest in the industry. Rest assured your management team has worked through prior cycles, both on the operational and the capital side of the business. We are committed to doing whatever is necessary to shepherd through this challenging period to preserve the long term potential of the company.

I want to emphasize why we believe Morgans is firmly positioned in terms of its capital structure. First and foremost, at the end of the fourth quarter we had $50 million in cash plus a revolving credit facility with no borrowings. Second, through the four quarters of 2008, we were able to generate $25 million in free cash flow after interest and maintenance capital. Third, we recently renovated four properties and, as a result, have no deferred capital expenditures at our owned hotels. Therefore, our maintenance capital requirements at those hotels will be minimal for the foreseeable future.

In addition, as discussed in our third quarter call, we have reduced our aggregate capital commitments to joint ventures, particularly those in Las Vegas. Fourth, we have no significant consolidated nearterm maturities. Finally, we have three unleveraged properties all recently renovated top to bottom that serve as additional foundation for our balance sheet; and we are now exploring steps to unlock additional flexibility for our balance sheet based on these three unencumbered assets.

Let's look at our fourth quarter results. As we indicated in our preliminary announcement on February 10, our results were affected by the Q4 industrywide dynamics. Our revPAR from comparable hotels declined 19% in constant dollars in the fourth quarter versus the fourth quarter of 2007. Adjusted EBITDA declined 35%. For the full year 2008, revPAR from comparable hotels was down 5% versus 2007. And adjusted EBITDA declined, however, by only 2% for the full year.

The aggressive cost reductions and contingency plans we eliminated [sic] beginning in January of 2008 allowed us to maintain an extremely favorable ratio of EBITDA percentage change to revPAR percentage change throughout the year, clearly demonstrating our ability to manage an extreme downturn in revenue with appropriate expense reductions that preserve cash flow.

Through 2008, we executed a multiphase contingency plan to improve efficiencies and support EBITDA margins. In the first three quarters of the year, we introduced cost savings initiatives that reduced annual operating expenses, both in the corporate office and in our hotels in the field by approximately $10 million. In Q4, we implemented another $10 million in annualized cost savings through both our corporate and property level reductions.

Given the continuing declines in the market since December, we implemented another $5 million in annualized cuts in January of this year. In the fourth quarter, based on these aggressive yet targeted actions, we maintained a ratio of 1.4 times EBITDA percentage decline to a revPAR percentage decline. This compares to industry norms that we view as typically around 2 and 3 times.

Most importantly, we have the ability to institute further cost reductions on the same targeted basis and, with emphasis, I say are already finalizing plans and actions in this regard.

Additionally, we believe our experienced management team has allowed us to implement these cost cuts without impacting the overall quality of our guest experience. This has been accomplished with careful, targeted approach and executed on practically a real-time basis.

Our priority is to maintain a high level of quality, the quality our guests have come to expect, and we measure this carefully in two ways. The first is our guest experience tracking survey. In the first three quarters of 2008, our guest satisfaction metrics went up each quarter on a quarter to quarter basis. In Q4, notwithstanding the reductions in costs we instituted in that quarter, we were able to maintain the same level we achieved in Q3. At Morgans in New York and Mondrian LA, two properties we just recently renovated, guest satisfaction scores improved dramatically.

The second way we measure this area is our revPAR fair market share index in each of our competitive sets. As we look at Smith Travel Associates Star Report, Morgans hotel group revPAR continued to post better results than the relevant competitive sets in their markets during the fourth quarter of 2008 by over 5 percentage points.

Despite the difficulties brought on by the economic crisis, we're confident that the core value proposition of our business model, that is our product and service differentiation, extraordinary brands without being a chain, irreplaceable locations, and careful management of financial flowthrough. Significantly, we have some of the most compelling brands in the industry and we have kept our properties fresh.

In 2008, we completed important renovations of two of our most renowned properties, Morgans in New York and Mondrian in LA. The completion of these projects put 350 rooms back in service and we opened a new property, Mondrian South Beach, just two months ago in December. This is a spectacular property with a great example of how we offer a truly unique venue and experience consistent with our strategy going forward, the majority of the revenue generated by this property is expected to come from high margin management fees.

For 2009, we have three projects  Mondrian Soho, Ames in Boston, and the expansion of the Hard Rock Hotel and Casino. They're expected to generate additional management fees in late 2009 and early 2010. Our new entertainment venue at the Hard Rock, The Joint, as well as our new meeting space will both open in midApril, over a month early. And we expect the north tower at Hard Rock to open its 550 new rooms two months early in July, capitalizing on the seasonality of that Las Vegas market, the summertime.

Going forward, our strategy for growth is to focus on management agreements with little or no equity, similar to the arrangement at Delano Dubai which already contributed an upfront $1.5 million branding fee in the third quarter. These kinds of arrangements we expect to make as we expand domestically and internationally.

I'd like to take a moment and talk about a key revenue initiative that plays into our growth strategy, both revenue growth and property growth. The last few years our online business, that is the business generated by morganshotel.com, has grown significantly. In 2008, over 20% of our total room revenue came from our proprietary website, morgans.com, with an 18% premium average rate to go with it.

Notably, this avenue of generation for our revenues has grown from 2003 from 8% to, as I said, over 20% in 2008 and continues to grow. This sales channel has proven increasingly important as a profitable business source, particularly in the downside of the market.

With this in mind, tomorrow we will launch an entirely new website that provides our guests with a unique, distinctive, and immersive experience. The new site includes enhanced functionality that will allow guests to more easily book rooms as well as book services online in real-time, including spa appointments, restaurant reservations, and theater tickets.

Our website presence is a highly strategic asset for us, and we're excited we have this new vehicle to connect with our customers as we look to garner a greater share of what has become a shrinking pie.

With that, I will turn the call over to Rich for additional details on our financial picture and our thinking for 2009. After which, I will provide closing remarks.

Rich Szymanski

Thank you, Fred. I'd like to focus on our fourth quarter earnings and a detailed review of our liquidity position as well as our thinking for 2009.

Our adjusted EBITDA for the fourth quarter was $22.2 million, a 35% decrease from the fourth quarter of 2007. RevPAR for our systemwide comparable hotels for the fourth quarter was $234.52, a decrease of 23.3% or 19.1% in constant dollars from the fourth quarter of 2007. The decline was primarily rate-driven, particularly in New York and London as ADR decreased by 17% systemwide.

As we have done all year, we kept a close watch on operating costs. For the quarter, operating costs of systemwide comparable hotels decreased by 13%. We measure our flowthrough and cost control by the ratio of the percentage decline in EBITDA to the percentage decline in revPAR, and we believe industry averages are typically two to three times at the hotel level.

As Fred mentioned, during the quarter we achieved a 1.4 times ratio, significantly lower than the industry norms. The combination of aggressive and proactive cost control, along with our food and beverage operation, has helped us to mitigate the shortfall in revenue. In addition to the cost savings achieved earlier in 2008, we implemented restructuring plans in October of 2008 and in January of 2009 that we expect to result in $15 million of savings in 2009. And we will continue to review our operations for more efficiency.

Liquidity and the preservation of capital is our number one priority. Similar to our approach to cost control, we're taking a proactive approach to our liquidity. 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 fourth quarter with approximately $50 million in cash and cash equivalents. This amount was bolstered by a dividend from our London joint venture of $11.5 million in December. As of yearend, we had capital commitments to fund projects of approximately $22 million. This includes letters of credit of approximately $11 million for the Hard Rock expansion, which has been outstanding since 2007, and $4 million for the Ames Hotel in Boston.

With the completion of the Mondrian LA and Morgans renovation projects in September 2008, we have no significant capital requirements at our owned hotels. Given the excellent condition of our properties, we estimate maintenance capital to be between $6 million to $8 million in 2009.

We're beginning 2009 from a strong base of cash flow. For 2008, we generated $25 million of operating cash flow. Our consolidated operations produced $72 million of EBITDA during the period, our consolidated interest expense was approximately $35 million, and maintenance capital was approximately $12 million.

Regarding financial covenants, we currently only have one consolidated debt instrument with outstanding debt that contains financial covenants, which is the $50 million trust preferred notes. The trust preferreds contain a trailing 12month EBITDA to interest ratio of 1.4 times that we may not fall below for four consecutive quarters. The trust preferred covenant ratio was 2.4 times as of December 31, 2008.

We also have financial covenants associated with our line of credit. The credit facility has an interest coverage test of 1.75 times and debt to EBITDA covenant of 6 times in 2009.

Under these covenants, debt is net of cash and excludes the convertible notes, the trust preferred notes, and The Clift capitalized lease. Our ratios as of December 31 were 4.4 times for debt and 2.4 times for interest coverage. The revolving credit facility which currently has no borrowings outstanding is secured by our three hotels in premier locations  Delano in South Beach and Royalton and Morgans in New York.

As part of our strategy to further increase liquidity and to be prepared for the possibility of a more severe downturn, we are pursuing opportunities for additional liquidity and intend to take advantage of the equity in our three unleveraged assets. It should also be noted that we have approximately $60 million of tax NOLs which can be used to offset taxes on future income, including gains on sales of assets.

With regard to consolidated debt maturities, we recently extended a $10 million mortgage on the Gale to January 2010. In addition, we have begun discussions regarding our nonrecourse mortgage on Mondrian Scottsdale, which is due in June of this year; and we do not intend to invest additional capital or fund cash flow deficits at this hotel.

We also have $370 million in mortgages on Hudson and Mondrian in LA due in July 2010. These mortgages may be extended to October 2011 if the applicable hotel has a 1.55 times debt service coverage ratio for the first half of 2010. If we do not meet the extension test, we have the ability to prepay a portion of the mortgages to qualify for the extension. I should also note if the economic crisis continues, there could be issues that we will face at joint venture properties that are more highly leveraged.

In summary, we have taken positive steps in recent months to limit capital commitments, extend maturities, and reduce our operating costs. Turning to our outlook for 2009, it goes without saying that it's very difficult for anyone to predict what will happen this year given the dramatic shift in demand that we continue to witness.

As Fred mentioned at the beginning of this call, the market conditions in January and February have declined versus the fourth quarter of 2008. In light of this, we will continue to manage our business and our capital position in a proactive and aggressive manner. We're not comfortable defining a specific revPAR target or range for the year because of the continuing uncertainty and volatility in the market.

However, to provide a framework, we can tell you that our goal is to maintain a ratio of EBITDA percentage decline to revPAR percentage decline of between 1.5 to 1 and 2 to 1. As an example, if revPAR for the year were to decline on average 20% to 25%, we would expect 2009 adjusted EBITDA to be between $45 million and $60 million. With that, I would like to turn the call back to Fred.

Fred Kleisner

Thanks, Rich. I would like to reiterate notwithstanding the difficult economy, we believe we're in a solid financial position. We have taken and are taking decisive steps to manage controllable costs and maintain a premier experience for our guests. We have unlocked significant cash flow from sequential cost savings initiatives that are highly targeted and, we believe, sustainable.

From a capital standpoint, we believe we have sufficient cash to run our business and no significant nearterm consolidated maturities, also three hotels that are debt free. However, we're mindful of the continuing economic situation. We're taking several steps to further reduce costs, preserve cash flow, and strengthen liquidity.

From a longterm perspective, we continue to believe in the potential of our business model and differentiated approach to the market. We have irreplaceable brands in markets with historically high demand and generally limited supply and supply growth. As we move forward in the midst of current unprecedented economic environment, we are extremely focused on preserving shareholder value while also positioning the company to benefit when the economy begins to turn around. I would now like to open the lines for questions.

QuestionandAnswer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Our first question comes from Celeste Brown with Morgan Stanley. Miss Brown, your line is open. There is no response from that line. Your next question is from the line of Will Marks with JMP Securities.

Will Marks – JMP Securities

Good afternoon, everyone. A few questions here. One, can you give a little more detail on the trust preferred covenant and you had mentioned, Rich, I believe that you can't fall below the 1.4 figure for four consecutive quarters, you mean just one time on a trailing basis, correct?

Rich Szymanski

No, four consecutive times on a trailing basis.

Will Marks – JMP Securities

So it has to happen the four consecutive quarters. Remind me what it was in this past quarter.

Rich Szymanski

2.4.

Will Marks – JMP Securities

In other words, the soonest it could happen would be a year from now, the soonest you could violate the covenant.

Rich Szymanski

We are not giving guidance on predicting. We're significantly over it today. It is calculated on a trailing 12 basis.

Will Marks – JMP Securities

For example, if you fell to 1.3 after the first quarter, that's only one time.

Rich Szymanski

Yes. It would have to be four times, correct.

Will Marks – JMP Securities

I just wanted to be clear on that.

Fred Kleisner

Know that we're not going the wait until a wave washes over us in that regard. We have opened lines of communication with the sponsor of the trust preferred to look for the opportunity to adjust that covenant in advance of any necessity.

Will Marks – JMP Securities

Second question, you were active, I believe, in the repurchase market during the fourth quarter. Can you touch on anything in the first? I assume that's all on hold.

Rich Szymanski

We have not done anything in the first. The repurchases occurred in the first two weeks of October.

Will Marks – JMP Securities

Are there any plans to do so?

Rich Szymanski

Marc will comment on that.

Marc Gordon

We believe there's extraordinary value in our shares at current levels. With the primary emphasis on liquidity that both Fred and Rich touched on, we are focused on conserving cash rather than repurchasing the securities.

Will Marks – JMP Securities

And on the year-to-date performance, I don't think there was much comment on that. Can you discuss maybe the different markets in particular how New York has done and we see the weakness in the travel numbers? Are you consistent with those? Any thoughts would be appreciated.

Rich Szymanski

If you look at the numbers that you're seeing for the individual markets and you drill into our competitive sets, we're a bit better than our competitive sets. The first two months of the year have opened in challenging fashion, but as you look at the boutique segment, there was just some numbers came out yesterday looking at the first two months of the year as well as the Smith travel numbers. We're on those numbers and in our competitive sets it varies from property to property, but we continue to be a bit better than the participants in our account sets.

Will Marks – JMP Securities

Can you tell us what those boutique numbers that came out from two months were?

Rich Szymanski

Let us get back to you offline on that.

Will Marks – JMP Securities

That's okay. All right. I guess just a final question. On the scenario you gave, it seems to me from a lot of companies we're hearing from, there is discussion or within guidance there's an assumption that fourth quarter it gets a little bit better because of an easier comp. It doesn't appear to be the case with that 20% to 25% figure that you're.

Fred Kleisner

Bear in mind, Will, that's simply an example to use as framework. We're not saying that couldn't happen. There is only one reality that we're looking at and that's the actual performance in 2008. We do know that progressively things became more and more challenging through the first three quarters and became significantly challenging in the fourth quarter. However, it doesn't make a lot of sense for us to start predicting when things get better. I don't know for certain when they will. I don't believe anyone does.

Operator

Our next question comes from the line of William Truelove with UBS.

William Truelove – UBS

Good afternoon. Thanks a lot for the detailed walk through of the balance sheet and the covenants. I think that's quite important. Looking into securing additional liquidity, obviously you have three hotels totally unencumbered, nothing on the line.

Are you considering looking at selling any of your owned hotels to generate some liquidity? Because a lot of people would say that you could sell some of your hotels and basically go private in a leveraged buyout. Can you comment on that possibility and the value of your shares relative to the assets? Especially those that are unencumbered?

Fred Kleisner

When I spoke about the balance of our management team, I sit and look at the team I work with. One of the strengths we have at this position point in a very, very tough market is Marc Gordon's key association with this company. Marc handles all of our capital markets, property sales and acquisitions, as well as any of the refis that we're doing. Let me have Marc comment because, I don't know if he sleeps a lot lately, he thinks about this a lot.

Marc Gordon

Thank you, Fred, for the vote of confidence. In terms of your question, as I mentioned before, we believe that there is extraordinary value in the shares in relation to where the stock has been trading for a pretty significant period of time now.

I think in your question, though, was primarily about how we can generate additional liquidity. Certainly the existence of the three assets which have no borrowings against them currently is a great source of potential liquidity, and we are looking to a variety of potential transactions that relate to those assets. That could take the form of borrowings against those assets or a sale of a partial or complete interest in those assets. At this point in time, we're not far enough along to announce anything. I don't know that it's valuable to get into any greater detail than that.

William Truelove – UBS

I can appreciate that. Fred, you mentioned that going forward you have your expansion plans really require almost no equity. So when we're talking about generating tons of proceeds, seems to me that one of the logical choices would be share repurchases if there's no CapEx and no plans for additional equity investments in your growth strategy, right?

Fred Kleisner

Marc's comment was well chosen. It's something we've talked about a great deal. Our first priority on cash is to retain cash. Until we have a stronger assessment as to the trends of business in general and business in the cities in which we operate, as that process goes on to look for additional creative ways to increase the liquidity of the company.

Should that occur, we'll still first look at let's conserve as much cash as we possibly can. If we have absolute certainty that we're in a position that can withstand any eventuality, we would look at the potential uses of those funds. Included in that certainly could be equity repurchase. But we'd also look at other forms of repurchase, including debt.

Operator

Our next question comes from the line of David Katz with Oppenheimer.

David Katz – Oppenheimer

The Soho Mondrian, I apologize if I missed something in here, that's a project that's still on the board and still looking for funding, is that right?

Marc Gordon

It is partially right. It is still on the board, but it is not looking for funding. All of the equity that we expect to be invested in that project has been invested for a period of time now, and it has a thirdparty construction lender who has been funding.

David Katz – Oppenheimer

Then, just an operating question. I guess we're all trying to see into the future and think about what the contingency plans could look like. How far away would you guess we are from looking at hotels and maybe closing off some floors and constraining off some of the supply that you have in your hotels? Is that three moves from now or one?

Fred Kleisner

It's a consideration I have made every time we have sat down in the past two quarter to look at what are the components parts of the next step. The first step in that consideration is looking for each hotel to, on a weekly basis, give us their going forward projection of the number of sellout nights, the number of nights they will be over 95% occupied as they look at the balance of the year and when those sellout periods will be placed. Based on that, we will make determinations as to the shuttering of sections of hotels. The larger the hotel, the more likely that consideration is made.

Know that it's something I have done in the past, have always looked at in the past, and there is a checklist one follows when you make that decision. It does save money. One needs to understand we are limiting the inventory of the hotel at that point, and it needs to be coincident to our ability to book to capacity subject to cancellation factor and casualty.

David Katz – Oppenheimer

Just one more to that end. Looking through, I know Fred you've talked in the past about yield management and some of the tools that you have available. I can imagine in this environment perhaps the computer that figures it out may blow up or overheat just because it's so difficult.

With some of the declining occupancy, if you could talk about what your rate strategy is, because we do see a wide range of operators, some saying look, you can cut price in five minutes and the demand still won't be there and it will take you years to work it back up, etc. If you could just talk about your philosophy on that.

Fred Kleisner

Step one, I firmly believe that rifle shooting that consideration demand generator by demand generator, channel by channel, is the appropriate way to get it right. Therefore, know that whatever decision you're going to make will, in fact, yield revenue in real-time in the quarter for the quarter in the week for the week in each decision.

Step two is to look at our business model. We run a very high and favorable ratio of food and beverage, emphasis on beverage, sales to room sales. Therefore, we will make a bit greater consideration toward supporting occupancy because we know it brings the extra sale to us.

Lastly, we will calculate two cost factors so we know where we can logically position our rate offering on a daily and weekly basis. The first consideration is what is our total cost per occupied room, that is from the first dollar to the last dollar? And secondly, the most important calculation, what are our incremental costs per occupied room from our base percentage point of occupancy that we're seeing at the time?

That allows us to make decisions where we know rooms are going to be vacant no matter what. That's a classic example of the right decision there. That's when we look at the opaque thirdparty providers and find out where can we hit the number to take advantage of the demand that does exist.

I am a firm believer that while computers support all this, it's great to have an automated environment. Those computer programs only prompt questions for our decisions. They help us validate our direction. At the end of the day, we operate through a very well trained, agile revenue management team led by Tom Buoy, who's been with the company nine years now, one of the best I've seen in the industry. It's also a function that is controlled centrally from the corporate office. It's one of the benefits of being a small, agile company.

David Katz – Oppenheimer

Thank you for that. One last question. Perhaps for Rich. Have you calculated what the impact of FX was in the quarter? We can look at the Sanderson and the St. Martins Lane and see some movements in there. How much EBITDA did it cost you?

Rich Szymanski

Around a million dollars.

Operator

Our next question comes from the line of Ryan [Malakar] with Morgan Stanley.

Ryan [Malakar] – Morgan Stanley

Just a couple quick questions for you. First thing we wanted to know is, obviously you mentioned some things about the Mondrian Scottsdale on the call and in the press release. I wanted to know what type of thought has been given to giving the property back to the banks, whether that's serious or preliminary or none of the above. And if there are any other properties that you were starting to think about that as well, particularly The Clift.

Then the other question I had really involved some of the covenants. You talked about additional borrowings to shore up some of your balance sheet, assuming additional debt would go towards some of your covenant restrictions. Do you have any idea as to a ball park EBITDA range that you're looking for for 2009 to remain in compliance with your covenants?

Marc Gordon

I will address your question about Scottsdale. As Fred mentioned in a different context, similarly at Scottsdale we are having conversations with each of the members of the capital stack there. Also as mentioned earlier in the prepared remarks from Rich, I believe it was, we intend to invest very limited additional capital into the assets, if any.

The result of those two things I cannot tell you exactly what the outcome will be. But there's obviously a range of them which involved what you had speculated about in terms of who ultimately owns the asset. You asked also about The Clift. The Clift is [inaudible] to a nonrecourse lease, and there is no maturity. There are many decades until we face anything along those lines with respect to The Clift.

I think for the rest of your question, Rich, you are probably best suited to respond.

Rich Szymanski

In the range, if we're down 20%, 25% in revPAR, then we have to look carefully at the covenants. Our approach toward it is twofold. One is to aggressively attack EBITDA. We gave a pretty wide range. That's because we have the flexibility to implement cost reductions. We can do it quickly, and we're looking at it and examining it.

The first approach is to make sure we maximize EBITDA. The second approach, as Fred alluded to before, is to communicate with lenders and sponsors and servicers and talk to them well in advance and make them aware of what's happening and have them understand where we're headed. That's how we're approaching the business.

Ryan [Malakar] – Morgan Stanley

Regarding The Clift, I shouldn't have said anything about a bank debt, I was more just thinking about at what level does cash flow have to drop to make it an issue where maybe it doesn't make sense to maintain the lease?

Rich Szymanski

Last year, we reported close to $8 million of EBITDA, the lease payment is $6 million. Again, that's a decision that is looked at long term and if it drops below in the short term, we would have to measure that decision over the long term. Based on last year's numbers, we were probably a $1.5 million to $2 million above the lease payment.

Operator

Our next question comes from the line of Leon Cooperman with Omega Advisors.

Leon Cooperman – Omega Advisors

Thank you. Just a small item. I don't fill out all these surveys, but I stayed four days at the St. Martins Lane in London a few weeks ago and I had a delightful experience. Somebody should fill out the forms so that can improve your survey results.

Fred Kleisner

We're going to get your email and make sure you get one of those surveys.

Leon Cooperman – Omega Advisors

Let me ask you a few questions. Are any of our properties crosscollateralized or is each property, loans stand on its own without recourse to other property values?

Marc Gordon

Other than the recourse debt of the company, which are the converts and the trust preferred, none of the consolidated financing is crossed. However, the two assets in London are part of the same 50/50 venture and the way the debt works there, it has the effect of those two being crossed.

Leon Cooperman – Omega Advisors

Secondly, I assume that the three unencumbered hotels, the Morgans, Royalton, and Delano, must have been appraised in concert with their serving as collateral for your $200 million undrawn revolver. Could you share with us what the appraised value was at the time that appraisal was done and if you have a view of their value in today's market?

Rich Szymanski

I don't recall the exact appraised value of those properties, but if you do the borrowing base test today on those properties, it would probably yield a borrowing base of around, in the neighborhood of $175 million just on that test. I don't recall the appraised values.

Leon Cooperman – Omega Advisors

It would stand to reason the appraised values could be twice the borrowing base or not that much?

Rich Szymanski

I would prefer not to speculate.

Leon Cooperman – Omega Advisors

Then, I guess, just listening to all the numbers, and I will have to look at the transcript, if I heard everything right, you are saying EBITDA, broad range 45 to 60; interest, I think, is about $34 million; maintenance, CapEx, we'll call $8 million; new CapEx or growth CapEx $22 million. Basically, those three numbers add up to about $64 million.

Best case, we could be close to flat cash flow, which means the $50 million in cash would be intact or possibly could draw it down by as much as $20 million. Is that kind of, am I understanding the numbers correctly?

Rich Szymanski

That's close. In the 45 to 60, there is some EBITDA generated by joint ventures which will not produce cash. You are pretty close.

Leon Cooperman – Omega Advisors

I guess the question was asked and answered, depends on whether you finance the three hotels, but we did spend a great deal of money buying back stock at $16 in July. Obviously if we had that decision to do over again, like a lot of other companies you wouldn't have done it. I know management has bought a great deal of stock back in November at twice the current price. I suspect you would think that the value of the business has declined much less rapidly than the magnitude of the decline of the price of stock.

I guess it's common sense, in this environment, you want to hold on to your liquidity. On the other hand, I assume you guys will be attuned to taking advantage of [inaudible] markets, mispricing, of either debt of equity securities if you had the chance. I guess the best chance would be if you could finance these three unencumbered assets, take that money and do something intelligent with it.

Fred Kleisner

Yes, Leon, that's correct.

Operator

Our next question comes from the line of Steve Altebrando of Sidoti & Company.

Steve Altebrando – Sidoti & Company

The Hard Rock at this point, is that completely written off essentially, off interest and JVs?

Rich Szymanski

Yes. We wrote that down.

Steve Altebrando – Sidoti & Company

That being the case, should we see I guess the losses from the JVs, whether it's coming through depreciation or interest expense, sort of trend back to preHard Rock levels?

Rich Szymanski

Yes. You know Hard Rock, as we open the addition, will have to ramp up a bit. We will still see some book losses on the property. The additional number this quarter was because of the writedown in the investment.

Steve Altebrando – Sidoti & Company

Is that resulting in the liability?

Rich Szymanski

Yes. The liability reflects the letter of credit that is posted of $11 million.

Steve Altebrando – Sidoti & Company

Did you have the debt balance for the London hotels?

Rich Szymanski

It's roughly around 100 million pounds, and we have 50% of that. At today's exchange rate, $70 million to $75 million.

Steve Altebrando – Sidoti & Company

Then the last thing, very sharp decline in corporate expenses, is this sort of a sustainable level for now?

Rich Szymanski

Yes. With emphasis, yes.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mr. Fred Kleisner for any final comments.

Fred Kleisner

Thank you all very much for attending our call today. We will look forward to updating you at the end of the first quarter. I will personally look forward to updating you when we see things turning around. I will be the first to call it when I see it. Thanks very much everyone.

Operator

Thank you all for participating in today's conference call. You may now disconnect.

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