Morgan Hotel Group Company
Q1 2008 Earnings (MHGC)
May 8, 2008 5:00 pm ET
Jennifer Foley - Public Relation Director
David Hamamoto - Chairman
Fred Kleisner - President and Chief Executive Officer
Rich Szymanski - Chief Financial Officer
Marc Gordon - Chief Investment Officer
Celeste Brown - Morgan Stanley
Will Marks - JMP Securities
David Katz - Oppenheimer
Good afternoon and welcome to the Morgan Hotel Group Company First Quarter 2008 Earnings Conference Call. My name is Stacey, and I will be your conference operator today. At this time, I would like to inform all participants that lines will be in a lecture-only mode. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to out recording of this call. I would like to now turn the call over to Jennifer Foley of Morgans Hotel Group. Please go ahead.
Jennifer Foley – Public Relation Director
Good afternoon, thank for joining us on our first quarter 2008 conference call. Joining us for today's conference call are David Hamamoto, Chairman of the board, Fred Kleisner, President and Chief Executive Officer, Rich Szymanski, Chief Financial Officer, and Marc Gordon, Chief Investment Officer of Morgans Hotel Group.
Before we begin, I need to remind everyone that part of our discussion this afternoon will include forward-looking statements. They are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to the Company's filings 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 on to David.
David Hamamoto – Chairman of the Board
Thank you, Jen, and thank you, everyone, for joining today's conference call. Before I turn the call over to Fred to discuss the Company's results, I wanted to make a few brief comments. Morgans Hotel Group has continued to perform extremely well and deliver strong results despite the challenging economic environment, as Fred will discuss later. We have high value brands in some of the best markets and a clear strategy to grow these brands through minority equity investments with partners, coupled with long-term management contracts.
Our financial position is strong, with $81 million of cash at the end of the quarter and three unencumbered hotels. We have the resources to finance our current joint venture commitments in our pipeline of projects in 2008. Consistent with our model for new hotels, we are exploring selling interest in our existing hotels and operating them under long-term management agreements to further accelerate the growth of the Company.
While the financing environment is challenging today, we remain confident that in the long-term we have the right locations and brands to attract potential investors. As Fred will discuss, we are pleased with our results and with our renovation projects underway and new properties under development. We believe we are well positioned for future growth. With that, I'd like to turn the call over to Fred.
Fred Kleisner – President and Chief Executive Officer
Thank you, David, and thank you, everyone, for joining us today to discuss our first quarter results. Before I begin, I'd like to note that we reported our fourth quarter and year-end earnings for 2007 just two months ago. And we covered, at that time, some of our early 2008 highlights. Today we'll walk through our first quarter results and then provide a short update on our recent activities. I'll then turn the call over to Rich for a detailed financial results and after that we'll be happy to take your questions.
Our first quarter results were in line with our expectations. Adjusted EBITDA was $21.6 million, an increase of 1.5% from the prior year period. And noting excluding Mondrian, which was under full renovation in the first quarter of this year, adjusted EBITDA increased by 12.5%. The diverse sources of demand in our markets along with strong cost containment, resulting from our contingency plans implemented in the quarter, enabled us to deliver a strong performance for the quarter. RevPAR at owned comparable hotels increased 5.6% from the first quarter of 2007 and RevPAR for system-wide comparable hotels increased 1.5% over the comparable period in 2007.
Excluding the impact of the Super Bowls in Miami in 2007 and Phoenix in 2008, RevPAR for system-wide comparable hotels increased by 5.4% from the first quarter of 2007, which is in excess -- well in excess of the domestic industry averages. Super Bowl returns to Miami in 2010, at which time we anticipate having four hotels open in South Beach to benefit from this event. Our results in the first quarter of 2008 were also affected by the negative impact of the timing of Easter, which occurred in March of 2008 as compared to April in 2007. We benefited significantly international travel to our hotels, which increased by 32% over the prior year's quarter to 31.7% of our total room revenues at system-wide comparable hotels in the U.S. This helped offset declines in domestic demand. We believe this is a clear illustration of our competitive advantage. Our irreplaceable locations, along with a unique experience that inspires our guests. It's the vibe we create that enables us to attract an extremely broad- based and loyal clientele.
Anticipating the slowdown in the economy, we implemented a cost containment plan during the quarter. This focused on costs which do not impact our guest experience and consisted primarily of limits on new and replacement positions and a reduction in discretionary expenses. As a result, operating expense growth at system-wide comparable hotels was limited to 2%, which kept our operating margins even with last year. As we've said, our greatest asset at Morgans Hotel Group is our unique portfolio of properties.
Let me take a moment to discuss what defines our unique offering, the Morgans experience. While our brands each have their own distinctive characteristic, each property shares some key attributes. Our properties are defined by sophisticated and dynamic atmosphere that aims to engage and inspire our guests. Cutting edge design and popular restaurants and bars that foster hip and inclusive social scenes. As the originator of the boutique hotel sector, we have remained the leader in our sector, not only by developing new properties, but by continually innovating our existing ones through renovations. That has enabled us to directly increase RevPAR for individual hotels and, correspondingly, their results.
At Delano we generated a 29% return on invested capital in 2007. And we continued to achieve strong results. The Florida Room by Lenny Kravitz has exceeded all of our expectations and is one of the hottest night spots in South Beach. At Royalton we are very encouraged by a 25.5% increase in average daily rate and an increase in profits at our Lobby Bar during a seasonally slow period. Royalton's restaurant revenues were also up by 69% over the prior year, although higher introductory costs along with some one-time marketing expenses related to the restaurant resulted in profits at the hotel that were lower than last year.
Currently we have full renovations underway at Mondrian LA, which will be – and will begin a full renovation at Morgans in New York the end of this month. We are on track to complete these total renovations by the end of the third quarter this year. As we completed floors, we're placing the new Mondrians back in service and our guest feedback has been, quite simply, outstanding. At Morgans we recently announced we'll be closing the hotel for the summer, which, similar to the Royalton last year, should enable us to complete that renovation on time, on quality and on budget.
Turning to our development projects, we currently have seven new hotels under development and one major expansion in Las Vegas; South Beach; New York, Soho; Chicago and Palm Springs. We're keenly focused on transforming these projects into EBITDA producing assets. Of these projects, Mondrian South Beach, Mondrian Soho, Hard Rock in Las Vegas and the Gale in South Beach have all financing in place. Mondrian South Beach is on track to open in late 2008. We've begun construction at Mondrian Soho and are making progress toward -- on the owned projects, like the Gale in South Beach across from Delano, and the conversion of unused space at Hudson into productive banquet -- high margin banquet revenue-producing space.
We look forward to the EBITDA growth that we expect these projects to generate in coming years. We began construction work last year on the Hard Rock expansion, which is expected to exceed -- to include 875 rooms and suites and additional meetings, additional convention space, doubling the size of the casino as well as beverage and entertainment facilities. We expect to have this completed in late 2009. As we've said, we do not anticipate making any additional equity contributions at the Hard Rock moving forward. Earlier this year we received approval from the Nevada Gaming Commission to operate the casino at Hard Rock. And we've been operating the casino since March. We're pleased that we have already generated year-over-year revenue growth of 9.7% at the Hard Rock Casino in April of 2008.
With regard to our Echelon project, we already have approximately 200 million in equity commitments from both ourselves and our partner, Boyd Gaming. We currently do not intend to contribute additional equity to this project and are diligently pu and additional equity financing to complete the project.
With that, I'd like to turn the call over to Rich, who can run through our financial results in greater detail.
Rich Szymanski – Chief Financial Officer
Thank you, Fred. To summarize our results, our system-wide comparable hotel RevPAR for the first quarter of 2008 was $278, an increase of 1.5% over the comparable period in 2007. As Fred mentioned, the results for the quarter and the comparison to the first quarter of 2007 were affected by the Super Bowl in Miami in 2007 and Phoenix in 2008. And excluding the impact of these events in both years, RevPAR at system-wide comparable hotels increased by 5.4% in the first quarter of 2008 compared to the same period last year.
Adjusted EBITDA growth was adversely affected by the Mondrian LA, which was under renovation in the first quarter of 2008. However, our cost control programs had a very positive impact as we limited expense growth at system-wide comparable hotels to 2% over the prior year.
Strong international business along with positive market trends drove results in San Francisco, New York and Miami. RevPAR at the Clift in San Francisco rose by 12% and RevPAR at our New York hotels increased by 6.6% over the same period in the prior year, despite a shift in the Easter holiday.
Excluding the impact of the Super Bowl, RevPAR at Delano and Shore Club in South Beach rose by 9.4% and 4.8% respectively. The increase in business from our international guests offset declines in domestic travel. And for the first quarter of 2008, international visitors to our system-wide comparable hotels in the United States represented 31.7% of our room revenues, as compared to 24.1% in the prior year's quarter. And this illustrates the strength of our markets and the diversity of our customer base.
We recorded a net loss of 7 million for the first quarter of 2008 compared to net income of $400,000 for the first quarter of 2007. And this was primarily due to a one-time non-operating income item in 2007 and an increase in equity and losses at unconsolidated joint ventures.
As of March 2008, consolidated debt, which includes long term debt and capital lease obligations was 729.5 million, and that included 80.5 million of lease obligations related to the Clift. In addition, we had cash and cash equivalents of 81.3 million. There were no borrowings outstanding under our $225 million revolving credit facility, which is secured by three of our owned hotels – Delano, Royalton and Morgans.
All of our debt at March 31st, 2008 was at fixed rates, either directly or as a result of hedging arrangements. As of March 2008 we had approximately 269 million invested in non-EBITDA producing assets. This includes consolidated assets, equity investments and joint ventures, and our proportionate share of joint venture debt. And these projects included Mondrian South Beach, the excess land and branding rights at Hard Rock and Mondrian and Delano in Las Vegas, the Gale in South Beach, Mondrian Soho and Mondrian Chicago.
While we have made significant investments in growth, we also believe that repurchasing our stock at the current prices was an excellent investment. During the quarter we repurchased 1.2 million shares of our company's stock for $19.2 million.
Based on our first quarter results, we are pleased to reiterate our guidance for 2008, which is 5% to 7% RevPAR growth at our system-wide comparable hotels and adjusted EBITDA of 110 million to 115 million. This guidance anticipates approximately $12 million to $15 million in EBITDA displacement, due to the renovations planned at Mondrian LA, Morgans and Hard Rock. Due to these renovations, we believe that the 2008 adjusted EBITDA level is not indicative of the normalized run rate adjusted EBITDA of the portfolio. And in analyzing the valuation of our company, we believe it is important to consider both the run rate adjusted EBITDA along with the significant investment in non-EBITDA producing assets.
Based on our current estimates, in 2008 we continue to plan to spend approximately $75 million to fund equity investment in unconsolidated joint ventures, of which approximately $50 million relates to the Echelon joint venture. We also plan to spend approximately $50 million in 2008 on renovations at existing hotels and expansion opportunities at our owned assets.
Our guidance assumes a 33% interest in the Hard Rock joint venture. Our ownership interest, based on cash contributed, was 32% at March 2008 and is expected to decrease further over time resulting in a lower proportionate share of both adjusted EBITDA and also adjusted debt.
We do not currently anticipate funding our pro rata share of future Hard Rock equity requirements. We plan to fund the above expenditures from our cash and cash equivalents and cash flow from operations after maintenance capital expenditures.
Based on our current projections, we do not need to borrow or sell assets to fund committed projects in 2008. As David mentioned, with a cash balance of $81 million and three unencumbered assets in attractive locations, we believe we have the resources for growth. I would like now to turn it over to Fred for closing remarks.
Fred Kleisner – President and Chief Executive Officer
Thanks, Rich. In conclusion, our continued strong results reflect the enduring appeal of our brands, the strength of our markets, despite the challenges of the current economic environment.
We will continue to target the 24- hour gateway cities, both in the U.S. and internationally, where we see the greatest opportunities. And we will provide an unparalleled and engaging experience to our guests in every market we serve. The past two month, Marc Gordon and I have spent time in Europe and the Middle East and are totally encouraged by the opportunities we see in those regions.
We'll continue to leverage our brand to take advantage of further opportunities for growth and explore the selling of interest in our assets while retaining the branding rights and long-term management agreements. We'll continue to carefully evaluate our use of capital. We're very focused on successfully completing the renovation projects and launching our new projects and believe we have set the stage for growth in 2009 and beyond. With that, we'd like to turn the call open for questions.
(Operator Instructions). Your first question comes from Celeste Brown from Morgan Stanley. Please go ahead.
Hi, guys. Good afternoon.
Sorry, I'm in an airport. David, could you flesh out your comment from the beginning where you said you were going to continue to explore selling pieces of hotels. It's a tough environment and you guys are positioned long-term. Does that suggest that maybe it takes a little bit longer to do or because of your positioning you can get it done in this kind of environment?
I think we're saying that there's a lot of interest. But as you know, there's a huge bid spread and there are not a lot of transactions that happened in the first six months of this year. So I think that there's basically not a lot happening. We do have a fair amount of interest in our brands and our properties. And as we've said before, we are interested in recycling capital by bringing in lower capital into the assets and using that capital to redeploy in higher returning opportunities over time.
Thank you. And then, Fred, can you just comment on trends in terms of your group bookings? Are you seeing increases in cancellations or are you seeing sort of the same as what you've been seeing over the last six months?
No, trends have remained steady. In fact, as we look at the second quarter, in May we're very encouraged by the trends, both in New York, in South Beach and in London as well. There's significant strength we're seeing right now.
Okay. And then just finally, can you just discuss a little bit more, I guess this question's for Rich, about Echelon financing. Is there a point where equity becomes so expensive and you walk away, could you get diluted down so much or is there a chance you get the your JV gets delayed just because of the environment we're in?
Celeste, Marc Gordon is here, so I'm going to turn it over to Marc and he can answer that question.
Celeste, obviously, as you well know, the market is not normal for financing. But we are encouraged by the interest we've received from financing sources, which I do think is a testament to this project specifically as well as our business model generally We are in conversations with prospective financing sources, both debt and equity. I cannot predict exactly how that will come out and it certainly is possible that it becomes cost prohibitive to do it in today's market. So all options are on the table, including potentially delaying or readjusting the scope of the project.
Okay, thank you.
Your next question comes from Will Marks of JMP Securities. Please go ahead,
Thank you. Hello, David, Fred, Rich. A few questions. One, on Las Vegas, how was your performance in the quarter as compared to the market? I'm just wondering how much it was impacted by renovations.
It was -- it is -- it was impacted by renovations. We started to move some dirt. The parking lot is pretty full with construction vehicles. But having said all that, we actually did better than the market and a lot of our competitors. Our RevPAR was actually down about 4% and most of the reports from the market have been 6% to 8%. So I think we did -- we performed fairly well and we're very encouraged by the early results from the gaming operation.
Great, okay. And looking at another market, New York, I realize there's strength now. What's your view on the rest of the year? It seemed as if last year, things got better and better and probably the comps are going to get tougher and tougher for you. Should we look at the market that way?
We see growth in demand continuing in New York. The markets have extremely wide breadth and great depth in each area. Where the financial sources of business are down, the other sources of business are up. And we're up 40% in international travelers to New York City to our hotels as a percentage of revenue. So we're very -- we had a huge increase in international visitors last year. It was up 25% in New York City. We're up another 20% in the quarter and that's the slow quarter. So I am still of the opinion that was expressed by Cushman & Wakefield in the fourth quarter last year; it would take about quadruple the number of rooms that are coming into the supply in New York City to bump up against the demand curve in New York. And we've got the locations that are attractive to the visitors and for both business and leisure to New York City.
Okay. And then on the Royalton, it was a little bit depressed during the quarter, I guess due to the startup costs. Is that correct? I think you mentioned that.
When would you expect that to resume to normalcy, I guess?
We've got an action plan in place that begins to withdraw those one-time support expenses and in the first quarter we had an awful lot of one-time expenses as well. Revenues were up significantly. The hotel revenues were up significantly as well as the lounges, an out-of-the-park homerun. We planned to use the restaurant and its positioning as a halo effect on the rest of the hotel. That has worked extremely well. As we come through the second and third quarter, that's where we'd see things adjust to stability.
Okay, great. And just my final question on the heels of an earlier one in terms of asset sales you guys have been talking about potentially selling interests or assets for a little while now and I'm wondering, can you tell me or confirm that you've actually hired an investment bank or a brokerage firm to explore this?
Let's have Rich and then Marc handle this.
Well we're not going to disclose or discuss whether we've hired somebody or not at this time, Will. But we have made it a focus and it is one of the priorities of the Company. So, Marc, if you want to add to that?
I don't have more to repeat other than essentially what David said just a few minutes ago. It is certainly a focus of the Company. We are spending energies to execute on it. And we will execute on it when we can find a transaction that's at the right price, that keeps us with a long-term management agreement and is tax efficient. I would expect that over time you will see that happen. In today's markets, given the difficulty financing, the leverage buyers, we question their ability to close. And so it's something you should expect to see over time.
Great thank you very much.
(Operators Instructions) Your next question is coming from David Katz of Oppenheimer. Please go ahead.
Hi good afternoon.
Two things. One, I just want to make sure that in some of your answers to the previous questions, one of the things we observe is the F&B profitability in aggregate being down. And I assume that that's attributable to some of the stuff we're talking about at the Royalton?
Okay is there anything else in there?
As a matter of fact, David, the Florida Room profitability was very strong and we're very pleased with that. The bulk of the lower profitability had to do with Royalton.
And then a little bit of Mondrian LA too, I have to say, because it is under renovation. The entire building there is shrouded with a construction elevator on one side of the building. So that has -- the volume has stayed there, which is exactly what we want. It is parts of our investment in the success of these projects, which, from a GAAP standpoint, cannot be capitalized.
Right, and then – the London hotels have been flattish or a little bit weaker than I think what we've expected the last couple of quarters. What's -- that's not necessarily consistent what we are seeing with European urban assets. What's going on there?
I think if you look at the London market in the first quarter, it was up maybe 1% or so, so it had a little softer quarter. With us, we still do about a third of our business there is U.S.-based, since we're a U.S. company, and the dollar works in reverse there. But I think we're pretty much around what the market did for the first quarter.
And my comments, David, on the trends we're seeing in May, that particularly applies to London right now. We're seeing a very strong second quarter coming together.
Also London – Easter is a very big holiday in London. And that did affect the results a bit. It's a little bit longer holiday. They get Easter Monday and the impact is a little bit greater. So I think that affected numbers in the first quarter also.
Great good quarter, thanks very much.
At this time there appear to be no further questions. I will now turn the floor over to Fred Kleisner. Please go ahead.
Well thanks very much to all of you for joining us today. We look forward to updating you next quarter. Thank you very much, everyone.
Thank you. This concludes today's Morgans Hotel Group Company First Quarter 2008 Earnings Conference Call. You may now disconnect your lines and have a wonderful day.