Morgans Hotel Group Reports Third Quarter 2012 Results PR Newswire NEW YORK, Nov. 1, 2012 NEW YORK, Nov. 1, 2012 /PRNewswire/ -- Morgans Hotel Group Co. (NASDAQ: MHGC) ("MHG" or the "Company") today reported financial results for its third quarter ended September 30, 2012. The Company will host a conference call to review the quarter's results on Friday, November 2, 2012 at 10:30 am. oAdjusted EBITDA was $2.9 million in the third quarter of 2012. The Company's quarterly operating results reflect lower hotel revenues and operating expenses compared to the prior year's quarter primarily due to the impact of rooms out of service from the renovation work at Hudson. oRevenue per available room ("RevPAR") for System-Wide Comparable Hotels increased by 8.0% in constant dollars during the third quarter of 2012. oAt Hudson, the rooms renovation was completed at the end of September 2012, and all guestrooms have been renovated and are now in service. Additionally, the Company is converting 32 single room dwelling units ("SRO units") into guestrooms, which are expected to be completed in December 2012, at a cost of approximately $150,000 per room. oIn August 2012, the Company announced an agreement with MGM Resorts International ("MGM") to convert the all-suite hotel at Mandalay Bay, THEhotel, into Delano Las Vegas, which will be managed by MGM. In addition, the Company acquired the leasehold interests in three restaurants at Mandalay Bay from an existing tenant for $15.0 million in cash at closing and a $10.6 million principal only promissory note to be paid over seven years. The venues will be reconcepted and managed by The Light Group ("TLG"). oDuring the third quarter, the Company announced a new long-term management agreement for Delano Moscow, a 160 room hotel in Moscow, Russia, expected to open in 2015. oIn September, the Company opened its newest international property, Delano Marrakech, a 71-room hotel in Marrakech, Morocco. Michael Gross, CEO of the Company, said: "During the third quarter, we made additional progress executing our growth strategy, with the announcement of Delano Las Vegas, in partnership with MGM, and Delano Moscow. The opening of our new international property in September, Delano Marrakech, marks the beginning of the rollout of our pipeline. We are excited about the momentum in our management business.Together with our previously announced expansion hotels, we will almost double the size of our portfolio when these hotels open, which we believe will allow us to generate high EBTIDA margins due to our scalable infrastructure. In addition, we completed our rooms and corridor renovation at Hudson in September. Overall, we are encouraged by our progress in the quarter and remain focused on executing our strategy and building long-term shareholder value." Third Quarter 2012 Operating Results Adjusted EBITDA ^ for the third quarter of 2012 was $2.9 million, a decrease of $2.0 million from the same period in 2011. Displacement due to rooms out of service from the renovation work at Hudson resulted in a $1.4 million decrease in EBITDA. RevPAR at System-Wide Comparable Hotels, which excludes Delano and Hudson, increased by 8.0% in constant dollars (7.4% in actual dollars) in the third quarter of 2012 from the comparable period in 2011. In the Northeastern United States, RevPAR from the System-Wide Comparable Hotels in the region, which consist of Morgans, Royalton and Ames, increased by 4.6%. Additionally, despite the renovation work at Hudson, ADR increased by 4.0% for the three months ended September 30, 2012 as compared to the same period in 2011. Mondrian SoHo, which opened in February 2011, generated an 8.9% RevPAR increase during the third quarter of 2012 as compared to the same period in 2011, driven by 6.4% occupancy growth. MHG's London hotels benefited from the Olympics during August 2012, which resulted in an increase in RevPAR of 16.9% (14.5 % in actual dollars) during the third quarter of 2012 as compared to the same period in 2011, primarily driven by increased rates. Revenues in Miami during the third quarter were relatively flat with a 0.6% increase in RevPAR during the third quarter of 2012 as compared to the same period in 2011. MHG's San Francisco hotel experienced a RevPAR increase of 11.0%. Management fees increased by 77.2% in the third quarter of 2012 as compared to the same period in 2011. This increase was primarily the result of the Company's acquisition of 90% of TLG in November 2011 and fees from new management agreements related to the hotel properties sold in 2011. In 2011, MHG sold its ownership interests in Mondrian Los Angeles, Royalton, Morgans, Sanderson and St Martins Lane. MHG continues to manage these hotels pursuant to long-term management agreements, and as a result, the gains on sales are deferred and recognized over the initial terms of the respective management agreements. During the three months ended September 30, 2012, the Company amortized $2.0 million of deferred gains into income. MHG recorded a net loss of $15.7 million for the third quarter of 2012 compared to a net loss of $24.8 million for the third quarter of 2011, which included a $10.6 million impairment charge. Renovations At Hudson, as of September 30, 2012, all of the guestrooms have been renovated and are back in service.The Company also plans to convert 32 SRO units into guest rooms at an estimated cost of approximately $150,000 per room, and expects to have these new rooms in service in December 2012 bringing the total number of rooms at Hudson to 866. Additionally, the Company is making progress with the new restaurant at Hudson, which is anticipated to open in early 2013. To date, the Company has spent approximately $24.0 million on room, corridor and restaurant renovations, $6.0 million of which was spent in the third quarter of 2012, and intends to spend an additional approximately $5 to $6 million to complete these projects at Hudson. Development Activity On August 6, 2012, the Company announced an agreement with MGM to introduce Delano Las Vegas, an all-suite hotel at Mandalay Bay. After MGM completes a property renovation and redesign, THEhotel will be converted into Delano Las Vegas. The conversion of THEhotel to Delano Las Vegas is expected to be completed in late 2013 and will be funded by MGM. Delano Las Vegas will be managed by MGM pursuant to a 10-year licensing agreement, with two 5-year extensions at the Company's option, subject to performance thresholds. Under the license agreement, the Company will earn a base fee, subject to increase based on its development and brand expansion, and the Company can earn an incentive fee based on Delano Las Vegas' RevPAR in its competitive set. MHG also acquired the leasehold interests in three restaurants at Mandalay Bay from an existing tenant for $15.0 million in cash at closing and a $10.6 million principal only promissory note to be paid over seven years. The venues will be reconcepted and managed by TLG. The three restaurants will be operated pursuant to 10-year operating leases with MGM, pursuant to which the Company will pay minimum annual lease payments and a percentage rent based on cash flow. On August 16, 2012, the Company announced a new agreement for the management of a 160-room Delano-branded hotel scheduled to open in 2015. The Company will manage Delano Moscow pursuant to a 20-year management agreement, with one ten-year extension option, subject to certain conditions. Under the Delano Moscow agreement, MHG has agreed to contribute an aggregate of $10.0 million in key money, of which $3.0 million was contributed in August 2012 upon the signing of the management agreement, with the remaining $7.0 million to be contributed prior to the hotel opening. The initial $3.0 million key money contribution is refundable by the hotel owner if Delano Moscow does not open by the predetermined opening date. Additionally, the Company provided a cash flow guarantee to the owner that becomes payable if the hotel does not attain specified levels of net operating profits set forth in the management agreement up to certain maximum amounts for the first four years of the contract. Such guarantee fundings, if any, are recoverable out of future hotel cash flows and under certain other conditions. In September 2012, the Company commenced the rollout of its hotel development pipeline with the opening of its newest international property, the 71-room Delano Marrakech. The self-contained luxury resort is located in the heart of Marrakech, Morocco, and boasts four culinary destinations, a world-class spa, three pools, luxury boutiques and a dynamic nightlife venue. With a strong infrastructure in place, the Company expects the incremental EBITDA margins for newly signed management agreements and hotels in its pipeline to approximate 90%. MHG now has signed management agreements for eight hotels, and a license agreement for another, that are scheduled to open over the next three years, with three of these hotels scheduled to open in the next eighteen months. Seven of these hotels already have financing for construction or redevelopment. Balance Sheet and Liquidity MHG's total consolidated debt at September 30, 2012, excluding the Clift lease, was $416.0 million with a weighted average interest rate of 4.67%. At September 30, 2012, MHG had $8.6 million of cash and cash equivalents and $16.8 million available under its revolving credit facility, net of $52.0 million in outstanding borrowings, and $10.0 million of letters of credit against the facility. As of September 30, 2012, total restricted cash was $7.8 million. MHG currently has approximately $269.0 million of remaining tax net operating loss carryforwards to offset future income, including gains on future asset sales. The Company has begun a sales process for Delano in South Beach and would use the proceeds from any sale for debt reduction, growth and general working capital purposes. In addition, the Company believes it has significant value available to it in Hudson. Subsequent Event Subsequent to the third quarter, the Company's results have been impacted by Hurricane Sandy. Though all four of MHG's New York properties were operating during the storm and none of them appear to have suffered any significant property damage, the Company has since had to close both Morgans and Mondrian SoHo pending the restoration of power to lower Manhattan. Given the widespread devastation Hurricane Sandy caused to the Northeastern United States, it is also impossible to assess the impact of the storm on the Company's results, although it can be expected to impact travel to the Northeastern United States and travel from the Northeast region to other locations where the Company operates hotels. Consequently, the Company is not providing RevPAR expectations or projected EBITDA for 2012 at this time. Conference Call MHG will host a conference call to discuss the third quarter financial results on Friday, November 2, 2012 at 10:30AM Eastern time. The call will be webcast live over the Internet and can be accessed at www.morganshotelgroup.com under the About Us, Investor Overview section. Participants should follow the instructions provided on the website for the download and installation of audio applications necessary to join the webcast. The call can also be accessed live over the phone by dialing (888) 802-8577 or (973) 935-8754 for international callers; the conference ID is 57989242. A replay of the call will be available two hours after the call and can be accessed by dialing (800) 585-8367 or (404) 537-3406for international callers; the conference ID is 57989242. The replay will be available from November 2, 2012 through November 9, 2012. Definitions "System-Wide Comparable Hotels" includes all Morgans Hotel Group hotels operated by MHG except for hotels added or under major renovation during the current or the prior year, development projects and discontinued operations. System-Wide Comparable Hotels for the quarter ended September 30, 2012 and 2011 excludes Hudson and Delano, which were both undergoing renovations beginning in the third quarter of 2011 and continuing into 2012, the Hard Rock Hotel & Casino in Las Vegas ("Hard Rock"), which effective March 1, 2011 was no longer partially owned or managed by MHG, Mondrian SoHo, which opened in late February 2011, the San Juan Water and Beach Club, which was no longer managed by MHG effective July 13, 2011, and Hotel Las Palapas, which is not a Morgans Hotel Group branded hotel. "EBITDA" means earnings before interest, income taxes, depreciation and amortization, as further defined below. "Adjusted EBITDA" means adjusted earnings before interest, taxes, depreciation and amortization as further defined below. About Morgans Hotel Group Morgans Hotel Group Co. (NASDAQ: MHGC) is widely credited as the creator of the first "boutique" hotel and a continuing leader of the hotel industry's boutique sector. Morgans Hotel Group operates Delano in South Beach and Marrakech, Mondrian in Los Angeles, South Beach and New York, Hudson in New York, Morgans and Royalton in New York, Shore Club in South Beach, Clift in San Francisco, Ames in Boston, Sanderson and St Martins Lane in London, and a hotel in Playa del Carmen, Mexico. Morgans Hotel Group has ownership interests in or owns several of these hotels. Morgans Hotel Group has other property transactions in various stages of completion, including Delano properties in Las Vegas, Nevada; Cesme, Turkey and Moscow, Russia; Mondrian properties in London, England; Marrakech, Morocco; Istanbul, Turkey; Doha, Qatar and Nassau, The Bahamas; and a Hudson in London, England. Morgans Hotel Group also owns a 90% controlling interest in The Light Group, a leading lifestyle food and beverage company. For more information please visit www.morganshotelgroup.com. Forward-Looking and Cautionary Statements This press release may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs and prediction of certain future other events. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" "believe," "project," or other similar words or expressions. These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results or other future events to differ materially from those expressed in any forward-looking statement. Important risks and factors that could cause our actual results to differ materially from those expressed in any forward-looking statements include, but are not limited to economic, business, competitive market and regulatory conditions such as: a sustained downturn in economic and market conditions, particularly levels of spending in the business, travel and leisure industries; continued tightness in the global credit markets; general volatility of the capital markets and our ability to access the capital markets; our ability to refinance our current outstanding debt and to repay outstanding debt as such debt matures; our ability to protect the value of our name, image and brands and our intellectual property; risks related to natural disasters, such as earthquakes, volcanoes and hurricanes; hostilities, including future terrorist attacks, or fear of hostilities that affect travel; and other risk factors discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and other documents filed by the Company with the Securities and Exchange Commission from time to time. All forward-looking statements in this press release are made as of the date hereof, based upon information known to management as of the date hereof, and the Company assumes no obligations to update or revise any of its forward-looking statements even if experience or future changes show that indicated results or events will not be realized. Income Statements (In thousands, except per share amounts) Three Months Nine Months Ended September 30 , Ended September 30 , 2012 2011 2012 2011 Revenues : Rooms $ $ $ $ 24,311 26,432 70,930 90,951 Food & beverage 12,649 15,575 42,025 49,216 Other hotel 1,036 1,271 3,495 5,020 Total hotel 37,996 43,278 116,450 145,187 revenues Management and other fees 6,040 3,408 18,672 10,112 Total revenues 44,036 46,686 135,122 155,299 Operating Costs and Expenses : Rooms 7,818 8,263 23,256 29,122 Food & beverage 10,178 13,664 34,773 41,901 Other departmental 829 870 2,655 3,117 Hotel selling, general and 9,549 9,951 28,335 33,301 administrative Property taxes, insurance and 3,965 4,247 11,531 12,136 other Total hotel operating 32,339 36,995 100,550 119,577 expenses Corporate expenses : Stock based 2,162 1,366 4,789 7,384 compensation Other 6,513 5,671 20,513 18,536 Depreciation and amortization 5,827 4,833 17,437 17,405 Restructuring, development and 3,460 2,125 7,704 10,518 disposal costs Total operating costs 50,301 50,990 150,993 173,420 and expenses Operating loss (6,265) (4,304) (15,871) (18,121) Interest expense, net 8,344 8,775 24,348 27,783 Equity in loss of unconsolidated 1,376 12,794 4,992 23,187 joint ventures Gain on asset sales (1,993) (1,101) (5,984) (1,721) Other non-operating expenses 1,728 616 4,190 2,885 Pre tax loss (15,720) (25,388) (43,417) (70,255) Income tax expense 234 230 548 523 Net loss from (15,954) (25,618) (43,965) (70,778) continuing operations Income from discontinued - - - 485 operations, net of tax Net loss (15,954) (25,618) (43,965) (70,293) Net loss attributable to noncontrolling 277 799 614 2,007 interest Net loss attributable to $ $ $ $ Morgans Hotel Group Co. (15,677) (24,819) (43,351) (68,286) Preferred stock (2,836) (2,285) (8,204) (6,701) dividends and accretion Net loss attributable $ $ $ $ to common stockholders (18,513) (27,104) (51,555) (74,987) (Loss) income per share: Basic and diluted from $ $ $ $ continuing operations (0.59) (0.89) (1.65) (2.41) Basic and diluted from $ $ $ $ discontinued operations - - - 0.02 Basic and diluted $ $ $ $ attributable to common (0.59) (0.89) (1.65) (2.39) stockholders Weighted average common shares outstanding - 31,208 30,617 31,283 31,359 basic and diluted Selected Hotel ( In Actual ( In Constant Dollars, ( In Actual ( In Constant Operating Dollars) if different) Dollars) Dollars, if Statistics (1) different) Three Months Three Months Nine Months Nine Months Ended % Ended % Ended % Ended % September 30, September 30, September 30, September 30, 2012 2011 Change 2012 2011 Change 2012 2011 Change 2012 2011 Change Clift Occupancy 85.0% 89.2% -4.7% 78.3% 80.1% -2.2% ADR $ $ 16.5% $ $ 10.7% 252.16 216.41 239.48 216.36 RevPAR $ $ 11.0% $ $ 8.2% 214.34 193.04 187.51 173.30 St. Martins Lane (2) Occupancy 82.0% 83.3% -1.6% 82.0% 83.3% -1.6% 76.8% 73.9% 3.9% 76.8% 73.9% 3.9% ADR $ $ 15.1% $ $ 17.4% $ $ 1.2% $ $ 3.5% 440.21 382.44 439.46 374.19 388.57 384.09 388.33 375.08 RevPAR $ $ 13.3% $ $ 15.6% $ $ 5.1% $ $ 7.6% 360.97 318.57 360.36 311.70 298.42 283.84 298.24 277.18 Sanderson (2) Occupancy 79.7% 76.9% 3.6% 79.7% 76.9% 3.6% 69.9% 74.5% -6.2% 69.9% 74.5% -6.2% ADR $ $ 12.0% $ $ 14.3% $ $ -0.3% $ $ 2.0% 486.08 433.81 485.26 424.45 435.88 437.41 435.62 427.15 RevPAR $ $ 16.1% $ $ 18.5% $ $ -6.5% $ $ -4.3% 387.41 333.60 386.75 326.40 304.68 325.87 304.50 318.23 Shore Club Occupancy 59.3% 56.6% 4.8% 63.8% 62.0% 2.9% ADR $ $ -2.8% $ $ -1.0% 219.10 225.43 284.60 287.42 RevPAR $ $ 1.8% $ $ 1.9% 129.93 127.59 181.57 178.20 Mondrian South Beach Occupancy 57.6% 62.8% -8.3% 66.9% 65.8% 1.7% ADR $ $ 6.8% $ $ 8.2% 202.18 189.37 264.90 244.90 RevPAR $ $ -2.1% $ $ 10.0% 116.46 118.92 177.22 161.14 Ames Occupancy 84.6% 80.3% 5.4% 76.7% 73.6% 4.2% ADR $ $ 4.1% $ $ 9.0% 254.40 244.28 241.67 221.75 RevPAR $ $ 9.7% $ $ 13.6% 215.22 196.16 185.36 163.21 Morgans (3) Occupancy 82.6% 85.7% -3.6% 79.1% 85.8% -7.8% ADR $ $ 2.4% $ $ 4.6% 283.09 276.54 275.47 263.38 RevPAR $ $ -1.3% $ $ -3.6% 233.83 236.99 217.90 225.98 Royalton (3) Occupancy 87.6% 86.7% 1.0% 86.0% 86.3% -0.3% ADR $ $ 4.7% $ $ 5.6% 303.83 290.18 298.67 282.73 RevPAR $ $ 5.8% $ $ 5.3% 266.16 251.59 256.86 244.00 Mondrian LA (3) Occupancy 80.9% 80.8% 0.1% 77.7% 79.1% -1.8% ADR $ $ -3.2% $ $ -2.0% 288.02 297.43 275.09 280.74 RevPAR $ $ -3.0% $ $ -3.7% 233.01 240.32 213.74 222.07 System-wide Comparable Hotels Occupancy 76.2% 76.8% -0.8% 76.2% 76.8% -0.8% 74.2% 74.5% -0.4% 74.2% 74.5% -0.4% ADR $ $ 8.3% $ $ 8.9% $ $ 3.7% $ $ 4.3% 296.09 273.48 295.94 271.82 292.74 282.43 292.69 280.70 RevPAR $ $ 7.4% $ $ 8.0% $ $ 3.2% $ $ 3.9% 225.62 210.03 225.51 208.76 217.21 210.41 217.18 209.12 Hudson (4) Occupancy 74.1% 92.9% -20.2% 69.3% 88.1% -21.3% ADR $ $ 4.0% $ $ 6.4% 230.73 221.96 218.94 205.78 RevPAR $ $ -17.1% $ $ -16.3% 170.97 206.20 151.73 181.29 Delano (4) Occupancy 58.9% 58.9% 0.0% 67.2% 66.8% 0.6% ADR $ $ -3.8% $ $ -0.2% 366.07 380.65 480.51 481.43 RevPAR $ $ -3.8% $ $ 0.4% 215.62 224.20 322.90 321.60 Mondrian SoHo (5) Occupancy 84.6% 79.5% 6.4% 77.7% 78.2% -0.6% ADR $ $ 2.3% $ $ 4.2% 305.86 298.95 303.52 291.25 RevPAR $ $ 8.9% $ $ 3.5% 258.76 237.67 235.84 227.76 Hotel Las Palapas (6) Occupancy 50.9% 45.0% 13.1% 50.9% 45.0% 13.1% 68.1% 63.7% 6.9% 68.1% 63.7% 6.9% ADR $ $ 5.6% $ $ 13.4% $ $ 3.0% $ $ 13.6% 136.16 128.89 134.60 118.68 150.99 146.66 150.31 132.32 RevPAR $ $ 19.5% $ $ 28.3% $ $ 10.1% $ $ 21.4% 69.31 58.00 68.51 53.41 102.82 93.42 102.36 84.29 Not included in the above table are the operating (1) statistics of San Juan Water and Beach Club, which the Company ceased managing effective July 13, 2011, and Hard Rock Hotel & Casino, which the Company ceased managing effective March 1, 2011. MHG and Walton MG London Hotels Investors V, L.L.C., (2) each 50/50 joint venture partners, sold the Sanderson and St Martins Lane hotels in November 2011. MHG continues to manage these hotels pursuant to long-term management agreements. MHG sold these hotels in May 2011 and continues to (3) manage the hotels pursuant to long-term management agreements. Beginning in the third quarter of 2011 and continuing (4) into 2012, these owned hotels were under major renovation. MHG began managing this hotel when it opened in (5) February 2011. Statistics are for the period MHG operated the hotel. This hotel is not a Morgans Hotel Group branded hotel (6) and MHG believes that the hotel operating data for this hotel does not provide a meaningful depiction of the performance of its branded hotels. Non-GAAP Financial Measures EBITDA and Adjusted EBITDA We believe that earnings before interest, income taxes, depreciation and amortization (EBITDA) is a useful financial metric to assess our operating performance before the impact of investing and financing transactions and income taxes. It also facilitates comparison between us and our competitors. Given the significant investments that we have made in the past in property and equipment, depreciation and amortization expense comprises a meaningful portion of our cost structure. We believe that EBITDA will provide investors with a useful tool for assessing the comparability between periods because it eliminates depreciation and amortization expense attributable to capital expenditures. The Company's management has historically used adjusted EBITDA (Adjusted EBITDA) when evaluating the operating performance for the entire Company as well as for individual properties or groups of properties because we believe the Company's core business model is that of an owner and operator of hotels, and the inclusion or exclusion of certain items is necessary to provide the most accurate measure of on-going core operating results and to evaluate comparative results period over period. As such, Adjusted EBITDA excludes other non-operating expenses (income) that do not relate to the on-going performance of our assets and excludes the operating performance of assets in which we do not have a direct or indirect fee simple ownership interest. We exclude the following items from EBITDA to arrive at Adjusted EBITDA: oOther non-operating expenses (income), such as executive terminations not related to restructuring initiatives, costs of financings, transaction costs related to business acquisitions and sales, litigation and settlement costs and other items such as proceeds from the sale of condominium units and related costs that relate to the financing and investing activities of our assets and not to the on-going operating performance of our assets, both consolidated and unconsolidated, changes in the fair value of promissory notes issued in connection with the acquisition of the 90% controlling interest in The Light Group, and non-cash impairment charges recognized by unconsolidated joint ventures in which the Company is an equity investee; oRestructuring, development and disposal costs: these charges primarily relate to losses on asset disposals as part of major renovation projects, the write-off of abandoned development projects resulting primarily from events generally outside management's control, such as the tightening of credit markets, and severance costs related to restructuring initiatives. We believe that these charges do not relate to the ongoing operating performance of our assets as measured by Adjusted EBITDA; oImpairment loss on development projects and hotels and receivables from unconsolidated joint ventures: these charges do not relate to the ongoing operating performance of our assets as measured by Adjusted EBITDA. To the extent that economic conditions do not continue to improve, we may incur additional non-cash impairment charges related to our assets under development, wholly-owned assets, or our investments in joint ventures. We believe these adjustments are necessary to provide the most accurate measure of core operating results as a means to evaluate comparative results; oEBITDA related to leased hotels to more accurately reflect the operating performance of assets in which we have a direct or indirect fee simple ownership interest; oEBITDA related to hotels reported as discontinued operations to more accurately reflect the operating performance of assets in which we expect to have an ongoing direct or indirect ownership interest; oStock-based compensation expense, as this is not necessarily an indication of the operating performance of our assets; and oGains recognized on asset sales, as we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our assets. In addition, we believe material gains or losses from the net book value of disposed assets is not particularly meaningful given that the depreciated asset value on which the gains are calculated often does not reflect market value of the assets. We also make an adjustment to EBITDA for hotels in which our percentage ownership interest has changed to facilitate period-over-period comparisons and to more accurately reflect the operating performance of assets based on our actual ownership. In this respect, our method of calculating Adjusted EBITDA has changed from prior quarters, and calculations of Adjusted EBITDA will continue to vary from quarter to quarter to reflect changing ownership interests. We believe Adjusted EBITDA provides management and our investors with a more accurate financial metric by which to evaluate our performance as it eliminates the impact of costs incurred related to investing and financing transactions. Internally, the Company's management utilizes Adjusted EBITDA to measure the performance of our core on-going hotel operations and is used extensively during our annual budgeting process. Management also uses Adjusted EBITDA as a measure in determining the value of acquisitions, expansion opportunities, and dispositions and borrowing capacity. Adjusted EBITDA is a key metric which management evaluates prior to execution of any strategic investing or financing opportunity. The Company has historically reported Adjusted EBITDA to its investors and believes that this continued inclusion of Adjusted EBITDA provides consistency in its financial reporting and enables investors to perform more meaningful comparisons of past, present and future operating results and to evaluate the results of its core on-going operations. The use of EBITDA and Adjusted EBITDA has certain limitations. Our presentation of EBITDA and Adjusted EBITDA may be different from the presentation used by other companies and therefore comparability may be limited. Depreciation expense for various long-term assets, interest expense, income taxes and other items have been and will be incurred and are not reflected in the presentation of EBITDA or Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, EBITDA and Adjusted EBITDA do not reflect capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation, interest and income tax expense, capital expenditures and other items both in our reconciliations to our financial measures under accounting principles generally accepted in the United States, or U.S. GAAP, and in our consolidated financial statements, all of which should be considered when evaluating our performance. The term EBITDA is not defined under U.S. GAAP and EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. In addition, EBITDA is impacted by reorganization of businesses and other restructuring-related charges. When assessing our operating performance, you should not consider this data in isolation, or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our EBITDA may not be comparable to EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner as we do. A reconciliation of net income (loss), the most directly comparable U.S. GAAP measures, to EBITDA and Adjusted EBITDA for each of the respective periods indicated is as follows: EBITDA Reconciliation (In thousands) Three Months Nine Months Ended September 30, Ended September 30, 2012 2011 2012 2011 Net loss attributable to Morgans $ $ $ $ Hotel Group Co. (15,677) (24,819) (43,351) (68,286) Interest expense, net 8,344 8,775 24,348 27,783 Income tax expense 234 230 548 523 Depreciation and amortization 5,827 4,833 17,437 17,405 expense Proportionate share of interest expense from unconsolidated joint 1,388 1,863 4,208 6,579 ventures Proportionate share of depreciation expense from unconsolidated joint 668 1,599 2,549 5,177 ventures Proportionate share of depreciation expense of noncontrolling interests in - - - (183) consolidated joint ventures Net loss attributable to (526) (799) (1,405) (2,210) noncontrolling interest Proportionate share of (loss) income from unconsolidated joint ventures not recorded due to (1,270) (5,103) (3,933) 1,904 negative investment balances EBITDA (1,012) (13,421) 401 (11,308) Add : Other non operating 1,728 616 4,190 2,885 expense Add : Other non operating expense from unconsolidated joint ventures 629 17,070 3,703 17,827 Add: Restructuring, development 3,460 2,125 7,704 10,518 and disposal costs Less : EBITDA from Clift, a (2,112) (1,772) (4,646) (3,901) leased hotel Add : Stock based compensation 2,162 1,366 4,789 7,384 Less: Gain on asset sales (1,993) (1,101) (5,984) (1,721) Less: Loss (income) from - - - (485) discontinued operations Adjusted EBITDA $ $ $ $ 2,862 4,883 10,157 21,199 Impact of Asset Sales and Terminated Joint Venture Interests: $ $ $ $ Sold Hotels EBITDA (1) (696) - 2,705 - Sold Hotels Management Fees - 759 778 2,019 1,193 Post-Sale (2) Joint Venture Asset Sales (3) - 2,040 - 6,041 Hard Rock Hotel & Casino EBITDA - - - 300 (4) Hard Rock Hotel & Casino - - - 832 Management Fees (5) Impact to Adjusted EBITDA, After $ $ $ $ Asset Sales and Hard Rock 2,122 2,019 11,071 759 (1) Reflects the EBITDA of Mondrian Los Angeles, Royalton and Morgans, the three hotels sold by the Company in May 2011, through their respective dates of sale. This hotel EBITDA is not reduced by any internal management fees earned prior to the date of sale, as these are eliminated in consolidation. (2) Reflects the management fees earned by the Company from the date of sale of each of Mondrian Los Angeles, Royalton and Morgans through the end of the periods. (3) Reflects the EBITDA of Sanderson and St Martins Lane, the two London hotels the Company owned through a 50/50 joint venture until November 2011, when the joint venture was sold. The amounts reflected are the Company's 50% share of the hotels' EBITDA. MHG continues to manage these hotels. (4) Reflects the EBITDA of the hotel for the period the Company owned a minority interest. Effective March 1, 2011, the Company no longer had an ownership interest in this hotel. (5) Reflects the management fees earned by the Company during the period it operated the hotel. Effective March 1, 2011, the Company ceased managing this hotel. Hotel EBITDA Analysis (1) (In thousands, except percentages) Three Months Nine Months Ended September % Ended September % 30, 30, 2012 2011 Change 2012 2011 Change Clift $ $ 19% $ $ 19% 2,112 1,772 4,646 3,901 Shore Club (45) (73) -38% 96 164 -41% Mondrian South Beach (487) (253) 92% 180 377 -52% Ames 160 73 -119% 138 103 -34% Owned and Joint Venture 1,740 1,519 15% 5,060 4,545 11% Comparable Hotels (2) Morgans (3) - (683) n/m - (837) n/m Royalton (3) - (33) n/m - 221 n/m Mondrian Los Angeles (3) - 20 n/m - 3,321 n/m St Martins Lane (4) (7) 1,284 -101% (594) 3,623 -116% Sanderson (4) (252) 756 -133% (934) 2,418 -139% Sold Hotels (259) 1,344 -119% (1,528) 8,746 -117% Total System-Wide 1,481 2,863 -48% 3,532 13,291 -73% Comparable Hotels Hudson (5) 2,672 4,054 34% 3,101 8,230 62% Delano (5) 1,248 1,562 -20% 9,681 10,700 -10% Hard Rock - Joint Venture (6) - - n/m - 300 n/m Mondrian SoHo - Joint Venture 411 393 5% 1,123 860 31% (7) . Total Hotels $ $ -34% $ $ -48% 5,812 8,872 17,437 33,381 (1) For joint venture hotels, represents MHG's share of the respective hotels' EBITDA, after management fees. (2) Reflects System-Wide Comparable Hotels that are owned or partially owned by MHG. (3) In May 2011, MHG sold these three hotels. Information is for the period MHG owned the hotels, and is not reduced by any internal management fees earned prior to the date of sale, as these are eliminated in consolidation. (4) In November 2011, MHG and Walton Street, each 50/50 joint venture partners, sold the joint venture entity that owned the Sanderson and St Martins Lane hotels. Amounts in 2011 represent MHG's share of the respective hotels' EBITDA, after management fees. Amounts in 2012 represent MHG's respective hotels' food and beverage EBITDA, after management fees. Following the sale of the joint venture entity, MHG continues to own and operate the food and beverage venues at the hotels under a lease agreement with the hotel owner. (5) Beginning in the third quarter of 2011 and continuing into 2012, these owned hotels were under renovation. The renovation at Delano was completed during the second quarter of 2012 and the room and corridor renovation at Hudson was completed in late September 2012. (6) MHG had a minority ownership interest in this hotel until March 1, 2011. Information is for the period MHG had an ownership interest in the hotel. (7) This hotel opened in February 2011. Information is for the period the hotel was open. Owned Hotel Room Revenue Analysis (In thousands, except percentages) Three Months Nine Months Ended September % Ended September % 30, 30, 2012 2011 Change 2012 2011 Change Hudson (1) $ $ -17% $ $ -16% 13,129 15,827 34,667 41,294 Delano (1) 3,850 4,001 -4% 17,157 17,040 1% Clift 7,332 6,603 11% 19,106 17,601 9% Total Owned $ $ -8% $ $ -7% Hotels (2) 24,311 26,431 70,930 75,935 Owned Hotel Revenue Analysis Three Months Nine Months (In thousands, except Ended September % Ended September % percentages) 30, 30, 2012 2011 Change 2012 2011 Change Hudson (1) $ $ -23% $ $ -21% 15,084 19,500 41,132 51,781 Delano (1) 7,806 8,313 -6% 33,319 34,305 -3% Clift 10,046 9,412 7% 27,842 26,593 5% Total Owned $ $ -12% $ $ -9% Hotels (2) 32,936 37,225 102,293 112,679 (1) Beginning in the third quarter of 2011 and continuing into 2012, these owned hotels were under renovation. The renovation at Delano was completed during the second quarter of 2012 and the room and corridor renovation at Hudson was completed in late September 2012. (2) Does not include revenue from the three hotels sold in May 2011, Royalton, Morgans or Mondrian Los Angeles, for the period owned during the year ended December 31, 2011, as these hotels are no longer owned hotels. Balance Sheets (In thousands) September 30, December 31, 2012 2011 ^(1) (restated) ASSETS: Property and equipment, net $ 304,233 $ 289,169 Goodwill 66,572 66,572 Investments in and advances to 11,630 10,201 unconsolidated joint ventures Cash and cash equivalents 8,554 28,855 Restricted cash 7,810 9,938 Accounts receivable, net 14,113 10,827 Related party receivables 5,514 4,142 Prepaid expenses and other 7,594 5,293 assets Deferred tax asset, net 78,779 78,778 Other, net 72,221 51,669 Total assets $ 577,020 $ 555,444 LIABILITIES and STOCKHOLDERS' DEFICIT: Debt and capital lease $ 504,603 $ 439,905 obligations, net Accounts payable and accrued 39,130 36,576 liabilities Deferred gain on asset sales 143,427 148,760 Other liabilities 15,052 14,394 Total liabilities 702,212 639,635 Redeemable noncontrolling 6,395 5,448 interest Commitments and contingencies Total Morgans Hotel Group Co. (138,006) (97,463) stockholders' deficit Noncontrolling interest 6,419 7,824 Total stockholders' deficit (131,587) (89,639) Total liabilities, redeemable noncontrolling interest and $ 577,020 $ 555,444 stockholders' deficit (1) The 2011 balance sheet has been restated for the final purchase price allocation of the Company's acquisiton of a 90% controlling interest in The Light Group, which was acquired in November 2011. SOURCE Morgans Hotel Group Co. Website: http://www.morganshotelgroup.com Contact: Richard Szymanski, Morgans Hotel Group Co., +1-212-277-4188; or Neil Maitland, The Abernathy MacGregor Group, +1-212-371-5999
Morgans Hotel Group Reports Third Quarter 2012 Results
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