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Morgans Hotel Group reports Q1 2013 results

Morgans Hotel Group Co (NASDAQ: MHGC) yesterday reported financial results for the quarter ended March 31, 2013. The company operates the Mondrian luxury hotel chain, which has partnered with Baha Mar in Nassau. 

Source:
Date:
Updated:
PRNewswire
Wednesday, May 1, 2013
Wednesday, May 1, 2013

MHGNEW YORK, April 29, 2013 /PRNewswire/ — Morgans Hotel Group Co. (NASDAQ: MHGC) (“MHG” or the “Company”) today reported financial results for the quarter ended March 31, 2013. The Company will host a conference call to review the results on Tuesday, April 30, 2013 at 9:00 am.

  • Adjusted EBITDA was $7.5 million in the first quarter of 2013, a $6.5 million increase over the same period in 2012, due primarily to increases in EBITDA at the Company’s fee-owned hotels, Delano South Beach and Hudson.
  • Operating margins at the Company’s Owned Hotels, which includes Delano South Beach, Hudson and Clift, increased by over 1,000 basis points during the first quarter of 2013 as compared to the same period in 2012.
  • Revenue per available room (“RevPAR”) for System-Wide Comparable Hotels increased by 17.0% in actual dollars, or 17.2% in constant dollars, during the first quarter of 2013 from the comparable period in 2012, the Company’s highest RevPAR growth rate since the first quarter of 2007.
  • RevPAR for System-Wide Comparable Hotels located in the United States increased 19.2% during the first quarter of 2013 as compared to the same period in 2012.
  • On March 30, 2013, the Company entered into agreements with affiliates of The Yucaipa Companies (“Yucaipa”) pursuant to which, upon consummation of the contemplated transactions, the Company will exchange its ownership interests in Delano South Beach, The Light Group and its subsidiaries that hold three restaurant leases in Las Vegas for $6.5 million in cash and the surrender and cancellation of convertible debt, preferred securities and warrants to purchase MHG common shares and certain consent rights over certain major decisions held by Yucaipa. The Company will continue to operate Delano South Beach pursuant to a long-term management agreement. Additionally, the Company will launch a $100 million rights offering to its existing shareholders which, together with cash received in the exchange transaction, MHG projects will yield approximately $65.0 million of cash after using a portion of the net proceeds to retire its credit facility and related obligations (together with the exchange, collectively the “Deleveraging Transaction”). The Deleveraging Transaction is currently expected to close in the second quarter of 2013.

Michael Gross, CEO of the Company, said: “The strong first quarter results underscore the significant progress we have made transforming our portfolio and repositioning our hospitality offering to capitalize on the growth opportunities ahead. With eight new hotels slated to open in the next three years and a growing pipeline of deals in key destinations around the world, we see a clear path to quickly increasing gross fees, EBITDA and cash flow. The deleveraging asset exchange transaction and rights offering will significantly reduce our debt and equity obligations and raise necessary capital for growth, allowing us to accelerate our strategic development. We are very confident in the future and look forward to building on the momentum of our recent results to increase shareholder value in the years ahead.”

First Quarter 2013 Operating Results
Adjusted EBITDA for the first quarter of 2013 was $7.5 million as compared to $1.0 million for the same period in 2012. This $6.5 million increase was due primarily to strong performances at the Company’s two fee-owned hotels, Delano South Beach and Hudson, as well as an increase in management fees and lower corporate expenses. EBITDA at Delano South Beach and Hudson increased by $2.1 million and $2.8 million, respectively, in the first quarter of 2013 as compared to the same period in 2012.

RevPAR at System-Wide Comparable Hotels, which includes all MHG-branded hotels with the exception of Hudson, which was under renovation during 2012, and Delano Marrakech, which opened in September 2012, increased by 17.0% in actual dollars, or 17.2% in constant dollars, in the first quarter of 2013 from the comparable period in 2012. RevPAR for System-Wide Comparable Hotels located in the United States increased 19.2% during the first quarter of 2013 as compared to the same period in 2012.

RevPAR from System-Wide Comparable Hotels in the Northeastern United States, which consist of Morgans, Royalton, Mondrian SoHo and Ames, increased by 21.8% in the first quarter of 2013 as compared to the same period in 2012, driven primarily by a 20.2% increase in occupancy. The region experienced strong trends throughout the quarter which allowed the Company to successfully execute its strategy to grow occupancy during the seasonably slowest period of the year.

RevPAR at Hudson, the Company’s non-comparable hotel located in New York City, increased by 38.7% and, with 32 new hotel rooms opened during the quarter, room revenues increased 42.5% during the first quarter of 2013 as compared to the same period in 2012. Hudson’s strong operating performance was also positively impacted by the February 2013 opening of its new restaurant, Hudson Common, a modern-day beer hall and burger joint featuring a wide selection of local craft beers, inventive preparations of classic American fare and soda shop-inspired specialty cocktails.

RevPAR from System-Wide Comparable Hotels in Miami increased 22.3% in the first quarter of 2013 as compared to the same period in 2012, driven by a 13.5% increase in occupancy.   The Company’s fee-owned Miami hotel, Delano South Beach, generated a 19.5% increase in RevPAR driven equally by a 9.7% increase in occupancy and an 8.9% increase in average daily rate (“ADR”) during the first quarter of 2013 as compared to the same period in 2012.

The Company’s two West Coast hotels generated 13.1% RevPAR growth in the first quarter of 2013 as compared to the same period in 2012, led by Mondrian Los Angeles. In London, RevPAR increased by 5.6%, or 6.8% in constant dollars, during the first quarter of 2013, despite the difficult economic climate in Europe.

Management fees increased by 17.7% in the first quarter of 2013 as compared to the same period in 2012. Excluding non-recurring items, management fees increased by 8.7%.  Management fees for the first quarters of both 2013 and 2012 exclude operating results from The Light Group, which is classified as a discontinued operation as the Company will have no continuing involvement with this entity after the closing of the Deleveraging Transaction.

Operating margins at the Company’s Owned Hotels, which consist of Delano South Beach, Hudson and Clift, increased over 1,000 basis points during the first quarter of 2013 as compared to the same period in 2012.

Corporate expenses, which also exclude The Light Group corporate expenses, decreased by $0.2 million, or 3.5%, during the first quarter of 2013 as compared to the same period in 2012.  The Company continues to actively explore opportunities to reduce overhead costs and anticipates achieving further reductions after the Deleveraging Transaction is completed primarily due to a more simplified balance sheet leading to lower accounting, legal and related costs.

Interest expense increased by $3.3 million, or 44.5%, during the first quarter of 2013 as compared to the same period in 2012, primarily due to a higher debt level and interest rate under the new Hudson mortgage loan, which was entered into during late 2012, and increased borrowings under the Company’s revolving line of credit during the three months ended March 31, 2013 as compared to the same period in 2012.

MHG recorded a net loss of $11.4 million for the first quarter of 2013 compared to a net loss of $14.3 million for the first quarter of 2012, due primarily to improved operating results and margins at Delano South Beach and Hudson, slightly offset by higher interest expense.

Deleveraging Transaction
On March 30, 2013, the Company entered into agreements under which MHG will transfer its ownership interests in Delano South Beach and The Light Group (including its obligations under $18 million in related promissory notes) to Yucaipa in exchange for the cancellation of the following debt and equity securities held by Yucaipa:

  • $88 million principal amount of the Company’s 2.375% Senior Subordinated Convertible Notes due 2014;
  • 75,000 shares of the Company’s Series A Preferred Securities, with a face amount, including accrued and unpaid dividends, of $99 million; and
  • Warrants to acquire 12.5 million shares of the Company’s common stock at $6.00 per share until April 2017.

The Deleveraging Transaction also eliminates certain consent rights Yucaipa has over certain major decisions. The Company will continue to operate Delano South Beach pursuant to a long-term management agreement.

In addition, MHG will also receive $6.5 million in cash for the Company’s leasehold interests in three restaurants at Mandalay Bay, Las Vegas that will be operated by The Light Group, and Yucaipa will pay the Company’s remaining note obligations with respect to the acquisition of such leaseholds.

As part of the Deleveraging Transaction, the Company will also launch a $100 million rights offering for 16,666,666 shares of its common stock at a price of $6.00 per share to its existing stockholders and holders of non-managing membership interests in its operating company subsidiary. To ensure that the Company raises the full $100 million target, Yucaipa has agreed to purchase from the Company, at the rights offering subscription price (without any discount or fees), all shares of MHG common stock not subscribed for by MHG shareholders in the rights offering. Proceeds of the rights offering will be used to retire the Company’s credit facility secured by Delano South Beach that, as of March 31, 2013, had $25 million of outstanding borrowing and a $10 million letter of credit drawn. The remaining cash proceeds, together with cash received in the exchange transaction, are expected to total approximately $65 million, and will be used to fund expansion of the business and for working capital and general corporate purposes.

On April 1, 2013, director Jason Taubman Kalisman filed a purported derivative action on behalf of the Company in the Delaware Chancery Court against the seven other current members of the Company’s Board of Directors and various third-parties associated with The Yucaipa Companies LLC in connection with the Deleveraging Transaction. OTK Associates, LLC, a shareholder of the Company, later filed a motion to intervene as a plaintiff in action. Among other things, the plaintiffs allege breach of fiduciary duties and seek various forms of relief, including enjoining the Deleveraging Transaction, invalidating the Board of Directors’ decision to reschedule the Annual Meeting and awarding the Company damages in an unspecified amount. The court has scheduled a hearing on plaintiffs’ motion for May 13, 2013.

The Deleveraging Transaction is currently expected to close in the second quarter of 2013, subject to resolution of the lawsuit.

The rights offering is being made pursuant to a shelf registration statement on Form S-3 that was previously filed with the Securities and Exchange Commission and became effective on August 3, 2010. A prospectus supplement relating to the rights offering will be filed with the Securities and Exchange Commission at the appropriate time. Additional information regarding the rights offering will be set forth in the prospectus supplement. This press release shall not constitute an offer to sell or the solicitation of an offer to buy any of the Company’s securities, nor shall there be any sale of such securities in any state or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities law of any such state or other jurisdiction.

Balance Sheet and Liquidity
MHG’s total consolidated debt at March 31, 2013, excluding the Clift lease, was $455.6 million, which includes $25.0 million outstanding on the Company’s revolving credit facility, which is classified as debt held for sale on the Company’s consolidated balance sheet, and $18.0 million of promissory notes issued in connection with the Company’s acquisition of The Light Group, which is classified as debt of discontinued operations on the Company’s consolidated balance sheet.

Delano South Beach, which secures the Company’s revolving credit facility, is presented as assets held for sale on the Company’s consolidated balance sheets, as the Company will have continuing involvement with Delano South Beach through a long-term management agreement following the closing of the 2013 Deleveraging Transaction. The Company has presented the operations of The Light Group and its subsidiaries that hold the three Las Vegas restaurant leases as discontinued operations in its consolidated financial statements, as it will have no continuing involvement with these entities following the closing of the Deleveraging Transaction.

At March 31, 2013, MHG had $6.3 million of cash and cash equivalents and $65.0 million available under its revolving credit facility. As of March 31, 2013, total restricted cash held pursuant to certain debt or lease requirements was $19.0 million.

At the closing of the Deleveraging Transaction, the Company will significantly reduce its consolidated debt and preferred securities obligations. If the closing of the Deleveraging Transaction had occurred on March 31, 2013, this reduction would have amounted to approximately $230.0 million, consisting of the elimination of $88.0 million of convertible notes, $18.0 million of The Light Group promissory notes, $99.0 million of outstanding Series A preferred securities and accrued and unpaid dividends, and the repayment of $25 million outstanding under the Company’s revolving credit facility. In addition, proceeds of the rights offering, together with cash received in the exchange transaction, are expected to generate approximately $65.0 million of cash available to fund expansion of the business and for working capital and general corporate purposes, after using a portion of the proceeds to retire obligations under the Company’s credit facility.

Upon the closing of the Deleveraging Transaction, the Company’s debt maturity profile will be significantly improved with $84.5 million of convertible notes due in October 2014, $180.0 million of mortgage debt secured by Hudson due in February 2014 with a one-year extension option and $50.0 million of trust preferred notes due in 2036.

As of March 31, 2013, MHG had approximately $295.0 million of remaining federal tax net operating loss carryforwards to offset future income, including gains on asset sales. The Company expects to have approximately $180 to $200 million in federal tax net operating losses remaining after the completion of the Deleveraging Transaction, which includes the sale of Delano South Beach. The Company’s remaining fee-owned asset, Hudson, has a tax basis of approximately $160.0 million.

Read more here.

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