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Morgans Hotel Group Co. (NASDAQ:MHGC)

Q3 2009 Earnings Call

October 26, 2009 5:00 pm ET

Executives

Michelle Reddin – Investor Relations

Frederick J. Kleisner – Chief Executive Officer

Marc Gordon – President

Richard Szymanski – Chief Financial Officer

Analysts

William Marks - JMP Securities

David Katz - Oppenheimer & Co.

Operator

Good afternoon and welcome to the Morgans Hotel Group Company third quarter 2009 earnings conference call. My name is [Julianne] and I will be your conference operator today. (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 Michelle Reddin of Morgans Hotel Group. Please go ahead.

Michelle Reddin

Thank you. Good afternoon. Thank you for joining us on our third quarter 2009 conference call. Joining me on today’s conference call are Fred Kleisner, the Chief Executive Officer; Marc Gordon, President; and Rich Szymanski, Chief Financial 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 as to future performance and therefore undue reliance should not be placed upon them. We refer to all of 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’ll pass the call to Fred.

Frederick J. Kleisner

Thanks Michelle and good afternoon everyone. Thanks for joining us on our third quarter 2009 conference call.

During the call today I’d like to first give you an update on the industry environment and our top line results for the quarter. I’ll also briefly discuss the proactive steps we’re taking to strengthen our capital structure and enhance shareholder value, which in the last two months alone has added $200 million of liquidity to our balance sheet. Marc will provide more detail on the recently announced balance sheet transactions and also talk about our development pipeline. After that Rich will walk you through the details of the quarter and related matters. At the conclusion we’ll be glad to take your questions.

Let’s begin with the overall operating environment. While business conditions remain challenging, we continue to see preliminary signs of recovery across the industry. The rate of decline in the lodging sector has slowed and we are beginning to see indications of return of demand in key markets. Most notably, in the form of improving occupancies in those markets. In fact, the rate of decline slowed meaningfully during the quarter itself.

Results at Morgans are directionally the same as general industry trends. The rate of decline in the adjusted EBITDA and RevPAR has slowed, although we’re nevertheless down significantly year-over-year. For the third quarter RevPAR from our comparable hotels was down 31% in constant dollars. Adjusted EBITDA was down 55%. During the quarter we saw continued improvement. September results were better than August with year-over-year RevPAR declining 23% in September. And we are seeing that sequential improvement continue in October.

We’re encouraged by the positive signs and returning demand. However, we still have work to do and our focus on maintaining efficiencies will not waver. Rates remain under pressure, booking windows remain short and we expect to see a slow recovery.

As I mentioned earlier, occupancies in certain key markets are up and approaching prior year levels. In New York, our core market, occupancies were at 91% for the quarter. In the first weeks of September we saw an upward trend in average daily rate as well, particularly due to high profile events including New York’s fashion show week in September, the United Nations General Assembly, and the United States Tennis Open. In particular, we were encouraged that fashion week in September showed meaningful improvement in traffic and excitement versus fashion week in February this year. We see that as another positive significantly of returning demand.

Our London properties also showed noticeable improvement in the third quarter. RevPAR declines were in the mid single digits, down approximately 6%. This was driven by continued limited supply and improving demand in this market.

We also saw improving results in Los Angeles, where RevPAR at Mondrian L.A. was down approximately 12% year-over-year compared to a decline in its competitive set of 27.9%. The strong relative performance of our all new Mondrian LA is particularly welcome news given the presence of several also all new competitors in its competitive set.

In Las Vegas, the Hard Rock Hotel and Casino opened its 490 room Paradise Tower, which drove a 7% increase in revenues at the hotel. We saw a continuation of high demand on weekends and we’re seeing an increase in midweek demand as well, driven by the opening of the new Hard Rock Convention Center. Hard Rock’s RevPAR decline continues to be less than that of the Las Vegas strip.

In contrast, Miami and San Francisco markets continued to face significant headwinds in the third quarter. In Miami, an increase in competitive supply combined with seasonally low periods in domestic U.S. demand and a moderation in European summer and South American winter travel affected all South Beach properties including ours. The San Francisco market also continued to face challenges. While the number of conventions remains stable, attendance was down significantly. This drop in group demand has resulted in a lack of compression across the San Francisco market.

To reiterate then, with some of our markets still struggling, others including New York are showing signs of improvement. While it’s too early to make any predictions based on these trends, we continue to monitor them closely. We believe that a sustained increase in occupancy is the precursor of our ability to increase room rates.

As demand grows, the ability to maximize pricing is a critical component in driving profitability. We believe the combination of our strong revenue management capabilities and high transient component of our business mix should enable us to swiftly implement pricing increases and outperform others in recovery. In addition, we have recently upgraded both our sales and revenue management teams, including the hiring of a new Senior Vice President Sales.

As we move into the fourth quarter, we expect to see easier comparables due to a steep downturn that occurred in the fourth quarter of 2008. So far in October our RevPAR is down a little over 15% across the portfolio, again with signs of improvement in selected destinations and properties.

Throughout 2008 and 2009 we have been focused on several initiatives to enhance the strength of our company including the reducing of expenses and enhancing of efficiencies to navigate through the downturn, increasing liquidity as well as addressing and extending maturities. We’ve been proactive in working on each of these three initiatives all year and we have been successful. In the terms of cost savings, we have successfully maintained the efficiencies achieved and we’ll continue to focus on cost controls while not compromising the quality of our guest experience as is evidenced by the fact that we have generally maintained our quality and guest satisfaction scores throughout the year. At the same time, we’re accelerating our focus on revenue enhancements by managing rates, dates and availability as occupancy levels continue to rise.

With regard to our balance sheet, we’ve added $200 million in liquidity in just the last three months through the credit line amendment we announced back in August and the Yucaipa investment announced just ten days ago. Marc will be discussing that momentarily.

Additionally, we continued to be successful in our negotiation with lenders as is evidenced by the extension effectively of the Hudson Hotel mezzanine loan which we announced last week. These recent announcements demonstrate our progress in strengthening our financial position of our company and effectively managing our balance sheet. I’m very pleased with the work our team has done in this regard to navigate the company through this challenging economic environment.

Before I turn the call over to Marc for a detailed discussion of these and other initiatives, I’d like to take a moment to acknowledge that last Monday, October 19, marked our 25th anniversary for Morgans Hotel Group. Over the years Morgans has developed from a single boutique hotel in New York to a multi-brand, internationally recognized company that offers guests a truly unique experience.

I’d also like to acknowledge Marc Gordon for the instrumental role he has played in the company’s development and I’m very proud to congratulate him on his promotion as President of Morgans. Marc has been a key member of our team for over a decade and has been a superb partner with me in the success we have achieved. I know our company will continue to strengthen and grow with our combined guidance and leadership.

With that I’ll turn the call over to Marc.

Marc Gordon

Thank you Fred and good afternoon everyone. As Fred just stated we’ve made several announcements recently about transactions and addressed concerns about our balance sheet, thereby enabling us to secure a safer and stronger future for our company.

As the financial and economic downturn became clear late last year, we identified areas of concern to you, our investors, and we prioritized those most fundamental to insure the financial stability of this company. We are pleased with the progress we have made in these areas thus far. We addressed the limitations in our line of credit, successfully amending the terms last quarter to give us access to $125 million on the line. We entered into an agreement with a mezzanine lender on the Hudson Hotel that we believe is effectively a three-and-a-quarter year extension of the mezzanine loan from the maturity next year, taking the maturity out to late 2013. Last, but certainly not least, as we have discussed in the past we are always exploring alternative ways of capitalizing the business and in that regard we raised $75 million of new capital through the recently announced Yucaipa transaction.

We believe the $200 million of liquidity from the new availability under the line and the cash from the Yucaipa deal should greatly assist us when addressing other issues in our capital stack not yet resolved. While there is still more hard work to be done in terms of strengthening our balance sheet, we have successfully dealt with some of the most significant and timely issues we have had before us.

Now turning to the Yucaipa transaction, we are excited about this investment and the long term partnership. Yucaipa and its key principal, Ron Burkle, has had a great track record of successful investments. Historically, they’ve fostered the growth of other small cap portfolio companies and we believe they will be a great partner to do the same with Morgans going forward. We believe Yucaipa’s investment in Morgans which was made after an extensive due diligence process, is a clear vote of confidence in our business and in our long term growth prospects.

As I review the details of the structure with you in a moment, you will see that Yucaipa has provided us with a shareholder friendly security with a great deal of flexibility to weather the remainder of the downturn. They of course are rewarded significantly on the upside, which they believe is clearly there. Morgans has issued to Yucaipa $75 million of preferred securities. We do not plan to use the net proceeds immediately as we are currently most intent on preserving the bulk of it for the remainder of our debt restructuring efforts, although some of the cash is expected to be available to grow our portfolio. The preferred provides an 8.5% dividend yield, with the yield increasing after the first five years to 10% for years six and seven, and it increases further thereafter. Also as part of the transaction, Morgans issued to Yucaipa a warrant to purchase 12.5 million shares at an exercised price of $6, which is over a 50% premium from our closing price today.

We believe the transaction terms are very attractive and provide important flexibility to Morgans for a variety of reasons. To begin, we believe the dividend rate of 8% going to 10% is reasonable in today’s markets. Additionally, we have the option not to pay the dividend in cash and instead accrue the dividends. At present, we do not plan to pay the dividend until at a minimum we get through the downturn and resolve our principal remaining capital structure issues.

Further, technically there’s no requirement that the preferred be repaid. There’s no maturity date on it. Of course, the cost of capital becomes very expensive after year seven, but the option to repay will be nice if we were ever to need it. On the flip side, we have the right to repay the security at any time without penalty, literally tomorrow or in two years or in seven years. Whenever we can refinance the preferred less expensively we can repay it. In terms of control, too, we consider the security favorable to our existing shareholders. Yucaipa does have the right to one board seat of a nine member board and Michael Gross has joined the board for Yucaipa. We welcome him and believe he will make a significant contribution to the company.

But otherwise the preferred has limited [consign] rights and it does not vote on an as converted basis like some other similar securities, so our shareholders continue to vote in the same proportions as before. Even with respect to the warrants themselves we believe the security is favorably structured with a mandatory cashless exercise feature. While in theory, Yucaipa has warrants of 30% of the company, they never really can acquire that much of the company via these warrants, and won’t even come close unless the stock price goes through the roof, which of course is a problem we’ll all be happy to have.

The cashless exercise feature, sometimes known as a net share settlement, is best explained by way of example. If Yucaipa exercises a warrant when the stock is at $12, more than triple where it is today, Yucaipa’s warrant would be $6 in the money since the strike price is $6. Therefore it’ll receive $6 per warrant of value on a $12 stock price, resulting in half a share for each warrant. Or in other words, the 12.5 million warrants become 6.25 million shares, equating to about 17% of the company’s equity based on today’s total shares outstanding.

Another example is that even if Yucaipa exercises their warrants when the stock is at say $25 a share, they receive 9.5 million shares in that instance, equating to about 24% of MHG. In connection with its relationship with Morgans, Yucaipa is also looking to raise an investment vehicle, to take advantage of hotel investment real estate opportunities out there. The fund as contemplated would provide MHG the right to manage its hotels. Under the proposed arrangement as described in the press release, Yucaipa will commit capital toward the fund and plans to raise the remaining money from third party investors. There will be no capital requirements from Morgans, though we would have the option to invest in minority positions in individual hotels. This proposed venture with Yucaipa is consistent with our strategy of pursuing growth via high margin management and branding fees and with little to no investment from Morgans.

We are pleased that Yucaipa with its track record is focused on raising this fund and pursuing these kinds of growth opportunities, which obviously could be enormously beneficial to help us grow our brand. However, in order for your expectations to be in the right place, it is important to note that these funds are always difficult and time consuming to raise, and in this market environment more difficult and more time consuming than usual. In the meantime, and regardless of the closing of a fund, we are pursuing some other interesting ways to grow our business and I will talk more about our development projects in a moment.

Turning to another recent announcement, we entered into an agreement with a mezzanine lender on the Hudson in a structured transaction that is effectively an extension on the Hudson mezzanine loan. The transaction is complicated by nature of the way the finance world has sliced and diced loans into CMBS, junior notes, CDOs, etc. To understand the transaction it’s important to note that affiliates of the mezzanine lender owned interest in certain of our other loans. We acquired some of those interests and suffice it to say the acquisitions will be reflected as pay-downs on our balance sheet. To procure the extension of the Hudson [mezz] we made a one time aggregate payment of $11.2 million to reduce the principle amount by $6 million from $32.5 to $26.5 million, acquire interest in $4.5 million of certain of our other debt obligations as I just discussed, pay certain fees and obtain a forbearance agreement from the mezzanine lender that effectively extends the maturity by three years and three months.

The mezzanine loan was originally scheduled to mature in July of 2010, and under the agreement the mezzanine lender has agreed to forbear from exercising remedies if we don’t repay the loan at its scheduled maturity for an additional three years through October of 2013, subject only to maintaining interest rate cap and making an additional $1.3 million payment to purchase additional interest in certain of our other debt obligations prior to October, 2011. The existing loan rate will remain the same for the first 15 months of the extension, which is a very attractive pricing in today’s market, and increases only in the last two years. We are pleased that our lender believes in the hotel and is willing to stay with it and with us.

Further, the mezzanine lender agreed to cooperate with our efforts to extend the first mortgage on the hotel and we remain focused on working proactively to reach an agreement on the first mortgage on this hotel as well as on the first on the Mondrian in Los Angeles.

We also are in active dialog with other of our lenders about revising terms on their loans. Most timely are Mondrian in Scottsdale and the JV in South Beach where the loans have matured. In both instances the lenders have been accommodating thus far, with the lenders allowing interest to accrue. While I have grouped the two, the eventual resolutions may be very different. As we have said before, we do not intend to commit significant funds to extend Scottsdale while in South Beach we may fund a modest amount into Mondrian to secure a loan extension and restructuring. We will of course let you know when we have more news on these fronts.

Turning now to development, we have four projects that you know about which we expect to start generating additional fees by year end 2009 or in 2010. Ames in Boston is set to open as a Morgans Original Hotel just a few weeks away on November 19. This property is in a terrific location in the heart of Boston and in its tourist district, and the hotel has already generated significant buzz. We invite you to check it out next time your travels take you to Boston.

At the Hard Rock in Las Vegas, as mentioned previously, we recently opened the North Tower guest rooms, the concert venue and the convention center to positive receptions. And we expect to open the 400 suite Paradise Tower, the South Tower, around the end of the year. Importantly, our partner in this project, DLJ, has continued to fund the equity requirements.

The highly anticipated Mondrian Hotel in SoHo Manhattan is still scheduled to open mid next year and we look forward to sharing more detail with you as the date gets nearer. We also announced this month a management agreement for the San Juan Water and Beach Club Hotel in Isla Verde, Puerto Rico. Initially the hotel is not a huge income generator. However, it does generate income effective immediately for Morgans while the owners complete their plans, entitlements and financing to renovate and expand the hotel and to convert it into a hotel that can be marketed as part of the Morgans brand and portfolio. The investment in the hotel by a local quasi-governmental agency should be helpful in accelerating the process.

All of these development efforts are consistent with our development strategy of expanding Morgans to major urban markets in selective resort markets. And also consistent with our commitment to applying the company’s unique expertise to generate third party management and branding fees, without being the primary equity investor in the ownership. In this regard we continue to explore numerous other pipeline opportunities. Let me emphasize that we remain committed to growing our portfolio in a way as to maximize value for our shareholders.

And with that I’ll turn the call over to Rich.

Richard Szymanski

Thank you Mark. I’d like to focus on our third quarter earnings and a review of our liquidity position.

For the quarter our adjusted EBITDA was $9.4 million compared to $21.2 million in the third quarter of 2008. The net loss before non-cash impairment charges was $10.3 million compared to a loss of $9.3 million in the third quarter of 2008. The non-cash impairment charges of $29.1 million were comprised of $17.2 million related to our Las Vegas joint venture at Echelon and $11.9 million related to Plaza South, the property across the street from the Delano. While we have not made any formal decisions regarding these projects, since the majority of costs consisted of plans and drawings, we believe that it was prudent to take a charge against the carrying values of these assets since we do not expect to develop these projects in the near future.

For the quarter, we recorded a tax benefit of $20.2 million and now have tax and OL’s of approximately $114 million, which may be used to offset future income, including gains on asset sales.

RevPAR for our system wide comparable hotels for the second quarter was $172.38, a decrease of 32.2% or 30.6% in constant dollars from the third quarter of 2008. The pace of decline has slowed compared to the first six months of the year, and within the quarter itself we saw encouraging signs. The decrease in RevPAR for the fourth quarter was driven by a 25.5% decline in average daily rate. As Fred mentioned, occupancy rates are generally strong and improving. In particular, occupancy rates at our three New York hotels, which is slightly below last year, averaging approximately 91% in the quarter. While pricing continues to be a challenge, improving occupancy rates are the first sign that ADR increases can be implemented.

We did see some positive signs at our non-comparable hotels, particularly Mondrian LA where the renovation was completed in August, 2008. The hotel far exceeded the RevPAR of its competitive set as we’re starting to realize the benefits of our extensive re-imaging at this hotel.

In July we opened the 490 room Paradise Tower Hard Rock, which drove a 19% increase in management fees from Hard Rock from the third quarter of 2008.

We continue to focus on reducing operating costs without affecting the guest experience. For the quarter, operating costs at system wide comparable hotels decreased by 16%. We measure our flow through and cost control by the ratio of the percentage decline in EBITDA to the percentage of decline in RevPAR. And since we own and operate many of our hotels and have control of our brands, we are able to implement cost controls efficiently.

During the quarter we achieved a 1.9 times ratio comparable hotel EBITDA percentage decline to a RevPAR percentage decline, the fourth consecutive quarter where the ratio’s been below 2 times, which is meaningfully better than our view of industry norms of 2 to 3 times.

We’ve also taken a proactive approach for our corporate expenses, which declined by 30% in the third quarter of 2009 from our comparable period in 2008.

Liquidity and the preservation of capital are the company’s priorities and we’ve been successful in executing our plan. Now I would like to walk through a detailed analysis of our liquidity, focusing on our cash position, the credit facility, commitments, cash flow and covenants.

Our liquidity position, pro forma for the Yucaipa transaction, is $195 million at September 30. Our pro forma cash balance is $105 million and we had $90 million available under our amended credit line, which is net of $24 million of borrowings and $10 million of letters of credit.

I’d like to reiterate the key terms under our revolving credit facility, which was amended in August. Our sole financial ratio covenant requires us to maintain a fixed charge coverage ratio of 0.9 times for the life of the loan, and at the end of the quarter we were at 1.58. The fixed charge definition excludes non-cash interest and dividends, so to the extent that we accrued dividends on the Yucaipa investment, it will not count against the covenant. The facility is secured by three recently renovated hotels in irreplaceable locations, the Delano, Royalton and Morgans. The interest rate is LIBOR plus 375 with a 1% LIBOR floor and the facility’s available through October, 2011. Our borrowing base is calculated at the lesser of the trailing EBITDA test or 60% of appraised value, with a minimum of 35% of appraised value on the New York properties.

Another key part of our liquidity plan was to reduce our capital commitments on new projects. As of September 30 we had approximately $11 million of commitments remaining to fund, which we expect to complete by year end. We also have no significant deferred capital expenditures at our owned hotels. Given the excellent condition of our properties, we estimate maintenance capital to be between $6 to $8 million in total in 2009, of which approximately $4.5 million has been spent through the third quarter.

Due to our extensive cost reduction program and limited maintenance capital requirements, free cash flow, defined as EBITDA less interest less maintenance capital, was around the breakeven level for the past 12 months. Aside from the revolver, our only other consolidated financial covenant is in the trust preferred notes, which contain a trailing 12 month EBITDA to interest ratio of 1.4 times. We were in compliance with the trust preferred covenant with a ratio of 1.42 as of September 30, but we do not anticipate meeting this ratio at the end of the fourth quarter. In order for it to be an event of default, we would have to fall below the 1.4 times ratio for four consecutive quarters, which could occur at the end of the third quarter of 2010. We are currently in discussions with the servicer to waive this covenant.

Turning to our outlook for 2009, it continues to be very difficult for anyone to predict what will happen the remainder of the year or into next year, given the short term booking patterns and transient nature of our business. In light of this, we will continue to manage our business and our capital position in a proactive and aggressive manner. And as we stated in prior calls, we’re not comfortable defining a specific RevPAR target or range for the year. However, we are continuing to provide the same framework for adjusted EBITDA given certain RevPAR levels.

And we believe that if, for example, RevPAR for the year were to decline on average between 25% to 30%, we would expect 2009 adjusted EBITDA to be between $40 and $50 million. And this is based on a ratio of comparable hotel EBITDA percentage decline to RevPAR percentage decline 2 to 1, and we’ve averaged 1.8 thus far in 2009.

And with that I will turn the call back over to Fred.

Frederick J. Kleisner

Thanks Rich. To conclude, we’re pleased to see positive signs in the lodging sector, particularly in markets which are core to Morgans. We’re confident that Morgans Hotel Group is well positioned to continue to navigate current economic challenges through 2009 and further, and will benefit from improving demand. We’ve made great progress in cleaning up our balance sheet and adding significant liquidity. We have irreplaceable assets, including a majority in 24-hour gateway markets that we believe will rebound faster and stronger as recovery emerges.

While we cannot predict the recovery, we do know that historically the 24-hour gateway markets, core markets to this company and this company’s been built on, have come back stronger than other markets. We have a clear growth strategy to extend our portfolio of properties and do so with high margin, long term management agreements. Further, we believe there’ll be multiple ways in which we can pursue this growth with the proposed Yucaipa development partnership a clear example.

We’ll continue to be diligent about taking the necessary steps to strengthen the company and most importantly build long term shareholder value. Thank you for your time on the call today. We’re now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from William Marks - JMP Securities.

William Marks - JMP Securities

I had a few questions. One on the joint ventures. So you gave a $11 million figure about future capital needs. Can you give us the current balances, maybe the net debt balances for each one and then kind of expectations of the management fees that those should have on an ongoing basis?

Richard Szymanski

Will, I prefer to stay away from expectations of management fees since we haven’t given guidance, but I can talk about the debt balances. You know roughly London which we disclosed in the press release, our share of that debt is about $80 million. The other pieces are Mondrian South Beach where our share is about $46, $47 million. And then Hard Rock where ultimately our share will be somewhere you know around $125, $130 million. Those are the big pieces so you know roughly $300 million of JV debt. And while I really don’t want to speculate you know or talk about expectations of fees going forward, but on the existing hotels you know through the first nine months we had about $11 million. So obviously that will increase. And as Hard Rock opens up and we add Ames and SoHo and the Water Club in San Juan.

William Marks - JMP Securities

Are Ames and SoHo combined net debt less than $20 million or?

Richard Szymanski

Combined net debt is probably I would say around $50 million.

William Marks - JMP Securities

And then on San Juan, I mean is this a meaningful contribution in terms of top line or bottom line?

Richard Szymanski

As Marc said right now it is not a meaningful contribution.

William Marks - JMP Securities

And update on Mondrian in Miami, sales levels, is there anything going on right now? I know it’s a competitive market.

Marc Gordon

Will, in terms of sales the sales have slowed pending the resolution of the issues with the loan.

William Marks - JMP Securities

And then can you give an update on the Shore Club? I believe its in the press a little bit lately, but.

Marc Gordon

Sure. You know we own only a sliver of the equity, so we are not leading the restructuring efforts. But what I can tell you then is that we have been told by the owner and the developer that they are in work out discussions with the lender and we Morgans are assisting them.

William Marks - JMP Securities

And in terms of status quo on your management fee, there’s been no indication if you could lose that contract or not?

Richard Szymanski

There’s been no changes with respect to our management contract.

William Marks - JMP Securities

I assume there’s no new news on the Hard Rock brand and any plans to do with that in markets where you’re able to move forward.

Frederick J. Kleisner

You’ll note, Will, we recently not only announced but we opened the new Hard Rock outside of Tulsa with the Cherokee Nation. That product has immediately produced fee income to the joint venture through which we are a participant. And last week we announced the agreement outside of Albuquerque with the Isleta Nation for a similar expansion and conversion of a Native American gaming facility in that area. A great deal of our initiatives look to expansion of the Hard Rock name through conversions of existing and expandable gaming facilities located and controlled by Native American nations.

Operator

Your next question comes from David Katz - Oppenheimer & Co.

David Katz - Oppenheimer & Co.

I believe you mentioned an $11 million letter of credit. When does that get funded or is it already?

Richard Szymanski

There’s $11 million of commitments. The biggest piece of that relates to Hard Rock and it will probably get funded in the fourth quarter.

David Katz - Oppenheimer & Co.

And then secondarily, the Delano, the occupancy there is off quite a bit more than what we’re seeing I guess in that particular market. Is there some specific challenge to that property that we should be aware of?

Frederick J. Kleisner

We were just down at Delano. In fact our new Senior VP of Sales came with us last week, David. Delano has maintained first and foremost approximately 115% of fair market share in its competitive set. So it continues to be the set leader and market leader as it should be. We don’t believe that further compromise in average room rates is going to result in any increase in true RevPAR. We’re carefully monitoring rate states and availability at Delano, but here’s the reality. The hotel is in great shape. It is exceptionally well received and it has maintained the iconic quality of that guest experience. I do believe we’ll see a bit of transition as we move into the post Art Basel period from the first part of December and as we move into the season.

But the most important thing that is hitting in the entire South Beach market is the 15.5% increase in supply in the greater Miami Beach area. That needs to be absorbed. And we do not feel it’s in the interest of our shareholders to create a rate war.

David Katz - Oppenheimer & Co.

I know Will was asking about the Hard Rock brand and we have seen you know both from yourselves and from the Seminole Nation some announcements for that. At one point we were talking about the prospect of selling those naming rights. Should we be considering that anytime soon? Or do you expect that your partner is going to elect to hold onto those going forward?

Marc Gordon

David, we don’t have a lot to say on that topic right now. As I’ve said about some others, always exploring options, always open to options. We’ll do what’s in the best interest of our shareholders but nothing to announce right now.

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.

Frederick J. Kleisner

Thank you very much. We appreciate your being with us on the call. We’re going to get back to work and talk to you after the fourth quarter. Thanks very much.

Operator

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

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