Executives
David Hamamoto - Chairman
Fred Kleisner - Interim President, CEO
Rich Szymanski - CFO
Analyst
Celeste Brown - Morgan Stanley
Jake Fuller from Thomas Weisel
David Katz - CIBC World Markets
William Marks - JMP Securities
Morgans Hotel Group Co. (MHGC) Q3 2007 Earnings Call November 7, 2007 5:00 PM ET
Operator
Presentation
Good afternoon, and welcome to the Morgans Hotel GroupCompany's Third Quarter 2007 Earnings Call. My name is Mary and I will be yourconference operator today. At this time I would like to inform all participantsthat your lines will be in a listen-only mode. After the speakers remarks therewill be a question-and-answer period. (Operator Instructions). As a reminderladies and gentlemen, this conference call is being recorded and yourparticipation implies consent to our recording of this call.
I would now like to turn the call over to Jennifer Foley ofMorgan Hotel Group. Please go ahead.
Jennifer Foley
Good afternoon. Thank you for joining us on the third quarter2007 conference call. Participating on today's conference call are DavidHamamoto, Fred Kleisner Interim President and Chief Executive Officer, and RichSzymanski, Chief Financial Officer of Morgans Hotel Group.
Before we begin, I need to remind everyone that part of ourdiscussion this afternoon will include forward-looking statements. They are notguarantees of future performance and therefore undue reliance should not beplaced upon them. We refer all of you to the company's filings with the Securitiesand Exchange Commission for a more detailed discussion of the risks that mayhave a direct bearing on the company's operating results, performance andfinancial condition.
With that I'll pass the call to David.
David Hamamoto
Thank you, Jen. I am glad to be with you all today. Before Iturn the call over to Fred to discuss the Company's results, I wanted to make afew brief comments.
Given the management transition we experienced in SeptemberI wanted to emphasize that the company has not (inaudible). This quarter wecontinue to deliver outstanding results with our Comparable Hotels RevPARrising well in excess of industry averages. We have significant underlying realestate value with fever irreplaceable assets in high profile market.
Today's announcement, by another hotel company, that it isdeveloping a new hotel in New York City for $1.4 million per room, including $400,000 perroom for land, further illustrates the value of our hotels in key markets. Ourhotels are well positioned in the boutique luxury segment and we owned some ofthe most notable brands in the industry, such as Mondrian and Delano.
With targeted reposition such as Delano and Royalton, and six new hotels underdevelopment, we have a well defined growth plan. We've recently raised $143million of capital, which puts us in a great position to capitalize onopportunities to grow our company. All of us, from the board level and down,focus on growing our brands and continuing to deliver outstanding results. Ofcourse, the results speak for themselves, as you all read in our earningsrelease.
I want to thank Fred Kleisner for taking the helm so quicklyand so well. As I said at the time of our announcement, we are extremelyfortunate to have someone of Fred's caliber, step-up to lead this company. Ihave been actively involved working with Fred and the rest of the managementteam over the past several months. This experience has given me greatconfidence in the breath and depth of management talent in the organization.Team has focused on a common vision of growing our brands through newmanagement contracts and minority ownership interest in hotel, in 24 hourgateway cities and select resort destination.
I am extremely proud of our strong operating results,strategic repositioning, solid financial position, and well defined growthplan, and I am highly optimistic about our prospects for the future. I firmlybelieve we have the management talent, brand value, and creative developmentexpertise continue to deliver superior growth.
Allow me to say a few words about our executive search. Theboard of directors is the actively engaged in the search for permanentPresident and Chief Executive Officer. We have been working with Spencer Stuartand our meeting with both internal and external candidates with impressiveleadership quality.
Let me assure that we are searching for a CEO withexperience and qualities necessary to take this company to the next level forthe benefit of all MHG shareholders.
With that I would like to turn the call over the Fred todiscuss the results of the quarter.
Fred Kleisner
Thanks David and thanks everyone for joining us today todiscuss our third quarter results. I will start off by reviewing some of thehighlights of the quarter; then I will turn things over to Rich who will getinto the details of our financial results. After that, David Rich and I will behappy to take your questions.
Before we begin, for those of you who may not have listenedinto the call we had in September, let me just say a few words to introducemyself. As David mentioned, I've served on the Morgan's Board of Directorssince the company went public in early 2006, and also has substantial expertisein the boutique hotel sector from my prior positions with both Wyndham Internationaland Starwood Hotels and Resorts.
I've spend my entire career in the hotel industry, and havethe same passion today as I did when I started in this business over fourdecades ago. Since assuming this expanded role at MorgansHotel Group, I've relocated to New York for full time working with the board andmanagement to execute the strategy and vision of the company.
Now let's move to financial results: The third quarter wasyet another outstanding quarter for our company and we are pleased with ourresults. We've had another quarter of industry leading RevPAR growth in ourcomparable hotels, up 11.5% over the third quarter 2006. This is the fifthconsecutive quarter of double-digit comparable hotel RevPAR growth. We operatein favorable markets, where we continue to see supply-demand fundamentalsstrong. Our hotels have benefited from a strong business and leisure demand,including an increase in foreign travel to these key gateway markets in ourthird quarter.
At new hotels, we achieved significant average daily rateincreases with Hard Rock's ADR increase at 13.5% and Scottsdale ADR at almost10%. We continue to demonstrate our strong revenue management capabilities andbelieve this is a key strength we bring to future projects. As a result of thestrong year-over-year growth at our comparable hotels, and the impact ofrenovations and new hotels, adjusted EBITDA increased by 34% than the prioryear period to $24 million. Excluding Royalton, which was closed for renovationduring the quarter, this increase was 46% driven by a 100 basis point increasein comparable hotel margins and the execution of our growth plan.
Now, I would like to discuss some of the important events ofthe quarter. We have a robust pipeline of announced projects with new hotelsunder developments in Southeast Miami, New York SoHo, Chicago andLas Vegas.We're on track to open Mondrian South Beachin Miami earlynext year. Despite difficult market conditions, we've secured over 200non-refundable deposits for condominium units. That's a strong endorsement forour brand.
Relative to the recent activities in our existing hotels,we've said before that it's not only by expanding into key markets withdevelopments of new projects, but also reinvigorating our existing properties,that keeps us in the forefront of the boutique hotel sector.
Our goal is to consistently create an unparallel guestexperience, creating a vibe that inspires our guest to live each visit moreintensely. We have seen that by renovating our existing projects and keeping ourbrands fresh and on a cutting edge, we are able to directly increase RevPAR forindividual hotels.
Recently on October 23rd, we unveiled our newly redesignedRoyalton here in New York City,which has been under renovation since June. We partnered with Roman &Williams to re-image and redesign Royalton's vibrant lobby, bar, restaurant andpenthouses. We have set out to bring life to one of New York's most iconic properties and are pleased to say, we've given New York back itspreeminent living room.
We've already received extremely positive responses from ourguests, which is further and even more demonstrated by the fact during thefirst two weeks of October, when all rooms were back in service, average dailyrate was up 20.5% over the comparable year, a period in October 2006.
Likewise, last fall we announced the completion of the firstphase of renovation at Delanoat South Beach Miami with 70% of the rooms completed. We are now completing therenovation of the remaining 30% of all of our guest rooms this month andcompleting the upgrade of the spa and gym, as well as building a new nightclubdesigned by Lenny Kravitz and Kravitz Design.
Our customers have reacted very favorably and, as a resultof these renovations, Delanohas achieved consistently high RevPAR growth, increasing approximately 16%,both in the third quarter and year-to-date.
As we previously announced, we have begun renovatingMondrian in Los Angelesin September, with a targeted completion date for the second quarter of 2008.We're doing complete room renovations including, a total redesign of our guestrooms, brand new bathrooms, re-imaging public spaces to enhance the modernchick Hollywood feel of that hotel.
With the track record of strong results this year from Delano, and positivereturns from the Royalton, we are confident in our expectation that Mondrian LAwill be our next RevPAR growth story.
In September, we opened a new Bungalow 8 nightclub in London's St Martins Lane.That was in partnership with nightlife expert Amy Sacco. This is an excitingproject that has brought significant notoriety and publicity to their hotel. Wewill continue to focus on opportunities to add value to our existing hotelswith planned renovations for 2008 at Morgan's in New Yorkand planned utilization of excess space at Hudsonin New York City, as well as the conversion ofresidential units to hotel unit at Hudson in New York.
As I mentioned earlier, our Hard Rock investment continuesto make a significant contribution to our EBITDA driven by the quality of ourmanagement. We are proceeding with design plans for the expansion project ofthat resort in Casino and that is expected to double the size of the hotel inCasino and add much needed meeting space.
Construction is expected to start this December with anexpected completion date in 2009.
With that I would like to turn the call over to Rich to runthough our financial results greater detail.
Richard Szymanski
Thank you, Fred. We are very pleased with our thirdoperating result. Our adjusted EBITDA of 24 million reflects strongyear-over-year growth and significant contribution from new and renovated hotel.As Fred mentioned, quarter adjusted EBITDA rose by 34% and excluding Royalton,which was closed for renovation, adjusted EBIDTA increased by 46%.
Our operating results were driven by our high RevPAR level,which was $260.13 for the quarter and that is among the highest in theindustry. This reflects an increase of 11.5% or 9.6% excluding the effects ofcurrency fluctuation and our comparable system-wide hotel. Given our highoccupancy level, we were able to achieve most of growth through ADR increase.For the quarter, comparable hotel ADR rose by 9% to $322 and occupancy grew by2.3% to 81%.
As you know ADR increases had a significant impact on EBITDAmargin, and this drove the increase of approximately 100 basis points atcomparable hotels.
At new hotels we achieved significant ADR increases in both,due to the implementation of revenue management strategies. In the thirdquarter, Hard Rock achieved a 96.1% occupancy rate and a $226 ADR. Thisrepresents a 13.5% increase in ADR, and an 11.6% increase in RevPAR over thecomparable period last year, when it was operated by prior management.
We recorded a net loss of $10 million for the third quarterof 2007, compared to a net loss of $700,000 for the third quarter of 2006.Results included a non-cash charge for stock compensation expenses of $7.3million, and other cost of $2.5 million in connection with the resignation ofour former CEO.
In the past few months we have completed new financings,which have raised over $200 million of new proceeds, and positioned the companyfor further growth. In July we completed a stock offering of 12.2 millionshares at a price of $22.50, which included 2.8 million shares sold by thecompany and 9.4 million shares sold by certain selling stock holders. We'verealized $59.5 million in net proceeds.
In October we issued 172.5 million of our [2 and 3A] SeniorSubordinated Convertible Notes in a private offering. The notes are SeniorSubordinated Unsecured Obligations of the Company and can be converted intoshares of the company's common stock under certain circumstances, and upon theoccurrence of specified events.
Interest on the notes is payable semi-annually in arrears inApril and October of each year, beginning next April. In connection with theissuance of the notes, we entered into a convertible note hedge and warranttransactions, which generally have the effect of increasing the conversionprice from the initial level of $26.89 to $40, and net proceeds of $142.7million after fees and expenses and the net cost of the hedged transaction,utilized $25 million to repay all outstanding borrowing under the revolvingcredit facility.
As of September 30 we had approximately $236 millioninvested in non- EBITDA producing assets including consolidated assets, equityinvestment and joint ventures, and our proportionate share of joint venturedebt.
Our future committed equity funding on these projects areapproximately $80 million and include approximately $50 million on Echelon, $15million for Mondrian Chicago and $15 million for the Delano expansion. With a cash balance todayof approximately a $150 million and undrawn $225 million revolving creditfacility in place through 2011, we have significant liquidity to execute theseand other future projects.
Looking ahead, we reiterate our guidance for the full yearof 9% to 11% RevPAR growth in our comparable hotels. Total revenue in excess of$300 million and adjusted EBITDA in excess of a $110 million. Due to the rampup in Hard Rock and Mondrian Scottsdale and the renovation at existing hotels,we believe that the projected 2007 adjusted EBITDA level is not indicative ofthe normalized run rate adjusted EBITDA of the portfolio.
So in conclusion, it was a very good quarter from afinancial perspective. We continue to deliver outstanding operating results andour recent financing has provided us with the liquidity to grow. We believe ourbusiness model of growing through minority equity investment with partners,coupled with long-term management agreements, should generate high returns oninvestment with management fees alone, having the potential to yield asignificant return on invested capital.
I would like to turn it now over to Fred for some closingremarks.
Fred Kleisner
Thanks Rich. Since taking on the role of interim CEO, I'vehad the opportunity to work closely with an incredible team of talented anddedicated employees and one of the strongest management team in our industry.We've already accomplished a lot together.
We believe there is more to come. Our outstanding resultsover the last several quarters reflect the strength of our brands in ourmarkets. We will continue to distinguish ourselves in the marketplace byredefining the guest experience through cutting edge design, renowned bars andrestaurants and outstanding personalized service.
We have a well defined growth plan and are focus solely onthe luxury boutique sector, the fastest growing segment of the hotel industry.
I have been here now for six weeks. And while I am impressedwith the quality of our locations in hotels, I have always had that, I am equallyimpressed with our management talent, our operating systems and our ability todeliver and generate high margins.
Lastly, let me say I have already met with a number of yousince coming on board. I look forward to meeting more of you.
With that, David and Rich and I are pleased to take any andall questions.
Question-and-Answer-Session
Operator
(Operator Instructions). And our first question comes fromCeleste Brown from Morgan Stanley. Please go ahead.
Celeste Brown -Morgan Stanley
Hi guys, good afternoon.
David Hamamoto
Hi Celeste.
Celeste Brown -Morgan Stanley
Few questions for you; one just a minor question: The $2.5million of other costs related to severance to Ed's departure. I understand thestock comp, I thought there wasn’t any severance associated with his departure.Can you just give a little there?
Rich Szymanski
Yeah, the $2.5 million does not have severances. It islegal. Its search accrued for the search cost and items like that.
Celeste Brown -Morgan Stanley
Okay. And then in terms of your guidance, I know that youdon't want to answer this, but you guys have trended ahead I think ofexpectations all year, with one quarter elapse. Is there any reason inparticular you are not raising guidance at this point or you just concernedgenerally about the broader economy?
Rich Szymanski
There is no reason for not raising it. We want to justreiterate what we previously said.
Celeste Brown -Morgan Stanley
Okay. And then I know you guys have talked about assetssales in the past, tough credit markets right now, but are you guys out in themarket or are you seeing anything that would stop you from selling any of them?
Fred Kleisner
Well, it is still part of our strategy and as far as what weare seeing in the market, of course banks are now requiring more equity andit's not necessarily a bad thing. This will get back to better underwritingstandards and so there are changes in the market certainly, but we haven't seenanything drastic so far.
Rich Szymanski
Again, I think for last week, obliviously there are a lot ofoffshore buyers that are extremely aggressive today and not really impacted bythe credit market, and I think you saw the announcement today of [OEH] deal at1.4 million a key to build it and that’s two years out, but still its a hugenumber in terms of what that implies for replacement cost in New York City. AndI think that the extent that there are aggressive buyers that are offshore,that want to buy our assets on an encumbered basis, that's probably ourcheapest source to capital and so we will continue to evaluate how to accessthat capital and an employed time in order to fuel the growth of our brands bybuying minority interest in new projects and getting long-term managementcontracts.
Celeste Brown -Morgan Stanley
Okay, great. Thank you.
Operator
Our next question comes from Jake Fuller from Thomas Weisel.Please go ahead.
Jake Fuller fromThomas Weisel
Yeah, good afternoon guys. Have you made a decision yet asto whether or not you're going to co-invest in the Hard Rock expansion?
David Hamamoto
We're looking at each progressive capital call individually.Thus far we've made them all and we remain very pleased with the results fromour current operations at Hard Rock and enthused about the additions.
Jake Fuller fromThomas Weisel
Make sure I understand what you're saying: You've met allthe capital calls so far. How much has been put into the project so far? Haveyou maintained your stake and how much does that mean you've put into the HardRock so far?
Rich Szymanski
Yes Jake, we have maintained our stake, we've posted lettersof credit for about $5 million, which is our proportionate one-third share ofthe money that have been spend so far.
Jake Fuller fromThomas Weisel
And what's the total? Refresh me: what's the total budgetfor the Hard Rock expansion?
Rich Szymanski
Roughly about $750 million, of which financing will coverabout $600 million, so total equity requirement we estimate is about $150million.
Jake Fuller fromThomas Weisel
So, for you to maintain your stake, that would require youto put in what amount?
Rich Szymanski
50
Jake Fuller fromThomas Weisel
Okay. Based on the financing that you've done to date, doyou have the capacity to make that investment, should you decide to?
Rich Szymanski
Certainly, yes.
Jake Fuller fromThomas Weisel
Okay. Thank you very much guys.
Operator
Our next question comes from David Katz from CIBC WorldMarkets. Please go ahead.
David Katz - CIBCWorld Markets
Hi, good afternoon.
Fred Kleisner
Hey David.
David Katz - CIBCWorld Markets
Names changing all the time. Rich, do you have an average inan ending quarter share count for us?
Rich Szymanski
Ending of the quarter pure share count was $34.7 million. Weused for our fully diluted calculation $34.1 million.
David Katz - CIBCWorld Markets
Got it. And just a follow up last question earlier, the $2.5million, as I look at through P&L, I see, sort of any other line item, Isee $3.2 to $9 million, its quite a bit higher year-over-year. We do assumethat a $2.5 million is baked into that number and what else is in there, inyour adjusted EBITDA calculation?
Rich Szymanski
Yes, the $2.5 million is baked into there, the other pieceare litigation cost, primarily on the Shore Club.
David Katz - CIBCWorld Markets
Okay. And I'm not sure, if we missed in the press release orin your comments, but Hard Rock fees for the quarter?
Rich Szymanski
Hard Rock fees for the quarter were about $2.4 million.
David Katz - CIBCWorld Markets
Okay. And last one, we are looking at the impact of the Los Angeles renovation, canyou help us try and quantify the impact of that will be next year?
Fred Kleisner
Well, I don't want to give forward looking statements ormake projections, but we were very encouraged by the first two weeks atRoyalton, and our expectations are that, we should get a significant rateincrease at Mondrian LA, to compete more with the Beverly Hills properties where we are bothsignificantly below them. So we are looking for significant rate increasesthere. Then, also one thing I want to point out to the numbers even that wegenerated in the quarter, they include the long-term of renovation in theMondrian in LA. So we did begin the renovation in September.
David Hamamoto
I emphasize, this is a total renovation. These are guestrooms that really had not had a 100% renovation of the bath, they are beinggutted out. Full replacement of all case goods and soft goods, since the hotelopened in 1984. This is an extraordinary change in the quality of ouraccommodation. And for those of you who know Mondrian LA, it's terrific squarefootage. We have significantly oversized rooms that are going to be welcome inthis market. Our projection is to absolutely hit this market head on.
David Katz - CIBCWorld Markets
If I can just follow that up for one quick second: It lookslike ADR was still up during the quarter and occupancy was down only slightly,and it sounds like one of the months and I assume the month of September was --there was under-renovation and I guess what we were trying to get out is howfar occupancy really falls during that period? And perhaps some thoughts abouthow you're going about the renovation? How many rooms we would consider,perhaps taking at a service at a time or those kinds of details would help usfigure out the impact, the negative impact?
Fred Kleisner
Yeah, we are basically taking out about quarter at a time orso it does not impact the guest experience significantly and I don’t exactlyhave the renovation schedule in front me to tell you where it would fall, butwe're probably taking out 10% to 15% of the rooms for a period of times. Sothat's a rough gauge.
David Hamamoto
It's clearly a: “do no disturb strategy” for implementation.We are operating during the period of each day that is not during customer useperiods that are typical. We are avoiding weekends that are major event periodsand we will shutdown the project during the award season in 2008, which is solucrative to that hotel. I do believe, we've taken the every precaution tominimize revenue displacement and prepare a product that will maximize revenueincrement, as we present a new product.
David Katz - CIBCWorld Markets
Right. And one last one and then, I promise, I will get outof the way. Stock-based comp was up dramatically year-over-year. Could you justtalk about what's in that $10.6 million this year versus last year, incorporate expenses?
Rich Szymanski
Sure, the $7.3 million related to the vesting of option orit is a expensing of options related to the resignation of our former CEO.
David Katz - CIBCWorld Markets
7.3, is what that number is. Thank you.
Operator
And we have time for one more question and that will becoming from William Marks from JMP Securities. Please go ahead.
William Marks - JMPSecurities
Great, thanks. On the last question, then expanded toseveral, but: can you just discuss the CapEx? And one: is there any additionalCapeEx from the Royalton in the fourth quarter? And then talk about CapEx needsin fourth quarter and also '08 including for Morgans Hotel?
Rich Szymanski
Sure. For CapEx, there is very little left on Royalton; mostof money was spent in the third quarter. Fourth quarter CapEx for renovations,we think will be in the range of about 10 million. Next year we are projectingabout $35 million or so, and that includes the Mondrian LA, it includes theMorgans, and it also includes the utilization of the excess space at the Hudson.
William Marks - JMPSecurities
And can you give us any indication with the Hudson versus just betweenthe approximately?
Rich Szymanski
Roughly the majority, the higher percentage would be from Mondrian LA. Hudson rough number, wekind of estimated at about $10 million for build out, but we don't costing onthat one because we don't have all the plans and we are still exploring thatand Morgans will be relatively minor.
Fred Kleisner
Note that at Hudsonwe have 25,000 square feet of space we have yet to utilize as revenue producingspace that can be significant meeting and entertainment space. We also haveresidential units that with the replacement value of individual units atMidtown in Manhattan,that we have churned up our plans to convert those units to hotel use asquickly as possible.
William Marks - JMPSecurities
And how can the Morgans be relatively minor if you may beshutting the hotel for a period of time? When you say: “minor”, is it?
Rich Szymanski
That’s in: “minor” in terms of: “CapEx”, because we don’tits something like Royalton renovation we did a major lobby renovation, it’s avery small lobby of Morgans, and it’s primarily room renovations. So, thethought of shutting would be, if we did, would be not to impact the guest, toget it done quicker because New Yorkis such a hot market. But the actual work we're doing in the rooms is notsignificant, and we are not touching the lobby and open the public space likewe did at Royalton.
William Marks - JMPSecurities
Okay. Clear the things hopefully. At the Clift, are youmaking money on the lease right now; I understand the lease payment may havegone up this year?
Fred Kleisner
Yeah, through three quarters we are at about, almost $5million and the lease payment is $6 million. So, we're pleased with the resultsthere, the results have gone up fairly significantly this year, and we are ontrack to cover the lease payment for the year.
William Marks - JMPSecurities
Okay. And then just a general comment on flow-through: Iknow that the total EBITDA number was strong, but it looks like your EBITDAgrowth, if you look at the owned hotels, really matched about the RevPARgrowth, and any comment common on if you felt the flow-through was weak, ifthere's improvement there or any related comments?
Rich Szymanski
We think generally the flow-through was pretty strong. Ofcourse you know -- I think what you need to look at is total revenue growth,which also includes food and beverage and other revenues but, we think if youlook at all the properties, you look at them individually, they all grew fairlywell, plus, we had some promotional events during the quarter, we had someunusual repair and maintenance expenses in the quarter and, that was probablythe only property that didn't have a really strong flow-through, but we thinkthat they are right placed events.
David Hamamoto
Let me comment, I've been looking at hotels, individualhotel results for a long time, the flow-through individual hotel by hotel, Richand I and David Weidlich, of EVP, Operations; went through each hotel, at theend of the quarter, the flow-though hotel-by- hotel, with the exception of someone time events at Hudson, was very strong, I'm very pleased. That drove a 100basis point increase in our margins and its interesting to look, our marginswere already strong.
William Marks - JMPSecurities
Okay, great. And I'm going to ask one final question andthat is just related to Hard Rock and any update on what you're doing with theland there, as well as the Hard Rock brand?
Marc Gordon
This is Marc Gordon. As you know, we've been marketing theland for central sale or joint venture. We have found a number of partiesinterested in doing something along the line in one of two categories oftransaction, nothing defensive, nothing ready to announce, but nice interestwith, probably those options.
William Marks - JMPSecurities
And the brand?
Marc Gordon
In term of growing, their brands in the territory where weown right?
William Marks - JMPSecurities
Yes
Marc Gordon
Similarly we've looked at a number of transactions in thoseterritories, the western part of United States of America, the selected number of countries where we ownthe rights outside of United States. Again, nothing to announce, butcertainly “interest” and it looks very parallel.
William Marks - JMPSecurities
Great, that's all from me. Thank you.
Operator
Gentlemen, there is actually one more question and it’s ourlast question and its a follow up question from Celeste Brown from MorganStanley. Please go ahead.
Celeste Brown -Morgan Stanley
Hi, guys. Sorry to hit you again. Rich, with theacceleration of the stock-based comp with Ed's departure, will your run rate belower than $2 million to $3 million we've seen in the past couple of quarters?
Rich Szymanski
I think if you took Ed's effect out of quarter even thenormal amortization, we're probably are still, we are probably in about to $2.5million range.
Celeste Brown -Morgan Stanley
Okay. And then in terms of the Royalton, there are clearlysome or I assumed didn't get rid of all of your employees where the costassociated with keeping your employees and everything else capitalized?
Rich Szymanski
Yes, because under accounting rule if the hotel is closed,you can capitalize that.
Celeste Brown -Morgan Stanley
Thank you.
Operator
This ends our Q&A session. I would like turn the floorback over to Mr. Kleisner for any closing comments.
Fred Kleisner
Thank you all, again for joining us today. Have a greatevening. We look forward to speaking to you again next quarter.
Operator
Thank you everyone. This concludes today's conference call.You may disconnect your lines at this time and please have a wonderful day.
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