Morgans Hotel Group Co. Q2 2008 Earnings Call Transcript

| About: Morgans Hotel (MHGC)

Morgans Hotel Group Co. (NASDAQ:MHGC)

Q2 2008 Earnings Call

August 6, 2008 5:00 pm ET


Jennifer Foley - Public Relations Director

David Hamamoto - Chairman

Fred Kleisner - President and CEO

Rich Szymanski - CFO

Marc Gordon - Chief Investment Officer


Celeste Brown - Morgan Stanley

David Katz - OppenheimerFunds

Will Marks - JMP Securities

Michelle Ko - UBS


Good afternoon, and welcome to the Morgans Hotel Group company Second Quarter 2008 Earnings Conference Call. My name is Mary and I will be your conference operator today. At this time, I would like to inform all participants that your lines will be in a listen-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 our recording of this call.

I would now turn the call over to Jennifer Foley of Morgans Hotel Group. Please go ahead.

Jennifer Foley

Good afternoon. Thank you for joining us on our second 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 on the call onto David.

David Hamamoto

Thanks Jen, and thanks everyone for joining today's call. Before I turn the call over to Fred to discuss the company's results, I wanted to make a few brief comments. While we continue to face a challenging economic environment, our strategy, our key gateway markets and irreplaceable locations within those markets and effective cost management have enabled MHG to deliver comparable hotel RevPAR and EBITDA growth outperforming the industry.

Our financial position remains strong with $73 million in cash and cash equivalence at the end of the quarter, along with [unrevolving] credit facility providing us with total liquidity of $206 million.

We also expect to receive an additional $30 million from the return of our deposit on the Echelon Project this quarter and expect to be released from an incremental $45 million of future funding obligation with no continuing guarantees and complete control of our brand.

As a result, we estimate that our non-discretionary funding obligations in 2008 and 2009 consist of approximately $25 million to complete hotel renovation and expansion projects and $20 million to $30 million on joint-venture projects currently under construction.

Our balance sheet remains strong and we have the liquidity to fund our current commitment. We intend to allocate capital strategically by committing it to the highest return opportunities. Right now, we believe those opportunities are repurchasing our stock under our new $30 million share repurchase program and investing in minority equity interest in new hotels, where we can secure long-term management contracts.

We also may raise capital by selling majority interest in some of our more mature assets which we would seek to recycle into higher returning strategic investments. While this is an important objective, we will not sell assets unless the price accurately reflects their long-term value.

The current state of the credit market has made the process more difficult. We have been working with Blackstone Advisory Services to assist us in this effort and have been in discussions with many investors who are attracted to our assets, because of their locations and gateway cities and the strength of our brand.

We continue to believe that the net asset value of our assets management contracts and brand is well in excess of our share price and that as our properties continue to perform and our renovation and development projects come online, this value will eventually be recognized.

With that, I would like to turn the call over to Fred to discuss the results of the quarter.

Fred Kleisner

Thanks David. I would like to begin our conversation with a recap of some of the thoughts I shared with our board at our most recent meeting. I'll then review some of the highlights of the quarter and turn to Rich for a detailed discussion of our financial results. After that we will be happy to take questions from those on the call.

As we look at the first and second quarter of 2008, it is clear our management team was ready day one to adjust to the downside of the economic cycle, and the results we are reporting today reflect exactly that.

Notwithstanding the broad challenges of the current business environment, our second quarter with over 4% comparable RevPAR growth in North America, comparable companywide RevPAR growth of nearly 3% and comparable hotel EBITDA growth of over 14% demonstrate that our unique hotels with the strongest locations in the best markets along with our effective cost control and any nimble management team continue to drive results throughout the economic cycle that exceed our peers and our competitors.

In anticipation of the economic slowdown in the first quarter, we implemented our contingency plans to effectively manage our cost. This process continued and accelerated in the second quarter which resulted in an operating margin improvement of 200 basis points and a reduction in operating expenses of 1% during the quarter over the comparable period in 2007.

I would like to point out that in addition to the fact that our earnings per share and market consensus more importantly, we received substantial leverage from our cost savings initiatives. In fact, the growth rate of comparable adjusted EBITDA exceeded our RevPAR growth rate by 5 times. well in excess of industry benchmarks of 1 to 1.5 times. Because of our cost savings initiatives focused in areas that did not affect our guest experience, we achieved savings without sacrificing the quality of our guest experience.

This provides further evidence that MHG is ready and able to successful execute both revenue enhancement and expense control. MHG has been known for providing our guest with an immersive experience to engage their senses and our guest engagement scores confirm that we remain the leader in this area. Our market share indices further confirm this.

In June this year, the year-to-date Smith Travel associates STAR report reflects we have maintained our market share in our competitive sets. Our internal guest surveys each month, or each of the last three quarters show that we are seeing significant improvements in our guest experience, which drive our 30% plus repeat guest factor system-wide.

Our employee engagement score is some of the highest I have seen in the hospitality industry led by extraordinary staff satisfaction throughout the organization. We realized that economic conditions are difficult and changing. However, we are confident we are well positioned to mitigate these challenges. As a result, we are reaffirming our full year guidance as Rich will discuss later.

Now allow me to address the market trends we saw during the quarter which continue to drive our results. Our hotels are located in the strongest locations in the top performing markets in the US, which include Los Angeles, San Francisco, New York and Miami and we believe those markets will continue to outperform the industry.

Additionally, an increase in business from international travel of 26% to our company offset declines in domestic travel. These trends along with lasting appeal of our property leave us well-positioned despite the market conditions.

Since the opening of our first hotel in 1984 MHG has engaged its guest and earned their loyalty by creating an unequal guest experience that has proven to be a competitive advantage. Just as MHG redefine the hotel experience with the launch of Morgans, we continue to do so with our renovation projects, which we believe are directly responsible for the increased RevPAR in our renovated properties.

Currently Mondrian LA and Morgans in New York, our original boutique hotels are undergoing the final stages of complete renovations. We will be unveiling our new design and grand re-opening parties scheduled for September 4 at Mondrian LA and till September 10 at Morgans in New York. This will mark the completion of all major renovation programs at our Owned Hotels and we look forward having a fresh upgraded new rooms and amenities at all of our Owned Hotels.

We expect this to have a significant impact in the future operating results, both from a return on investment and the elimination of $10 million to $12 million of annual EBITDA displacement at these hotels in 2008.

We are also in the process of converting the first phase of SRO rooms' conversion at Hudson, adding one Florida Hudson, approximately 20 guest rooms which we expect to have completed in the first half of 2009. We will continue the process of converting the remaining 80 single residence occupancy or SRO units into hotel rooms over the next several years. In addition to our renovation projects, we have a well-defined growth strategy to develop new properties in attractive gateway cities

In June, we announced the joint venture to develop Ames Boston which has been a target metropolitan market for us. The Ames which represents a new addition to our brand portfolio is Boston's first skyscraper centrally located near Boston Common, Government Center and Faneuil Hall. This property is expected to have 115 guest rooms, restaurant bar and other hotel amenities with significant outdoor space for food and beverage operations adjacent to one of Boston's busiest pedestrian walkways.

We'll continue to expand our brands. both in other locations within the US and internationally through long-term management contracts that require little or no investment on our part. Internationally, we are carefully focusing on the Middle East and Eastern Europe's gateway cities where RevPAR is extremely high, the type of cities where MHG thrives. At the same time, we are actively transforming our projects currently under construction into EBITDA producing assets.

Our Mondrian South Beach project is scheduled to be fully opened this year in time for the Art Basel festival on December 4th. We are under construction in Mondrian SoHo New York, Ames Boston and the expansion of the Hard Rock Hotel & Casino in Las Vegas, all of which are expected to be opened by the fourth quarter of 2009. We look forward to these projects contributing to our EBITDA in 2009.

In June, we announced the closing of financing for the Hard Rock expansion project. Construction is underway and the project is on time, on budget and on quality. We expect portions of this project to begin opening mid-2009 with final opening in the fourth quarter of 2009.

With the expansion and other improvements in the existing facility, we are further enhancing Hard Rock status as the one true boutique hotel in Las Vegas. MHG's percentage ownership interest in Hard Rock is now approximately 20%, which further diversifies our risk exposure.

Allow me now to provide an update on the Echelon Project which David has already touched on. This has been in the news. Last week Boyd Gaming announced its decision to delay the entire project due to the difficult economic environment surrounding today's capital markets and the general economic conditions.

As we previously announced on July 1st, the deadline to obtain construction financing for the Echelon Project was extended to September 15th this year. Given Boyd's announcement and the difficulties in the credit markets, we believe the joint-venture will be unable to secure financing at favorable rates and conditions by September 15th. We do not intend to further extend the joint-venture agreement on its current terms.

While we made significant investments in growth, we also believe that the purchase of MHG shares is an attractive investment for our company. Reflecting our board's confidence in MHG's prospects in July we announced that our board authorized the repurchase of up to $30 million in MHG's stock, or approximately 9% of its outstanding shares based on the then current market price. We are pleased that our balance sheet and cash position provide us the financial flexibility to implement this program, which we believe is an excellent way to continue to build value for our shareholders.

Before I turn the call over to Rich, let me address several important appointments we recently announced. As we continue to grow and in the past year we made a strategic decision to invest in the people of our infrastructure and support our growth, particularly in the areas of marketing, operations, human resources and design.

In June, we appointed Howard Wein as Senior Vice President of Food and Beverage. Howard joins MHG from the Starr Restaurant Organization, where he served as Chief Operating Officer and Founder and President of Starr Restaurants Hotel Group since 2004.

As you know our properties are known for the entire experience in the dynamic vibe they create. We look forward to enhancing the restaurant experience for our guests. In July, we announced the appointment of three new members to our board of directors, Deepak Chopra, David Moore and Marc Gordon, expanding the board from seven to ten.

Deepak is a world-renowned entrepreneur and thought leader recognized, both for his vision and his inspirational nature. Additionally, we believe that his deep understanding of the Far East will prove valuable to us as we continue our international expansion.

David Moore is Chairman of 24/7 Real Media Inc, a global leader in search engine marketing solutions and we look forward to benefiting from his internet branding and marketing expertise.

Finally, Marc's years of experience in service to MHG have been integral to the company's growth and success. We look forward to continuing to benefit from his financial and real estate development expertise. We believe our new members will add additional breadth and depth to a dedicated and experienced engaged board. I look forward to working with them.

With that, I would like to turn the call over to Rich Szymanski, who can run through our financial results in greater detail.

Rich Szymanski

Thank you, Fred. To summarize our results, our System-Wide Comparable Hotels RevPAR for the second quarter was $275, an increase of 2.8% over the comparable period in 2007. RevPAR at Owned Comparable Hotels increased by 4.4% to $255.

Our concentration in key international gateway cities, such as New York, Miami and San Francisco drove RevPAR growth in excess of the US industry average growth for the quarter. An increase in business from international travel which rose by 26% offset declines in domestic travel.

For the second quarter of 2008, international visitors represented 35.6% of room revenues at System-Wide Comparable Hotels in the US, as compared to 28.3% in the comparable period in 2007.

EBITDA margins at System-Wide Comparable Hotels improved by 200 basis points, as compared to the same period in 2007. We achieved this increase through a 1% reduction in comparable operating cost at these hotels due to the implementation of cost savings initiatives related to labor, marketing and other hotel level expenses.

Adjusted EBITDA from System-Wide Comparable Hotels increased by 14%, as a result of these cost-savings initiatives. Due to an estimated $4 million of the EBITDA displacement at Mondrian LA, Morgans and Hard Rock which were under renovation and classified as non-comparable hotels in the second quarter, adjusted EBITDA decreased by 9.6% to $27.8 million.

During the quarter, our ownership interest at Hard Rock based on cash contributions was reduced from 33% to 27%. This resulted in a weighted average of 30% for the quarter, resulting in a lower proportionate share of adjusted EBITDA but also of adjusted debt. Had the ownership percentage remained at 33%, adjusted EBITDA for the second quarter of 2008 would have been approximately $500,000 higher than reported.

Our share has further been reduced to approximately 20% to-date and as part of our strategy to become more asset-like, we ultimately expect our ownership interest to be under 15% and our management fees to double when the expansion is completed at the end of 2009.

We recorded a net loss of $700,000 for the second quarter 2008 in line with consensus market expectations compared to net income of $800,000 in the comparable in period in 2007. And this was primarily due to non-cash stock compensation expense and depreciation and amortization.

As of June 30, 2008, consolidated debt was $730 million which included $81 million of lease obligations related to the Clift. There are no borrowings outstanding under our revolving credit line, which is secured by three owned assets Delano, Royalton and Morgans.

In addition, we had cash and cash equivalents of $73 million. All of our long-term debt at June 30, 2008, was at fixed rate either directly or as a result of hedging arrangements and the bulk of our maturities are in 2011 and beyond.

As of June 30, 2008 our liquidity measured by cash and cash equivalents and availability under our revolving credit facility was $206 million. We also expect to receive a return of our $30 million deposit related to the Echelon Project during the quarter and expect to be released from an incremental $45 million of future funding obligations, with no continuing guarantees.

As of June 30th, we estimate that our total future obligations in 2008 and 2009 for development projects currently consists of approximately $25 million for hotel renovation and expansion projects and $20 million to $30 million for joint venture projects. We believe that after giving effect investments in non-EBITDA producing assets, our company is trading between nine and 10 times EBITDA, an attractive investment for a company with assets in New York, London, South Beach and Los Angeles.

Recognizing this on July 1, 2008, our Board of Directors approved a $30 million stock repurchase program. Today, we have repurchased 1.1 million shares of our common stock in an average price of $11.05 for a total of $12.2 million. As of August 5, 2008 there were approximately 31.1 million shares of our common stock outstanding and approximately $1 million operating company units outstanding which may be redeem for common stock.

Turning now to guidance, we are pleased to reaffirm our adjusted EBITDA outlook for 2008. We anticipate system-wide comparable hotel RevPAR growth of 3% to 5% and adjusted EBITDA of $106 million to $111 million. These EBITDA amounts have been adjusted from prior guidance to reflect the expected 20% ownership interest in the Hard Rock joint-venture for the remainder of the year, again resulting in a lower proportion of share of debt and adjusted EBITDA.

As you recall, our original guidance of $110 million to $115 million assumes a 33% interest. and we indicated that we would be adjusting our outlook as we have more clarity around our ownership position. Our 2008 guidance anticipates approximately $12 million to $15 million in EBITDA displacement due to the renovations in Mondrian LA, Morgans and Hard Rock.

Due to these renovations, we believe that the 2008 adjusted EBITDA level is not indicative of the normal run rate adjusted EBITDA of the portfolio. With the completion of the Mondrian LA and Morgans renovation expected in September, EBITDA displacement is expected to decrease beginning in the fourth quarter of 2008.

Including amounts spent to date, we expect to spend a total of approximately $25 million to $35 million to fund investments and joint-ventures and approximately $45 million to $50 million on renovations and expansions of existing hotels based on current estimates. We plan to fund the remainder of these expenditures from existing cash and cash equivalence.

Based on our current projections, we do not need to borrow or sell assets to fund committed project in 2008 or 2009. To summarize, we have significant liquidity between our current cash position and availability under our revolving credit line.

In addition with the recent news at Echelon and the reduction of ownership at Hard Rock, we have reduced our future capital commitments and our exposure to a currently challenging market in Las Vegas.

We believe our cash flow and earnings will improve with the completion of our renovation projects at our owned hotels in September and the opening of new hotels in 2008 and 2009. In this difficult economic period, we will carefully focus on capital preservation and allocation to maximize returns for our shareholders.

I would now like to turn it over to Fred for closing remarks.

Fred Kleisner

Thanks Rich. While this year will continue to present its challenges, the common threat as we approach the balance of 2008 and 2009 will be one of preparedness and caution. Our results reflect the preparedness with which we entered this year through our revenue and expense contingencies in particular.

While we have been focused on controlling our costs, we have maintained our leadership position by continuing to reinvent our properties and provide a one of a kind guest experience to each of our guests resulting in a strong RevPAR growth and correspondingly strong increases in EBITDA.

Our pipeline remains active, yet we remain focused on our prudent approach toward the use of capital. Regarding asset sales, we will only do what makes sense for MHG and our shareholders and we expect any transaction to be accretive to both our balance sheet and our equity while allowing us to retain brand rights and long-term management agreements.

In conclusion, we believe that our irreplaceable assets in top performing markets at the best locations within those markets with our effective cost management, financial flexibility and the strong management team will continue to drive our results in this uncertain economic environment.

Operator, I would like to now open the call to questions from those on the call.

Question-and-Answer Session


Certainly, sir. (Operator Instructions). And our first question comes from Celeste Brown from Morgan Stanley. Please go ahead.

Celeste Brown - Morgan Stanley

Hi, guys. Good evening.

Fred Kleisner

Hi, Celeste.

Rich Szymanski

Hey, Celeste.

Celeste Brown - Morgan Stanley

Can you hear me okay?

Fred Kleisner


Celeste Brown - Morgan Stanley

Okay. I guess this is for either you Fred, or for Rich. Obviously, you are in a much better situation from a liquidity position right now. What kind of cash do you feel like you need on hand in order to be comfortable in a worst case scenario that people are talking about on the economy, or I guess the better question is like how much cash would you be comfortable using for buybacks if the opportunity arises and you are comfortable with the price?

Rich Szymanski

Well, this is Rich. We evaluate that from time-to-time and we like to keep a good sufficient amount of liquidity on our balance sheet I mean without mentioning a number, we do sensitivity to EBITDA. And, while we are comfortable with our guidance, we usually rely on that to determine how much we need, but it is hard to say an exact amount.

Celeste Brown - Morgan Stanley

Okay. And then, this question is for you, Fred. I thought you guys did a great job of cutting cost during the quarter, particularly comparing to a lot of the other hotel companies that are struggling with the same thing. Is there a lot of room for opportunity going forward,, or it going to be dependent on what is going on again with your customers and the demand?

Fred Kleisner

We are very sensitive to looking only in those areas, which we feel is, what is called for now. Those areas which do not affect the hotel guest experience. Having said that, our first approach from Q1 to Q2 was to make sure all the savings from Q1 stayed in Q2 and then evaluate opportunities through attrition deferring new positions particularly at the mid-management level property-by-property.

We feel that, A, the cost savings we put into place are maintainable and we will look carefully for further opportunities to turn that screw a little tighter as we move further, having said that as I look back on the quarter the most difficult month of the quarter was April.

May and June showed strength to our expectations and we have seen enough of July to see that trend continuing. Whereas nimble and agile as you can imagine. However, our focus right now will be to maintain all of those savings until such time as we feel we are comfortably heading into the next growth cycle and good Lord knows when that is going to happen.

Celeste Brown - Morgan Stanley

Okay, thanks. And then just finally, it sounded like you were saying you would love to be involved with the same brands at Echelon, but potentially just putting less capital up.

Fred Kleisner

Well, let us be very clear. Our view of the Echelon Project right now is it is not a financeable project at this time, and that the monies we have committed, both in deposit and the prospective monies that we had put into our uses of funds this year will not be expended.

There may be proposals that would fit our strategic plan to be more heavily weighted toward management fee income that we would certainly consider, but it is not in the interest of our shareholders or the company to consider further equity investments in Las Vegas.

Celeste Brown - Morgan Stanley

Okay. Thank you.


And our next question comes from David Katz from OppenheimerFunds. Please go ahead.

David Katz - OppenheimerFunds

Hi, Good evening, all.

Fred Kleisner

Hi David.

Rich Szymanski

Hi, David.

David Katz - OppenheimerFunds

I guess the follow up on to that last discussion is which other projects do you have out there on the board that don't yet have financing and what progress have you made there and should we be looking at any of those with a critical eye to see if those are potentially cancellation candidates.

Fred Kleisner

Marc Gordon is with us. We will let him to take that call, David.

David Katz - OppenheimerFunds

Hi, Marc.

Marc Gordon

How are you, David?

David Katz - OppenheimerFunds


Marc Gordon

Of the projects that we have announced, I believe the only ones that are not financed currently are the project we have announced in Chicago and the project we have announced in Palm Springs. Certainly in these uncertain and ever-changing financing markets, we can't tell you for sure those things are going to get finance, but we are seeking financing in each instance and believe that there is enough likelihood of us getting it that we are continuing to proceed with the projects for now.

Fred Kleisner

In particular, David, we remain very bullish on the potential of the Chicago market and the location we have in the Gold Coast area of the Chicago market near North Side Cedar. That's a project we would like very much to see move forward.

David Katz - OppenheimerFunds

All right, And just one last question while we have Marc here also; it's hard for us to evaluate the prospects of unlocking some value by selling off some interest in properties. What details on a general sense can you give us about where you are relative to the last time we discussed the issue some months ago?

It seemed as though you had taken some steps forward. Is there the population of people reviewing proposals that you expected? Where are you in terms of your expectations three months ago, let's say?

Fred Kleisner

As we made clear, we do intend to sell interest in our owned assets overtime when we get an attractive price in a tax efficient transaction and a transaction where we would keep management and branding on the assets.

As discussed, financing markets have not been accommodating off late. We are in the fortunate position that we do not have any necessity to transact until the timing is right. Specifically, with respect to your question, I think David made clear that we are working with an advisor currently, Blackstone, real estate investment banking group.

We are having conversations, but those issues relating to the financing markets remain out there. So, it's really just impossible to predict. Overtime, it's definitely our intention to do so, but overtime may be commensurate when the markets are more accommodating.

David Katz - OppenheimerFunds

Okay. Thanks very much.


(Operator Instructions). And our next question comes from Will Marks of JMP Securities. Please go ahead.

Will Marks - JMP Securities

Hi, good afternoon, everyone. Few questions, one on South Beach and can you give us a sense of where sales are and I think in the past you have given us a figure in terms of full collections, on not just deposits but full purchase price?

Marc Gordon

This is Marc again. There remains great interest, both in the condos and in the hotel at the Mondrian South Beach. Specifically, with respect to the sales, we have closed 69 condo sale and we have approximately 165 contracts with firm refundable deposits set to close.

While it is heavily weighted towards the one that we will close in the future, I think it's actually fairly impressive that we have had so many close given that the physical construction of the properties not yet complete. We hope to close the bulk of the deal that are under firm contracts when the physical construction is complete, and we obviously have the ability to continue to sell thereafter.

Will Marks - JMP Securities

Marc, why would the 69 people pay the full price if they do not have to? Is there some discount if they pay before the project opens?

Marc Gordon

They want to be involved in the project.

Will Marks - JMP Securities

I can understand why they put down the deposit, but given the time value of money, why would they put it down more than six months ahead when the project is going to open if they do not have to is my question.

Marc Gordon

Obviously, we are trying to induce them to do so. I was not asking so much why they would do such a thing. We think it is a pretty positive statement that they do. As I have said, there is great interest in the condos and there remains great interest in the hotel as well.

In fact, we believe that there is a very good chance overtime this hotel will be recognized as the best, certainly among the best in all of South Beach and I guess they wanted to confirm their ability to be involve in it.

Fred Kleisner

Having just toured the Mondrian South Beach project recently, the quality of that project, the square footage per unit, our sales price per square foot are all extraordinary. It will be a stellar Mondrian`, hard to rate which is the best, but it is an extraordinary project. As these units are completed, it does not come as a surprise that we have a closing process in place.

Will Marks - JMP Securities

Thank you, and few other questions on specific markets. Vegas, you had occupancy rate, down a little bit, but can you give us a sense of how that compares to the market? It seems like you must have outperformed during the quarter.

Fred Kleisner

Las Vegas at Hard Rock, one of the things we've emphasized is that Hard Rock is Las Vegas is only true boutique hotel. We have benefited from that. It has the unique location. It is not on the strip. It has a unique signature to itself. We have seen that while Las Vegas is a difficult market, we are doing particularly better than all of our competition and particularly the properties on the strip.

One area that has held up very well is beverage sales. As we look at beverage sales, we have seen those sales grow and we've set new records that our Sunday Beach Party called Rehab Rx, we have broken all record since we reopened Rehab Rx at the end of April and that continues with a full construction project going on all around the pool.

Will Marks - JMP Securities

Great, Okay. And then on New York, it appears that the market, I know this is just a general Smith Travel number, what was up 6.1% in the second quarter and the Hudson was up 3.7%, but maybe even more important the revenues were actually flat. The overall revenues of the Hudson, any comment there?

Fred Kleisner

When you are at a superlative, we are talking about a hotel that runs in very high occupancy and a very high rate, particularly based on the size and number of rooms we have. Our food revenues are not a significant source of income revenue-wise or EBITDA. Beverage sales have held.

Rich Szymanski

Yes. And Will, this is Rich. There is one other factor, we did some outdoor repairs to our outdoor bar in the Private Park, and it opened later this year than it had in the prior year and that also contributed to the flatness in revenues.

Will Marks - JMP Securities

Okay, great. Very helpful, thank you.


And our next question comes from Michelle Ko from UBS. Please go ahead.

Michelle Ko - UBS

Hi. I was wondering given the difficult environment and with airline capacity declining, it's impressive that you are not changing your EBITDA guidance. I was just curious if you could tell us a little bit more about your thought process maybe about what you are seeing at some of your hotels, the trends that you are seeing that might be different than?

Fred Kleisner

Yes, Michelle. I'm happy to. Number one, we were on the highest absolute dollars of RevPAR of any publicly reporting hotel company. And therefore, A, the proportion of total travel expense represented by airline travel is less in our end of the market.

Also, our customers are not as sensitive to the cost of our travel as other sectors of the hospitality marketplace. There is nothing like unshakeable facts to clarify where we want to bring our guidance in.

As we look at the sustainable control of expenses, as we look at actual drop of 1% in operating expenses for the quarter, we are comfortable and confident that the guidance we began the year for EBITDA is the guidance where we will maintain through the year.

Michelle Ko - UBS

Okay. And also I was just wondering it looks like that the stock-based compensation and the corporate expenses are there increased in the second quarter? I was wondering if that was an appropriate run rate to use for the rest of the year.

Fred Kleisner

Yes. I think the run rate we have is appropriate for the rest of the year. Next year the initial grants, which were issued in 2006 dropped off, so there might be a reduction next year. But as far as the stock comp, I think that is an appropriate run rate.

As far as the corporate expense, I think it's generally an appropriate run rate. We had some additional legal cost in the quarter. You file your proxy and you have some additional spikes up with the expenses during the second quarter, but I think that's probably a good run rate and we have added to the marketing department and some other departments here in the corporate office.

The one point I do want to make about stock compensation is that even though the expense is there, and it is our P&L, we do adjust it from adjusted EBITDA and the way we prefer to look at it is to back that expense out from an accounting standpoint and just add in the shares. And they are roughly close to $2.5 million LTIPs in restricted stock units, and we think that's really the proper way to look at the company.

Rich Szymanski

If I could go back to the question on our reaffirmed guidance and our trends, one of the things we have been absolutely consistent in our communications with the marketplace and our shareholders is that we have a unique positioning as a company. We are only in gateway cities, our locations within those gateway cities are very strong.

We operate in New York, San Francisco, Miami and LA which are four of the strongest markets that we have seen this year. We believe those markets will continue to show strength compared to the rest of the country. And in Las Vegas, where the market is difficult, we have shown that we have the strength to do far better than the rest.

When we look at that reality, and the reality that we are 90% business in leisure-stringent, we don't depend heavily on group business, which is an area of business that drops off quickly when the market changes, we are not at airports, we are not in suburban locations, we do not have major convention hotels.

I believe that the confidence that we have in reaffirming our guidance comes from the fact, we know our products, we know our company, we know it works and we stick to that. We are not going to go out and do other things.

Michelle Ko - UBS

Okay. Thanks.


There appears to be no more questions at this time. I would like to turn the floor over to Mr. Fred Kleisner for any final comments.

Fred Kleisner

I have one thing to say, and thank you all for joining us today. We look forward to speaking to you again next year. Be well.


Thank you, everyone. This does conclude today's conference call. You may disconnect your lines at this time, and please have a wonderful day.

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