Morgans Hotel Group Co. (MHGC) (the “Company” or “Morgans”) today reported financial results for the quarter ended June 30, 2016.
Second Quarter 2016 Operating Results
Adjusted EBITDA, defined below was $11.2 million in the second quarter of 2016, compared to $12.7 million for the same period in 2015, a decrease of 11.4%.
Revenue per available room (“RevPAR”) at System-Wide Comparable Hotels decreased by 1.5% in constant dollars (2.8% in actual dollars) in the second quarter of 2016 as compared to the same period in 2015, due to a decrease of 2.4% in constant dollars (3.8% in actual dollars) in average daily rate (“ADR”) offset by an increase in occupancy of 1.0%. System-Wide Comparable Hotels rooms revenues plus resort and facility fees, which are not included in RevPAR, decreased by 1.0% in constant dollars (2.3% in actual dollars) quarter over quarter.
RevPAR from System-Wide Comparable Hotels in New York decreased 4.6% in the second quarter of 2016 as compared to the same period in 2015, due to a 5.0% decrease in ADR slightly offset by a 0.4% increase in occupancy. RevPAR at Hudson decreased 4.9% during the second quarter of 2016 as compared to the same period in 2015, driven by a 5.4% ADR decrease primarily due to new supply in New York City. Including facility fees, room revenues at Hudson decreased 3.2% quarter over quarter.
Delano South Beach experienced a RevPAR decrease of 12.2% during the second quarter of 2016 as compared to the same period in 2015, due to a 13.8% decrease in ADR, which was primarily the result of new supply in South Beach. Including resort fees, rooms revenues at Delano decreased 10.3% quarter over quarter.
Clift’s RevPAR increased 5.8% in the second quarter of 2016 as compared to the second quarter of 2015 due to a 3.0% increase in occupancy and a 2.7% increase in ADR.
RevPAR from System-Wide Comparable Hotels in London, which is comprised of Sanderson and Mondrian London, increased 2.7% in constant dollars during the second quarter of 2016 as compared to the same period in 2015, due to a 1.7% increase in ADR and 1.0% increase in occupancy. St Martins Lane continues to be non-comparable, as the hotel was under major renovation in the first half of 2015.
Management fees decreased by $0.5 million in the second quarter of 2016 as compared to the same period in 2015 due primarily to the termination of the Mondrian SoHo management agreement effective April 27, 2015 and the decline in revenues at Shore Club due to the effect of the shift in timing of the anticipated termination of our management agreement, which was initially scheduled to occur in the second quarter of 2016 and has been postponed until the fourth quarter of 2016.
Interest expense decreased by $1.7 million, or 14.2%, during the second quarter of 2016 as compared to the same period in 2015, primarily due to the February 2016 prepayment of a portion of outstanding mortgage debt secured by Hudson and Delano South Beach.
The Company’s consolidated debt as of June 30, 2016, net of deferred financing costs of $3.0 million, was $575.5 million, which includes $102.3 million of capital lease obligations primarily related to Clift. As of June 30, 2016, the Company had $75.0 million of outstanding Series A preferred securities and $62.5 million of undeclared dividends.
As of June 30, 2016, the Company had approximately $11.2 million in cash and cash equivalents and $13.1 million in restricted cash. In early July 2016, the Company posted an approximately $3.0 million bond to stay enforcement of a judgment pending appeal in connection with a litigation.
As of June 30, 2016, the Company had approximately $460.0 million of remaining Federal tax net operating loss carry forwards to offset future income.
On June 8, 2016, the Mondrian South Beach joint venture entered into a purchase and sale agreement to sell its interest in Mondrian South Beach. Pursuant to the terms and conditions of the purchase and sale agreement, the buyer paid the joint venture a cash purchase price sufficient for the joint venture to extinguish its outstanding mortgage and mezzanine loans, plus accrued interest, in full at a negotiated discount, and the buyer assumed certain liabilities of Mondrian South Beach. As a result of the debt extinguishment, the Company’s operating subsidiary, Morgans Group LLC, was released from the condominium purchase guarantee of up to $14.0 million and the construction completion guarantee.
As part of this transaction, on June 8, 2016, the Company and the Mondrian South Beach joint venture mutually terminated their existing management agreement for Mondrian South Beach and the Company entered into a license agreement with the buyer to allow the hotel to remain under the Mondrian brand. The license agreement grants the buyer a limited, non-exclusive right to use the Mondrian brand and other specified intellectual property of the Company, subject to certain termination rights, in exchange for a license fee that varies with Mondrian South Beach’s monthly gross revenue for the term of the license agreement but is subject to a minimum annual fee payable to the Company.
Announced Sale of the Company
On May 9, 2016, the Company entered into a definitive agreement under which the Company will be acquired by SBEEG Holdings, LLC (“SBE”), a leading global lifestyle hospitality company. Under the terms of the agreement, SBE will acquire all of the outstanding shares of the Company’s common stock for $2.25 per share in cash. As part of the transaction, affiliates of The Yucaipa Companies (“Yucaipa”) will exchange $75.0 million in Series A preferred securities, accrued preferred dividends, and warrants for $75.0 million in preferred shares and an interest in the common equity in the acquirer and, following the closing, the leasehold interests in three restaurants in Las Vegas currently held by Morgans. The transaction, which was approved by the Company’s Board of Directors, is expected to close in the third or fourth quarter, and is subject to regulatory approvals, the assumption or refinancing of the Company’s mortgage loan agreements, and customary closing conditions, including approval of the transaction by the Company’s shareholders. Morgans shareholders representing approximately 29% of the Company’s outstanding shares of common stock have signed voting agreements in support of this transaction, including OTK Associates, Pine River Capital Management and Vector Group Ltd. Affiliates of Yucaipa have also signed a voting agreement in respect of their Series A preferred securities and warrants.
“Adjusted EBITDA” means adjusted earnings before interest, taxes, depreciation and amortization, as further defined below.
“EBITDA” means earnings before interest, income taxes, depreciation and amortization.
“Owned Hotels” means Hudson in New York, Delano South Beach in Miami Beach and Clift in San Francisco, which the Company leases under a long-term lease.
“System-Wide Comparable Hotels” means all Morgans Hotel Group branded hotels operated by the Company, except for hotels added or under major renovation during the current or the prior year period, development projects and hotels no longer managed by the Company. System-Wide Comparable Hotels for the periods ended June 30, 2016 and 2015 exclude Mondrian South Beach, which effective June 8, 2016, the Company no longer manages, St Martins Lane in London, which was under major renovation in the first half of 2015, Mondrian SoHo, which the Company no longer managed effective April 27, 2015, and Delano Las Vegas and 10 Karaköy, both of which are licensed/franchised hotels. Additionally, due to the effects of the planned closure of the Shore Club, which was initially scheduled to occur in the second quarter of 2016 and was postponed until the fourth quarter of 2016, Shore Club is considered non-comparable for the periods presented.